Q4 2021 OrganiGram Holdings Inc Earnings Call

Good morning, and welcome to our Gan Gan of Graham Holdings, Inc. Fourth quarter earnings conference call for the fiscal year 2021.

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After the Speakers' remarks, there will be a question and answer session with analysts.

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As a reminder, this conference call is being recorded and a transcript will be available on our Ghana grabs website.

Listeners should be aware that today's call will include estimates and other forward looking information.

These review the cautionary language in today's press release on various factors assumptions and risks that could cause the company's actual results to differ.

Furthermore, during this call reference will be made to certain non <unk> measures, including adjusted EBITDA and adjusted gross margin.

These measures do not have any standardized meaning under <unk>.

And our approach in 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.

I would now like to introduce MS. Bina Goldenberg, Chief Executive Officer of organic Graham Holdings, Inc.

Please go ahead Ms Goldenberg.

Thank you operator.

Good.

Thank you for joining us today.

With me is Derrick West our Chief Financial Officer.

For today's call, we will discuss the financial results for the three and 12 months ended August 31, 2021, and I will provide a general business update we will then open the call for questions.

To begin I'd like to say, how pleased I am to be part of the organic growth team and host this call with investors.

With organic brands reputation for high quality products, our strong brand portfolio and our proven ability to innovate in ways that meet consumer needs. I believe we are positioned for success.

What's more we have the strategic partner the team and the resources in place to ensure we will execute on our growth strategy.

Our fourth quarter 2021 results demonstrate progress against all of our strategic objectives.

We achieved double digit growth in recreational revenue.

We introduced innovative products that were quickly embraced by consumers we can.

Continued to improve our adjusted gross margin.

We enhanced the operations through adding key team members and advanced our product development collaboration with BHG.

Also and importantly, according to highest by your data we grew our recreational cannabis market share to 7% in Q4 from five 4% in Q3 positioning organic ground as the number four L. P in Canada.

And the momentum continues our latest data shows the market share of seven 9% at the end of October.

Starting with our brands in the quarter. We continued the revitalization of our portfolio with the introduction of <unk> 16, new skus into the recreational market, bringing the total to over 100, new Skus in fiscal 2021.

In addition, we recently introduced two new brands Shred and Gummies in Q4, and our CBD forward wellness brand moved or subsequent to quarter end.

We have been refreshing our portfolio based on our ongoing consumer research to ensure it is aligned with current and expected evolutions and consumer preferences.

The launch of Shred and Big Bang, but is a great example of our strategy could tackle the migration to large format low priced and high THC offerings.

Big bag. The buds offers 28 grams of high quality flower at a consumer friendly price shred. It the COVID-19 value segment product that is the leading brand equity to its unique and bold flavor profiles. It has captured the imagination of the cannabis consumer with sales growing 67% from Q3.

<unk> has remained the number one search Brent on the Ocs website for 11 of the past 12 months.

When it comes to addressing the evolving needs of the premium cannabis consumer we continue to invest in our Edison Brad.

In fiscal 2021, we introduced seven new high potency strains that were well received by consumers.

Going forward through our in house genetic breeding program backed by our R&D investments in our advanced cultivation facility, we plan to bring new cultivars to market with unique European profile and the high THC content that consumers are looking for.

We also devoted significantly market marketing budget to Edison to elevate new product introductions, and solidify brand position and we're seeing the results of our marketing efforts. According to Breakfield survey of 3350 panelists over the August September period, Edison experienced a 4% growth and brand awareness.

And achieved a significant increase in its numbers of social mentions and positive consumer sentiment scores in.

In fact over 80% of consumers indicated they would likely recommend edison to a friend.

We will continue to invest in building our flagship brand with consumers both in marketing and product development to ensure this momentum continues over time.

While we wreck what wildly are committed to improving our mix in favor of premium products. We do recognize the importance of the value segment and its pivotal role in converting illicit market users to the legal market.

That's why we continue to focus on offering brands, such as shred and big bag, a bunch to consumers seeking a high quality legal product at a fair price.

That said, we are committed to ensuring we can do so profitably.

Big bag, a bunch, who has always had reasonable margins for the segment.

We were able to leverage the strong consumer demand and loyalty on shred to take price, which improves the margin on this popular brand.

On the premium side, we expect that in time consumers will become more discerning and we'll start making choices based on genetics, Budd structure flavor and aroma profile as well as other quality attributes our product development strategy anticipates. This evolution and we will be ready as the shift in consumer behavior happens.

Moving on from flower in the fourth quarter, we launched shred and gummy <unk> to leverage the success and brand recognition of shred shred.

Trends are available and indicates the timber and hybrid version with exciting flavors like sour Jerry punch sour Mega Mellon and while Barry Blake.

Since their launch in August trends quickly gained momentum capturing five 8% national market share in the gummy category as of last week.

This is the first product launch from our recently acquired Edibles and Infusions Corporation and demonstrates the synergies achieved from combining eic's confectionary expertise with the strength of our shred brand and our keen focus on consumer insights the efficiencies that are in place and EIC also allows shred it to be one of the most competitive.

