Q1 2021 OrganiGram Holdings Inc Earnings Call

Good morning. My name is Casey and I will be your operator today at this time. I would like to welcome everyone to the organigram holding tanks first quarter fiscal two thousand and twenty one month or next conference call all lines have been placed on mute to prevent any background noise after the speakers remarks. There will be a question-and-answer session. We ask that you please limit yourself took one question and one follow-up question. He may wreak you if you have any further questions as a reminder, this conference call is being recorded and a replay will be available on our website at this time. I would like to introduce a new Swamp vice president investor relations, please go ahead.

Thank you, Casey.

Joining me today are abandoned grams chief executive officer Greg angle Chief Financial Officer, Derek West and our chief strategy officer palooka before we begin. I'd like to remind you that today's call will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's press release regarding various factors assumptions and risks that could cause our actual results to differ furthermore during this call. We will refer to certain non-ifrs Financial measures including adjusted ebitda and adjusted life. These measures do not have any standardized meaning under IFRS and are approaching calculating these measures May differ from that of other issuers and so are not directly comparable, please 6 days earnings report for more information about the I will now hand the call over to Greg.

Thanks, Amy. Good morning. And thank you for joining us today this morning. We reported our fiscal quarter our first quarter of fiscal 2021 results for the. End of November 30th, 2026. Please with meaningful growth in our adult sales sequentially from last quarter strong evidence that our new products is part of our portfolio revitalization are resonating well with consumers. We're excited about the recent launch of another three stains under our Edison brand and we have more to come in the next few quarters as we continue to reinvigorate this brand encouragingly Edison was recognized as one of the most sought-after brands on Ontario cannabis store website for the month of November.

We've started to ramp up call.

And Staffing such that we can meet overall increase demand in the industry and for many of our new products and we have the assets and financial strength to support our plans in contrast to many of our peers. We generate a positive cash flow from operations in q1 the second quarter of the last three quarters with positive cash flow from Ops since the second half of fiscal 2020. We've been extremely active introducing new products and among many of our existing ones since July. We have launched 53 new skus with up to fourteen more in the pipeline expected to launch before the end of February. We continue to see Dr. Alarm paroles as a young age categories in the Canadian wreck market and based on US legal State data. We believe they will continue to dominate the foreseeable future even as alternative product forums gain traction. We've successfully launched a number of value segment dried flower offerings in the first half of fiscal 2020 particularly in larger format sizes in response to increased demand in that category. I'll talk more about our success there in a moment dead.

We're also very focused on our higher-margin Edison fire portfolio by introducing new unique strains and higher potency THC products where we think there is a good opportunity for us to differentiate subsequent to Thursday. We launched three new Indica strains black cherry punch and ice cream cake or I see see both with THC ranges of twenty-two twenty-six and slurricane was seventeen percent plus THC. We expect to launch at least 3 more Hi-Tec strains under the Edison brand over the next few quarters as a result of our continuous investment in new genetics. We run trial cultivation Cycles to ultimately identify the winners the ones we decide to move forward with because we expect them to attract the strongest consumer response. We continue leverage are indoor facility and our unique three-tiered cultivation rooms, every constrained benefits from being grown in one of these data backed strain-specific Grow rooms with bespoke micro-climates designed to offer a distinct flavor and Aroma profile and to ensure consistent Club.

Variables such as humidity temperature and light or customized to optimize the growth can happen and terpene profile of each string.

Opportunity scale-up new genetics require patient and deliberate process or cultivation Protocols are proud for each cultivar and adjusted through multiple Grow rooms before. Two multi-purpose rooms in our facility. We've launched a number of new genetics over the past eighteen months including our Hi-Tec Edison Limelight or Ultra sour, which is now the company's best-selling strain. Our new age of ours were developed from genetics originally sourced from a premium cannabis Nursery. The nursery is processes and Technology help ensure robust healthy high quality plants are focused on both in the environment in which they're grown results in a unique phenotype expression. This means even plants grown from the same genetics can be markedly different in terms of physical properties potency terpenes in Romans based on their growing conditions.

We believe this product development process is a differentiator for us revisiting our more recent launches in the value dried flower category. We Believe are

Value products are differentiated and do not have to compete on price alone particularly since the onset of the COVID-19 pandemic value the large format sizes have become an increasing focus of consumers off the spring of 2020. We responded with the introduction of buds, which is indoor grown whole dried flower and strain-specific the company's value segment strategy also includes dry flour offerings that were launched in large format sizes of Seven Grand 15 gram under the Trailblazer brand in July 2020, the Trailblazer value brand continues to offer increasingly higher THC levels versus what was offered when originally launched start of adult. I don't use cannabis cannabis legalization and at a competitive price point at the beginning of q1, we expanded our value portfolio with lots of shred a high-quality high-potency dried flower that is pretty shredded for Consumer convenience shred offers 3 premiered varieties all of a T C levels of 18% or more dead.

And combined specific strains to provide unique flavor profiles for each of the three product offerings. It is made from whole flower does not contain any Shaker trim and is mailed to the same specification. Third World products thread is currently organigram is more most affordable option on a program basis sales of shred contributed significantly to our growth in Revenue in q1 and was the number one most searched brand on the Ontario cannabis store website for both November and December the product has exceeded our expectation and continues to sell out one of the reasons. We are ramping cultivate suck cultivation and Staffing which I will talk about more shortly at the end of the quarter. We also launched limited edition seasonal offerings including Trailblazer Christmas sticks and affordable point five grand prix wage, which continues to do well in retail stores.

