Q2 2021 OrganiGram Holdings Inc Earnings Call
Second quarter fiscal 2021 earnings conference call.
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Minder. This conference call is being recorded and a replay will be available on organic grams website. At this time of I would like to introduce Amy Schwalm, Vice President of Investor Relations.
Thank you Jack joining me today are organic and Chief Executive Officer, and think angle, Chief Financial Officer, Eric West and our Chief strategy Officer of power to the attack before we begin I would like to remind you that today's call will include estimates and other forward looking information from which our actual results.
And could differ.
Please review the cautionary language in today's press release regarding various factors assumptions and risks that could cause actual results to differ.
Furthermore, during this call we will refer to certain non <unk> financial measures, including adjusted EBITDA and adjusted gross margin.
These measures do not have any of standardized leading on the isos and our approach to calculating these measures may differ from that of other issuers and so these measures may not be directly comparable.
Please see today's earnings report for more information about these measures and I'll now hand, the call over the clock.
Thanks, Amy good morning, and thank you for joining us today.
Here, we are over a year into this pandemic and despite challenging times currently there's a light at the end of this tunnel and start seeing start to be administrative and.
Minister of across the country and worldwide.
And we couldn't be more excited about the prospects for the cannabis industry and organic ground.
Before going into more detail I wanted to take a moment to thank our employees for their commitment and dedication of the company over the last 12 months, which have been challenging for all of us.
This morning, we reported our second quarter of fiscal 2021 results for the period ended February of 'twenty eight 2021 as.
And as we expected and indicated and in our last quarter's disclosure Q2 continues to be a transition period, while we were ramping up operations and hiring and the requisite stop such that operations are anticipated to be better supported and Q3.
Our Q2 results were also further impacted by production production disruptions on two occasions related to COVID-19, as well as market.
The dynamics due to COVID-19 restrictions.
As we continue to be laser focused on execution and a very competitive Canadian market.
Our team has been busy with some significant recent developments, which we believe have meaningfully strengthened organic <unk> near and long term competitive profile and the potential there.
Position the company for more and near term revenue growth with the acquisition of the Edibles and Infusions Corporation and believe our collaboration with B, a T will be transformational over time.
I will spend a moment on these two transactions before I comment more on the quarter.
The hallmark over gain of great and that's been our focus on R&D and innovation.
Our efforts and attention and have been and continue to be about delivering innovative differentiated products with the most consumer appeal.
We were one of the first two candidates companies to invest and biosynthesis.
And we believe this technology has the potential to change the cannabis landscape.
Another example is our in house R&D teams development of of proprietary nano almost vacation technology to allow for faster absorption of cannabinoids when compare to traditional edibles.
It is our view that the cannabis industry is still and the nascent stages of product development and the continued investment and innovation and R&D is necessary to secure a long term competitive advantage.
The a T a leading consumer goods business with innovative product platforms and the.
The press of dedication of R&D and deep consumer insight chose to collaborate with us after extensive discussions workshops and.
And up due diligence.
The centre of excellence of our theory has been established on a month and facility.
The C O.
We will work on developing the next generation of cannabis products IP and technologies and also cannot come now also dropped upon our R&D capabilities and licensed facility in Winnipeg to augment and diversify our product development efforts.
Both organic and BRT and B a T are contributing scientists researchers and product developers to the skew of week.
Initially the focus will be on the CBD products.
Both companies have access to certain of each other's intellectual property and subject to certain limitations have the right to independently globally commercialize the products technologies and IP created by the center of excellence.
Through the Coa and be a piece of representation on our board of directors, we intend to leverage <unk> expertise for our wider operations Theres the steering committee to supervise and govern the theory of activities with an equal number of senior members from both companies.
And we also anticipate benefited benefiting from to the 18 nominees to organic revenue board of directors.
At closing, we welcome Mr. Zahn Hepper to our board and the other non and he is expected to be appointed and the near term.
Mr. Hepper, who is the group category director at the of Tea has over 23 years of diverse management strategic leadership and M&A experience at global companies, including Procter and Gamble Danone and most recently and lifestyle of health care.
Not only as of this collaboration with BP and go into accelerating and strengthen our research and product development activities is also expected to be instrumental and establishing the foundation for our U S and international strategy.
As part of the transaction.
<unk> invested approximately $221 million Canadian and us for 19, 9% equity interest.
The significant capital injection organic brand is well positioned to expand into the U S and other international markets at the right time and subject to applicable law.
Under the product development collaboration agreement, we will be granted of worldwide royalty free sublicense simple perpetual license took the boy IP developed under the collaboration.
This license, which is non exclusive outside of Canada, and solar and Canada will also enhance organic <unk> ability to enter markets outside of Canada, including through sub licensing arrangements with established operators.
Approximately $30 million of investment has been reserved for our portion of funding obligations under a mutually agreed initial budgeted for the Coa and costs will be funded equally by organic Graham and B a T.
Now turning to our most recent transaction or line of just last week.
We acquired the Edibles and Infusions Corporation or <unk> for short.
Soft shoe manufacturer with other specialized confectionary capabilities and backed by leadership from a company with a 100 years of confectionery operations.
The IC management team also has experienced and supply and confectionery products to over 20000 locations throughout North America.
James Fletcher CEO of Caldolor candies.
And they're kind of Graham as president of the IC.
James has deep CPG, and confection and their expertise and experience and a proven track record of delivering to some of the world's biggest retailers such as Costco and Walmart.
The acquisition.
Positions us for more and near term revenue growth from the largest edible category soft choose of gummies and diversifies, our R&D and manufacturing capabilities with an operational footprint and Western Canada.
EIC currently holds the standard processing license is in the process of obtaining net sales license until it receives the sales license. It can manufacture products and bulk for further processing review and sale by us or other third party licensed producers for white label opportunities.
Importantly, the acquisition also strengthens our R&D capabilities with this research laboratory and research license.
EIC constructed and leases of purpose built highly automated 51000 square foot manufacturing facility in Winnipeg, Manitoba with state of the art equipment designed to produce highly customizable precise and scalable cannabis infused products, including edibles.
We now have two facilities dedicated to rec two point of products, both designed under EU GMP standards.
We believe that our strong presence and bulk cannabis 1.1, and two points of markets is crucial to sustain a significant share of the Canadian market.