Definitely priced gummies on the market.

Launched in August Edison jokes with another first to market offering in the quarter that demonstrated our R&D capabilities, our creativity and our commitment to consumer driven innovation.

I'll start candidates first flavored high potency peaks the lozenges they are available and attach a 10 minute flavor lozenges. The 10 milligrams per losses for a total of 100 milligrams per package.

For the eight week period, ending November 6th Jolts reached the number one position within the adjustable extracts category.

And finally last week, we announced the major addition to our cannabis derivatives lineup with the introduction of a CBD infused soft chews under our new wellness brand mature.

They are offered in very nicely in citrus medley flavors as well as in both vegan friendly and sugar free format merger offers 20 milligrams per piece and is attractively priced with 30 pieces per pack.

Most of ours also produced at our EIC facility in Winnipeg, again, Eic's highly efficient production technology means we can produce high quality low cost edible products at scale.

In fiscal 'twenty, two we expect to add even more edible products to our lineup and both THC and CBD formulations.

Yeah.

Moving onto our growing facility in mountain and.

In the past quarter, we launched several initiatives to increase the average THC content per plant as well as the average yield. These initiatives are aligned with consumers' demand for high THC and are expected to continue the improvement in our margin.

In Q4, our year yield per plant with 127 grams compared to 117 grams in Q3, and 101 grams in Q4 of fiscal 2020.

We harvested about 12000 kilograms of dry product in Q4 compared to about 8400 in Q3 of fiscal 2021.

The increased harvest help to meet the growing demand for our products and for the growing store Buildout in Ontario.

However, we are reaching capacity at our Moncton campus.

The higher consumer demand for our products has meant that we are not able to take advantage of all the sales opportunities presented to us.

In order to better capture these opportunities we have decided to complete the phase <unk> expansion of our growing facility at Moncton.

Which will significantly increase our capacity and ability to meet and monetize further demand.

This is a rare situation in the Canadian cannabis industry, while other Canadian Lps or closing facilities, we are expanding.

I think that speaks to both the prudent initial build out of our growing infrastructure and our compelling product offering.

Our current annual capacity at that facility is approximately 40000 kilograms. When the phase <unk> expansion is complete the facility will have an annual capacity of approximately 70000 kilograms of flower.

We are also making design improvements and environmental enhancements to the facility to improve yield and flower quality.

In the fourth quarter, we significantly advance the build out of our center of excellence or Coa and mountain that we are building as part of our product development collaboration with B E T.

As has been discussed in prior quarters. The Coa will develop the next generation of breakthrough cannabis products IP and technology, both organic ground MVP are contributing scientists researchers and product developers.

Currently we have reached the first 100 day milestone in the project with staffing construction and project planning underway in the next eight to 10 weeks, we expect to have the remaining core construction projects completed with the bio left to be completed in Q2 of fiscal 2022.

Research collaboration has begun with initial focus on CBD candidates vapor and oral products.

This is an exciting opportunity this strategy should enable us to grow our market presence in Canada, what's more having access to new IP from the collaboration and the ability to sub license the technology opens up significant opportunities in the U S and other markets.

Finally, before Derrick provides the financial overview I'd like to comment on our international sales to Israel. We recently resumed shipments to Canada, and we expect to make further shipments in fiscal 2022.

This is a high margin revenue source for us and one that provides our leading cultivars to markets outside of Canada.

Over to you Derrick.

Yeah.

Thanks.

I will start with a strong financial position in terms of liquidity. We ended fiscal 2021 with 184 million in unrestricted cash and short term investments compared to $75 million at the end of fiscal 2020.

This 109 million increase was primarily due to the 65 million unit offering done during November of 2021.

$221 million private placement as part of the strategic investment from D. A.

Net of the allocation of $31 million to restricted funds for the CIB.

Along with 115 million used towards debt repayment.

Our strong cash position and debt of $300000 ensures we're well resourced to execute on our growth strategy.

As Bina mentioned earlier this year, we made the decision to complete the phase <unk> expansion at our Moncton campus.

The budgeted amount for phase <unk> is estimated to be 38 million and began in fiscal Q4 2021 with completion targeted during fiscal 2022.

We have sufficient resources to support these expenditures and a corresponding growth to our working capital assets, while still maintaining sufficient liquidity and financial flexibility.

In addition on August 31, we filed a preliminary base shelf prospectus, which allows us to move quickly to access even more financial flexibility if necessary to pursue attractive growth opportunities should they arise.

To date, we have not offered any securities under the space shelf prospectus.

Net cash used in operating activities was $7 7 million during Q4 fiscal 2021, which was flat compared to the same prior year period.

For the fiscal 2021 year cash use was $28 6 million down from $45 1 million in fiscal 2020, mainly as a result of improved inventory management.

Net cash provided by financing activities was <unk> was 55000 during Q4 fiscal 2021 down from $46 million for the same prior year period, which had been driven by draws from our credit facility.

For the fiscal 2021 year cash provided by financing activities was $174 million up from 169 in fiscal 'twenty with the current year's net amount driven by the net proceeds from the equity investments net of debt repayment.

