Q2 2022 OrganiGram Holdings Inc Earnings Call

Good morning, My name is Rob and I'll be your conference operator today.

At this time I would like to welcome everyone to the organic Graham Holdings second quarter fiscal 2022 results conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star one.

Thank you Craig Mcneill you may begin your conference.

On today's call should be aware that it will contain estimates and other forward looking information from which the company's actual results could differ.

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

Further references will be made to certain I F. R. S measures during the call.

Including adjusted EBITDA and adjusted gross margin.

These measures do not have any standardized meaning under IRS and our approach in calculating these measures may differ from that of other issuers. So these measures may not be directly comparable.

Accordingly. These non <unk> measures are intended to provide additional information and should not be considered in isolation.

Or as a substitute for measures of performance prepared in accordance with Rs <unk>.

Please see today's earnings report for more information about these measures.

Listeners should also be aware that theyre, making certain statements relating to market share data. The company relies on reputable third party data providers I would now like to introduce Vena Goldenberg Chief Executive Officer of organic Graham Holdings, Inc. Please go ahead Ms Goldenberg.

Thank you and good morning, everyone with me is Derrick West our Chief Financial Officer.

For today's call, we will discuss the financial results for the three months ended February 28, 2022, and I will provide a general business update we will then open the call for questions.

I am happy to report the second quarter of fiscal 2022, we continued the progress of the past several quarters. We again achieved record net revenues in the quarter the highest in the history of the company.

We grew our market share and now hold the number three position among Canadian LP in the recreational market in Canada.

And most importantly, we achieved a positive adjusted EBITDA of $1 6 million.

Two quarters earlier than we projected at the start of the year.

Also in the quarter as we announced in our last call, we acquired Laurentian and our seasonal craft grower and premium cash producer based out of Quebec.

And net revenue in Q2 was $31 8 million.

117% increase over Q2 of fiscal 2021.

This is a record level of net revenue for organic growth and demonstrates our continuing success at understanding consumer needs innovating to best address market demand and introducing compelling brands and products that resonate.

And we continue to grow our market share in February we secured the number three position in market share among Canadian Lps for the second month in a row with a share of eight 2% According to high fire.

In March the momentum continued with another 20 basis point gain from a market share of eight 4%.

We also continued to hold the number one position in the flower category, which represents about half of the Canadian cannabis market.

Our shred milled flower products are at the top sellers in Canada with Shred Tropic Thunder being the best selling flower product in the country.

We also hold the number three position in the gummy category, having doubled our market share quarter over quarter with two of our skews amongst the top 10 best sellers in the country.

This market position include shred, and Gummies, which were introduced this past August and long shore or large format CBD infused soft you introduced this past November .

Edison Joel our unique high potency take the lozenge maintains its Beth is position as a best seller in the injectable extracts category.

Now moving on to innovation, we recognize the need to bring news to the category. So we continue to launch new products.

We have leveraged our shred brand that has achieved high visibility among cannabis consumers.

In March we ship shred ex Keith infused blend and an innovative product that combines the convenience and popularity of shred milled flour with the potency of teeth in a 50 50 ratio.

We also launched Shred X date. These are 510 cartridge right with the flavor profiles of shred node flower products Tropic Thunder Mega Mellon and false Mascara and how are we doing well within days of launch shred ex Tropic Thunder was the fourth best selling vacant Ontario.

Building on the success of Shred and Gummies, we added unique line expansions shred and pop gummies and the classic pop flavors of Cola root beer and cream soda were introduced in March. We've also added two new sour flavored sour Apple flap and sour blue Raspberry.

With eight Skus now available to consumers, we expect to strengthen our market position in the gummy category.

We have also added two new premium strength towards Edison line with Edison Kush cakes, and Edison frozen Lemons. These high potency and Turkey. Rich addition will create further engagement with cannabis enthusiasts.

With big bag of buds or large format value brand, we added pin cookies, a high potency in the constrained this expansion of our product line addresses the desire for specific strains by value seeking consumers and reflects the evolution of the Canadian cannabis market.

International sales also bolstered our Q2 results we shipped approximately 1700 kilograms of dry flower to Israel and Australia in the quarter, marking the highest international <unk> shipments in the history of the company.

We expect to have further shipments to <unk> in Israel, and Canada truck in Australia in fiscal 2022, and we will look to expand our international partners to ship more wholesale dry flower.

Now, let's look at operations beginning with Laurentian.

After acquiring <unk> acquiring Laurentian in December we began working on integration.

One of our priorities was to increase the distribution of its unique trumbo hash and Laurentian craft flower products.

At acquisition Laurentian products were available in four provinces by the end of the fiscal year, we will be available in all 10.

In Ontario, we've been successful at increasing distribution levels of Trump will hash from 25% to almost 40% of Ontario's 1500 stores and have grown sales by 21%.

This Ontario example, underscores our success in leveraging our marketing distribution and field sales capabilities to drive results.

We expect to be able to achieve the same success across Canada as we increase the footprint of Laurentian brands.

We are also making progress in expanding and automating production at Laurentian construction of licensing for the additional base is expected to be complete by the summer of 2022 with a four times increase in cultivation capacity and increased automation processing and storage space to be achieved by the end of 2022.

Yeah.