Well candidates, one point of dried flower pre rolls and oils still accounts for more than 70 per cent of the overall Canadian market.
The two point of sales growth is outpacing the overall market is new product formats are launched and consumer preferences evolved.
For example, edibles currently represent about four percentage of the Canadian Rec market.
The 12% to 15% and U S markets.
In fact, we note that in Colorado, which is the most mature U S market.
Edibles accounts for about 17% of the total cannabis sales.
To date, and Canada, Edibles, and one of the fastest growing segments of Rec two <unk> products.
We now have specialized capabilities and the two largest edible subcategories gummies and chocolate.
The largest subcategory is gummies or soft choose with our acquisition of the IC. We can enter this market quickly backed by proven confectionery experience.
The IC equipment is designed to produce craft and large scale and nutraceutical grade cannabis edibles, including packed and gelatin and sugar free gummies, toffee and caramel with novel capabilities, such as infusion striping and the possibility of using the fruit purees.
Chocolate sort of the second most popular edible category and our Moncton facility houses are world class chocolate production and packaging line.
Concentrates on the other subcategory of Greg two pointed out of that.
And the meaningful growth and appear to have a lot of upside when you look at the popularity of these products and the U S.
We have plans for and that was hydrocarbon extraction from the production of concentrates and other unique products.
Currently we expect to begin commissioning of this equipment and Q4 fiscal 2021.
In the interim we've continued to revitalize our product portfolio was 63, new Skus launched since July 2020.
And if the 31 more skus still to come and Q3 fiscal 2021.
Ontario, SKU rationalization mandate has not negatively impacted us to date.
As a result of US revamping of our portfolio, we were able to trade up some of our slower moving older products and we're ready to replace them with new listings.
I'll take a moment now to highlight some of our new key listings and launches and.
And we discussed during last quarter's earnings call. We are very focused on revamping of our higher margin Edison portfolio.
After launching three new Edison and the constraints in late December 2020.
We introduced the strange black Cherry punch, ICC and slot arcades and three packs of have Grand Prix walls.
We expect to launch.
More high THC strains under the THC strains under the Edison and brand in Q3 2021.
Edison was among the most searched brands on the Ontario cannabis store website in November 2020, as well as January and February of the share.
Also in late March we introduced the new brand called indie one of Canada's only cannabis brands dedicated exclusively to index cultivars Skyway Cush is the first train and the companies any portfolio and currently offers THC and the range of $20 to 23%.
And the popular value segment, we leveraged our successful shred brand by launching <unk> joins the convenient jar of 14 have Grand Prix roles of Shreds Tropic Thunder.
That has been the number one most searched brand on the Ocs website for the last five consecutive months.
In terms of Rec two point of products.
Produce milk chocolate trailblazer snack bars.
The third flavor to be added to the initial launches.
Of Mint and Moca flavors, we also plan to launch further Edison bytes truffle products and the next few quarters. After the success of our seasonal gingerbread offering last fall.
And look forward to improving revenue from our <unk> portfolio with the launch of two new products with higher THC concentrations.
These include and Edison plus other disposable vape pen and the very competitive price point.
Well as the new one gram of Edison cartridge for the 510 day browser.
Both products will be based on our popular and line might stream.
These two additions will add to our portfolio, which already includes the value segment offering of Trailblazer Sparks sicker, and glow 510 thread towards cartridges and half Gram and one gram formats.
And the premium Edison Pax era distillate cartridges.
With last quarter's results, we indicate that we were scaling operations we've.
We've made good progress hiring more staff and ramping cultivation, which we expect will improve demand fulfillment and drive higher net revenue in Q3 as compared to Q2.
We do caution net net revenue could be negatively impacted should we identify any positive.
COVID-19 cases, and the future and need to take similar.
Measures to Q2, we essentially shut down the Moncton facility on two occasions, and Q2, sending employees home types of late.
As well, Ontario announced its third state of emergency last week, shuttering cannabis retail stores to foot traffic and limiting purchases to online shopping.
And local online.
Online shopping and click and collect and local delivery of which could also impact Q3 revenue.
Beyond Q3, we are targeting for sales of soft chews and fiscal Q4, 2021 subject to certain progress, including but not limited to the receipt and commissioning of certain equipment.
Please share of QE documentation and the hiring of records and staff and obtaining listings for provincial boards.
Also we expect to resume shipments of <unk> in Israel and in the near term.
Seeking good agricultural practice certification from the control of Union medical cannabis standard to comply with Israel's updated standards for import of candidates.
Subject to successful completion of the required inspection likely to be conducted of remotely we anticipate the and certified as early as the end of our fiscal third quarter shipments to <unk> are expected to resume and fiscal Q4 2021 contingent upon regulatory approval from health, Canada, including obtaining the export permit.
And the availability of the desired product mix.
In terms of gross margins, we see the potential for significant upside here, we have identified a number of opportunities to improve levels over time.
We expect the gain economies of scale.
And efficiencies as we as we continue to scale up cultivation.
There's potential for greater contribution from higher margin products and formats, including new strains under the Edison and indie brands international sales to <unk> as well as from multipack crude oils, and one grant dates, which attract higher margins and singles and half Grandbabies.
We also continued investing in automation to drive cost efficiencies and reduce our reliance on manual and labor for example, our new pre rule machine has been up and running since March consistently churning out of 25% to 30 per roles per minute over time with the potential for further improvement over the last week alone we've seen it consistently turning net 40.
Pre reals per minute and.
And finally, we are looking at more cost efficient packaging as part of our packaging task Force mandate the task force and it all.
I'll now pass the call over to Derek to go through the financials in more detail before I wrap it up.
Thanks, Greg.
As I, usually do I will start with our financial position last week, we repeat of our entire term loan balance of $58 5 million since the no amounts of owing under our credit agreement and at the present time, we intend to terminate the credit agreement and discharge of the related security the <unk>.
And loan repayment amounts of $2 7 million and <unk>.
Interest savings in terms of balance sheet liquidity. The company currently has $232 million and cash and short term investments.
Q2, 2021, net cash used in operating activities of $10 4 million was similar to the $10 9 million views and Q2 2020 of the current quarter had a lower gross margin, but this was offset by nominal changes to working capital as compared to the cash outlay and the comparative period, which was largely due to scale and.
The operations just ahead of route to point out of launches.
