Organigram Holdings Inc.

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings fourth quarter and fiscal 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. We ask you to please limit yourself to one question and one follow-up question. You may recue if you have further questions. Thank you. Max Schwartz, you may begin your conference.

Thank you. Good morning and thank you for joining us today. As a reminder, this conference call is being recorded and the recording will be available on OrganiGraph's website 24 hours after today's call. Listeners should be aware that today's call will include estimates and other forward-looking information from which the company's actual results could differ. So please review the cautionary language in our press release dated December 19th, 2023 on various factors assumptions and risks that could cause their actual results to differ. Further, reference will be made to certain non-IFRS measures during this call, including adjusted EBITDA, free cash flow, and adjusted gross margin, among others. These measures do not have any standardized meaning under IFRS and are intended to provide additional information and, as such, should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today's earnings report for more information about these measures. Listeners should also be aware that the company relies on reputable third-party providers when making certain statements relating to market share data. Unless otherwise indicated, all references to market data are sourced from HiFire in combination with data from Weed Crawler, provincial boards, retailers, and our internal sales figures. I will now introduce Bina Goldenberg, Chief Executive Officer of Organic Ramp Holdings, Inc. Please go ahead, Ms. Goldenberg.

Thank you, and good morning, everyone. With me today is our Chief Commercial Officer, Tim Enberg, and Chief Strategy Officer and Interim Chief Financial Officer, Paolo De Luca. By way of reminder, Paolo served as the company's CFO for over two years, including calendars 2018 and 2019. I'd like to take a moment to thank Derek West for his contributions to Organigram in his time as our Chief Financial Officer. All of us at Organigram wishing the best of luck as he takes time to focus on his health and recovery following a recent surgery. Additionally, as you likely saw in our press release yesterday, we are pleased to announce the appointment of Greg Guyot as our new CFO as of January 8th, 2024. Greg joins us from FINA, where he held the positions of CFO and CEO. Previously, he was CFO at Green Space Brands and held various senior finance positions at Kings Tech Capital and Sears Canada. We look forward to welcoming Greg to the team in January and would like to thank Paolo for stepping in as interim CFO in Derek's absence. We will now discuss Organigram's performance for Q4 and full year fiscal 2023. We are pleased with Organigram's progress throughout fiscal 23, and I'm proud to say that we have continued to differentiate ourselves as Canada's leading pure play cannabis company. Despite a challenging regulatory and competitive landscape, which did contribute to a reduction in our bottom line during the second half of fiscal 2023. We have grown Organigram's market share through an unwavering focus on the consumer, our strong marketing and sales expertise, and of course, our keen focus on industry-leading innovation. As you may have heard, Organigram won the coveted Kind Magazine Innovation of the Year Award once again this year with our revolutionary Ripstrip hash. We previously won this award for our Joltz ingestible extract product, These awards are truly a testament to our strength in developing disruptive new products that are designed specifically to meet the needs of our consumers. As anyone in the industry will tell you, branding and marketing are challenging in the Canadian landscape due to regulations, and as a result, the consumer has been predominantly motivated by price and THC potency. This is one of the many difficulties that every LP in Canada faces. However, the engagement Organigram is seeing with its Shred brand stands out, with a community of loyal consumers who affectionately refer to themselves as Shredheads. Shred is even in the final round for AdTerm's Social Media Brand of the Year, an accomplishment we're very proud of. The success of this brand is owed to online and retail marketing and continued product innovation within the brand, including our revolutionary Ripstrip hash, whole flour-derived PHCZ gummies, and our continued success in milled flour, where we command over 50% of the market. Consumers are increasingly seeking quality, novel, and differentiated experiences, which Shred has built its reputation of consistently delivering. We've seen an impressive growth in several categories in fiscal 23 compared to the prior year. Ship sales in gummies have doubled, propelling Organigram to the number one position in this category during Q4. and a leading position in pure CBD gummies, achieving over 50% market share nationally. Earlier this year, we challenged the Health Canada determination stating that our Jolt ingestible extracts, one of our higher margin products, were improperly classified and subsequently removed from the market. The company made an application for judicial review. The federal court granted the application and determined that there was a breach of procedural fairness by Health Canada. The matter was remitted back to Health Canada for redetermination. In the meantime, and pending the outcome of final redetermination, Jolts, which are now a patented Organigram product as of September, are back in market. Earlier this year, we shifted our focus to growing our share of pre-roll category, as ready-to-consume cannabis products are rapidly gaining momentum with Canadian consumers. To achieve this, part of our 2023 CapEx plan included commissioning Cantos rolling and CME packaging machines, which together are capable of producing over 2.8 million pre-rolls per month. The response to our tube-style pre-rolls has been incredible. Consumers are impressed with everything from the aroma, packaging, and flavor down to the rolling tightness and airflow of these joints. As a result, our pre-roll ship sales growth between 2022 and 2023 was 54%, bringing us from the number 10 market position in Q3 2023 to the number 3 market position in the category by the year end. The pre-roll category has seen 21.5% year-on-year growth. This growth has been driven primarily by tooth segments, infused pre-rolls, which grew 125%, and tooth style pre-rolls, which have grown 30%. Looking at the sales over the last three months, ending November 30th, Organigram had the second-best sales per SKU of two-style pre-rolls, indexing at nearly two times the market leader. And since launching IPRs in Q3, we have achieved the number four market position in the month of November. Now, we did absorb some order fulfillment challenges and cost inefficiencies during the ramp-up in the second half of 2023 due to a decision we made to accelerate the launch of these products to hit key seasonality. Given our clean balance sheet and cash position, we were able to make this competitive decision to increase penetration of the Shred Grant into these key growth segments. We are already seeing improved fulfillment and throughput in our pre-roll production processes. Our aim is to continue to expand our pre-roll share while optimizing production to improve our margins in fiscal 2024. As we have said, consumer preferences are evolving, and we are beginning to see purchasing decisions that are driven more and more by preference for differentiated experiences. As the Canadian leader in innovation, we are extremely excited about our lineup of new products for 2024. Part of this lineup is supported by our first U.S. strategic investment into Phylos, conducted earlier this year. With exclusive access to Phylos' whole flower-derived THC-V, We plan to bring this novel cannabinoid to consumers in a variety of formats. It's important to note this is not synthetic THCV. Our THCV products will be enhanced by the natural entourage effect we see with other minor cannabinoids derived from extraction or included in flour with high enough concentration. In 2024, Organigram customers will be able to experience whole flour-derived THCV in edible, vape, and flour formats. Our shred and THC-V gummy have been in market for only five months, and we are already our seventh most popular gummy out of a portfolio of 13 by the end of the year. The experience of THC-V is reported to be