Cash production at Laurentian is now supported by high quality and high potency Keith coming from our mountain facility. This was identified as an acquisition synergy.

At our Moncton campus, we are completing the phase <unk> expansion and expect to reach upwards of 80000 kilograms of dried flower capacity.

Environmental enhancements are currently in place and approximately 40% of the facility and should be fully implemented by the end of the year.

These upgrade path and we will continue to further enhance yields and flower quality as they are completed.

We currently have two automated pre roll line, and we will be adding high speed poach filling lines for shred and big bag of bonds by the end of fiscal 2022.

In Winnipeg, adding onto our highly automated gummy production line, we have automated labeling and excise stamping and our commissioning pouch packaging equipment.

We have also upgraded our leveraged our warehouse to optimize our logistics network and drive freight savings.

These changes helped improve our efficiency margin and customer service.

The buildout and improvements in Montana, and Winnipeg reflect our strategy to make investments based on recognized business needs and strong payback.

In the quarter all large scale construction projects were substantially completed at the product development Center of excellence and Mazda.

The bio lab as being fully equipped in Q3, and then we will begin to conduct advanced plant Science research.

In the quarter, our joint R&D efforts continued to progress well and we look forward to applying the discoveries and deep scientific knowledge to both strengthen our existing market products as well as develop new consumer consumer centric innovations.

It's important to note that support for the product development collaboration and organic <unk> as a whole was further showcased at the beginning of March when they invested $6 $3 million into the company.

This investment was made through the exercise of their top up rights pursuant to an investor rights agreement and increased their equity position from 18, 8% to 19, 4%.

Also as mentioned in our call last quarter in December we increased our cumulative investment in hyacinth biologicals by $2 5 million to $10 million.

For a strong minority position.

Highest since advanced research engine using biosynthesis to produce THC CBD and cannabinoid without using cannabis plants provides us with another avenue to innovate in the future.

Through these collaborations and in addition to our in house R&D capabilities, we will continue to produce unique exciting products for the Canadian consumers.

Subject to terms of the PDC create proprietary IP that we can introduce globally.

Now I will turn it over to Derek to present, the financial overview Derrick.

Thanks Peter.

Turning to our earnings results for Q2 fiscal 2022.

Gross revenue grew 128% from Q2 2021 to $43 9 million and net revenue grew 117% from the same period in fiscal 2021, $31 8 million.

These revenue increases were primarily due to higher recreational net revenues, which grew 108% from Q2 of fiscal 2021.

The completion of international shipments to Israel under our agreement with Cantor and to Australia through Canada.

While gross sales grew 128%.

Cost of sales decreased 20% year over year to $25 million.

Lowering our total cost of sales during a growth period was that as a direct result of increased efficiencies at our production facilities combined with improved inventory management.

We harvested approximately 10000 kilos of flowers during Q2 of fiscal 'twenty, two compared to about 4500 kilos in Q2 of fiscal 2021, an increase of 125%.

Over the proud here the company has experienced a growing demand for its products and this has led to increased planting and cultivation levels, which when combined with higher flower yield per plant and as compared to the prior year's comparison quarter.

This resulted in the doubling of our hearts.

Largely due to a higher net revenue a reduction in inventory provisions unabsorbed inventory cost and a lower cost of sales per unit. The gross margin in Q2 improved to $6 9 million from a negative $16 5 million in Q2 of 2021.

On an adjusted basis gross margin was $8 3 million compared to a negative 700000 in Q2 of fiscal 'twenty one.

We expect that we can continue to achieve efficiencies and better economies of scale from the three facilities lowering production costs.

Combined with contributions from higher margin products will further improve margins.

SG&A, excluding noncash share based compensation increased to $14 million in Q2, 2022 from $10 3 million during the prior year's comparison quarter and this was largely due to higher employee costs due to increased head count, including the acquisition of Laurentian.

General wage increases.

Kris professional fees due to technology investments and higher trade investments in marketing spend initiatives.

In the quarter, we achieved positive adjusted EBITDA of $1 6 million, a $9 4 million improvement over a negative $7 8 million in last year's comparison quarter.

This is the result of the continual improvements in our business, including higher sales volume lower production costs, which generated higher gross margins and operating costs.

We achieved positive adjusted EBITDA two quarters earlier than projected at the start of the year.

Based on the momentum we see in terms of increased sales and improved efficiencies, we expect to generate positive adjusted EBITDA into the future.

Net loss for the quarter was $4 million compared to a net loss of $66 million since Q2 of fiscal 2021.

This large reduction in the net loss was due to the increased sales and higher gross margins I've already mentioned.

In terms of our statements of cash flows cash.

Cash used in operating activities was less than $1 million during Q2 of fiscal 2022 compared.

Compared to cash used of $10 million in Q2 of fiscal 2021.

The year over year improvement is primarily due to the current period's operating income.

Cash provided by financing activities was $6 million during Q2 fiscal 2022 compared to $51 million in cash used in the prior year's quarter.

During the current quarter the company received $6 3 million from proceeds from shares issued.

Cash used in investing activities was $23 million during Q2 fiscal 2022.

Compared to cash provided of $18 million in Q2 of fiscal 'twenty one.

Cash used in Q2 of this year reflects the $70 million in cash consideration for the acquisition of direction.