Turning to our earnings results for Q4 fiscal 2021.

Gross revenue grew 24% from Q3, 2021, and 43% from the same period in fiscal 2020 to $36 2 million and.

Net revenue grew 22% from both Q3 2021 and from the same period in fiscal 'twenty, respectively to $24 nine.

These increases to revenue was primarily due to higher recreational net revenue, which grew 36% from Q3 and 52% from the same period in 2020 due to an increase in sales from the flowers upwards.

Cost of sales decreased 11% year over year to $26 million, primarily due to the current periods of lower cost of cultivation and due to the nearly 11 million of inventory write offs and provisions recorded in Q4 of last year.

As expected the charge related to Unabsorbed fixed overhead and included in cost of sales continues to decline again sequentially.

It is anticipated that we will no longer have unabsorbed fixed overhead and we expect this to help our margin going forward.

We harvested approximately 12000 kilos of flower during Q4 fiscal 2021 compared to approximately 8800 kilos of flower in Q4 fiscal 'twenty, an increase of 38% usage.

This increase was directly related to increased cultivation planting stopping during Q3 and Q4 of fiscal 2021, which was done to meet the growing demand for many of our new products.

Part of the product portfolio revitalization as well as the increase in industry demand.

Largely due to higher net revenue and lower cost of sales gross margin in Q4 improved to negative $1 million from a negative $3 6 million in Q4 of 2020.

On an adjusted basis gross margin was $3 million compared to negative $7 million in Q3 of 2021.

We expect that the price increase to shred as well as lower production costs will further improve margins.

SG&A, excluding noncash share based compensation increased to $13 6 million in Q4 2021 from $10 8 million in Q4 2020, largely due to the establishment of the organic ramp up settlement center of excellence.

Increased out of licensing fees with the continued rollout of stores in Ontario.

With marketing initiatives behind Edison and the launch of our new coming products as well as well as higher audit and related professional fees in connection with the Companys regulatory requirement to obtain an integrated audit opinion for the first time for fiscal 2021 financial statements.

We also reduced our net loss year over year from $30 9 million to $26 million.

Overall.

We are pleased with our improving financials and the momentum we're seeing.

Just on this we currently believe that we will achieve positive adjusted EBITDA by Q4 of fiscal 2022.

This concludes my comments thank you.

Like to turn the call back to Peanuts.

Thanks Derrick.

You've heard today, we have generated significant momentum in Q4 fiscal 2021 against all of our strategic objectives, which include achieving strong sequential revenue and volume growth. In addition to doubling market share.

Innovating to bring new and exciting products to market and improving our ability to match our supply with increased demand for our product portfolio.

We also expect to see further improvement in our adjusted gross margin as we continue to realize economies of scale from cultivation and as our price increase on track comes into effect.

We are excited for what fiscal 2022 holds for organic ground looking.

Looking ahead, we expect to continue our strong growth momentum as we maintain our focus on increased points of distribution growing market share exceeding consumer needs by bringing more insights driven and innovative products to market and improving our ability to fulfill growing demand I look forward to updating you on our progress.

And now operator, you may open the call for questions.

Thank you ma'am and as a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad.

And we ask you to please limit yourselves to one question and one follow up question.

Requeue, if you have further questions. Once again, if you wish to ask a question simply press Star then the number one on your telephone keypad.

Your first question is from the line of whether we go Gomez. Your line is now open.

Hi, Good morning, guys. Congrats on the quarter. Thanks for taking my questions. So the first question is just on market share you guys are obviously gaining share.

Really rapidly in Canada now number four O b here so that's positive.

So just wondering how do you plan to keep those market share gains or just how sustainable do you believe they are just considering the fragmentation of the market to have the competition right.

<unk> seen some some other Lps are gaining market share and then losing some of that so what are your thoughts there.

Thank you Fred repo and ask for your questions.

Look we believe we have a very strong position with our shred brands, we see a heightened consumer interest through the search on the Ocs website for the brand we see strong consumer pull in demand.

To the extent that at this point, we can't supply the demand that that brand is generating with consumer and we think it's a unique offering because it has it's not simply a milled flower.

We're providing.

Bold sort of flavor profiles that are resonating with our consumer at this point, we believe there are opportunities.

And our momentum and our market share because we see that theres opportunity to extend to other regions.

Across the country. We currently sell most of our product in Ontario, and Alberta.

With a little bit of shred it being sold in Quebec, the demand is out there.

We have plans to.

It continued to build out our capacity so we can fulfill that demand.

So that's on our shred shred business, we believe there is further opportunity.

And with respect to Edison, which is our premium brand.

We need to continue to bring news to that brand and keep making sure. It resonates with the cannabis enthusiasts and we will do that with continuing to bring new.

Flower unique screens out to the marketplace and bringing some other products such as that.

That we have with that live resin and other products that will continue to advance that brand as a more premium brand within our portfolio. So we're confident that we have the plans in place to continue the momentum and that we have the consumers.

Interested in our brands and will.

Coming back for more.