Turning to our results for Q2.
Net revenue declined to $14 6 million from $23 2 million and the prior year quarter. This change was primarily due to a decrease and wholesale revenue and a lower average net selling price impacting all product line. It should also be noted that the higher wholesale revenue revenue in the prior year's quarter where opportunity.
And the nature and largely consist of sales to a single license pretty soon.
Net revenue from the Rec market decrease from Q2 2020 due to lower volumes as a result of the prior year quarters being the first quarter for two point of sales and a lower average selling price as well as higher proportion of volume products being sold and the current quarter.
As Gregg mentioned Q2 2021 net revenue was also impacted by temporary shutdowns of the facility and isolation of certain stock after the identification of positive COVID-19 cases.
In total we were unable to fulfill and approximately $7 million of demand from our products from Q2 2021 due to the various production and processing constraints.
And we have heard from other Lps recently, many of the provinces have been reducing their inventory levels to free up working capital.
Alberta is one such example is also had an impact on net revenue during the quarter.
Q2, and 2021 cost of sales increased to $31 1 million from $15 8 million and Q2 2020, primarily due to the current quarters higher inventory provisions and higher cost of production and a charge related to unabsorbed fixed overhead as a result of lower production volumes and <unk>.
Q2 2021.
As we expected and indicated and our Q1 and 2021 disclosure discharge declined sequentially from last quarter and is expected to decline further in Q3, 2021, and we continue to ramp of operations.
We harvested 5028 kilos of candidates during the during the quarter compared to 5023 kilos and Q1 and 2021.
And Q1, we were using 40 per cent of our growing rooms on average and.
And Q2, this was increased to and on average of 54%.
And as of the day and of our M D and we're currently using 69% of our growth.
Also encourage and encouragingly during the quarter, we achieved higher plant yields any meaningful sequential decrease and the cultivation cost per day.
As a result of optimizing the density of plans per room, and decreasing the time spent and vegetation and the average yield per plant increased the slower cultivation cost during the quarter lowers the cost of inventory compared to earlier quarters.
And that one and this inventory is sold this will positively impact gross margins and note that the overall level of Q3 adjusted gross margin compared to Q2 will also depend on the other factors, including but not limited to product category and brand sales mix.
Adjusted gross margin decreased to a negative $7 million compared to a positive Q2. The 2020 gross margin of $8 4 million largely due to lower net revenue and as described above and value segment offerings, comprising a larger proportion of total revenue in Q2 and 2021.
Negative volume for US gross margin of 17 2 million decline from a positive gross margin of 11 3 million largely due to lower net revenue and higher cost of sales as just described as well as the net noncash fair value changes to biological assets and inventory sold and other charges.
And Q2 2021 versus positive changes in the current year's quarter.
Q2, 2021, SG&A, excluding noncash share based compensation decreased to $11 1 million from 14 million and Q2 2020.
Largely due to higher professional and consulting fees and the prior year's quarter related to project specific work, including the launch of Rec two <unk> products.
Q3, 2021, SG&A is expected to be higher than Q2, 2021, largely due to an increasing staffing related to the EIC and Bachelor of injections.
The net loss of $66 4 million or negative 29 cents per share on the diluted basis during the quarter compared to a net loss of $6 8 million of negative four cents per share and the prior year quarter was primarily due to the current periods of negative change of 37.
$7 million and the fair value of the derivative warrant liabilities and the negative gross margin.
That concludes my remarks, and won't pass the call back to Greg.
Thanks Derek.
After a 13% decline from 2020 to February 2021, wrecked retail sales of rebounded in March. According the high prior data of widely used digital retail platform and attracts and estimates of national retail sales March recreational sales reached an all time high of $305 million.
And can find and annualized run rate of $3 7 billion retail stores continue to open with Ontario, driving the growth and targeting 1000 stores opened in the province by the end of the summer.
Since July the store count and the provinces grew by 87% of just over 71007 hundred 90 stores currently driven by Ontario, growing 468% to nearly 580 stores and.
And the mid February, Ontario announced it is authorizing 20% to 30 stores per week or up to 120 per month.
Longer term the Bright-field group estimates Canadian adult rec sales closer to $8 billion by 2026.
The other analysts have estimated as high as $10 billion by that timeframe.
This is expected to be driven by retail store footprint expansion and the introduction of new product formats, and there is room for more upside depending on regulatory amendments starting with the mandatory review of the cannabis Act, which starts in October of this year.
In closing we are laser focused on operational execution to drive top line growth and greater economies of scale and cost efficiencies. Our team is benefiting from increased staffing and expects to leverage the experienced leadership technical capabilities and resources obtained via the recent NDA.
And the IC transactions and of course, we're investing in the future of innovative cannabis products for the long term competitive vantage and the industry.
We are doing all of this against the backdrop of solid industry growth and one of the strongest balance sheets and the Companys history of sheet history. So that concludes my prepared remarks, operator, if you'd like to go ahead of and open up the line for questions.
Thank you.
If you'd like to ask the question. Please press star one we ask that you. Please limit yourself to one question and one follow up question you may re queue. If you have further questions.
Our first question comes from the line of Andrew Carter with Stifel. Your line is open.
Hi, Thanks for taking my question.
And we just to start off with.
And do you have a strong balance sheets and your guidance recently announced the acquisition of.
The IC and and strengthening your edibles offering.
Do you see any more white space in Canada and.
And if not the could you also provide a little bit of color on your on your international expansion strategy channel.
And I got a sense of what are your focus and <unk>.
Priorities are.
And deploying this cash.
Yes, Andrew Thanks for all the things Craig here I'll take the question. So I mean certainly.
And as you saw and mentioned our EIC.
Acquisition was really about entering the category with the kind of.
And entry point with a proven operator that has potential to really scale up and prove the proven ability to produce very high quality of products and get those to market.
And the near term I think when we look at other white space for us as an organization I mentioned earlier and the call.
We're not playing in and participating in some of the concentrates areas of some of the more advanced products. So certainly.
And our hydrocarbon extraction equipment, which has been delayed in terms of getting getting it fully operational due to some of the certification processes, but we do expect and Q4 to have the hydrocarbon extraction equipment up and running and and being able to begin.
Production of those products. So that's again, that's the category, we're not playing and today I.