In addition to new rack 1.0 products. We've launched a number of innovative 2.0 offerings in Vape edible and beverage categories just after quarter and we launched Trailblazer spark Flicker and glow 5/10 torch Vape cartridges in a new one grand format. This extended our line up to a suite of trial-size 0.5 gram and full size. One gram cartridges for the 510 vaporizer.

Trailblazer towards offers consumers 5 10 cartridges high-quality CO2 extract in three unique terpene infused flavors are Vape portfolio also includes products for the mainstream and the premium segment Edison plus feather ready to go distillate pens and Edison Plus Pack Sarah distillate cartridges. We're focused on increasing concentrations in many of our products to meet consumer demand. So stay tuned for changes to come in this category.

Are chocolate portfolio includes Trailblazer snacks of value price cannabis infused chocolate bar available in both mint and mocha flavors and we expect to launch new flavor. This quarter are staged. They are chocolate equipment allows for each of the five sections of the bar to be filled separately allowing for higher accuracy of infusion. We also offer Edison bites truffles available in both milk and dark chocolate for directions as well as a gingerbread flavor for a limited time.

At the end of the quarter we launched it.

Medicine remix dissolvable cannabis powder this products distribution has expanded listings to eight provinces and we expect to secure listings for the remaining two provinces in the near future. We belong the beverage segment could have greater potential than we've seen in the US then what we have seen in the US to date as I mentioned on our last earnings call, but worth repeating estimate suggests creational cannabis beverage Market represents, a $467 million-dollar opportunity in Canada and results of a recent organigram survey indicate a significant majority of current consumers 74% would offer to add cannabis to their beverages versus consuming a pre-mixed 1. This is also supported by sales data in Colorado where cannabinoid Infuse powders have rapidly risen to the top of the beverage category in popularity representing 55% in the states beverage market sales. This is from head set data in Colorado Market insights from July twenty 20th of last year.

We Believe Edison remix offers a unique experience for consumers made possible by our R&D department, they developed a proprietary Nano emotion technology that generates metal droplets which are very small in uniform this provide improved absorption compared to traditional solid Edibles and beverages potentially allowing for more reliable and controlled experience than now no emotion technology is all she has painted have increased ability to temperature variations mechanical disturbance salinity pH and sweeteners and then dried powder formulation offers discretion portability and a potential extended shelf-life compared to a liquid.

It's available in three formats with five milligrams of THC H2O with five to five milligrams of THC to CBD and 5/8 with 10 milligrams of CBD each as we've said we're encouraged by the consumer response to date for many of our new products. However, we understand the frustration consumers have when they can't get what they want because of inventory said we've already begun to ramp up Staffing with plans to hire a hundred staff mostly in cultivation was up to another 30 staff and packaging by early in our third quarter. We know we have missed out on significant sales opportunities and remain focused on improving supply-chain processes and Order fulfillment rates, for example, internally, we've identified a list, of course Q's for which we aim to ensure may go out of stock in an effort to drive maximum distribution and continue to build brand Equity increased production and Staffing should result in efficiencies from greater economies of scale benefits to revenue margins are not dead.

To be recognized in Q2 as we take this quarter to hire staff further we do. We do know that the industry demand may be damp and a negatively impacted you to sales due to lock Downs related to COVID-19. For example, since November 23rd cannabis retail stores and the densely populated regions of Toronto peel and the province of Ontario have been closed to physical retail traffic and since December 26th birth of stores in Ontario being closed to in-store purchases. The stores have still been able to offer click and collect and limited delivery services in the near future. We expect to resume shipments to can dock in Israel were seeking good agricultural practice certification by the control Union medical cannabis standard to comply with Israel's updated standards for imported cannabis.

We're making good progress.

And subject to successful completion of a required inspection likely to be conducted remotely. We anticipate being certified as early as our third-quarter shipments will also depend on the availability of the desired page as we work on ramping up Staffing and production to accommodate demand in addition to revenue outside Beyond fiscal Q2. We've identified a number of opportunities which have the potential to greatly enhance gross margins. We expect to gain economies of scale and efficiencies as we scale up cultivation and packaging including the decline in charges for unabsorbed fixed overhead costs.

The recent launches of higher-margin Edison strains with more lunches on the horizon have the potential to positively impact gross margins over time these products gain Traction in the market and comprise more of our total revenue gained a greater proportion of our portfolio is being dedicated to higher volume excuse such as multi-pack pre-rolls and one gram Vape cartridges, which attract higher margins we continue to invest with automation to drive cost efficiencies and reduce dependence on manual labor. For example, a new pre-roll machine is expected to be fully commissioned and operational by the end of fiscal Q2 twenty one month and as a result of a packaging task force project a number of cost reduction opportunities have been identified with the potential to benefit margin starting in queue for 20 21. I'll now pass the call over to Darren's go through our financial position and results in more detail before I wrap up.

Thanks, Greg starting with our financial position. We ended the quarter with $134 million of cash and short-term Investments on December 1st. We used $55 down or term loans is 60 million which left us with a pro forma cash and short-term investment balance of $79 million the repayment on our Term Loan was agreed as part of the amendment and restatement of our team will be completed during the quarter as we discussed last quarter. We raised $69 million in Gross proceeds in q1 from an underwritten public offering with strong institutional support as Greg mentioned this past quarter represented the second quarter of the last three which generated positive cash flow from operations in q1 net cash provided by operations of three million compared to be used by operations of 26.9 million in the prior year. The Improvement was largely due to the prior periods increase in working capital assets as we scaled operations of birth.