$2 5 million for the additional investment in <unk> eight.

$8 7 million for facility expansion and improvements.

And $4 5 million invested into restricted cash to be used to fund the centre of excellence.

In terms of our balance sheet.

February 28, 2022, we had $151 million in unrestricted cash and short term investments compared to $184 million at the end of fiscal 2021.

The decrease during fiscal 2022 is primarily due to the companys investment in its working capital assets and capital expenditures.

Port facility improvements the purchase of Laurentian and the additional investment in hive.

This concludes my comments. Thank you I would like to turn the call back to Peter.

Thanks Derrick.

The first half of fiscal 2022 has shown the success of our strategy to create exciting products and brands that are embraced by the market to maintain efficient operations and deploy capital wisely. This will continue to be our focus which positions us for success for the rest of the year.

We reiterate that our investors can continue to expect strong revenue and volume growth driven by expanded distribution more new and exciting product and brand introductions.

Continued international sales.

Further improvements in our adjusted gross margin and continued positive adjusted EBITDA.

Thank you for joining us today I look forward to updating you on our progress.

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

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Our first question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.

Hi, good morning, and congratulations on the quarter and reaching the EBITDA target two quarters ahead of what you originally expected.

So first question for me just on the EBITDA, so thinking about the EBITDA margin opportunities longer term right. So now you've been selected treatment of profitability do you expect that to continue going forward. Just how do you think about the EBIT margin opportunity may be in the next 18 to 24 months as you expect continued improvement on the gross margin side.

Sales ramping up thank you.

Eric over to you on that one.

Okay.

Okay.

That will continue positive adjusted EBITDA based on the momentum over the past few quarters.

Into the future with the increase to our capacity at all our facilities. This will result in economies of scale, which will lower our production costs, which will improve margins.

There is also as well.

Additional contribution from <unk>, which has a higher average price.

<unk> per unit just based on the drilling of the premium product.

And as well contributes to a positive margin, but bear in mind that as we we need to continue to invest in our business to support the continued growth.

And so while we expect to have a growing EBITDA, we're not providing specific.

Our guidance at this time in terms of the percent of revenue, but we do expect without the minimum that we have with increasing sales demand increased capacity to have higher sales through through throughput with lower cost per unit that ultimately we are well positioned to have increased.

The increase to our EBITDA over time.

Hi, great. Thanks, so much for that color and detail.

Second question for me on International rights on a nice sequential increase once again in the quarter.

It looks like you're expecting for continued.

You mentioned bound that Brian just wanted to clarify, particularly in terms of the shipments during the quarter was there anything on the timing side do you feel like those are going to be reoccurring is this a good run rate on a go forward and then just any color you could provide maybe on the margin I know, it's a higher margin and we've kind of go over this before but the margin differential in terms of the internet.

National versus the domestic revenue. Thank you.

Great. So thank you for the question. So first of all we do expect to see ongoing shipments to both Israel and Australia.

Obviously churn the paperwork import quotas important documents expert documents and need to get those.

Turning to before every shipment so that continues to be the regular cadence of our business and we expect to see more shipments obviously for the balance of this year.

In terms of your question on Martin I mean, the real answer is.

There is no excise tax on international on any <unk> sales and Thats the significant improvement in margin over just.

General recreational sales.

It obviously comes with different kind of testing requirements, so theres a bit of offset to that but it is good margin business and nicely complements our recreational business.

Alright, Thank you very much and congrats on the quarter I'll jump back into the queue.

Thank you.

Your next question comes from the line of Tami Chen from BMO capital markets. Your line is open.

Great. Thank you and good morning first question I had and specifically on your Rec sales you described how youre continuing to see momentum in your share market share has continued to expand so I'm just curious like why did your net rack revenues.

Decline, a little bit quarter over quarter.

Okay.

So we have a bit of a.

Timings of overall, Tommy our momentum is solid and we saw our market share grow again in March we had a bit of a.

But challenged during the month of January with Omicron as it ran through our facility and.

We had some high absenteeism that impacted our fulfillment, we got we had the highest shipping.

<unk>.

In February to get product out.

But we had some sort of a little bit of a timing issue that rolled into some solid momentum into the month of March so thats, what youre seeing on the rec side of the business.

Our market share continues to grow so the offtake isn't the problem, but we did have a little bit of timing issue through the quarter as a result of that disruption.

Okay I understand.

And then my follow up question is.

If I look at the broader high fire and even the SaaS CAD retail sales data for the industry. It seems to be slowing down are stalling a little bit the last several months really since the fall and I noticed that you also produced.

That less loud I suppose that's attributed to the omicron aspect, but I guess two part question here with respect to what's been happening in the market. First is you called out for your fiscal Q3 that youre expecting market growth and your outlook.

So are you seeing now that the industry is growing again to a new high and second part of the question is based on where the market is today and what you expect over the near term do you still believe that once you're out the think almost 80000 killed that capacity the market can still more than.

Absorb that from you. Thank you.

Perfect. So so a couple of key questions. There Tammy so so first of all.

We do see the market picking up so it has been a little bit stalled over the last few months.

Ken has reported.

But given the opening.

Yes.

Communities, and we expect to see we'd expect to see.

Concerts, this summer and fair and we expect to see the opening up generally of social activity. We do expect to see the market to rebound over the course of the next few months, especially expecting a nice big lift coming up for 'twenty.