I think we as a company are very focused on continuing to drive and improve the quality of our flower and the facility and as you can see from the recent launches and if you look at the reviews online there is the improvements there.
We still are contemplated and how do we play and the ultra premium area, which is an area that we're not participating in but we certainly are seeing the strength of our flower production and the new cultivars, we're bringing into the market continued to improve and drive kind of responses there.
And so that may be one area. We continue to look at is how do we continue and expand into that area I think on the international front I mean, we've.
We've been vocal before and open about the fact that we continue to look at.
Primarily the CBD market and the near term.
Because that is of more larger and more addressable market, even with our collaborations and product development collaboration with B a T. The initial focus on products is on CBD based products because its a larger global addressable market, whether or not that's in the U S or in Europe or elsewhere.
With THC markets I mean, we've been exporting to Australia for a few year now fears that few years now and we are working towards.
Re certification to be able to export into Australia, which also has the potential and serve as an entry point through Canada, and Australia into other markets. So.
As we kind of work through that process. It it will give us an opportunity for continued and growth and the international sales market potentially without certification.
Yeah.
Thanks, a lot of additional color and maybe just switching gears and.
Talking about the.
Your outlook you guys already mentioned.
And.
And next quarter revenue should be up versus the versus the this quarter.
You know absent of any kind of COVID-19 risks.
Further shutdowns of your facility and things like that.
Is it possible to give any kind of.
Ah indication as of as of.
The magnitude of what you could expect.
Maybe tying into the recent SKU launches.
And more SKU launches that you guys are planning to do and and the quarter.
You know of should we be thinking about.
Q3 of returning to Q1 levels or potentially of Q4 levels.
And any kind of further color would be very useful.
And I guess I'll answer that by saying I mean, as you said, Andrew and we do expect revenue to be higher in Q3 over the over Q2.
And there are a number of risk factors, which you, which you outlined some of them certainly and COVID-19 related and the order even the <unk>.
Eight of emergency we have seen in Ontario, and the impact that could have and we could see that roll into other provinces.
I think it's.
We're not in the position to give.
The guidance on what that quarter is going to look like full suddenly, but I think the the key things for US as you said, great response to our new genetics that we've seen.
And we've got 31, new Skus launching before the end of this quarter.
<unk> seen the.
The market growth kind of bouncing back out the us in.
And March based on the high for our data and I think.
We've ramped up operations I think our biggest challenge and.
In Q2.
The combination of not enough supply or not as enough processing capacity.
To respond to the the the.
Response from the market. So we did leave significant revenue on the table as Derrick outlined so.
Wrapping up production and ramping up.
The cold processing staff, and our packaging and ability as one of the key aspects for us and I think.
I mentioned is slightly we are focused on operational efficiency. So with some of the key things that are really improving for us.
Our packaging and costs on a per unit basis for many of the products have gone down and I can.
I mentioned on our previous earnings call for example debt.
The automation and pre roll of equipment that we have.
We went down from 2022 operators to fly and staff kind of running that line.
And with a consistent and constant.
Ill put it and things like that will help margin overall, but it also improves the top line because youre able to sing.
Significantly increase the product availability.
And for that market segment, which reported which allowed us again to launch the the <unk> thousand 14.
The joint jar of joints under.
The the shred brand, which has been extremely well received.
Thanks for taking my questions I'll get back in the queue.
Your next question comes from the line of David <unk> with <unk>.
And capital markets. Your line is open.
Hi, good morning, Thanks for taking my questions.
I just wanted to go back Greg and team for a second with the 7 million and.
Unfilled demand just due to the COVID-19.
The closures.
Just wondering if you could provide us any color with respect to what that demand was for and with for example was it one point of products two point of products and have two point of what product segment.
Does that and and also what measures do you think you can take so as the prevent something like this again, especially given you know already of months of the half.
The Q3.
Yes.
I can answer it and say I mean, it was predominantly one point out of products in terms of so again. It was it was the combination of.
Reduced staffing and are of the shutdowns because of it wasn't just.
The the shutdown of the facility for a couple of days in both instances there were significant staff that had the self isolate for up to 14 days right. So.
But it was predominantly one plano products there were some <unk> products and the demand there.
I think for us.
I would say, we have put very strong and stringent measures in place and I think one of the key aspects of.
One of the cases for example was identified by us and our screening right and and you know where that individual that would be tested and went and got tested and.
Was pretty asymptomatic and I think again were.
And we're working closely with the provincial government and the Brunswick, and our facility and collaborate and we immediately.
Took it upon ourselves to do it through.
Deep cleaning of the facility and a testament to our staff too.
And just.
Cleaning and sanitation staff that were part of that we had levels of management and and a lot of volunteers.
Helping out with that the people who set the let's get this done as quickly as possible and get reopened.
And so preventing and the going forward, we are very confident and our.
And our own activities and we certainly have no reason to believe nor does the province have any breeze at least and I believe these case were linked to the facility. They just happen to be individuals that work, there and more than likely contracted COVID-19 out and out in the marketplace.
Okay. Thanks, that's very helpful. Thanks, again for the color on moving along here as well I think Greg you mentioned in your prepared remarks with your early investments and the highest since the biosynthesis play here.
I'm, just wondering especially with the investment now from the.
Are you able to provide any sort of general color with respect to what products or category of products you expect.
The synthesis to play and for organic ground and any indication of the timing when that can occur, especially just given to Derek remarks, with net selling price are going down even further this quarter. Thank you.
Yes, David It's a good question and I know you spent a lot of time about tenders and so I think when you know when we look at that market.
Potential and the segmentation I mean, you have to look at it two ways as we've outlined before the major cannabinoid production and doing that of large scale for the.
The CBD or THC or different versions of those two major cannabinoids.
I think that as well as the potential for minor cannabinoids as a key driver and our investment.
Certainly it was one of the reasons that would be of T. One of the many reasons. The BHP was excited and understood interested and.
This collaboration agreement was that.
We're one of only two cannabis companies to really be at the forefront of investing there and I think when we look at the novel minor cannabinoid and I think that is the one where.
Future products, where you can bring those novel cannabinoid.
Into product mixes for both.
Medical and recreational use and I think it's going to be the exciting part so.
And again, when we talked about the collaboration and.
Under the Coa and a big part of that called the collaboration as product development and and making sure that those products are tested at a very high level and to a high standard and I think that's kind of be important and so yes, I mean you'd have to speak the highest interaction directly to get an indication of kind of their timing and plans, but we're certainly.