Direct 2.0 legalization turning to our results for q1 Canadian adult use wreck net revenue grew 30% to 16.8 million from 12.9 million the prior year quarter and gross revenue grew 42% to twenty two point five million from from 15.5 to 15.9 million in q1, 2012. A year-over-year increase was mainly driven by the legalization of 2.0 products despite overall Revenue being down sequentially due to the temporary pause in sales to be gross and net adult use Revenue grew 14% And 11% respectively from Q4 2020 q1 total net revenue of 19.3 million declines twenty five point two million in the prior prior year quarter largely due to significantly lower wholesale revenue and a lower average selling price in q1 2021 the higher home.

No Revenue in the prior-year.

. Reflected opportunistic sales to a single licensed producer and was not necessarily expect to refer each quarter at those levels or at all total gross revenue of 25.3 down and compared to twenty eight point four million in q1 2020 largely due to similar factors impacting this revenue and reflected the increase in excise taxes, as a percentage of gross revenues into one 2021 T1, 2021 cost of sales of 23.2 million increased from q1, 2020 cost of sales of 15.8 million month higher cost of sales this past quarter. It was largely due to higher production costs a greater inventory provision and a charge related to unobserved fixed overhead as a result of lower production volumes in q1 2021.

Adjusted gross margin decreased to 1.9 million from ten point two million in the prior Year's quarter primarily due to lower net revenue and value segment offerings comprising a larger proportion of total revenue in q1 2021 negative IFRS gross margin is 16.7 million declined from positive gross margin of 11.2 million in q1, June 2020 largely due to net non-cash negative fair value changes to bio assets and inventory sold in q1 2021 versus positive changes in q1 wage 2020.

Sg&a of 11.1 million increase from the prior Year's amount of 9.4 million as a result of higher Insurance costs and general wage increases T1, 2021 negative adjustment other jobs, 6.8 million declined from a positive adjusted of a a 5.7 million in q1 2020. Mostly due to lower adjusted gross. Margin this past quarter wage loss of 34.3 million or 17 cents per share on a diluted basis in q1 2021 compared to a net loss of nine million or $0.01 per share in the prior-year quarter primarily due to Greater negative gross. Margin in q1 2021 that concludes my remarks. So I'll pass the call back to Gregg. Thanks, Eric the industry continued progress with the latest run rate estimated at 3.2 billion for the wreck Market based on stats Canada data for October 2020 a large driver of the growth is coming from the increase in the number of retail stores most wage.

Province of Ontario since July the store count in the province's grew by approximately 47% to 1414 stores as of last week driven by Ontario's cannabis retail stores more than tripling to 330 stores and in early December Ontario announced it was doubling the number of store authorizations again to 80 per month outside of Canada. We continue to serve International markets including Israel and Australia export permits and look to expand International sales Channel.

Finally, I'd like to make a few comments about the United States because recent developments are significant for cannabis as everyone's likely where the u.s. Election results in particular the Georgia run-off elections at tip Senate control to the Democrats is positive for pro-cannabis initiatives. Well, we believe the timing of full legalization is unclear and will likely still take considerable time to happen. It is clear. The political landscape has changed. We patiently followed the market and particular exploring past to enter the CBD Market the date we have not found opportunities that meet our risk-reward criteria, but we continue to monitor closely with any of the Rd initiatives and new products that we work on We Believe will ultimately commercialized in u.s. CBD markets and ultimately THC markets one federally legal. For example, our Edison remix Innovative product that we believe would translate well in the US in preparation for us activities Christy, Joe. Our vice president of legal Affairs is now an active member of the board of directors of the American Trade Association.

I'm registered in Washington DC founded to promote the expansion protection and preservation of businesses engaged in illegal trade of industrial medical and recreational cannabis and hemp based products. The organization is offering in the next phase of marketplace expansion brought providing the bridge from the Cannabis industry to mainstream name-brand businesses who will be partners in advancing the industry and ending prohibition and we are pleased to Welcome to the company's board of directors. His wife's offer is based in California and represents her first US domiciled board member, we believe she will be a tremendous asset given her deep us and internationally and finance experience combined with her board experience. Notably. She was recognized by a variety magazine in the 20 28 2018 dealmakers impact report performing schools include Chief Financial Officer and executive VP of corporate development at Lionsgate entertainment, a multi-billion-dollar global entertainment company. She oversaw m&a including Acquisitions and integration. Yep.

Cannabis and hemp. This is a trade organized.

Hi Mark pictures Artisan a non-payment and red bus film's distribution new cake. We look forward to Miss Wise offers contributions and insight as we continue to to chart an ambitious path for the company nationally and internationally in closing. We are we are well through the revitalization revitalization of our product portfolio and are starting to see it come through and top-line growth. This will only be aided by the additional resources. We are now bringing on WE remain focused on cost management and if identified meaningful upside potential for gross margins to drive profitability and sustained active Returns on investment for shareholders. So that concludes my prepared remarks operator. If you could go ahead and open up the line for questions.

Great. Thank you at this time. If you would like to ask a question, please press star followed by the number one on your touchtone phone to withdraw your question, press the pound or hashtag. Once again, please limit yourself to one question and one follow-up question. You may reach you if you have any further questions from there. Thank you. And your first question here comes from the line of David critical from a TV Capital markets, please go ahead your line is now open. Hi, good morning congrats on a quarter and thanks for taking my question. So just looking at your gross margin profile here Greg. I'm wondering if if you can comment just over the next several quarters, um, and and knowing that you know that you won't be providing a form of guidance here just with respect to product mix whether its value or your premium segment 2.0 vs 1.0 products. How should we think about the overall wage?