characteristically different from THC in that it has appetite-suppressing qualities and a more focused and energizing sensory experience. We anticipate that the introduction of THC-B in additional formats will help familiarize this novel cannabinoid for Canadian consumers. And according to Canatrack, a large consumption tracking study, THC-B awareness is already starting to build in Canada, which is very exciting. Beyond the benefit of THC-B, our investment in phylos has enabled us to begin the process of transitioning a portion of our facility to more advanced seed-based production through the completion of trials. Seed-based production is the preferred growth method in mature agricultural industries, as it results in lower-cost grow operations and more robust, stabilized genetics. Organigram intends to establish itself as a Canadian leader in seed-based cannabis production as we roll out this initiative. Our goal is to convert 30% of our gardens to seed-based by the end of fiscal 2024, delivering significant cost savings to the organization. Another target area for Organigram in fiscal 2024 is growth in the vape category. Organigram made a strategic investment in GreenTank in fiscal 2023 in exchange for 18 months of exclusivity for their revolutionary hardware. We are gearing up for launch of our whole flower-derived THC v-vape, as well as vapes outfitted with GreenTank's cutting-edge vaporization technology, which reduces clogging, improves flavor and performance, and which we believe will increase the perceived potency for the cost of our vapes compared to other products in the market. There is a tremendous opportunity for OrganiGram to excel in vapes. We intend to compete much more aggressively in this category in 2024. Part of OrganiGram's corporate DNA as a leader in innovation has been supported by BAP's $221 million investment into OrganiGram in 2021 and the resultant product development collaboration taking place in our Moncton facility. I'm pleased to say that we continue to make progress on fundamental science and formulations that will form the basis of our products moving forward. Our nanotechnology formulation is being studied in a clinical setting with pharmacokinetic studies underway, which will provide Organigram with the ability to make claims regarding the onset and half-life of these products. Other work streams are also underway to develop innovative technologies in the edible, vape, and beverage categories, in addition to new disruptive inhalation formats. VAP support has been a critical differentiator for Organigram. We have observed other strategic investors in the space over the years deploy significant capital only to sit on the sidelines. Furthermore, many large strategic investors elected to opt out of providing further capital. On the other hand, we have seen our relationship with BAP evolve into something far more collaborative and complementary. This support was further demonstrated by BAP's recent follow-on investment of $124.6 million into Organigram, announced on November 6th. Approximately $83.1 million of this new investment is earmarked for Jupiter, a strategic investment tool managed by Organigram to increase its global footprint. while the remaining $41.5 million is allocated to general corporate purposes. This investment is a win for Organigram, its shareholders, and the industry in general, as we have shown that strategic capital is available to companies that show strong governance and disciplined capital stewardship. With no debt, capital for global expansion, and general corporate purposes, as well as improving operational efficiencies, Organigram is positioned for long-term sustainable growth on the global cannabis stage. Now, I'd like to provide an update to the guidance we previously gave regarding our intention to achieve free cash flow by the end of calendar 2023. This timeline has been impacted by the acceleration of THC inflation in the Canadian marketplace and delays in international shipments that we believe would resume in Q4. Regarding THC inflation, we are still seeing an alarming level of fraudulent THC levels in flower products supported by selective testing and lab shopping. Some milled flower products are now claiming over 30% THC, which we know is truly an unbelievable claim. Organigram continues to work with industry stakeholders to raise awareness of the THC inflation issue. and to advocate for the consumer by working to establish guidelines for THC testing that contribute to a fair and even playing field for licensed producers. We applaud both Health Canada for their Cannabis Data Gathering Program and the OCS for their recently announced temporary THC testing efforts to uncover THC fraud, and we look forward to seeing positive changes taking place in the market because of our joint efforts to address this growing concern. On the international front, Organigram had a record year, shipping $18.9 million in flour versus $15.1 million in 2022, an increase of 25%. However, in fiscal Q3, we experienced a slowdown in international exports due to newly enforced testing requirements in Israel. We believe historical export volumes would resume in Q4. However, we experienced delays relating to cultivar selection and shipping challenges. Our lower Q4 international sales did impact our margins, but we anticipate stronger demand for our products on the international stage as shipments to Australia and Israel are expected to resume in fiscal 2024. We will also begin building our export volumes to Europe as we sign two new supply agreements with Sanity Group in Germany and Forsey Labs in the UK. The potential for distributing our exclusive THC Z cultivars abroad is also very exciting. Lastly, our EU GMP application for our Moncton facility has been submitted, and we are expecting an audit process to begin in the new year. This is expected to shorten the turnaround time to get products in the hands of international medical patients while expanding opportunities to new markets. Beyond direct international sales, the creation of the Jupiter investment pool is expected to reward us with additional exposure to international markets. by providing us with a wider array of strategic investment opportunities in the U.S. and other legal jurisdictions. Operationally, in Moncton, fiscal 2023 was transformative. We harvested 87,000 kilograms, up from 54,000 kilograms in fiscal 2022, a 61% increase, and executed game-changing capex. We have invested in a variety of efficiency-improving and cost-cutting projects that will result in significant savings in fiscal 2024. To recap on some of these initiatives, we have internalized some of our testing requirements. We implemented remediation in-house. We commissioned rapid drying machines, which has decreased drying time from 7 to 10 days to 2 days, while increasing the available footprint in our facility for hang-dried flour. We automated our shred packaging, which reduced headcount. Our new Cantos pre-roll machine is producing tube-style pre-rolls at scale. And our new speed mixer has allowed us to infuse our milled cannabis for infused pre-rolls with distillate, diamonds, and botanical terpenes in a one-step process. With this $29 million 2023 CapEx spend behind us, we are now focusing on driving in some of the newer processes we have put in place to drive further efficiencies. In fiscal 2023, we realized approximately $4.3 million in savings related to these initiatives. In fiscal 2024, these enhancements will deliver an additional $4.6 million. And the conversion of a portion of our garden's seed-based production, along with other initiatives, are estimated to realize an additional $5.3 million in savings, to bring the total aggregate savings in fiscal 2024 to $10 million. At our Hash and Crafts cannabis facility in Lac Supérieur, we just completed our first harvest resulting from the expansion of the facility. The 30,000 square foot expansion is complete with four net new grow rooms, three drying rooms, a 5,000 square foot warehouse, and large packing area. We launched Red Rift strips, Holy Mountain and Wola pressed hash, Tremblant Black Afghan hash, and High Alpine hash in fiscal 2023. Our hash production earlier this year was about 100 to 150 kilograms of hash per month, up to a peak of 350 kilograms per month in Q4. Our focus at Life Superior for fiscal 2024 will be on our continued performance in hash and optimizing our garden to produce high-quality, high-margin craft flower. And on that note, I'd like to turn the call over to Paolo to discuss our financial results for Q4 and fiscal 2024. Thank you, Veena.