Optimistic and the future debt, we'll see both.
Potential for major.
But more importantly minor cannabinoids that could be utilized and some of these products.
Okay. That's very helpful. Congrats again on the quarter of how about I'll hop back in the queue. Thanks.
Your next question comes from the line of Tim Chan with BMO. Your line is open.
Good morning day for the question.
First and I wanted to go back to the.
On the production side so Greg.
Talked about the number of quarters at the where the company I think moving.
And that can change, but you've been growing sales more in line with consumer demand and so I'm. Just wondering first one of the company is at with respect to climbing up the learning curve of strength.
The strength because.
And what we're sort of continuing to full inventory position and with last quarter and nowadays and fishing. All this quarter. So I'm just trying to understand and I think that a result of they are still going up the learning curve of the constrained.
Right that will continue.
And then.
And maybe all of its good thanks, Kevin for the question I'll start off and then maybe turn the Derek answered part of the question, but so the majority of the inventory provisions were related to.
And when you think on the product side related to extract and or extractable material right. We've got sufficient inventory of.
And extract that carries us out for a significant amount of time going forward based on the demand on two point out products at this point.
Although again with hydrocarbons produced can uniquely new products and the future and.
And there were certainly and packaging and even some.
And some vape hardware that was part of those provisions so.
Certainly I always included and provisions is discounts that are taken with the provincial boards, if something's of slow moving and SKU and one of the things.
Outlined in our prepared remarks was that we've been very.
Very active and working with the provincial boards to ensure we don't get into return situations.
Looking to a reduces the skew the average selling price if its not moving or and then and more importantly for us transition and flip that skew to of newer products. So.
And the last element of it is the there is some R&D work that happened. So certainly as part of the growing process youre going to get to three star strains of five star Strange Youre, producing 15 or 20. So you do have some losses, but not a significant number but.
The very optimistic with what we're seeing and very good numbers in terms of what we're seeing from a production capacity perspective as Derek indicated when you look at where we were two quarters ago.
We were we were only producing the kind of on average and about 40% of our rooms were now at 67%. So we've increased production capacity significantly.
And we are seeing no question, you know better yields and better THC numbers coming out. So we expect to see good progress there and I don't know if you want to add any color to that.
I guess you only had two went through and again as outlined would be that when.
And we look at our overall carrying value of the inventory we have to take a look at each of marketing and forecast out and utilize the.
And the latest pricing the market price and as well, which and that considers.
And the market's pivot more towards the how you from from mainstream pricing and when you apply some of that lower and pricing.
Against the existing the kidney value of the inventories and are valued at fair value.
It does end up with.
Our non cash kidney volume adjustment, that's required and and that's also rebounded and.
Into the number of that negatively impacted the quarter, which would be the only item. In addition, the Q1 rate is already.
Okay.
Okay. Thanks, and my follow up and I'm wondering if you could talk of that about the.
And different brands.
And and flour, primarily between Edison and shred.
Yeah.
And over the last little debt and now and more.
More velocity more demand on the value side, some of your shred of products or anything.
And some more relative velocity and more traction and a more mass mass opinion products like Youre Edison and back.
Yes.
Yes, Tim it's a good question I think so certainly one of our challenges I mean.
Shred it has been and extremely successful launch for us as I indicated you know number one searched the prada.
Product or brand on the Ocs website for five months in a row. So the demand is there we have not been able to fulfill the demand for it.
Because of the demand being so much higher than we had expected although again, we did launch the debt.
Shred Jarrod joined so it's a way to kind of supplement that as well.
And so it's.
Certainly the demand is very high there I don't know what the cap on the demand is because we're not and we have not been able to consistently supply of that historically.
Edison.
That is where we're continuing to improve and increase our product mix.
The new the three new weighted because I mentioned earlier and getting new products to market. We've got another three new products coming.
And.
And the.
Coming up in the quarter.
In terms of new strains and I think we are seeing again, it's when you when you get the product out and market. There is good demand. So for example, one of our strains and that mixes Blackberry punch Theres a few other companies that have black Cherry punches.
But our our Edison and Blackberry punch of sells them from the data that I've seen so so there is strong demand there.
And I think by launching recently, India, which is an index of focus brand. It diversifies, our brand portfolio of little bit and in terms of specifically, saying going forward. This is going to be kind of an index of brand.
And I think again, our challenge has been it's been.
And the inability to fulfill and part because of the production levels.
We're growing because as you know it takes.
It takes 12 to 16 weeks kind of of the growth cycle and then.
Other month to get product process and of the door. So when you make a decision to pivot.
And it doesn't have an immediate impact. So again, we are seeing continued demand.
And there's a line that means.
A big part of those net post was simply.
And not having either of the product or the ability to process. It but and then we've made big changes and our facility on operational efficiency to really.
Improve our packaging throughput.
We are continuing to add.
And automation on some of the areas with minimal investments to two improving and lines.
Alright, thank you.
Your next question comes from the line of John comparable with the CIBC. Your line is open.
Thanks, Good morning, I wanted to ask about the recent EIC deal and just would like to get a sense of what you think the reason is the edibles and the category is larger than it is currently and assuming that part of the reason is regulatory restrictions on potency or quantity of however, you want to describe it is is there any reason you would expect.
Health, Canada to liberalize regulations on edibles as part of the upcoming regulatory review.
Yes, John and it's a good question I think of.
Initially are for certainly part of the <unk>.
Two pointed out it's been launched it feels like part of the the <unk>.
Lower revenue versus the comparative the state data.
But certainly and.
And so but that's caught up I mean, certainly there is a good supply and a good mix of product. So I think again still like any category there.
Different quality of products that are and consumers made choice over time and it's one of the reasons. We're very excited about EIC is.
Were confident and the quality of the product theyre going to produce and be able to produce it out of very low cost based on kind of the equipment they have and the proven history of manufacturing.
But to your point, how do we.
If you of state data is 12% to 15% and Canadian data and it's just over 4% how do we improve that I think one of the key drivers has to be.
This change to get away from the 10 milligram maximum per package.
I think I.
I think in the marketplace.
What are the important things is going to be as well as better differentiation between the products right. Many of the products that we've seen to date are very similar.