Let's um in revenue and we're just so we can get a better grip here on the gross. Margin. Thanks. Yeah. No. Thanks Dave. It's a great question. So I mean certainly as we indicated dried flower makes up the greatest proportion of our revenue and and over the last couple of quarters. The value segment has been a higher proportion over those two quarters in we'd seen in the past, you know, as I alluded to earlier, you know, one of our keys has our genetics program and introducing new cultivars. So we we did introduced three new cultivars in late December black cherry punch ICC and slurricane mentioned and we have plans to introduce additional new products under Edison coming forward. So those new higher THC new genetics in the Edison Banner are of higher wage because they have a higher average selling price. So that's been a big shift for us, you know, it's important to note as well. Um, you know while in a couple of quarters previously, we had reduced pre-roll production wage.

To covet we were able to start ramping pre-rolled production up, but those do also have a lower margin than Edison. For example one big Advantage for us as I mentioned.

Earlier as well going forward is that um, you know, we have new automation equipment. We expect to be fully commissioned and operational by the end of this quarter early Q3, which again a reduce the cost of goods on pre-rolls and allow us to not only you know be efficient in the pre-World production. But as our plan involves, you know, what we're looking to do is continue to increase wage. No, excuse eyes and efficiency and margin by going to higher volume. I talked to earlier about you know on a Trailblazer Vape cards going to a one gram on the pre-rolls. We're going to multi packaging well, which we've seen very good consumer response from and you know, I think when you look at our overall picture, one of the things that's impacted us certainly is, you know, that's part of the the good news on the genetics program is that you know, we've really been able to sort through and come up with these new products, but it does have an impact in the near-term as you're working on a number of dead.

New genetics and getting through that genetic mix till until you optimize the conditions takes time. So, you know, we're confident that we're going to be able to continue to improve that on a go-forward basis. You know, I think one of the other things that's really impacted us, you know, as we said we're we're in the process of Staffing up because we were producing less than the market demand for our products, which is good news in terms of on a go-forward basis. So, you know increasing that will reduce, you know, this isn't gross margin specifically, but we're reduced some of the absorbed overhead and effect song Justin ibadah and really optimized and and continue to improve efficiencies and that's one of the keys for us as an organization. We've proven in the past that we can run very efficiently I am now what kind of scaling back up we you know, we believe that will be the case going forward. And and the last thing I'd say David is just that you know, we also have a packaging task force has been working over the last month.

Two quarters to look at other opportunities for cost reductions and I think one of the key area, you know, we identified a number of key areas, you know life is to bring bike you for some of those initiatives into place to really have an impact on efficiencies and package. So, you know, just I guess in summary I would say that ultimately we believe that our documents as I said in in these new strains and new genetics to really meet the consumer demand or going to pay off but it takes time to get there. Okay. Thanks for those really great color my phone no question has to do with kind of the month of December and giving these unusual type of covet but have you noticed any seasonality effects and in particular have any particular products within your 2.5 product portfolio, whether that's chocolate Vapes or beverages if any of those products kind of stuck out to you just from a consumer overall Revenue perspective, but during the month of December and I'm even in, Georgia.

Two weeks holidays next. Yeah. No, it's it's a good question David. I mean certainly it's too early to tell on a remix beverage product because you know, we've just launched that and and we're don't have distribution never took as of yet. You know, we did look to some seasonal offerings that when I think that was one of our approaches right with our Christmas dicks pre-roll 0.5 grams specific for the Christmas season as well as gingerbread Edison bulb a milk chocolate truffle that was gingerbread flavored and and so the response to both of those was was very good. You know, the only thing I would say we had seen an impact and through the whole period of Cove it on areas like disposable vape pens Revenue in that area has not been as high as expected and we understand that those are driven in some cases more wage like, you know, tourism and travelers and errors like that and those are also things that people take to share at events and stuff. So those have been that kind of calories, but we didn't necessarily see a seasonal wage.

May have been diverting kind of some of their disposal income to other areas. But you know overall, you know, I think you know part of our way of taking advantage of something he was to offer a couple of unique, uh Community seasonal offerings, which both were very well received in the market.

Okay. Got it. Thanks very much for that color. I'll hop back with you and congrats on the quarter.

again, typically like anything, you know people

Your next question comes from the line of Andrew Parthenia from Steve, please go ahead your line is now open.

All right. Thanks for taking my question. Maybe if we could continue the conversation on on gross margin, you know, I think you mentioned you know, the re Staffing activities only benefit gross margin in Q3, but on absorb costs could be reduced in in Chrome to just wondering if if we Staffing activities are the main source of the unabsorbed cost and and lower production utilization. Could you talk a little bit more detail than and reconcile these two items? Yeah. Maybe I'll turn that over to direct answer that question.

Sure. Thanks. Great. Yeah during the quarter. We had absorbed overhead fixed cost essentially depreciation insurance and taxes of 2.7 million and that was dead operating at the capacity level we have which was approximately 40% during q1 as we add to our planting and cultivation and and add the staff wage would be utilizing more of the rooms and as a consequence as it relates to our overall margin a lower dollar amount or of these unabsorbed overheads would impact them to 2 as well as Q3 it would be staggered in terms of the direct benefit, but there would be some benefit in terms of the overall direct charge to the Costco sales during the second quarter. But to Craig's point on overall basis the cost and production of of brands that go into your evening Tori really normally dead.

After some some quarters are just in cost to sales and and that was why he was providing perhaps a a comment that the the true benefit of operating at a higher level and getting a lower cost per year Life Starts to impact to 3 and later quarters.