I'm pleased to be speaking here to you today. Before I go any further, I'd like to remind everyone that OrganiGrant made a decision earlier in the year to change its fiscal year end from August 31st to September 30th. We made this decision for a few reasons, including to align our quarters with more traditional fiscal quarters, which allows better comparisons to our other public peers, and also to ease operational efforts around shipping cutoffs and inventory counts. We believe that this change will streamline financial reporting efforts over time. As a result of the company's change in its fiscal year end from August 31st to September 30th, and in order to bridge fiscal 2023 to fiscal 2024, the financial information presented here for the current quarterly period is for the four months from June 1st, 2023 through September 30th, 2023. And for the fiscal 2023 year consists of the 13 months from September 1st, 2022 through September 30th, 2023. Whereas the comparative periods for 2022 are the three months from June 1st, 2023 through August 31st, 2023, and the 12 months from September 1st, 2021 through August 31st, 2022, respectively. Going forward, our quarters will now end with December, March, June, with September being our year end. Year over year, gross and net revenue increased by 12% and 11% respectively. primarily due to net increases in recreational revenue of $15.1 million and net increases in international revenue of $3.7 million, partially offset by a decrease in domestic medical sales. In fiscal Q4, gross revenue increased by 9% and net revenue increased by 1% compared to Q4 fiscal 2022. The increases over the comparative periods were primarily due to the extended firm period, offset by a decrease in international revenue in fiscal Q3 and Q4 as Bina mentioned, price compression as a result of THC inflation did have an impact on the border. Year-over-year, cost of sales increased to $136.4 million from $119 million in fiscal 2022. Organogram's cost of sale in Q4 fiscal 23 was $42.9 million compared to $36.7 in Q4 2022, an increase of 16%. The increase in the cost of sales over the same prior year period was primarily due to an increase in inventory provisions and sales volume in the adult-use recreational cannabis market. Included in Q4 fiscal 2023's cost of sales was $4.8 million of inventory provisions that primarily related to NRB adjustments for whole flour now being used for derivative productions, including for keef, for example, keef and extraction, with a smaller amount related to unfailable inventories. We harvested approximately 28,000 kilos of flower during Q4 fiscal 23 compared to 16,000 kilos in Q4 2022, which represents an increase of 74%. The increase was primarily attributable to the extra month of cultivation, but also the availability in 23 of increased cultivation, planting, and additional grow rooms being available. In Q3, we accelerated a change in the operational conditions for plant care to increase THC levels. This resulted in a decrease to plant yields, which had a negative impact to our cost of cultivation and which temporarily reduced the company's gross margins and gross margin rate. By the end of Q4, plant yields increased over 16% to 163 grams of plant from 141 grams of plant at the end of Q3 to and average THC increased by 14% since fiscal 2022. We continue to optimize growing conditions during Q4. While yields and THC content will fluctuate over time, the trend we have seen over the last six months has been larger yields and higher potency. These higher yields will reduce the cost of cultivation in the long run, as will the cost-saving production initiatives Bina outlined earlier. As this flower is sold, we will achieve a higher gross margin rate and we expect to be able to have an overall lower cost of cultivation for fiscal 24 as a whole. As I mentioned, month-to-month and quarter-to-quarter harvest, yield, and cost of cultivation will fluctuate for a variety of reasons, but the overall long-term trend has been clear improvement. In fiscal 23, which includes the extra month, we harvested just under 90,000 kgs of flour, which even normalized for 12 months would be 83,000 kgs. That works out to approximately 6.9 thousand kgs a month. Our goal is in 24 to improve upon that 6.9 thousand average kilos a month average we saw in 2023. Year over year adjusted gross margin increased to 25% or 40.2 million up from 23% or 33.4 million in fiscal 22. The increase was primarily due to an increase in recreational revenue and international revenue. partially offset by a decrease in mountain sales and the temporary cessation of jolt sales between April and September. On an adjusted basis, Q4 gross margin was $7.9 million, or 17% of net revenue, compared to $10.4 million, or 23% in Q4 fiscal 22. The compression and adjusted gross margin was primarily attributable to price reductions that lowered net revenues, temporary higher flower costs, a decrease in international sales, and higher cost of sales per unit, which was correlated to higher inventory provisions for unfailable inventories and NRB adjustments. On a year-over-year basis, SG&E increased to $71.8 million compared to $59.8 million in fiscal 2022. The increase in expenses mainly relates to the extended fiscal period, higher employee costs due to more G&A full-time employees to support the company's growth, general wage increases, and higher professional fees and higher technology costs, which included 7.7 million in ERP installation costs for the year. By way of comparison, ERP installation costs in fiscal 22 were 3.2 million. SG&A, excluding non-cash share-based compensation, increased at 21.6 million in Q4 23 from 15.7 million in Q4 22. The increase in expenses was primarily due to the extended fiscal period and to a lesser degree, higher professional fees. ERP is also a factor in explaining Q4 23 increase over Q4 22. In 2023, Q4 ERP costs were 2.4 million in the period versus 1.8 million in the prior period. We are pleased to report that the heavy lift on our current ERP implementation is mostly behind us, that we have just over 1.1 