In terms of the quality and the experience for consumers have to has to continue to evolve and if you go into the Canadian retail store versus.
You test of the U S dispensary, the diversity of products and it's extremely different there so.
And so I think it is the combination of the packaging of limitation and I think it's a combination of.
The the of kind of limited scope of some of the products many of them of our kind of me too type products and again, our investment and and I see as one where we believe it has potential to produce some very differentiated products based on.
And the type of proven confectionery.
Products.
And we've already seen.
The test runs with the equipment to understand what the equipment can do and produce and it's a pretty diverse range of products and we're excited about it.
Okay. That's helpful. Thanks, and then my second question is on on the margin side and I, just like the better understand the expectations for the margin expansion and certainly increase the utilization seems like a positive driver, but but if we think about shred and being a bigger proportion of your flower revenues and you're needing more.
The 2.0 that category of Hasnt been the margin driver or some of the industry thought it would be and it probably means more startup costs and the near term. So should we interpret the commentary on the improved margins to the more likely at the longer term development, rather than something youll see over the next 12 months.
And John maybe I'll get their attempts to that question.
Yeah, I would say generally net margins is a.
We expect to see gradual improvements over time with the long term lock one of the things that did occur during the quarter is that we have.
<unk> lowered our production costs in terms of the dollar per gram to create the flower in Florida and some of the largest.
Some of the category.
And most of those costs would then being towards the inventory and so as we.
Selling and gene and Q3 that would.
And I don't think relates to the coupon on it.
The decrease in yet cause the rate of collection.
And I've seen comp, we would choose the level of savings but.
No debt and now.
And I would imagine the will be dependent on product categories and and <unk>.
And our sales mix and.
And we have focused on.
Hum too.
And ensure that we can place of electronic and he can into the emerging areas and while we're also focused on improving.
Our cost efficiencies and the facilities.
<unk> continued to achieve a lower cost per unit metrics, what we achieved in Q2.
Thank you very much.
Your next question comes from the line of her first party with Oppenheimer. Your line is open.
Hello, and good morning, and actually Matt and Don on their cash thanks for taking our question.
So just the variances and the industry headwinds out there. So how long do you currently see some of the COVID-19 related industry headwinds last day.
And my limits.
Question to answer I mean, certainly.
Canada is in the midst of the third wave right now and certainly we're seeing.
Ontario, Quebec.
Alberta, and BC, Manitoba, and particular vignette hard and then we're seeing kind of stay at home orders and restrictions so.
On one hand, though we did see during the previous shutdown I mean cannabis as a.
And Canada stores of have been allowed to remain open for curbside pickup and local delivery.
Click and collect type of and certainly it did blunt we believe some of the sales.
And may be shifted more sales to the online purchases as well.
But without that in store experience and consumers.
They have reduced their.
And it may have reduced their purchasing habits at.
At this point as far as we know for example, and Ontario.
Still of more than three weeks to go and that existing stay at home order.
I think this is more of a.
And one of my larger question I mean, Canada is accelerating its vaccination programs.
And was far behind.
Many other parts of the world, but sort of more recently and a catch up so as that starts to improve.
We would expect at some point.
The summer just things to start to return to some level of of normalcy, but I mean, the focus right now is just on blunting or reducing the current the.
Current third wave that is hitting many parts of Canada.
Okay, Great that's helpful.
And then just switching gears.
Yes, the acquisition so how should we think about the near term revenue, but can you just said the business and then.
And just anything you can share for longer term margin dynamics from the acquisition of.
The accretion or anything like that that would be great.
Yes, and certainly we look at.
EIC it it has two levels of manufacturing equipment.
One is mark Graf focus and and others large scale production capacity and again part of our rationale for this acquisition is that.
And we see that.
<unk>, what we've seen and the market to date with soft chews in particular, but other categories and confection net.
The amount of throughput and the automation that's there.
And is very high so that definitely the ability to produce product out of low cost. So I think certainly.
Youre going to see some unique and interesting products come out of the EIC.
Hopefully and our Q4 this year and again that is dependent upon licensing.
And the commissioning of equipment and everything but certainly.
We do expect and.
To be.
To be strong in terms of.
And what their cost of goods is going to be relative to the competition. The thing you can't control is the market dynamic in terms of where pricing is so.
We were excited about EIC, it's why we made the investment we certainly think that.
They're going to be able to do things that the majority of other companies cannot do from a costing basis and and consistency basis. So.
That should definitely be it the contributor to how that product contribution looks like.
Okay, Great. That's helpful. Thanks, so much and I'll pass it on.
Thanks.
Your next question comes from the line of Aaron Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thanks for the question.
And so quickly and we just given the drop and the average price per Gram and the higher mix from shred net that was attributable to I just want to know if you had the kind of goal in terms of.
The mix value of your portfolio and what you expect it to be kind of going forward.
And then you've got to be more in line with the industry below the industry because you did speak to.
Demand for shred still remaining very high so just curious as to how that plays into your own cultivation plans and thinking about five of them coming out and the next few months because you've also mentioned kind.
And the desire for more high tech, the Edison and possibly coming out too.
Yes, I mean, our goal Aaron and thanks for the question is very much to continue to drive more.
Higher THC product higher.
Differentiated product in terms of new and interesting strains or kind of star strains that have had good response and the marketplace and.
Shred was really created as a way.
And there was the white space, there and certainly in terms of the marketplace, where we had seen some blends and the past, but they werent curated and we look at shred being kind of curated wear of unique mix of a couple of the two strains to get up with the private flavor profile and again the demand is very very high and strong.
Ultimately we are our production.
And is shifting more and more to the higher and.
The higher THC and higher margin products with Edison as Eric alluded to earlier and I think it's important for us because there is strong market demand. There. There is strong demand not only in Canada, but internationally and even <unk> and Canada, because we've seen it recently for example.
With the announced the acquisition of of <unk>.
Supreme by cannot be aware.
And can it be and the past of shuttered.
Numerous facilities so they're.
And they're not in and.
And my assumption certainly it's the purchase wasn't based on cultivation capacity. It was based on improved higher quality product in terms of how product is perceived and I think we of the.
Of the advantage with our Moncton facility and the way, it's designed to continue to kind of drive and improve the quality of of what we're producing.
Whereas as we've seen and gets at least and this one case where companies have to go out and do an acquisition to backfill some of their own.