Okay. Thanks for that additional color and

kind of on the same length

You know when you noticed that you know, when you talked in the past that you know, you you planning on lowering yields to to increase quality. So when you can find the lower yields, but also the higher-margin new Edison strains and obviously can take taking into context that you're that you won't be providing any kind of formal guidance around what levels do you think we can see gross margin stabilizing you have any internal goals in this metric and maybe as you know as part of that could you also remind us, you know, where your production levels where before restocking activities and what kind of increase we can expect once you're fully staffed? Yeah, so maybe I should start off and answer that Andrew. I think you know again, we you know, when we come in before that are you know, we knew we would, you know be decreasing yields on our program basis and being part of that also. Keep in mind.

you know because of COVID-19. Of

Tractable product and concentrate. We also stopped harvesting trim right in Q2 of twenty-twenty which made up 30% of the, you know, material from the plant so that had an impact on our overall yields to begin with we knew to optimize THC we would you know have to kind of work to optimize yields and it wasn't necessary improving THC as I said it with that investment in genetics. You don't have the ideal conditions, you know that impacts the drop and it takes you know a number of different rooms and Cycles to really get to the point. We are 16 yields improving over the last quarter certainly along with THC levels. So we've been able to continue to see progress in both areas as you can see by the product launches that we've recently had, you know in that, you know, twenty three to 27% THC range and you know yields are are starting to go back up. I don't want to give birth.

Kind of necessarily a specific Target relative to you know, what what yields you know where we need to be on the yield per THC basis because you know, every strain is different game and you have to treat them accordingly and there is room depending on the strength to have you know, some differential pricing as well for the product based on the demand, you know, one comment. I would make before entering the back part of your question also is that you know, we returned we started using street names, you know in the marketplace and it's it's actually had a very positive impact in terms of response people know the strains, you know, we've seen the legal Market attract a lot of people from the illicit market and that's been very very helpful for them to identify the projects and certainly something that's been a positive move. I think they're just indicated that you know in answer to the second part of question that you know, when we look at our facility and utilization wage.

Staffing up right above 40% utilization rate of the facility. So, you know by adding these, you know, hundred cultivation and 30 packaging people again, this will be staggered in over a long time. And you know, we we expect to continue to progress on that. You know, it's not only just a cute to initiative as we see opportunities not only domestically but internationally growing age, you know an opportunity to continue to expand and increase cultivation levels going forward.

Thanks for that additional color and I'll get back in the queue.

Your next question comes from the line of Erin Gray with Alliance Global Partners, please go ahead your line is now open.

Hi, good morning. And thanks for the questions. You know, first one for me. It's kind of you know want to go back to the commentary main kind of around the kind of how you're looking at it cuz obviously been in a lot of focus on thanks giving the election results. So you've seen some of your peers kind of get into the you know, Ms or other businesses. So just curious as you kind of talk bout, you know, not liking some of the risk Awards you're seeing right now. Could you kind of give some more color in terms of what you believe might be the best way to play it today, you know given there's still uncertainty in terms of you know, whether there will be federal law and federal laws were look and if you're now kind of thinking about play the wait-and-see game to see it all how it involves or if you might be a little bit more aggressive in terms of making a potential movement to the things I you know, it's it's a great question. It takes for the questionnaire and you know, I think as I alluded to I mean one of our focuses has been always um are focused and investment in R&D and developing new and differentiated products from you know, because again, ma'am,

Only we believe in order for the legal Market to displace the legal the illicit Market whether or not that's in Canada in the US or in other jurisdictions offering offering differentiated products that change.

Change the whole cannabis consumer experience is going to be important. So that's why you know in products like our remix dry powder beverage, you know that we've developed invested. We believe there are opportunities potentially to you know to license that to other markets and to look at you know, how do you take those platforms and bring them into the markets, you know as they said earlier we have spent a lot of time over the last two years really looking at the CBD market and and as a potential entry point into the US and I think you know ultimately to be frank. We just haven't found the right partner on how to do that way. You know, I think for us as we look at, you know, we we continue to focus on the opportunity, you know, there isn't a clear path as a you know, as a Canadian company that you know traded on the Dual listed on the NASDAQ and the TSX with the regulations that exist. They're currently to enter the US in the THC Market. Certainly, you know, we've seen some companies take some off.

And approaches relative to you know, our approach is really about developing branded products developing Innovation and technology that we feel will lend itself to the market and that may be something you know, we either look to license out or we look to do ourselves in the future as as a regulations allow.

All right, great. Thanks a lot for that color. And then second one would be specifically kind of around the province of Ontario, you know, obviously, you know, everyone's looking for, you know, a lot more stores to come online, you know and 12 or 1 we start seating towards the end of 2020. So just curious from your perspective in terms of like as a criminal stores come online. You know, how are you seeing in terms of like saturation within specific geography right? So I know there's some sales in Toronto where there's a lot of you know retail stores in one specific area. So do you feel like that might start to impact maybe the incremental, you know dollar sale we're going to be seeing, you know, per new store that you age and Ontario and how do you feel like that might impact kind of the overall, you know competitive landscape for you guys going forward and thanks know. Yeah. It's a great questionnaire and I think you know, you're bang on in terms of you know, not every store is the same in terms of the ability to generate additional Revenue. I think you know what you're seeing for example you referenced in Toronto. There's a couple key areas in Toronto on Queen Street along Yonge Street that two of the major artery.