million $1 million budgeted for fiscal 2024, mostly in Q1 2024. In fiscal 2024, we anticipated some fluctuations in adjusted EBITDA between quarterly periods, with stronger adjusted EBITDA metrics expected in the second half of the year, as the company's production optimization of recent high growth categories, such as tube-style pre-rolls and infused pre-rolls, is fully recognized in the financials. However, we remain confident in the upward trajectory of our earnings on an annualized basis as seen over the last three fiscal years, supported by the newly enhanced production processes and cost-saving initiatives being outlined, and beginning international shipments to Germany and the UK while continuing to supply Australia and Israel. In the quarter, while adjusted EBITDA was negative 2.4 million compared to positive 3.2 million in Q4 of 2022, on an annual basis, adjusted EBITDA in fiscal 23 increased to positive 6 million compared to positive 3.5 million in fiscal 22, an increase of 71%. On a year-over-year basis, SG&A increased to 72.4 million compared to 59.8 million in fiscal 22. Net loss. in fiscal 23 was 248.6 million compared to 14.3 million in fiscal 22. The vast majority of the net loss for the year is attributable to full-year impairment charges of 210 million consisting of 165 million on property, plants, and equipment and 45 million on intangible assets and goodwill. Of these impairments, 191 million of these impairments were taken in Q3 and announced last quarter, of which $38 million related to intangibles and goodwill, and $153 million was attributable to PC&E. The impairment test completed in Q3 was warranted by the company's market capitalization, trading significantly below its shareholders' equity, combined with Q3's operational results. A meaningful contributing factor to the quantum of the impairment charge was related to the impact of flower sales and margins due to THC inflation. When considering the significant sales and margin that flower product categories collectively contribute to Organigram's financial results, this is a key driver to the amount of the impairment loss. It should be noted that all things remaining equal, impairment losses recorded on the company's PP&E will result in an improvement to the gross margin rate going forward. In Q4, additional impairments were taken in the amounts of $11.6 million on PP&E and $7 million on intangibles, mainly due to refinements in the current impairment model related to macro sector and company-specific assumption inputs. During Q4-23, Organigram's net loss was $33 million compared to a net loss of $6.1 million in Q4-22. The increase in net loss was primarily due to the aforementioned impairment losses, collectively totaled $18.7 million on the quarter, and to a lesser extent, lower international revenue than previous quarters, and the lingering effects of price compression. From a statement of cash flows perspective, net cash used in operating activities after working capital changes was $38.8 million in fiscal 23, compared to $36.2 million in the prior year. The increased year-over-year includes higher R&D costs and higher ERP implementation costs, both of which are investments until the company's long-term success. Cash provided by investment activities in fiscal 23 was 4.9 million compared to cash provided at 44 million in 22. Much of the explanation for the positive figures in both years is a redemption of short-term investments into cash. But on the ultimate side, Organigram deployed 29 million in PP&E during the year and another 10 million relates to the investments in green tank and pylos. These expenditures are all geared to obtaining long-term competitive advantages to drive productivity gains. In the previous fiscal year, 2022, Organigram had invested $48.7 million in PP&E. Thus, 2023 represented a reduction in PP&E investment and 2024 will be a further reduction of the CapEx programs almost entirely complete now. This is a good news story for the company as we will now be in harvesting mode as we optimize all these additions to the company and are on the path to long-term sustainable margins. In terms of our balance sheet, we are pleased to state that we have one of the healthiest balance sheets in the space. As of September 30th, 2023, and by way of reminder, none of this takes into consideration the recently announced deal with BAP on the Jupiter private placement. We had unrestricted cash of $33.9 million and restricted cash of $17.9 million for a total cash position of $51.8 million with negligible debt. While the company expects to continue to report growth in year-over-year adjusted EBITDA, queries when the company achieves significant increases in sales will result in increases in receivables, and this will negatively impact cash from operating activities. However, given that our major Catholic spends are now behind us, we are seeing increased yields, improving production efficiency, and are anticipating increases in international sales. Achieving free cash flow positivity in fiscal 2024 is an achievable target, which we are currently budgeting for in the second half of the year. Our existing cash balances already have us in a strong position, The BAT private placement expected to close in January will only buttress the company further. We believe that balance sheet strength will be one of the key determinants of the long-term winners in the space, along with market share strength, operational efficiencies, and investment in R&D and product innovation. We also believe that balance sheet strength will offer financial flexibility as M&A and commercial opportunities increase in Canada, as players struggle with debt loads stretched payables including unpaid exit taxes, and the inability to invest in automation and other production efficiencies needed to get down the cost curve in a highly competitive market. In short, many of the recent financial and strategic transactions that we've announced are geared with a view to sustainable, long-term competitive advantages. This concludes my comments. I will now turn the call back to Dina.