Okay. Thank you Dana that's helpful and then just on international markets.

Mentioned your shipment to Israel, but are you looking at any other other markets out there in Europe. In addition to Israel and to that point would you consider an acquisition plans or some of those markets. We've seen some some lps, they're making acquisitions you know in Germany, Netherlands, So any color there would be helpful. Thank you.

Yeah sure. So in terms of renewing are resuming our shipments with Israel. So we have a great partner in <unk> and have an opportunity to continue to supply that market.

Currently supply the Australia market and are working with our partner can attract in Australia to continue to build out our portfolio. There. So those are markets that we're currently in and certainly the news on on Germany, that's been coming out it makes it a market that we will continue to explore.

But in terms of interest in acquisitions in other European markets.

At this point, we'll continue to evaluate the opportunities we'll continue to look at how regulations change because sometimes the news happens way faster than the actual changes happened in the regulation. So we'll monitor it and continue to evaluate opportunities in the international market.

Thank you I'll hop back into queue. Thanks. Thanks.

Your next question is from the line of Rahul sorry Garrett.

From Raymond James Your line is now open.

Rahul.

Line is now open.

Good morning, Dana Derrick sorry, I was talking to myself on mute I apologize for that.

Thanks, so much for taking my question.

So congratulations on driving terrific top line.

Quarter over quarter growth.

As well as market share. My question. However is really on margins, we saw the gross margin profile relatively flat.

Between last quarter and this quarter.

Given the capacity expansion that you talked about being as well as the changes in the unabsorbed fixed overhead that you talked about Derrick could you give us a little more color in terms of how you expect margins to improve over over the next few quarters.

Thank you Raul.

Then I'll pass.

Eric add to my comments.

So first of all as you kind of as we increase production, we get economies of scale. Our facility. We saw that benefit is the numbers improve between Q3 Q4 of 2021.

Expect to continue to see that offering.

As we build out more capacity within our fleet.

And we have some inbox.

Smith that are driving those deals and we expect that continue to drive improved gross margin gross margin.

As well as driving higher tier and we all know that we can get higher.

Average selling price.

So higher THC products.

You know as I talked about in my opening.

We did have the ability to take price.

On shred them.

That is.

I think that in this market where most.

Prices are coming down, but we have such high consumer demand youre able to be <unk>.

Recognizing our.

Our lower our inability to fulfill all of the sales opportunity, we were able to take a price increase which again will help our margin.

And finally.

As we look towards.

There's an operator.

And improve our margins through improving our provincial Nyx right now we're heavily.

So the Korean market.

The most compressed margin mark.

As we expand our offerings to further.

Often says we expect to see again.

And our margins.

So those are a couple of comments, but Derrick I'll, let you.

Yeah, just I guess in addition, we are reviewing our sourcing with suppliers and consuming more strategic sourcing there is opportunity for further automation with regards to our billings of the shred premium flower along with real hard in Q1.

The automation of our second pre roll machine and have labor savings with that so we do see some near term improvements with our margin as well we were leaving Q4 new capacity, but during Q4.

In the early parts, we were not at capacity and there is.

Fixed.

Cost component to our operations and as we achieve these.

Economies of scales from operating in Q1 at the current capacity and then with the build out we do think that we can drive down fairly significantly our cost of cultivation that will allow us to have.

Sustained quarter over quarter improvements.

To our to our costs and therefore to our adjusted gross margin and just by example in going from Q3 to Q4, our adjusted gross margin went from negative 4% to plus 12% so in one quarter.

Just from some of the initiatives we've already implemented we improved our adjusted gross margin by 16%.

Great. Thanks, Thanks, so much for that color and then just pivoting towards the British American tobacco partnership specifically given the investment that you have highest since then.

The recognition that this was essentially a key motor but motivator for that partnership we're starting to see biosynthesis or fermentation derived products start to hit market by a few of your competitors can you maybe give us an update in terms of that partnership how do you see products rolling out and maybe potentially a broader update on the British American tobacco.

Understood.

Okay perfect. So let me start with highest since as you said.

That's it.

This is something that we believe there is a long term opportunity to build out from this partnership.

Yeah, we actually did a strategic review of the IND.

Investment back in the summer and we are very happy with the progress being made very happy with the IP that has been developed.

And we continue to look forward.

Maybe to further.

Our relationship with heightened because.

We do believe down the road there is an opportunity around biosynthesis of some of those rare cannabinoid and well look forward to updating you further on that.

Relationship.

To invest and build that one.

As for the partnership.

Yeah.

That is.

Prominent every day and what we do we have right.

<unk> shipped with with our Investor we have the center of it.

As I mentioned earlier.

That is well on its way and being weak.

We've hired scientists and product developers and recurs booked from B E T as well as from organic ground that are working together and.

We have the build out of the center of excellence almost complete.

We said, we expect all the construction to be completed by Q2 of fiscal 2020.

That includes not only the labs.

Also the buyout.

And this is having.

Having facilities to work with our collaboration projects to continue to build out.

Okay that we're looking at.

Around.

Oral and vapor product and CBD products.