Please where there is an abundance of stores going in and so that does lead to some level of saturation. So it will grow the overall Market, but at the same time the revenue per store off, you know will not be at the same level because of that saturation point, you know, I think when you look outside of the core of Toronto, there are certainly lots of opportunities and we are seeing you still happen in areas that have limited stores or no stores today and I think that's been one of the keys, you know, and I think that's where the growth opportunity certainly exists is to kind of, you know, people that have had to rely upon online only sales getting access to you know, a store or multiple stores now is one of the key facets so long, so it's a bit of combination of both but certainly you know, and and I'll look at Alberta as an example where you know with the number of stores Alberta has the highest number of stores per capita right now home.

They probably did reach a saturation point.

Kind of last year and we've seen where you know a small number of stores have closed or there's been a little bit of consolidation happen and optimization. So on terrorism long way away from that happening because they're still tremendous room for growth and you know in terms of you know, where we see the growth happening, but again certainly along a couple of quarters, you know, there's there there is some saturation happening. The other would comment on is, you know, there are still a couple of municipalities especially in and around Toronto that don't allow cannabis wage or so if you recall when legalization happened now Ontario government allowed each municipality to opt-in or opt-out, I think certainly smart retailers should be looking to you know, put them on the border of the kind of those municipalities and I think that's kind of one of the opportunities that exist right now, especially kind of north of Toronto. There's you know, there's a there's a big opportunity wage.

Border stores along Steeles Avenue, for example would have a huge impact on Revenue.

All right, great. Thanks for calling. I'll pass it along.

Your next question comes from the line of graham cracker with a capital, please go ahead your line is now open.

Hi, good morning. And thank you for taking my question. I wanted to ask a follow-up with respect to the the adjusted gross margin and I appreciate the the comments made in the prepared remarks and the discussion earlier about the money to fix the unabsorbed fixed overhead. I wanted to dig a Little Deeper red you mention on the call that you're going to be bringing in a pre-roll machine in the middle of the year. And the packaging task force is expected to walk by the end of the year. Can you give any indication of what what those initiatives will do discreetly for the gross margin, you know, maybe there's some internal modeling you've done there and you compare that to a off the Baseline is right. Now that that would be helpful. Thank you. Yeah, I don't want to give guidance necessarily specifically about the impact. I mean the one you know, I will give a comment on the pre-roll equipment. I mean I spend on site now we've been working with it and we have seen, you know during test runs it producing 40-50 pre-rolls per minute, you know and reducing labor required with pre-roll production wage.

22 people down to 3 so, you know, that's an example of you know, just directionally what we've seen now, it's not fully optimized. We're still you know on playing around with the Blends in terms of the appropriate blend mix of you know material for it. But you know, we expect that to have a significant impact in the near-term and then you know off of our shift for Q4. As I said is is really looking at you know, some of the shift in some of our packaging types and designs and you know trying to be more consistent and in terms of utilizing a couple, you know pouches for example for multiple different product lines, which allows us not only efficiency and packaging but also allows us in terms of our packaging inventory and always availability, you know, one of the things I commented on in the prepared remarks was, you know, we know we left revenue on the table in the quarter. We certainly, you know, we did not have service.

in product and or capacity

City and Staffing to meet the demand for a product which is why we're Staffing up but you know, so I can't you know, I don't want to give specific Direction in terms of what we expect on savings. We have done modeling but you know until we get to the point where you know, one of the challenges always with Automation and equipment is until you get it commissioned and up and running. You don't know what impact is going to actually have.

Okay, I understood and and appreciate the the anecdotes there that's helpful. Then perhaps then in terms of order of magnitude and what your expectations are between increasing your Staffing levels, which are going to get you higher higher throughput there. And then you know, the the pre-roll initiatives the packaging initiatives. Can you give any sense directionally in terms of what you're expecting will have the most outsized impact in terms of Interest margin there, you know again directionally, I would say it's definitely a combination of both. You know, I think I think increasing Staffing and increasing put in throughput is going to have the most significant impact because again producing more sellable product, especially as we've now, you know, optimized conditions around some of these new heights genetics will you know, create significant opportunities for us and you know, the the the initiatives on packaging or more of a longer-term impact and we'll have, you know an improvement in margin but

At the end of the day, you know increasing revenue on a high THC product, which has a higher margin is going to have more impact.

That's very helpful. Thank you very much.

Your next question comes from the line of Adam Buck, Scotiabank, please go ahead your line is now open morning and thanks for taking my questions. So first in some sort of capacity. Is it possible to speak to the potential size of missed Revenue opportunities and physical key one as a result of production constraints maybe in terms of purchase orders or something along those lines.

Yeah, Adam, I mean, you know internally we we do know now some of these portraits orders we were able to fulfill in Q2 so they weren't necessarily completely missed but we did we did have between five and six million dollars of POS. We were not able to fulfill in the quarter. Okay. That's that's a good color. Thanks. Secondly in the prepared remarks indicated that there is there could be some cooling off in the market giving the retailer services in that area the date have you seen any impacts or buying patterns from from the OCS and and then just a bit of a fall off that the OCS has recently had some comments that potentially rationalizing the account. Obviously you guys are going to be that much of its portfolio. But with this potentially come and do you think it could actually be a bit of a Tailwind for the the left or the products their left remaining on the OCS? Yeah. No, it's it's a good question. So to answer your first question, I think certainly, you know, we have no money.

Seen a shift in order patterns, but certainly we've been notified by OCS, you know again as they are continue to kind of monitor daily weekly the impact of you know now going to walk and collect and and local delivery only will have on retail sales that they could.