Thanks, Paolo. And as Paolo just said, the Canadian industry continues to grow, yet is saddled by high excise taxes and restrictive regulations. We've seen LPs shuttering operations and entering creditor protection, while others are seeking short-term extensions on their maturing debts. Further, an astonishing number of LPs are in arrears on their excise taxes, and we are beginning to see the CRA hold these LPs accountable. Given these issues, it is not surprising that some LPs would mislabel products to artificially inflate THC levels to increase sales. However, this is simply not sustainable and we expect to see more of our peers struggle to survive in the coming year. Organigram continues to fortify itself as current market forces put pressure on the industry and is positioned to be highly opportunistic. To summarize our success against this backdrop, we've seen impressive growth in several product categories throughout 2023. Despite the industry challenges, we defended our market share as our brands and market-leading innovations are continuing to resonate with consumers. Organigram ended the year in the number two position among LPs in the recreational market. We were number one in milk flour, number one in hash, number one in gummies, number three in flour, and number three in pre-rolls. We invested heavily in cost-cutting and efficiency-driving projects in our facilities to help us realize additional savings for fiscal 2024. We also invested strategically to acquire rights to technologies like green tank vaporization hardware and phyllosis seed-based genetics. Our focus is now on further strengthening our pre-roll offerings and shifting towards winning in the vape category while introducing products in the higher margin craft flower market. The recently announced $124.6 million follow-on investment from DAP is designed to better assist us in capitalizing on opportunities in domestic and international markets. while the product development collaboration continues to work on the development of novel cannabinoid innovations and formulations that will support our product pipeline in years to come. We are set up to achieve an improved margin profile in fiscal 24, supported by production efficiencies, better fulfillment, and expansion into more international markets. We have effectively no debt, sufficient cash, and an industry-leading portfolio of products and brands that consumers love, supported by industry-leading production capabilities. And with that, I want to thank you for joining us today. Operator, you may open the call for questions.