Lots of opportunity here to continue to build out the <unk> and the technologies that we think have some opportunities for both our companies, but we would have that that.

Melody could take it to other markets around the world.

Yeah.

Great. Thanks, again for taking my questions and congratulations again on the quarter.

Thank you.

Your next question is from the line of refresh Parekh from Oppenheimer. Your line is now open.

Thanks for taking my question. So I guess, just going back to that target for a positive EBITDA margin later in your fiscal your fiscal year is there any way to frame what type of gross margin you expect to get to to be able to achieve that target.

Second question is just I guess as you look at the capacity right now that you have.

I guess what type of revenue.

The facilities are fully ramp like what type of revenue do you think you can get up to with your existing facilities.

Derek why don't I pass that one over to you.

Okay.

As it relates to the the.

The merger that we would need to get to positive adjusted EBITDA and Thats not really the type of guidance, we would normally provide.

Providing the positive guidance just based upon where.

Where we are today and the trends in other products.

That we have and the cost analysis, that's been done and our control over our SG&A costs. We are confident that we can.

Get to.

Q4, adjusted EBITDA positive and that will happen overtime game benefiting as well from the economies of scale from operating at the higher output more towards the 70000.

In terms of.

What type of revenue.

Results in I mean, youre not going to of course sell everything you produce when you add 70000 kilos of European capacity because of our packaging processing losses, but what the ultimate topline revenue.

Number.

Extrapolates to is really dependant strongly on the on the mix of the.

Flower, that's being offered and mainstream or <unk> value and whether it's with people. So there can be a large fluctuations with that I think that you can look at some of the.

The data points on the net average selling price in our disclosures and when we come up with a range for it but it's not the type of extrapolated guidance that we would be comfortable.

Going on the record with at this time, but we are providing the guidance that we will be at least at 70000 kilos of flower by the end of the year. After completing the construction. So that was the guidance we can provide.

Okay, Great maybe just one follow up question. So clearly your liquidity position do you see better than peers, where does M&A fit in the strategy going forward at this point for the company.

So thank.

Thank you for that and.

Look were.

To look at opportunities as they make sense for our business.

Right now Theres a lot of talk about what.

What is the opportunity in the U S.

And keep moving forward and we'll just.

As we evaluate those regulations when or if it's right for us to move into the U S market.

And do it so well continue to look at opportunities there.

Core organic ramp not because other competitors are there.

And look we're watching what our other competitors are doing so it's something that we'll continue to evaluate and I'd say beyond the U S. There are opportunities in Europe.

Europe that we could look at them, but there are certainly opportunities in Canada as well as we strengthen our position in the Canadian marketplace. So right now.

We're focused on getting our foundation right getting our business our product portfolio revitalized growing our market share and as we see acquisitions that fill in.

So gaps in whether it's in segment gaps in certain regions, we will look to fill those gaps with accretive acquisitions that make right.

Great. Thank you for all the color.

Yeah.

Your next question is from the line of Aaron Grey from Alliance Global Partners. Your line is now open.

Hi, good morning, Thanks for the questions and congrats on the market share gains and improvement on the gross margin.

So just wanted to double back to my question in terms of some of the gross margin commentary.

<unk> two.

But you said Derrick in terms of.

Targeting EBITDA profitability in <unk> 2022 could.

Could you just maybe you know maybe give some targets you have within that.

To help get that breakeven mark maybe in terms of metrics metrics for gross margin or top line just to help us kind of model out how we might get to there. Thanks.

Yeah.

I understand the desire to run the models off without there's just so many variables that can come into play whether it's your.

The when the flower comes off in terms of what market lands and what brand there is a large range in selling price.

Depending on the product format and the brand that can lead to two.

<unk> range.

And so I tend to look at it in terms of the average of averages but based upon.

Getting too high.

Higher level and capacity, which we only get to at the end of the year.

<unk> and <unk>.

Construction is complete that is.

It's very reasonable that we would expect to be EBITDA breakeven.

Uh huh.

But to get granular in terms of what that exact math is all wet.

Hello, everyone.

Yeah.

Do the modeling on that but we do believe that we can.

Significantly reduced our cost of cultivation as we.

<unk> produced at a higher level going from 47 kilos of flowers 70000, and this of course was improved yields from the innovation with the regime. There is theres extra opportunity there but.

And that would go on top of that but there's just too many variables at play too for me to put it on one or two but we are confident that based on the cost structure of the facility.

Rent expenses and the fact that we have the capacity to sell.

This product is everything is being harvested and into the foreseeable future that we are confident that we will be able to be a adult positive for Q4.

No. That's helpful commentary, thank you for that.

And then second question for me you guys have done really well in terms of market share as of recent so just.

You know a lot of your peers talked about shifts to more consumers shopping in brick and mortar.

You can kind of regain some share gains during that time. So I just wanted to hear about you guys and your strategy as consumers potentially go to more shopping in brick and mortar versus online how youre looking to maintain the merged territories that you guys have particularly maybe if there is maybe less of books on price I know you guys. I'll just talk about the value proposition you had within that price range, but love to get your kind of commentary on that.