So yes, we think that it will rebound over the summer and we will start to see the benefit of.

Those interactions I think we missed some of the challenges we had even in the last few quarters, where it stalled.

Quebec had this issue where they Pat required the vaccine passport to just get into the cannabis retail stores. So there was a little bit of a disruption from.

From Covid over the last few months that has it that had stalled the category, but we expect with all the openings coming.

That we will see a rebound for sure. So that's with regard to the.

Market growth and sorry could you repeat your second part of the question.

Yes, sure I was just wondering where you see it going.

The near term, perhaps even medium term of the market are you still confident that once you reach your full capacity at market.

The market can still more than absorbed that for music.

Right, Okay, sorry, yes, so so on that front.

Number one we do see some continued growth as I mentioned on our last call. Our current situation is that demand is outstripping our supply so we have.

Our shred product is currently only being shipped to Ontario, Alberta, and we have some shipments going into Quebec.

Not meeting those needs. So we have limited our distribution to other provinces, which is something that we will certainly expand once we have more capacity.

And then for now we are a net buyer of product we have to buy flower to meet the current demand. So we don't have any concerns about using the capacity we have in our Moncton expansion.

As we are already using product buying product from external suppliers that we will buy it from in house once we have it up and running.

Great. Thank you.

Your next question comes from the line of Matt Bottomley from Canaccord Genuity. Your line is open.

Good morning, Congrats on the print this morning, and thanks for taking these questions. Maybe just wanted to start maybe just at a higher level. When it comes to what's happening in the Canadian market, just sort of piggybacking off of what Jamie was talking about as well.

Just the fact that if you look at some of the incumbents in the space that started with close to 20% market share on recreational implementation in Canada, it's consistently been coming down where I think the leader in this space now has maybe a little over 10% market share So where do you see this bottoming out even though that organic rate and that's been doing very well and re accelerating as of late if you look at commoditize.

<unk> and <unk>.

The U S like Colorado, Oregon market leaders, they're barely sort of eke out 5%. So I'm just curious where you think this is going in Canada.

Barring any sort of major change in excise tax or federal regulations in terms of the ability to secure outs.

Outsized market share.

Right. Thank you Matt.

So first of all I think that.

When you look at some of the bigger players who had 20 market share that dropped down to 10, I think one of the things that that we see when we look at their performance is that you can't sit on your laurels you can sit with a product thats out in the marketplace and think it's going to keep delivering the sales.

Last quarter or the quarter before you have to keep innovating a lot of the focus of my comments. This morning was around innovation. We know this is a category that needs to constantly be refresh bring new news bring new innovation excite the consumers and I think thats something that we focused a lot of our time on we introduced 90 new.

New products over the course of the last 12 months, we focus a lot on rationalizing taking up slower mover is bringing in new products just to keep it fresh and this is something that I think has helped our momentum continue over the course of time.

Thank the question about what's going to happen long term.

Highly fragmented market, we all know that there is a lot of small players.

That have less than 1% of <unk>.

Market share.

And that amount of players has grown however, we also know that the provincial boards are starting to tighten up they don't want to carry.

Thousands of duplicate products they want to manage how many items they have in their lineup and one example, I could share is as we took our trombone hash out to some of the new provinces to get it lifted the feedback. We got was they were excited that it was part of our portfolio because were already.

Supply year to them and they don't have to set up another vendor and so they weren't they might not have taken the trouble of hash from it's a unique vendor, but they were happy to have it in our portfolio and I think that's a message that we have to recognize as this market matures. The provinces are going to want to deal with less vendors.

And the vendors that are full suppliers of a cross portfolio are going to be.

Prioritize we're going to have first access we're going to have better opportunity to get better distribution get our listings in and thats going to help. So so I do think that as it matures you're going to find some of those smaller players sort of Dropbox, you are going to see a consolidation but in the.

Bigger players the need to keep it fresh keep bringing in new news is very important and that's been our focus.

Great I appreciate it and just one follow up for me on the consolidation part.

We've seen over the last several years.

A half dozen or more acquisitions for these types of craft Brewers. Many of them have actually turned out quite favorably in terms of their penetration or market share being a little more sustainable when it comes to pricing is there any other product categories or Skus Reclassifications do you think are kind of next in line for the industry to consolidate or just sort of any other commentary on where you think M&A is going.

In the domestic Ellen.

Element of Canada.

Right. So so first of all I think we've seen different types of M&A over the last few.

Few years, so theres been the.

Big players, who have acquired other big players and as a result had a lot of duplication and offerings and drove some obviously synergies, but some rationalization of brands as well.

As one of the things that we focus on our M&A strategy has been looking at our portfolio and seeing where there is gaps in our portfolio and really looking to find acquisitions that can fill those gaps. So the example, when we acquired <unk>.

EIC Edibles and Infusions Corporation last April we work in the Gummy space right. We acquired it in April It was pre revenue by August we launched the new gummies into the marketplace. We're now.

We're now the number three gummy player right went in six months from when we launched into the market. So we found that call. We recognized with our Laurentian acquisition that we needed a craft flower provider, we work in concentrates and concentrates with a growing segment and we wanted to be.

<unk> our presence in the Quebec marketplace.