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, please press star one again. Your first question comes from the line of Aaron Gray from Alliance Global Partners. Please go ahead.

Hi, good morning, and thank you very much for the questions.

So first for me, I just wanted to touch on gross margins. So you called out a couple of things that impacted some of the gross margin pressure, including pricing, some of the higher flyer costs, higher costs per unit, as well as the same inflation impact and international. So just to think sequentially, down 200 basis points, 90% to 70%, can you help to quantify maybe a rank order, which one has been the biggest impact to that margin pressure, and then how we think about the margins on the near term. So you spoke to international, you know, back up in fiscal year 2024. Is that more of a next quarter dynamic, or do you think it will be more of the back half? And then how do we think about, you know, the impact in terms of the Canadian marketplace on gross margin as T is pushed to remain? So any color on your gross margin expectations in the near to medium term would be helpful.

Thank you.

Perfect. Paolo, I'll put that one over to you.

Great. Thanks, Nina. And thanks for the question, Aaron. On margin, look, the highest margin opportunity for us always is international. So to the extent that we have international sales, that's going to drive margin, and that's obviously going to depend on the mix of the size of those sales and, you know, in comparison to the sales that we have in the REC market. And so just broadening By nature, historically, international sales have been lumpy, and that's something that we're working to address, and we're working to address that by diversifying the countries that we sell to, to have more than two countries. So we're moving to four countries, but we hope to expand that even further. And then where possible to diversify within customers within those countries, and then also to spread out the shipments. So by doing that over time, we'll avoid the issue that we've had historically, which is essentially lumpy margins. At least, I would say at least half of that is related to international sales. So to answer your question, international by far is the most important thing in terms of determining margin mix for the quarter. All of the products that we're now growing in have good margin profiles for us when they are operating and when we're producing them at a steady state and avoiding all the wrap-up issues that we have, you know, as almost any of our people have with their, you know, the initiation of those products. So, you know, we spent a lot of time on the call and compared comments talking about infused pre-rolls and tube-style pre-rolls. I can tell you that right now, the way that we're producing them right now is a lot better than the way we were producing them three or four months ago. And so while we could have made a decision to just optimize and not be in market, we would have lost the opportunity to gain market share. And I think it's very important that, especially in growing categories, that you get in there when you can. And I think where we're happy with We're happy with the way that we can kind of clean space and clean share in those spaces and that's going to continue to grow. And so I would say if you want to look at the margin profile of our quarters in 2023 versus the way that we expect it to play out in 2024, it's almost a mirror image. So whereas in 2023 we started off strong with margin and then it declined, in 2024 it will be the exact opposite. I think that certainly our budget, and I don't want to make this forward guidance, but the way we plan the year out, our margins should get back to the same levels they were historically, and it's not even better.

Okay, great. Thanks for that, Colin. That was really helpful.

Second question for me. I know still relatively early days, just in terms of the Jupiter initiative and the potential investments there. you know, any color in terms of what you're seeing in the marketplace and how you might have narrowed in on some opportunities, particularly, you know, geographically, some catalysts ahead on the international front with Germany medical reform and essential abilities down the line with phase two. And then, obviously, in the U.S., where potential rescheduling as well. So, any color in terms of, you know, what you're seeing out there in the marketplace, U.S. internationally or maybe potentially in Canada that might be appealing to you where you might be able to deploy some capital for some investment opportunities? Thanks.