Production capacity.
Okay, great. Thanks, that's helpful and the second one from me is just on.
The expected return of shipments to <unk>, I think you expected and and the fourth quarter of the fiscal year I just wanted to get your take on kind of how to expect sales of that thereafter is still expected to be be lumpy on a quarter to quarter basis.
Or how should we kind of look at the growth of those sales internationally and Pedro thanks.
And it's still tough to predict I mean, certainly of the initial shipment that we made to Israel two of the three strains stalled out within a matter of weeks very quickly. So a very good response and they were ready to purchase.
Certainly the.
And make additional purchases pretty quickly after those first shipments went out and so but understanding theres a process with import permits from Israel and export permits being issued by health, Canada, but.
And the demand is there and certainly.
First of all getting true through with the U Mcs.
The GMP certification process, so that we're able to begin and importing.
And again.
And then again getting through the process for every shipment because you do have to kind of go through and each shipment, but we certainly expect to return.
At this point by by the end of Q4 to shipping again based on product availability.
Shipping there and it's.
And it's going to be dependent and the.
Market response has been very strong to our products and Israel and I think.
Ken doctors, we're excited to get our products back and inventory, we're not the only supplier, but we are the only and or supplier for them and they've certainly noted that that's a big differential and quality and the market in terms of the consumer response.
Okay, great. Thanks.
Your next question comes from the line of Graham claims.
With eight capital your line is open.
Hi, Good morning, and thank you for taking my question, Greg I wanted to follow up on and your comments earlier about M&A and Theres been a number of your competitors turning to M&A to drive growth and consolidate market share I'm wondering if that's been a strategic consideration for again and Graham currently is at the very difficult landscape to drive incremental share and I don't use impacted.
By both the competitor and provincial level, but you know theres a lot of initiatives going on to rebalance of the product portfolio and and cater to consumer needs, but I'm wondering.
And if the general consolidation of that market share of something where you're seeing and opportunity to consolidate some some share and the adult use market. There. Thank you very much.
Yes I.
I think when we look at the marketplace.
Again, its been key for us is.
Again, as I've talked about on the call and previously as continue to improve our quality and hitting the product specs and getting the product of the door that the market demand is there.
And I think one of the things we've done and we'll look to expand with the recent launch of India's to explain and expand our own brands and house. So that we can target of different consumer with that.
I think certainly we are always.
And the looking at M&A and when we look at targets for ourselves I mean, as you saw with the IC.
We focus on two things one is there kind of innovation and technology or.
Or something unique that comes with it or secondly is and any consumer packaged goods area.
And.
If the.
And of course, acquiring brands, which we've seen canopy due with the with both of the acquisitions recently has been more of a brand a brand play.
And I think that's something you need to be open to our and their strong brands out there I think.
Seven acres.
And as it is a relatively strong brand and so that was of an acquisition that made sense, but theres not a lot of and out there which is the challenge right. When you look at consolidation targets.
There is a couple of OLED could be of interest but at this time.
They're not necessarily interest and discussions and so I think in some of the need to always be evaluating because.
If you can expand through innovation and technology or acquire brands that really resonate with consumers those of the two key things that we.
We focus on.
Okay I understood I appreciate the color there and then as a follow up.
Okay.
Based on your comments on brand and and creating the products of that consumer wants and when you think about the CBD market, which is going to be the focus of the initial product launches with the <unk> deal and Thats, a highly competitive market, where there is thousands of brands and and regulation and can make the difficulty that tier one and shelf space when looking at the market on a global scale and so I'm wondering if the strategic.
Plan to launch products and that market has any expectation of some sort of regulatory reform.
Or is this something that you've heard and presents a bit of a challenge and the near term and it's more of a longer term opportunity there. Thank you.
Great and that's a great question and I think both of ourselves and our.
And the reason and I have stated repeatedly the reason we're investing.
Heavily in the center of excellence from the product development is that we believe there are going to be new standards right. For example, if you look at the U S market today.
Very limited regulations on CBD right. There are limitations on what you can source the product from so it has to be hemp of THC less and point out of three and there are limitations on health claims that you can't make it and the FDA has gone after people from making health claims, but beyond that theres very little or no restrictions or oversight. We do expect there to be of regulatory regime on CBD.
Products and the future.
And I think it's important that when you're developing and CBD products that you develop them to a rigor that the current products are not developed to right and I think that's one of the key aspects from an investment in the marketplaces.
CBD is metabolized in the liver so it's not without.
Potential effects and so.
I think it is important that through this collaboration and the way we operate that we our goal is to set new standards right and be at a level above and I think that's where there's a.
A competitive advantage that we will have with the products that are developed through this collaboration is that they're going to go through more rigor and out of higher standard the competitors can meet and then.
It is not if but when stricter regulations come into play of these products are meet.
To meet the standards that are required and it could put other companies and this.
The very wide range of products and market today into the difficult situation and that that carries over and Canada. When we expect new regulations are going to happen here and you.
Europe, there is movement towards sort of changes as well. So I think it's important when you think globally in terms of the CBD market about setting the standard and being the leader there.
Understood appreciate the color. Thank you very much.
Our next question comes from the line of Rahul.
And with Raymond James Your line is open.
Good morning, Greg and thanks for taking the questions. So I'd like to focus on the the partnership.
Given the organic strength in the animal segments of the markets and the company not doubling down on the segment with the acquisition of net.
Yes, there's a bit of eight and achieved with the <unk>, it's probably fair to assume the more innovation and focus on it.
The ask whether the IP sharing deal potentially benefit both sides of the edible and <unk>.
The horrible format.
Yes, so and again, we did disclose and our announcement.
The focus of the product types is both on vapor and oral and.
And all is a pretty broad category.
And it doesn't it's not just and.
And it could be and again I am not I cant I am not in a position disclosed all of the product specifically, but you think of oral consumption of whether that's the the edible or of tincture or it's an oral mucosa oral buccal forms. So there is a pretty comprehensive list of potential products there. So.
Both parties, including we did contribute to the intellectual property and two.
And to this as well so it is kind.
Kind of a pretty broad product development.
Agreement.
And I, thank you very much and so.
Yes.
Is it.
And their and their channel living and the opportunity organic and then leverage the.
<unk> distribution, particularly not in the international channel as you begin to broaden the footprint outside of Canada also given given the the other partnerships.