And that's working really well for us not only do we get the benefit of the higher margin products that Laurentian has provided but we strengthened our relationship with the FTC in Quebec, and we're seeing that reflected in the growth of our core organic Graham Skus not just the <unk> skus. So.

We've been very focused at looking at the portfolio and figuring out where we have to go that makes it. So it is accretive and incremental as opposed to just <unk>.

<unk> market share that ends up with duplication might result in some.

Rationalization.

So that's sort of our approach in terms of your thoughts where it's going to go look there.

There's a lot of players in flower and flour.

Flower is a big part of the category, but how do you differentiate over time is going to be important and I think the.

Right.

Some of the fragmentation in the flower spaces people want news, but the bigger players to keep bringing new strains new news and you don't need to have.

A separate.

LP come out and set up for a one time offer in and out.

<unk>.

We're really focused on our quality of our flower growing at improving both our European and our THC and developing high quality products for our Edison brand and bringing some new strains that are in the marketplace. So the retailers don't feel they need to chase those crafts.

Specialty producers and of course, we have our laurentian craft flower as well. So that's that's how we see it and hopefully can see you can keep growing and driving our market share as a result of that M&A approach.

Great I appreciate all the color.

Thank you.

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

Thanks very much.

Question really has to do with your strategic thinking.

As it relates to pricing in the marketplace. It seems you have done an excellent job from that perspective.

But do you think some of the pricing declines in the marketplace that we've seen over the last 12 months are over or we had a base or could we see some further erosion.

In overall pricing in the Canadian marketplace.

Right. So so.

So here is and I think I've talked about this last quarter I think a lot of the price compression that we saw in flower.

Has happened I think we got to a point where flower pricing on the value segment is actually.

At or even slightly below what the illicit market is that and so I think that our pressure on flower is mostly behind us.

We've also seen with with less supply in the market in Canada, we've had some.

Grow cultivation sites that have been shuttered, we've got a bit more balanced between supply and demand that was pushing some of that price compression as well. So the flower piece I think is mostly behind us.

There is more compression that we'll expect to see we see it in <unk>. So we see it in concentrates.

And I think the important thing is that for us recognizing that.

We we don't shy away from the value segment, we think it's an important segment. It's a high volume segment. If you could make margin and the value segment and then build some more premium offerings in terms of your mix you've got it made you can continue to drive your positive EBITDA. So.

I think that there could be other compression in some of those other segments.

Until they reach that point, where they are lining up to what the illicit market was offering.

That's that's the the pressure point and once.

People could buy the product through retail stores legal retail stores and yet at the same price.

If you look at some of the research results more better quality product.

Yeah.

Why would that that's where it will settle down so hopefully that provides the color you were looking for yes, no that's very helpful.

As a follow up.

What we're finding and I don't think this is a surprise but.

But tenders play a key role in them.

Focusing on what type of product.

Yes.

People should buy and.

What do you think.

And the parent preference for the smaller guy as well relative to larger Lps.

So they do support the craft growers, probably to a more significant extent.

Then the larger players.

Youre thinking on that I know that.

You probably describe your strains in your innovation, but there is there anything else that you can add as well.

So listen I think youre right, but tenders do play a very important role because consumers there are consumers that come into those retail stores and they're asking questions and want some guidance on what to buy.

Think one of the things that we pride ourself on organic ground as we have our own dedicated sales force we have feet on the street across the country. We spend a lot of time engaging with Bud tenders, not only sharing with them. What our products are strains are but we do education programs with them when we run.

We go in and we set up in store Activations and.

So we have relationships in store.

And we promote.

The breadth of our portfolio.

So if there is a bug tender that's focused on kraft or more premium flowers will focus a lot of our attention on our Edison brand or bring in our Laurentian craft flower now you've got some about tenders that are really looking for the innovator products. So when we introduce something like our.

<unk> key confused blends.

We're introducing something new and exciting the tight potency.

Really great feedback on our trombone hash as we've taken the education of what <unk> out to the marketplace. How it's used and done a lot of education with the Bud tenders.

And then on our Gummies look we came into the market with products that were.

At a price point that was more accessible to a lot of consumers and we got a lot of positive feedback from the Bud tenders that now people could buy.

Our four gummies for for under $5 as opposed to the.

$8 that was being charged before and so a significant benefit so I think there is.

It's not all about price, it's about price and value and uniqueness and offering in all of those factor into what about what about tender might recommend to a consumer so we spend a lot of time with that connection with Bud tenders talking about our portfolio and we feel that they are often recommend our products.

So it's not just the little guys that they recommend they're recommending quality products and we feel we have a really good portfolio.

Excellent. Thank you very much.

Thank you.

Your next question comes from the line of Thai calling from <unk> capital. Your line is open.

Hi, Thanks for taking my question and congrats on a really solid improvement in gross margin. This quarter could you help us unpack the key moving pieces. There in terms of what drove that gross margin improvement just how much of that was due to a wrench and how much from a larger international shipments how much from product mix for example.

<unk> any color you could provide there thanks.

Okay perfect. Thanks, Ty Derik I'll pass that over to you.

Perfect.

I would say.

Outlined a couple of the points that.

That were key in terms of improving the margin, but it was.

A little bit of everything in terms of product mix. No question, there was more with the international shipment which is.