Thanks, Aaron. So I'll start and then I'll hand it over to Paolo as well on this one. But just to start with, certainly our intention on Jupiter, I would say, you know, 60% to 75% of the investment will be focused on the U.S. market. That is an area that we dipped our toe in slightly this year with the Philo's investment. So we understand the complexities and making sure we do something that is compliant with our NASDAQ listings. But we are significantly focused on the U.S. And the inbounds that we received after the announcement of this Jupiter pool has been just a testament to the opportunities out there. And we are currently narrowing down, you know, the areas that we're going to focus. I would say there's a portion of that investment looking at other international markets. But, again, the priority is U.S. first and then, you know, what is the best opportunity globally moving forward from there. So that's in terms of the focus. Paolo, if there's anything else you want to add?

No, the only other thing that I would add is that I would say it's relatively early days and – The fact that some of the expected changes that people have called for, whether it be in countries like Germany or in the US, they haven't manifested as quickly as anticipated, I think bodes well for us for a couple of reasons. One, it just allows us more time to expand our scouting and develop relationships with all the people and all the participants in those markets. And two, as these markets have been slow to move in terms of the initial expectation, the capital markets have been hampered as a result for Canada's companies. We're lucky because we're one of the few companies to pull off a very large investment at a very favorable valuation to where we were trading at. And I think that will set us up well because I don't think there's that much capital floating around for companies that need capital. So I think we're in a very good position and I think we'll have a lot more to announce on that in the calendar 2024 year. Okay, great.

Thank you very much for the detail. I'll go ahead and jump back into the queue.

Your next question comes from the line of Federico Gomes from ATB Capital Markets. Please go ahead.

Hi, good morning. Thank you for taking my question. My first question is just going back to your comments on international and that being the largest margin opportunity for you. So I'm just curious, tying that to your free cash flow guidance for the second half of fiscal year 2024, does that guidance sort of relies on international growth? And if you could, you know, unpack a bit of the drivers behind that guidance and how much of it is about, you know, in terms of the sales mission of domestic sales international, that would be great. Thank you.

Yes, sure. No problem, Fred. So our intention, as we said in the script earlier today, was that we are – working on our EU GMP certification, which we expect to get in the back half of the year. So while the first half of the year on international shipments, we will expand outside of just Australia and Israel. We will add the two new countries. We already announced supply agreements. That's to Germany and to the UK. But our goal, as we look forward, is to leverage the EU GMP certification to get into countries more countries. And as regulations continue to change, there are more opportunities out there. So, we do see the international sales growing, sort of phasing further into the back half as we grow out new international opportunities.

Thank you.

My second question is just looking at the Canadian direct market and I guess in your outlook, you mentioned the many LPs are behind payment of their taxes. And there's obviously a lot of challenges to raise capital and some bankruptcies happening. But at the same time, it just seems that this process of rationalization among LPs is always around the corner and never arrives. So just curious on your perspective here for next year, why could it be different from this year? How do you see that playing out? It's going to be Is it going to accelerate into 2024? Is it going to be more of a gradual process? How do you see that happening? Thank you.

Great. So thank you, Fred. You know, we have been saying for a while now that this industry is primed for consolidation. And it hasn't happened because, honestly, the fact that the CRA has allowed companies to be in arrears It is unbelievable to us. We've seen and we've talked to a bunch of LPs. The arrears are astonishing. CRA has started to clamp down. We have heard that they've been in upon license renewal and asked for actual payment plans to get the people back. I think There are some companies that will never be able to do the payment plan getting back. So we've seen some closures as CRA has clamped down. We've also seen some closures as debts have come due and not been extended further. So banks have shut down LPs. So it's starting to happen. We have companies not only going into CCAA, but companies just going into bankruptcy and shutting their doors. And It has to happen, right? I mean, there's just the dynamics right now are unsustainable. By having testing on THC inflation, which gave some LPs an extra year of runway by claiming they had products that were, you know, 30 to 35% THC, that when we tested it was sitting on average between 17 and 21 potency, it gave them runway. So what you have is companies out there you know, really pressuring what is, you know, approved regulations just because they're doing it to survive and they've been able to survive an extra period of time. But it's not sustainable. This is, you know, it's crashing in on them while access to new capital isn't available. So, you know, is it happening as soon as we thought? No. Is it continuing to happen? Absolutely. So you're hearing about it. You're seeing these changes over the next, You know, whether it takes 12 months or 24 months, what we know is that we're sitting on cash. We have strong brands and we have innovation and we will be here on the other side of it. And in the short term, while there's an unfair playing field because people are exaggerating their THC potency or aren't paying their taxes, that's going to come to an end at some point. They're going to go away and the strongest will survive and we're going to be one of them. And that's how we see it.