Change to an existing PO for example, that's due to be shipped 3 weeks out could be reduced. So we have not seen that happen yet, but they've given us indication that that could happen. Yeah. I mean I get your point. We we've been probably one of the most active companies in working closely with OCS in terms of you know, revamping our portfolio from switching our products. So certainly that's been a big factor for us and and we really see with every Province and you know, certainly with the two largest provinces for us and for the market, Alberta and Ontario we've been active in that so, you know, I think it does I mean the their strategy I mean they've you know, they're going to a hundred cord listing products. They expect those products to always be 100% available. And so, you know, there are Tailwind opportunities for those products for cordless their products to generate Revenue because again, the commitment from every company will be to you know, make sure

Through those products are always in stock and and you know, there's tremendous opportunities. So retailers know that they will always be able to you know, access those products and carry them at the retail store, but I'm not listing requirement in the province of Ontario now will require a 98.5% inventory level. And so, you know, it's critical for companies to consistently with that level where you run as you would see in any normal retail environment. You run the risk of being delisted. So, you know companies that have in demand products and are able to consistently Supply the market wage, you know are in a great position in terms of Revenue against those products.

Great. Thanks for the color.

Next question comes from the line of the vampire from CIBC, please go ahead your line is now open.

I think's good morning. I want to get sent to how you feel about the balance sheet at the moment. And of course he did the recent Equity raise, but we're still some some debt on the balance sheet and Industry valuations are real bust at the moment. And now there's the prospect potentially of entering the us at some stage at least just would like to get your thoughts on capitalization levels at this time. Yeah. Look, I mean we're we're very easy with our balance sheet. As you said, I mean, you know at the end of the quarter after using 55 million of proceeds to pay down a portion of the of the debt facility, you know, we suck million remaining in debt, but we did have, you know, seventy nine million dollars in cash and short-term Investments + 8 million dollars of restricted cash. And I mean again one thing I would highlight is, you know, we had two for the 2nd of the last three quarters positive cash flow from operations. So, you know as a company perspective, I think we're you know, we're in a strong position wage.

You don't want to go forward basis relative to you know, our own cash position and also kind of how we're operating in our operating consistency.

Okay, thanks. And then my follow-up is on is on the gross. Margin. When you think about getting back to the previous levels, you'd hit kind of that thirty-five to forty percent number. Do you need to get the same level of net cannabis Revenue? I have that $25 million-plus, um in terms of sales or or is your cost structure different now than it wouldn't quite need to be so high or or is it potentially higher because now you're um, uh offering a lot more value products just would like to get a sense of what what you need to hit on the top line to hit that previous gross margin model. Thanks. Yeah it it's a good question John. I think you know, there is a mix there. So certainly on one hand, you know, we have become much more efficient as an operator, you know, you know, I hate to say it was a benefit from COVID-19 of the things that you know with reduced Staffing it forces us to do was look at you know, how we operate how we do things and and we've been able to get much more efficient in a lot of things we do and then come home.

as I said

You know some of the initiatives we've taken on automation or even kind of systems and how we operate so, you know, do we need to be there? I mean, yes the you know, there's no question that there are mix is you know, so I didn't mean to say do we need to be there? Yes at the same level of net net revenue. I think it's it's a mix right because we are selling, you know, more value large birthday excuse, you know, so your average price per gram there but certainly is lower. But you're you know, your labor costs would go into that and packaging costs are significantly lower as well. But you've been our goal is to as I spoke to earlier is to really continue to drive more revenue on the high-margin products. And you know, that's why this investment in the genetics program and what we've been doing the last, you know, twelve to eighteen months is it's really starting to pay off now and cuz that is going to be critically important, you know, we have seen there's no question. We've seen price compression in many categories and and it's not wage.

Just you know value dried flower categories. It's also been in you know innovates category as well. So, you know again, I don't want to give a specific forecast as we do offer guidance on what we level we need to hit. But you know, I guess your comment would be accurate in terms. It's a mix between the two you you know on one hand you're we're selling more of the high volume down lower price value products, which do have a lower margin one of our lowest margin products historically has been provable. So we're looking to improve that dramatically with the automation right so long

Okay, that's pretty colored. Thank you very much.

Your next question comes from the line of Vivian Acer with Cowen and Company, please go ahead your line is now open.

Hi, good morning. I need to pull up on Aaron's question about the the market and your posturing. They're around there hasn't been a lot of evidence around brand Equity transferability between CBD and THC and and frankly the category development and has been quite lackluster there continues to be regulatory uncertainty around the FTE. So, can you just expand on on why that's the appropriate Pathway to enter the US. I understand, you know, obviously the regulatory constraints around THD. But but why even pursue like to be strong know it's a great question. Did you know ultimately what you've outlined is why we have not entered the we have not seen really an impact. I mean, you know, is there transferability between CBD and THC products? Not necessarily think there's only a few areas where that's the case. I think for part of us are our strategy there was you know as wage.

Evaluated entering the market is you know, simply to get a toehold in the US and looked to be in a u.s. Operator and kind of you know, look to hire people potentially or acquire a company that you know, you could leverage across to the THC Market. But but I agree with you a hundred percent that to date we haven't seen that transfer and ultimately that's why we haven't made the decision. You know, again, our our Focus has been dead, you know as outlined earlier in response to Aaron's questions, you know, I think there are Technologies and Innovations like our dried powder that can be applied in both markets and and one strategy may be to say do we look for you know for someone to license those two or do we look to launch those ourselves? I think there is still a level of uncertainty on on CBD, you know in the US with the FDA. I think the real still going to be God showed where they are going to look at certain forms of you know ingestion. For example, we're investing products having to undergo some toxicology work potentially. So the dog

Still aren't clear on CBD and and there's a number of reasons. We have not yet entered the market, but certainly we've looked at it as an opportunity to potentially get it to hold and see possibly