Outlined earlier with LTE.

Excise tax it has.

A much higher margin than most rock flower does that was helpful. There generally we have been in play as well as the contribution from <unk>, which has a crop to grow and with the house product does attract higher margins.

In that business and there was a contribution there the genesis of the quarter.

But I think the other element that's really key.

Just with overall continued sales growth over the last few quarters and with higher levels of production. We're just starting to achieve economies of scale and getting a lower cost of production on an overall basis, which is helping the margin and all of our product categories and we expect that lifts to continuously as we look forward.

Given that we harvested 10000 kilos in the quarter annualized rate of 40000, we do believe review the fiscal year at 80000 that we have the capacity to sell that product.

As per our flow through and we're just a large component of our costs are fixed in nature just by operating at these higher levels, we do over time.

Lower cost per unit and this is just provide a good general lift for the company in the quarter and then as those partially seen in last quarter as well and we expect this to continue.

Great. Thanks for that and then just for my follow up.

A a market level question given some of the pressures on consumers pocketbooks here between inflation and rising borrowing cost are you seeing customers.

Turning to trade down into value categories at all and is that a risk to your plan to kind of emphasize more premium skus in your sales mix.

Yeah. So so first of all I think.

Our sales mix, we have a lot of value products and I think that we don't shy away from them.

Can make margin on our value products as well as our premium yeah.

You have to be able to meet different consumers are driven by different.

Sensitivities and obviously theres a big consumer groups that are looking for the lower priced products.

Still high quality, but lower price.

But there are the cannabis enthusiasts, then sort of crap seekers that want the higher quality products. So we want to make sure we're offering the different products to different consumers, what they're looking for in terms of pressures to the pocketbook Theres. No question. We all know that cost of living has gone up I think what we saw over the course of.

Covid was that people were buying into the cannabis market to address stress to address relaxation. It wasn't all about partying and discretionary it became more of them.

Something to help them get through some of the challenges and look well I'd like to admit that we're excited about more of a recreational time over the summer the pressure on it.

Inflation and cost increases is out there and we think that.

Our products offer consumers an opportunity to.

Address those stresses and.

And feel.

And feel good about.

Their day right. So it's it's a little bit of a help in a little bit.

And it's an important addition to I think their lifestyle. So.

Really expect there would be a very big impact other than perhaps a more of a shift to the more value products and that will of course benefit us we're happy to be a valued supplier along with the premium supplier.

Great Thanks, Dan and thanks Derek.

Your next question comes from the line of Frederico Goldman is from <unk> capital markets. Your line is open.

Hi, good morning, Thanks for taking my questions.

Just on your gross margin you guys are showing some good growth there. The expansion can you talk about the differences in margins between your direct sales in Canada, and your international sales and how much of that margin expansion coming from the mix with higher international.

Thank you.

Eric I'll take that.

Yes.

Well I guess our international.

Revenues were $4 4 million in Q2.

Which is a.

One of the highest that we've had.

As a total and.

As a percentage of our total on revenue as a company as noted that we don't have the X I saw that it does attract a much higher margin than our <unk> business.

Despite our margins also in improving <unk> business as well we've been lowering the cost of production at the facility and this is helpful for all product categories, including pre rolls as well. So we don't publicly disclose I guess our margin by.

By distribution channel and so it's a difficult question to answer.

Answer in the sense that we just don't provide that specific guidance, but we do the international shipments are important part of our business. We do have a cadence of ensuring that we try to have.

Quarterly shipments and.

We expect to continue to do so.

But the both businesses are growing and we expect to have more flower available at the end of the year to supply both these markets and when we do so it'll be at a lower cost per unit just from economies of scale, but in terms of.

Getting granular on what is the margin by distribution channel that's just.

Guidance, we haven't historically provided or published though.

Apologies if not the clearest answer to the question but.

But it's just not guidance we provide.

Yes, no sure I understand that thank you.

And then when you look at your your market share.

And your growth outlook for the remainder of this year.

Which product categories do you expect youll gain most market share in.

We know that you are a leader in flower, but.

Do you expect it to gain a little share notables vape or continued to gain share and flowers. So any color on specific.

Product categories. Thank you.

Right. So thanks, Brad I think listen we just launched a bunch of new products, we're very excited about our shred it states.

A known fact that we are very underdeveloped in this segment.

And we have a great brand in shred.

Bold.

Flavors, and we could reproduce those flavors in our vape offerings.

Shall uptake we have shipped to new Brunswick sold out very quickly on our initial shipment. So we do expect to see some growth coming from our vape launch.

As I mentioned in mice.

<unk> point earlier, we have a bunch of new innovation coming into the gummies space really on our shred and building out that lineup from three skus to eight provides us a bigger presence we expect to continue to drive.

Our market share on the Gummies segment and are seeing great results in certain retailers, where we're already the number one gummy supplier. So that certainly is a goal of ours to continue to drive the growth in the gummy space with regard to concentrates remember we only had <unk>.

<unk> two months of Laurentian in our Q2 results.

So we do expect to see not only an increase.

Based on having the full quarter, but obviously as I mentioned, we're expanding our distribution we have started to ship.

To some of the Atlantic provinces already we have.

Shipments expected to go out to B C.

That expanded distribution on concentrates on top of.