Look in terms of temporal shifts in consumer first hybrid tend to go to more brick and mortar shopping and how you're positioning. Thank you.

Yes, sure no problem.

So I would like to just remind everybody that one of the unique differences for organic ground is that we have our own dedicated sales force.

While many of our competitors use third party.

We're focused day in day out in this space and our team is out out in retail stores meeting with Bud tenders and so we think that that's a competitive advantage for us we will continue to build out our presence in the stores. You know we were able to get our shred them gummies significantly.

Significantly into distribution within 12 weeks of launch we were out in in mass distribution across the country.

Except Quebec, but we were able to get that product out quickly and that is so as you talk about what happens as people start going back into stores.

The reality is I think that's going to be a benefit for us and we know that it will help our Edison brand, where Bud tender recommendations are important we will do some more in store Activations, which we werent able to do last year during COVID-19.

And so getting the name out getting that that contact them. It will help us maintain our or our presence and continue to drive our momentum look we have budtender education programs, we kicked off a program called plant lab at last year and it's a dedicated.

Program for Bud tenders, and learning about the quality of our of our products and available to consumers.

And on top of that we will continue to improve our consumer communication strategies.

It's a difficult category because he can't market.

Unlike traditional CPG companies can to consumers, but there are two places we could reach our consumers and that's in store and it's an online and the.

In start with hampered last year with all the retail restrictions during COVID-19. So we're excited about the opportunity to ramp that back up and.

And continue to improve our online programs to really reach the consumers both for our Edison brand.

And for our other new products like our gummies and our goal that we think have great potential to continue to drive.

Further improvements in our product mix.

Alright, Thank you very much for that color and commentary and I'll jump back into the queue.

Your next question is from the line of family Chen from BMO Capital markets. Your line is now open.

Thanks, Good morning.

Sorry to harp on the gross margin again, but I just want to make sure I understand the.

Going from the negative 4% gross margin last quarter to 12%.

Quite a significant recoveries so was that more due to changes in your product mix.

Or was that largely because you're producing more and so you you had those economies of scale because it was it more due to the ladder.

I would say that was more yeah, I would say that the improvement of the 16% was more to do with cost improvement that we achieved at the facility over Q3 and the early Q4 that did allow for the improved margin and that was prior to operating.

At full capacity at the 40000 kilos in and that was why we were gaining confidence as to.

The improving cost structure and the improvement to the margin.

We're always looking to.

Sell our products and brands in the formats that allow for that.

Higher selling prices in the whole of course.

The improvement to the margin as well, but we have seen.

The improvement over the last quarter.

It's going to come from improvements in our cost structure.

Oh, so it was improvement to the cost structure. So this was even prior to our getting to more production efficiency and economies of scale.

Correct, which was one of the drivers along with the sales demand for our products that gave us.

The ability to give the guidance on the adjusted EBIDTA for the end of the year.

Interesting okay. So it sounds like the now that you are producing more than I can continue to produce more through fiscal 2022, there's that's where that upside to more margin improvement will come from okay.

And I.

My next question is can.

Can you give us a sense like your big bag of buds and your shred them. I know you just took that price increase on shred it.

Those two product lines like are they in the positive margin gross margin territory at this point now where it's like shred. After the price increase still kind of like just outbreak even like can you just give us a sense of the margin you get off of those two products. That's it. Thank you.

At this time all our flowers.

What categories and brands have a positive margin product margin, but to get into the details of one over the other and format sizes and perpetual.

Jurisdiction is.

Not something that we would normally get into what I would indicate that.

Because of the lower cost of production already achieved over the last couple of quarters.

Our categories are positive.

Positive copper markets.

Okay. Thank you.

Your next question is from the line of Adam <unk> from Scotia Bank. Your line is now open.

Good morning, Thanks for taking my questions.

So maybe just following up to <unk> question. There Derrick are you able to provide some more color on particularly in the flower segment, what the mix between volume and premium was for you guys this quarter and where that compares to maybe the last two quarters.

Yes.

Yes, I would say that.

The shred it has been very popular and that's been great for our gaming Brian in the sense that we've been able to.

Have demand that exceeded our production capacity at a time and perhaps left sales on the table in that situation. So it was.

Over the last couple of quarters with a successful.

<unk> with the shred.

Has increased the <unk>.

<unk> to total with regards to value.

Values the value formats are value brands.

However, with our current spend and future spend on innovation.

And we know that is a focus of ours too.

Have more product available and mainstream to premium brands and as well we deferred some of the comments on the side of being in terms of.

Some of the opportunities that would always be considered to complete the portfolio, but we don't historically give.

Volume breakdown by brands, but no.

No question the success of <unk>.

Glenn two shred as.

The bigger percentage of the total in terms of the sales of the facility, but the top cover overhead cost.

For us that showed decent group margin.

Okay, great. That's good color. Thanks, Derrick So just as my second question. So obviously you know if you look over the last four or five months. Many of your peers have kind of tried to jump into premium rising their overall portfolio.