Your next question comes from the line of route from Raymond James, please go ahead your line is now open. You want morning Greg. Good evening. Thanks so much for including us in the queue. So my first question is is is there a market share and and you know, all of your comments, uh, earlier are well taken, I guess maybe more more of speaking to Mark the macroscopic level, you know, we seen a decline in market share of over several Quarters at least in this last quarter we've seen that you know that being attenuated somewhat unique you are stemming that given you earlier comments about increasing appreciation and demand for organic products. Do you anticipate you know that you kind of body image eating out and market shares should start to that should start to increase over time. Yeah, you know, it's a great question rule. I think we're you know, as I mentioned, I mean we had unfulfilled p o as in the quarter, there's no question and I think wage

thanks a lot,

The challenges we've had truly is, you know, we've had inconsistent supply of many of our products. So even you know, our Trailblazers snacks when it was launched and chocolate category wage. It was not always available and and part of the you know, part of the challenges you face is that in certain jurisdictions in terms of how much product they carry at launch and then if it sells out quickly, you know, our shred is a similar to that right? So shred was an overwhelming success, you know, as I said, it was the most searched number one most searched brand in November December in on the OCS website. And so we took no no idea that was going to be the case. So, you know again it's it's difficult to just look at our share because there's kind of a lost opportunity there where you know, we've not been able to fulfill the market demand and I think certainly, you know, we believe with increased production, you know, we are in a great position, you know to be able to age

To continue to increase share on products like that or some of our new offerings on Edison because you know, every time we ship shred in and she'll themselves out very quickly right now. And as I said the search, um, you know metrics that we've seen on on those CS would be an indication of the demand. So, you know what you see in terms of share doesn't represent the demand necessarily we've got to do a better job in in a meeting the the inventory levels to to fulfill that demand.

Great. Thanks. And then just a quick follow-up and finding a little bit. So, you know, you're one of two companies that have taken a pretty pretty material bet and buys them and we're seeing the states real life guarding evolve and and given the vet in heightened heightened and it's specific somewhat unique strategy of focusing on on the major cannabinoids relative to the university. You're very focused on the line of cannabinoid. Do you see this as kind of your you know, the whole particularly when it comes to entering the US market as you as you referred to play around the beverage routers wage. Yeah. So again, I, you know, I'd agree in part with what you said, like initially certainly high sense approach has been you know, they were the first commercial company that am aware of first bio since it's this company to have a commercial sale of you know of a cannabinoid with CBD a produced through biosynthesis. And so but I mean

We're focused on minor cannabinoids as well. I mean, they've got a fulsome portfolio of twenty-three cannabinoids 19 minor and and four major cannabinoids, you know again, I think one of

The keys of early focus on major cannabinoids is that the process for producing them is somewhat more straightforward and not as complicated but you know in parallel they are also working on minor cannabinoids and I think that's going to be critical for the future, you know we and and and I wouldn't you know, I wouldn't necessarily agree with your comment that like every you know, other companies are all focused on my life. We've seen other companies, you know talking about plans to commercialize and near-term and not spend their focus. So but I think you know Hisense Focus, you know, they've got a you know a strategy with them is then you know that we believe they have a strong IP portfolio and that they are working, you know on dual-path both with major cannabinoids, but potentially for minor cannabinoids in the future and I think that's one of the key aspects where we believe, you know in the future minor cannabinoids are going to benefit greater greatly from biosynthetic Prasad.

Can because you know, ultimately you cannot produce the majority of minor cannabinoids from a plant in any significant level and the cost would be cost prohibitive. So the benefits of mass production is, you know, or much higher with my cannabinoids than major cannabinoids.

Terrific. Thanks very much.

Your next question comes from the line of Pablo doing please go ahead your line is now open. Good morning two quick questions one, you know, when you see a free until re-emerge, you know, how do you think about them? You know, you have about three or four percent share based on my numbers, you know as the industry starts to emerge. Is that a problem for a company like you're like yourself or you know how to how does that manifest itself off the ground level or it doesn't make a difference. It's not something that's keeping you awake at night and the second question in the case of Israel. We can dog there's been two or three other companies that have also shipped to Israel wage. It seems like a dog is like you said Sherry speaking and they buy something from some companies and other things from other companies just talked about that dialogue in terms of whether they buying from you. And what is it that that stands out compared to what other people are you expecting to Israel? Thank you. Yeah. No, it's great. You know your first question in terms of the overall market place. I think you know, you know, we have seen you know bigger does

Necessarily mean better. I mean some of our larger peers have shuttered multiple facilities. So, you know, uh, a potential merger of Anna free and Tori coming together, you know, it it may be more about International markets from certainly what I've seen written or kind of looking at other markets and it is about the Canadian Market Per Se certainly a lot at least that's many months, you know perspective on it. I think for us the key has to be continued to drive forward with, you know, new and Innovative products differentiated products that there is market demand for an hour. And you know, that's going to be one of the critical parts to answer your question on Israel, you know certainly for us with with can you know, we're an indoor producer and certainly there's a break in between, you know, there are other supplier at this point.

you know in terms of the marketplace and and certainly

The initial response to the product we did sell in on our first shipment was extremely positive and you know, we're working hard to to with can. To be able to continue to supply them in Q3 home. And again that will be dependent upon getting the c u m c s certification as well. As you know, having the right product mix for them at the time but, you know, certainly for them one of the big advantages that they saw as being an indoor producer so

Got it. Thank you.

And there are no further questions at this time. Ladies and gentlemen, this concludes today's call. We thank you for your participation and you may now disconnect.

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