The extra volume just from a full quarter should help us really increase our market share on the concentrates.

Section as well so so we're very I would say that while flowers is obviously very important we're number one in flower and we'll keep driving.

Fulfill flower requirements, where we see our biggest market share gains are going to be from some of those two point out categories that we believe could strengthen our full breadth of portfolio, but will also improve our margins they tend to be higher margin segments as well.

Thank you that's really helpful. Congrats on the quarter again.

<unk>.

Your next question comes from the line of Owen Bennett from Jefferies. Your line is open.

Good morning, guys hope all well.

First question I, just wanted to come back to the sales mix, obviously really impressive market share traction and it does appear to be driven the value AUM, we've shred and a lot of the new launches.

We've shred. So I was just wondering could you give maybe a bit more color on your actual sales mix currently between value and premium and then what you're doing exactly to address the top end of the market. Obviously, you bought Laurentian you've got Edison. We're interested in how you see that sales mix evolving going forward or how you'd like to see it.

In an ideal world Funky.

Right. So thank you let me, let me say that so our flower sales if I look at the mix over time.

If I go back to the fourth quarter of 'twenty, one we had about 68% of our business was our flower and 18% ore blends which was our shred.

If you fast forward to this quarter. The flower went from 68% to 58% and blend held roughly the same from 18 to 19. So these our percent of our total revenue. So I guess the message is we're.

We're holding our position in flower by continuing to innovate and bring new strains and meet the consumer needs but.

The focus on our growth has really been an expanding some of those other.

Areas right I mean edibles.

Obviously, new to us in our fourth quarter at 3% now represents 9% of our business in Q2.

Constant rates, which we didn't have and now represents 5%.

And I forgot to mention earlier, we have the number one SKU and the Ingestible extracts category with our Joel.

Hi loved <unk>.

A high potency <unk> that we have out in the marketplace and it really is it's unique it's differentiated patent pending and it continues to grow there's a lot of interest in that product and we've just introduced a couple new flavors into the marketplace. So the.

The mix is changing by adding 2.0 products, while continuing to make sure we have news and and unique offerings in our flour and in our plans.

Okay. Thanks, and then just the next question is I mean, how are you trending currently with the available capacity and then when will construction on amongst soon be completed and then just linked to that how much of a boost you think to gross margins would you foresee when mountain is complete and running at full scale.

Thank you.

Great. So I'll start and then I'll pass it over to Derek to answer the question on the gross margins. So currently we're running at capacity. So we are basically.

As I mentioned earlier, our demand is outstripping our supply as soon as product comes off the line gets through our testing and our packaging we're shipping it out the door. So what's ending up in the marketplaces fresh high quality flower and we are.

We don't have any spare capacity. So we are currently buying from external.

Our customers, making sure obviously the quality meets our specification.

And look forward to when we will be able to.

Supplier one product as the expansion comes online. So your question of when do we expect that we expect to be planting in the.

Foresee expansion by the end of Q3, and we expect to be harvesting flower out of that out of those new rooms in Q4 of this year. So we're well on our way.

Very excited about getting the extra capacity.

As I said beyond.

There is opportunity to expand our distribution.

Shred into some other markets.

Which we haven't been able to do.

And we have.

Well explore further opportunities.

As we we have the capacity to provide it so we've been somewhat restricted.

And we look forward to having that extra capacity.

Derek over to you on the margins.

I think when comparing Q2 of this year to Q2 of last year, it sort of demonstrates the impact to the financials, just arent changing production levels.

In Q2 of 2021.

We're seeing approximately 4000 a key.

<unk> in the quarter and we ended up reporting in that quarter, a negative adjusted gross margin so a negative 5%.

And just by moving up to our current capacity, which was in around the 40 to 45000 level prior to completing construction.

Along with other process improvements and initiatives at the facility. We have taken is that negative adjusted gross margin in this print for Q2, we have a 26% adjusted gross margin of 31% swing.

I'm, not indicating that I'm expecting a similar gross margin.

In terms of an extra 31% being added on as we go forward to capacity, but it is only to indicate that.

Level of volatility the merger has has a direct consequence of the cost of production.

Hi.

Coupling, our effectively doubling the op risk <unk>.

At the end of that as we go into the early parts of next year from where we are today, we will provide a significant lift to our reduction of costs that are significant enough that will make a meaningful difference to our adjusted gross margin in those future periods.

To provide specific guidance on it but.

The lift that we've had to date is really we have an increased capacity. We've just increased our planning and have done other improvements at the facility on whether it's labor management or other.

<unk>.

Packaging review on materials et cetera that have allowed us to achieve and improve margin. So we just think that by getting to this higher level of scale and ultimately theres great opportunity for us to continue to see.

Positive.

Movements to the adjusted margin that were otherwise reported.

Great. Thank you very helpful.

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

Good morning, Thanks for taking my question. This is <unk> speaking on behalf of Andrew.

I'm, just curious delving into Quebec, a little bit more could you provide any additional color on how the sales of your products are doing specifically in the Quebec market and whats working well there.

Right. So so I think I would say to you that our product is in Quebec is it's performing.

<unk>.

Sure that's flat lining a little bit based on what we acquired.

Is it required a little bit of refresh the product within the market for a while and the thing that we've seen over and over again as you need to have sort of new news and we have.