So if you look at your market share gains through the summer and it sounds like a lot of them have come through the shred brand and.

The associated products through that.

If you look more specifically at Edison.

Are you able to provide some color on how market share has trended in the premium category for you guys like what the launch on the new strains are you starting to see greater uptick some color there would certainly be helpful.

Okay. Adam Thanks for that question, so our focus on Edison and as I mentioned in my comments earlier is really going to be around building that consumer connections and we're investing park.

Okay.

Okay.

You know to continue to build on that that brand awareness and loyalty factors attached to Edison.

Certainly.

During COVID-19 utility talk to consumers.

<unk> get Bud tender recommendations was limited.

We see over the next year the opportunity to strengthen the messaging that our connection with our consumers on Edison.

Also have the plans in place to introduce some new products that bring some new news to Edison, So not only in Spain, but also.

Great.

At.

Yes.

The product under Edison to continue to build out the portfolio beyond just flower on our more mainstream consumers as opposed to it all being about.

You know I think Edison is more than just high THC, we're talking about adding <unk> to our labels, we're adding about we're talking about adding more visibility to our screens.

And these are things that I think over time, the cannabis enthusiasts will be interested in so it's a slower build on Edison, but I think we have a really good platform on which to build and continue to build that brand, while we leverage as I said it earlier leverage shred.

You know to get those new those consumers from the illicit market coming over with a lower priced offering higher teach the offerings. You know that one is an easier message. We don't put a lot of our marketing funds towards shred I think that the positioning in the market works on its own but our investment has been made.

Into our Edison brand.

Okay, that's great color, thanks, and congrats on the quarter.

Thank you.

Your next question is from the line of Douglas <unk> from RBC capital markets. Your line is now open.

Okay.

I guess as part of this gross margin question I am curious if you could comment on if youre getting close to capacity today at 40000, and as you move to the 70000 can you tell us what's going to be required to get there in terms of are there any new approvals.

Third as you bring on capacity is there a chance that margins.

Could decline over the next few quarters before.

We get to Q4.

Yeah.

Yeah, I mean, obviously I don't really see where the margins.

In terms of being impacted for the extra could possibly just there is this.

Fixed cost component in terms of running the facility, whether we're talking about labor or other overhead type.

And as we add new room to add new capacity and you're spreading those costs over and and so on.

I'm, not really seeing where margins are going to be integrated with them and obviously, there's a little bit with changeovers and things as we make these various environmental and other enhancements and one in Houston to the facility, but on overall basis are moving from 40000 to 7000 by the end of the year in terms of sales.

Those of flower.

Do not really see that we would have a disruption to month monthly or quarterly cost structure that would hurt the margin but.

On the cost of the flower or there are other factors.

Beyond.

The quality Paolo we're seeing sold as well with our derivative products. We recently launched in Q4.

With Edison <unk> along with the.

Some of them come to us and derivative products than we do.

The assumption of a larger part of the market share and becoming a larger part of our revenue and so that will also assess the overall margins for the underground as we move forward.

Okay, perfect and then.

Maybe you could comment on.

One of the things that you've obviously been very good.

Your ability to identify changes within the consumer how they're thinking.

Maybe you could describe some of the new consumer research that youre.

Youre seeing right now and how that's changed over.

The last let's say six or 12 months and how you intend to take advantage of that and that's it for me. Thanks.

Sure. Thank you for the question.

In terms of where do we see the consumer going over the course of the next a little while we do see the evolution, where consumers will start to look at not only the highest THC for the lowest price, but we will start to really care about aroma and flavors and well.

We'll also look at.

The genetics and making sure that you know it is there something unique and interesting about it so there's a certain kind of foodie.

Approach to the cannabis enthusiasts that they want new and and a unique different cultivars. So we think that will happen and we'll be ready with our in house breeding programs to continue to provide that under our Edison brand.

We also see that the wellness.

Segment will continue to be a trend.

We just launched our most sure our.

Providing CBD in that sort of daily regimen.

We believe that them more wellness will will continue to build over time and you know we have to have offerings to consumers that perhaps arent looking for the high but are looking for the the wellness benefits, both CBD and balance CBD THC offerings.

You know I think you know these are things you know the consumer we'll continue to look at edibles. Instead of oil you know over time I think the oil segment has declined as edibles have become a nice way to get them, you know discrete but specific milligram.

And take over time sort of dosing.

And we're really excited about our edibles infusion Corporation because that acquisition has helped us get into that gummies category very quickly. So we we have said that we have you know last quarter, we talked about our cannabis innovations panel we have.

2500 consumers that we speak to to get better insight into trends, we use that panel to understand flavors to launch in our gummies, we use that to look at what we want to do on pre rolls are on chocolate. So we have opportunity continues to dip into that consumer research and continue.

To adjust our portfolio accordingly.

Great. Thank you.

Your next question is from the line of Andrew <unk> from Stifel. Your line is now open.

Yeah.

Hi, Good morning, Thank you for taking my questions and congrats on the profitability improvement in this quarter.

Maybe just talking about.

Your rec performance.

You mentioned that you took price increases on shred.