They do leverage the distribution networks of the partners.
Yeah. So at this point the the collaboration does not contemplate that necessarily each party is.
We.
Both of ourselves and be a tier are having the ability to commercialize and launch all of or any of the products that are developed through the collaboration under our own brands in any markets. They can be even sublicense to some degree with some restrictions and those markets. So.
The.
At this point that that's not what the collaboration is focused on.
It's really focused on the product development side of things.
Terrific, thanks, very much and I'll get back and as well.
Thanks, Rob.
Your next question comes from the line of Douglas <unk> with RBC capital markets. Your line is open.
Yeah, Good morning, Greg.
Just a quick question with respect to.
And the.
The strategy.
The growing maura markets and better streams and those sorts of things.
We're hearing the same thing from almost every single company out there and can you tell us how youre going to be able to differentiate yourself and if you think theres going to be in the pricing pressure as people all start to move.
In that direction.
It's not so much that.
This market is going to change overnight, but it seems that within the next quarter or two people are going to have multiple screens available in the marketplace.
Yes, Doug.
Good question and again I would point to the canopy acquisition of Supreme right, where companies are are focusing on it and they're looking to do it but they may not with their announced capabilities be able to do it I mean, if we look at it.
Some of our peers, who are of closed facilities and the reason they've closed those facilities as they were not either cost efficient and or more importantly, they weren't capable of producing net of products and that range right. So.
So I think that's the advantage.
Of our facility and then and again a key part of.
It's not just the facility, it's the staff and the people we have overseeing things, but it's also the been the genetic acquisition right I mean getting access with once you kind of the nursery programs. We're open and these licenses has allowed us to really obtain a very deep bank of genetics.
And also bring back some of the Gen X, we had and our own reserve to.
Market and work on the conditions for them. So so while a lot of companies might be.
Indicating they're moving in that direction.
We have not seen that.
From some companies as of yet and I think again.
Certainly opt.
Optimistic based on the data, we're seeing right now and the products, we're growing and what's coming out of harvest that we have moved the products up into those categories. So.
People are talking about it but im not sure everyone's able to execute on it.
Okay.
And that's fine and then with respect to the 7 million and and maybe you answered this already but.
What was the breakdown and thats it.
Primarily shred or.
And what gives you the missing specifically.
Yeah.
We wouldn't give a full breakdown on it but I mean certainly.
You can imagine net value products, because they have made up of significant portion of our revenue was a significant part of it but it was also demand for Edison strains of new products and some of our two pointed out products as well. So it was it was a mix.
And.
Certainly again as I said it was a combination of what product was available, but also the processing and packaging capacity with some of the impacts we had from Covid staffing reductions.
Alright, great.
Great. Thanks, Doug.
Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Your line is open.
Good morning, Al I, just wanted to go back to that $7 million that Doug was just talking about.
With respect to I guess relationships with the provinces and the bill and the ability to carve out additional market share and these various skus are there any near term implications for.
And for not being able to fill certain orders as I know there is a very strict.
Fulfillment policy that many of the provinces, particularly Ontario, and <unk>. So just any color on how that may or may not impact relationships with these by yourself.
Yes, So I think first of all I would start off and the answered the question Matt that.
And our sales team and very strong relationships with the provincial boards and I think when we talk about.
The opportunities here.
Certainly and what Youre alluding to is Ontario, and Alberta in particular that have and in Ontario is implementing a very strict kind of guidelines in terms of listings is.
You've got to manage that relationship and manage against future. So the way that it works and a couple of provinces.
You kind of get of rolling Poe within a window and you have this and so within the timeline. So when we talked about missing it.
And part of it.
Of that Miss happened in the quarter part of it sort of rolled into the next quarter right. So.
It's not necessarily but again it was issued and it was we kind of fulfill it and the quarter. If we'd had the product available at that time, So I think we're not.
And at this point I think we've done an excellent job of our sales team of <unk>.
Transitioning out.
So we're selling skus for new listings and new Skus and I think that's critical and but again as you say, it's going to be even more important going forward.
The fulfillment demands that you focus on what your quarter listing are and make sure that you're hitting those numbers right. So it is of share for the industry. It's a share for the company.
And the.
To be honest it may kind of a detrimental effect on across the industry on some of the other provinces is as people are rushing to fulfill Ontario.
Because of the penalties that are theyre not that other provinces don't.
And also hubs.
Kind of commitment levels, but just one thing and general trend of the industry to be cognizant of.
Great. That's helpful. And then just one more question from me on sort of market share and just tying back to some of your comments you mentioned that the I guess pool of of brands to be purchased like a supreme are like some of the other <unk>.
And as deep where there'd be sort of mass M&A expected in the near term near term just for brands. So if you kind of look at where your market share is today and how much growth is left in the sector, which is still quite a bit but we are like you said I think $3 billion plus on a run rate whats the best way to and your view the gain that incremental share if not through and.
And a.
Obviously, you guys are focused a lot on the edibles and choose and maybe thats an undersized the proportion of the market today versus where it is that maturity, but just any color that ex M&A how market share can be gained and your view in the coming months and quarters.
Yes, I think it steps down to three key things, Matt one is.
Continue to focus on improving the quality and the product offerings that you have right just in terms of of what the consumer demand is I mean, you can spend five minutes and read it and see what the comments people are making on product reviews, and the consistently regardless of its flower or pre roll or and edible it's about quality so companies and.
We're very much focused on improving the quality I think the second is diversifying your own and house brands as I said recently, we launched indeed.
And we have of select target group of consumers of it that products targeted for shred.
Shred was the new launch for Us and I think as you continue to look at how do you diversify and really do more targeted segmentation for consumers and so far again with those product launches. We've seen good response, and so thats another way to grow organically.
And I think the third is still and I've mentioned this a few times is just innovation, bringing new innovative products, we're very excited.
About the IC acquisition in terms of some of the products and the product quality and we can bring to the market because as I said, what you see today and the soft shoes. For example is the majority of the products are quite similar and we're excited about bringing.
Some unique and innovative products to market.
<unk> and and then the more midterm.
Products through the collaboration with <unk>, and that's going to be important as of the market of balls.
Alright, Thank you Greg.
There are no further questions at this time, ladies and gentlemen. This concludes today's call and we thank you for your participation you may now disconnect.