<unk> been working on great New innovation and upgrades that we can bring into the Quebec marketplace to make sure. It continues to be a fresh offering there, but taking what is a tremendous product that was available in the Quebec market for the last year and rolling it out to some of the other markets, where its new and are seeing great.

Results as a result of that so I think.

One of the things we're doing is getting the right.

Offering into Ontario market, we have we've been converting from a 24 pack down to a 12 pack to make sure that the independent trade in Ontario will pick it up not too big a ring for them to bring it in and we're spending a lot of time educating the bud tenders on that product. So we're really at.

Excited about what the trombone hash could do for us, but in terms of Quebec, specifically, we were onto some innovation some exciting innovation that we're.

Again, I want to bring into the Quebec market to just keep it fresh and make sure that we maintain the momentum and some of the reasons why we bought the business I will say as I mentioned earlier that not only is the acquisition was not only to get the the trombone the Russian Laurentian brands in Quebec, but it was <unk>.

Also to strengthen our relationship with <unk> and we have seen a significant increase in our base organic ground business in Quebec as a result of building that relationship.

Okay.

Great. Thank you for the additional color and I'll step back in the queue.

Your next question comes from the line of Michael Freedman from Raymond James Your line is open.

Hi, Peter Hi, Derek Thanks, and thanks for taking our questions and congratulations on this.

Booming gorder.

I would like to ask two questions.

BHG PDC Research Alliance.

Wonder if you could provide any color on <unk>.

<unk>.

Of this of this research Alliance you described sort of the R&D facility as being substantially completed now, but I guess.

If you could describe the activity of those schemes they'll be working on those innovation products.

Now perhaps highest in.

Cultured cannabinoids innovations might be folded into those activities.

And you've previously described.

P driven and.

Entry or at least approach to international and specifically U S markets.

If you could provide some color on the on these things.

So certainly so first of all with regard to the product development collaborations.

As we've mentioned before the focus is predominantly in CBD.

Which is the area that we're doing most of the really scientific research.

<unk> is looking.

Looking at improving.

Efficacy.

Onset.

Just the delivery mechanisms.

Lot of fundamental research that starts with.

That we could then leverage as we launch new products to bring into our portfolio. So the teams at the product development.

Centre and at depth.

Our internal R&D teams work together, so as we learn more about the product we learned how to improve the offerings that we have in our portfolio through our own R&D. So that's an exciting development that that's happening already.

I mentioned, we're just completing the bio lab and so what that means is more advanced scientific research on the plants and plant genetics, it's going to happen as we move forward.

So that's the that's what's happening in our PDC in terms of highest at this point, they're not connected but for us the whole focus is around innovation and we see there's an opportunity that at some point, we will look at API that potentially is higher purity that comes out of biosynthesis.

But then from cannabis plants that might be more appropriate for certain markets. So we wanted to make sure that we have that.

Opportunity to be connected in the biosynthesis space as well.

And in terms of longer term IP, we know that moving flower across borders is difficult, but if we develop I E that really becomes the opportunity to take into new market. So its something that we continue to work on together with our partners.

That's perfect very helpful. Thanks.

Quickly on the forest. The expansion you mentioned the planting is is going to be happening there by the end of third quarter harvesting in fourth quarter, but wondering how you can how you would describe the timelines between them.

Cultivation ramp from around 50000 kilogram run rate capacity.

Sort of today to full capacity with force included of around 80000 kilograms per year.

How would you describe the timeline of that ramp.

Derek do you want to grab that one.

Yes, I can.

I would indicate that right now we are approximately at 45000, we would leave August around.

<unk> thousand kilos, a year in terms of the annualized rate.

And I think that the <unk>.

<unk> is pretty heavy right now to July 10.

August in terms of when that comes up just as a consequence of that.

You have to complete the construction and while we're not planning of all wounds at the same time, there is going to be staggered just in terms of.

Labor management and.

Taking consideration the construction work.

It would be really starting to ramp heavily into the.

July and August period, and going from say 45000 kilos to beauty.

With chemo.

Alright, and Derek I very quick follow up on that.

I understand that escalating cultivation world will should improve margins based on that.

Economies of scale, but do you might we expect a margin blip as you as you undergo this does aggressive ramp and cultivation pointing out.

I'm not sure it would be a.

Cost per whether it would be more or less there is a delay in terms of.

When you're harvesting and the costs that you have on it to when it hits your income statement because you almost have that one month delay to the products sold so ultimately in terms of all of the rooms churning. We're talking about the end of August and that really starts to in <unk>.

<unk> the cost of the inventory that's expense during Q1 of next year, and but I think there'll be with some of the rooms coming on during some of the harvest coming onto the news from the new rooms in June July that there will be some.

On a scale and therefore lower costs that will benefit that.

Q4 margin, but the real improvement comes after.

Sometimes I've sat on operating at that higher level, which again, we think we're leaving fiscal 2022 with the full capacity room harvest.

Alright, Thank you very much.

So there are no further.

Okay.

Thank you I know, we ran we ran a little bit over our time, so I want to thank everyone for joining us today, we're very excited about the momentum on our business and we look forward to updating you on our progress I will wish everybody a happy for 'twenty for next week and with that I'd like to end the call.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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