Wondering what that did to the.

Average net selling price in the quarter.

And.

If you continue to take price increases on shred, where where that can go.

And.

In tandem with.

Either premium offerings.

Thank you, Andrew and and so so let's just talk first about the increase on shred. So here's a brand that we were having were struggling.

To supply the demand and when that happens you know price taking prices is a natural response.

We have had.

Had our Alberta price increase in market in August as of August and the Ontario increase took effect at the end of October so the benefit of the price increase will we will see in our next quarters results as we.

Continue to grow those brands, but.

Thank you.

Yeah that that should help the margin on on that brand.

And you know there are other opportunities as we have supply to take the brand to other markets, Ontario is the most price compressed market. So just expanding that brand in other regions will also help on our average selling price for that brand.

When you you asked about Edison.

We feel strongly that our Edison brand.

Maintains a good position in the marketplace for our mainstream brands in terms of pricing and we just need to continue to provide news and excitement behind that brand in that.

That's our strategy as we move into fiscal year 2020 to talk talk to consumers talk to Bud tenders AD innovation. It's a it's a great opportunity to continue to build our mix towards premium and then you know as I mentioned earlier, the gummies that we're launching so our derivatives, both mature and our shred them.

And add an interesting mix, obviously higher asp's as you move out of the flower segment. So we're excited about the opportunities as we look at our product portfolio moving forward.

Thanks for that and maybe just continuing on that.

Talk about.

The continuing revitalization of the Edison brand.

Maybe just.

Providing a little bit more color on on the mechanics behind that.

Do you need to win any SKU listings for that.

I'm not sure that you're required to do that in the past you may have just switched the mouth.

We're through existing legacy strains.

Just some color on the path forward given.

The provincial markets are or the provincial buyers are.

Or being a little bit more stringent with the with.

With SKU list things here.

Yes, sure look part of our interest is to have the best selling products in the marketplace at all times right and so I think we're we're working with the provincial boards to make sure. We have our best offer offerings in their portfolio. So we will work with them and look.

If we have any slower movers and switching them out to add new Skus and there there is.

A need for new in this category to continue to refresh the portfolio and so that is an ongoing process that we currently do with our provincial boards and so we're not worried about trying to get.

Too many more incremental skus, we're looking at optimizing our offerings in each board can make sure we have the best selling skus in the marketplace certainly when we bring in something that's unique like our Edison Joel.

We find a way to get in incremental.

Listings across the board, but there is a need to ongoing.

Rationalization or optimization of your portfolio and so as we bring new cultivars then we'd retire some and continue to refresh our portfolio.

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

Thank you.

Once again, if you wish to ask a question simply press Star then the number one on your telephone keypad. Your next question is from the line of Green Grindler from <unk> capital. Your line is now open.

Hi, Good morning, and thank you for taking my question.

With respect to the expansion of capacity at phase for the company still incurring charges for Unabsorbed fixed overhead and the cost of sales. So I wanted to know what those charges are related to given the fact that it's currently expanding capacity and what types of level of output or needed to be achieved to fully absorb that overhead. Thank you very much.

Okay.

Yeah.

Thanks, I can take that question, the unabsorbed overhead, which was more significant in the earlier quarters.

As a consequence.

We utilized a portion of the depreciation on our chocolate business Archrock machine and secondly to the unused grow rooms that.

And that was supposed to be occurring in the earlier quarters, we had a.

Much smaller amount in fact, our Q4 financials, but looking forward.

We do not expect to have any of these are absorbed.

Overhead amounts as a consequence of reducing the rooms as they're available for growing.

Et cetera, so that was more of a historical contract can have that cost comes out of our cost of sales.

And we're using all the rooms, we're absorbing the rest of the cost naturally through our to our margins and so that will have an overall positive.

Back to the gross margin and those costs mainly relate to.

The depreciation property tax and insurance on the.

Newsrooms are unused rooms at the time, but again as we.

Got to capacity at the end of Q4. It was more of a normal charge for Q4 is not expected to reoccur, even with the expansion because I knew rooms come on we will we will only be depreciating them as they put into use and penalty you need to be put into use.

And so hopefully that provides some clarity.

Okay understood. Thank you for that and then with respect to incremental capacity coming online with phase four so can you comment on the company's position in downstream packaging and processing, what the spare capacity it looks like to handle the increase in production areas that had been a bottleneck in the past. Thank you.

So thank you for that question, we continue to invest in automating our.

Our production at our downstream processing, we had one automated pre roll line last year, we brought on a second automated prewar line I'm just in August or September of this year.

We're looking at more automation in our packaging and our blending and.

So as we build out our capacity. We're also looking at downstream processing to make sure that we're able to not only grow the flower, but get it out the door and meet our consumer demand. So that's all part of our plans and efficiencies that we hope to gain in this fiscal year.

Okay. Thank you very much for that.

Thank you.

Thank you everybody for joining this call today and thank.

Thank you operator, and I look forward to updating you on the progress moving forward.

Have a good day.

And with that this concludes today's conference call. Thank you for attending you may now disconnect.

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