Thank you very much.

Your next question comes from the line of Yiwan Kang from Canaccord Genuity. Please go ahead.

Hi, good morning. This is Yiwan Kang on behalf of Matt Bottomley. Thank you for the question. I just wanted to shift gears back to the Canadian adult use market and wanted to ask about the PhD innovation that you guys have been rolling out recently. I wanted to ask if there is a dollar premium that you're able to attach to these THC-B products versus non-Canada-noded THC products. And as well, I was also curious to see how you guys have been thinking about the cost-benefit analysis of how these THC-B products have been performing, although it's early days, against the investment dollars that you guys have spent on silos for the partnership so far.

So thank you for the question. First, I'll pass it over to Tim Enberg, our chief commercial officer, to answer the question on THCV and other products that we have in market. Tim?

Sure. Thanks, Tina. So currently we have two THCV gummy products in the market, one under the Trailblazer brand and one under our Shreddoms brand. And we don't have it as a premium currently from a pricing perspective. but the reception in the market is quite strong. So as Bina mentioned earlier, we've got 13 Treadham SKUs in the market, and it's sitting in about the seventh position from a performance perspective early days into the market. So THCV also, for us, it requires a lot of education to not only the consumer, but to the bud tender. So part of our mandate from a commercial perspective right now is to really educate the consumer and educate the bud tender on THCV so they understand the attributes of THCV and be able to recommend it comfortably. And as we ramp up to our next portion of our THCV launch, which is our THCV vape, which we're launching very shortly, we expect a significant lift in the THCV section of our portfolio.

And just to, thank you, Tim. And just to build the second part of your question, which is, you know, the payback on the investment with our Filos investment, I want to remind you that it was really strategically twofold, that it was not only access to THCV, but it was also the ability to move our production to seed-based production. Now, Filos is known for being able to develop F1 hybrid seed that will give us significant cost savings by converting a portion of our garden over to seed-based production. Our plan for fiscal 24 is that we'll have 30% of our garden converted over to seed-based by the end of the year. And what that does is not only does it shorten the cycle time in the garden, but it gives us more robust flowers, more predictable attributes to the flower. And when you have F1 hybrid seeds, we could take those to other markets around the world to deliver the exact same cultivar and experience in other markets. So it just gives us some stability and predictability. So we're very excited about that. And truly, the payback on the silos very much links back and is, you know, a huge payback based on the conversion to the seed-based production.

And sorry, Bean, I'll just answer one more point, is that there is a lot of interest on THCV from an international perspective. So we've been in discussions with our current partners, but also potential future partners on exporting THCV into their potential markets as well.

Great. Thank you for the caller. And just my second question on the international shipments for fiscal 24 going forward. I know that you guys are going through an audit to get your facility EUGMP certified. So is it fair to expect that the international exports will likely, the sales will likely accelerate in the back half of fiscal 24 as you guys receive the EUGMP certification for shipments going to the UK and Germany? Thanks.

Tim, why didn't you take that one as well?

Yeah, so that's the idea. We're going through the eGMP certified process right now. We expect to set up the audit fairly soon. And once we establish the certification, we will be able to expand. And it's not only about market expansion. It's about turnaround time. When we go into a country like Australia, it takes longer if you don't have eGMP to convert to eGMP and get into the marketplace. So it will allow us to get a quicker turnaround and reorder process because we'll be able to ship finished goods versus bulk into this market, which will put it into the hands of the patient sooner and then, you know, get reorders in a more timely fashion versus taking eight weeks or so. So we expect it to benefit us from a market expansion perspective and open doors, but also to eliminate some of that lumpiness that Paolo referred to earlier.

But let me just build on Tim's comment, which is we will be audit ready. We are dependent on getting an auditor over from Germany to certify the facility. And while we hope to have that early in 2024, we are, you know, this isn't something that we could tie down. We'll continue to drive towards that. But we do believe that even without the certification in the first half of the year, just resuming some of our shipments to partners, as well as adding the new supply agreement. So our agreement with both Sanity Group and with 4C Labs that we announced are predicated on us selling out of a non-EU GMP facility So they will go through conversion, whereas in the back half, if we should get the certification, that should go faster as well. So we will see increase even if there is delay in the certification because of new customers, but we do hope to see the certification because we believe there's even more upside by the end of the year once we get that.

Great. Thank you for the caller. I'll jump back into the queue.

And we have no further questions at this time. I will now turn the call back to Bina Goldenberg for closing remarks.

Thank you, everybody, for joining the call today. I know that we're coming off on the holidays, so I want to wish everybody a happy and healthy holiday season. And I look forward to sharing with you more updates as we report our Q1 in mid-February. Thank you for joining the call. This concludes today's conference call.

Thank you for your participation, and you may now disconnect.