Q3 2023 Organigram Holdings Inc Earnings Call
Speaker 2: Good morning, my name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Organigram Holdings' third quarter 2020 three earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session.
Speaker 2: We ask you to please limit yourself to one question and one follow-up question. You may read queue if you have further questions. Thank you. Max Schwartz, you may begin your conference.
Speaker 3: Good morning and thank you for joining us today. As a reminder, this conference call is being recorded and a recording will be available on our Ganogram's website 24 hours after today's call.
Speaker 3: Listeners should be aware that today's call will include estimates and other forward-looking information from which the company's actual results could differ. Please review the cautionary language in our press release dated July 13, 2023 on various factors, assumptions, and risks that could cause our actual results to differ.
Speaker 3: Further reference will be made to certain non-IFRS measures during this call, including digestive EBITDA, free cash flow, and adjusted gross margin, among others. These measures do not have any standardized meaning under IFRS and are intended to provide additional information and as such should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
Speaker 3: Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today's earning report for more information about these measures. Listeners should also be aware that the company relies on reputable third-party providers when making certain statements relating to market share data, unless otherwise indicated all references to market share data.
Speaker 3: are sourced from High Fire in combination with data from WeedCrawler, Provincial Boards, Retailers, and our internal sales papers. I will now introduce Pina Goldenberg, Chief Executive Officer of Organigram Holdings, Inc. Please go ahead, let's go over it.
Speaker 4: Thank you, Max, and good morning, everyone. With me are Tim Enberg, our Chief Commercial Officer, and Derek West, our Chief Financial Officer.
Speaker 4: For today's call, we'll discuss the results for the three and nine months ended May 31, 2023 and the General Business Update. We will then open the call for questions.
Speaker 4: In Q3, the team at Organogram continued to position the company for sustainable long-term success while navigating the short-term challenges present in the industry. We were successful in the continued growth of our Canadian recreational business versus last quarter with a 7% increase in net revenue, driven largely by success in hash.
Speaker 4: and a late rebound in flour.
Speaker 4: Year-to-date recreational net revenue also increased by $8 million, or 10%, over the same prior year period, reflecting growth in pre-rolls, gummies, and hash.
Speaker 4: Despite this positive momentum, three factors outside of our control contributed to the softening we saw in our Q3 financial results.
Speaker 4: lower than expected growth in the flower category for organograms, delayed international shipment, and the impact of our patent-pending Edison Jolt being removed from the market had the largest impacts on our net sales and gross margin for the quarter.
Speaker 4: Regarding our flower growth trajectory, I want to first address the issue of THC inflation, the increasingly widespread practice by certain licensed producers of inflating the stated THC potency on flower products through selected sampling and testing practices.
Speaker 4: As Health Canada's regulations prevent dialogue and education around cannabis products, the consumer is left with fewer tools to make educated decisions about which products best suit them. The result is that price and THC content have become their paramount decision drivers when purchasing flower, which has led LPs to race to the bottom on price.
Speaker 4: with many falsely overstating the THC content of their product.
Speaker 4: Let me be clear, as an industry leader in the nascent cannabis industry, Organogram has not, nor do we intend to engage in the practice of inflating THC levels on our labels.
Speaker 4: We firmly believe that we have a responsibility to act ethically and responsibility as a and responsibly in our regulated industry. We are dedicated to our consumers and believe they have the right to transparency when it comes to their label. And we also believe that it's our responsibility to build an industry that we can be proud of. THC fixing deceives consumers and hurts our credibility as an industry.
Speaker 4: In the context of today's regulations, this is happening because Health Canada has not yet prescribed specific and rigorous testing standards for cannabis as they have in other categories like tobacco as an example.
Speaker 4: Given the strength of our balance sheet, Organigram can weather the financial impact of irrational pricing and THC fixing, and as such we are tackling the issue the right way.
Speaker 4: First, the THC content of our flower cultivars is trending upwards through recent operational optimizations and the addition of new, more potent cultivars.
Speaker 4: Second, we are working collaboratively with key stakeholders in the industry on several initiatives aimed at bringing solutions regarding standardized testing and sampling.
Speaker 4: The second event impacting our results in Q3 was our international sales. In Q2 we achieved a banner, a quarter in export sales due to a pipeline of new cultivars.
Speaker 4: We anticipated that Q3 would return to normal replenishment levels. However, a newly enforced CUMCS testing protocol meant that we were unable to ship product to Israel in the quarter.
Speaker 4: During Q3, we have refined our testing protocols in line with these regulations and have built inventory to meet demand going forward.
Speaker 4: The third event impacting our results was the stop sale of Health Canada on our high-margin patent-pending Edison JOLTS product. We remain confident in our categorization of JOLTS as an ingestible extract and await the judicial review in late July that will determine whether Organigan can resume producing and selling JOLTS under the ingestible extract category.
Speaker 4: We still believe that JOLTS is an important product within the extract category as its format, potency and price point was highly successful in converting illicit market users to legal product.
Speaker 4: Now I'd like to move on to discuss some of the exciting developments from this quarter and what they mean moving into Q4 and Pisca 2024.
Speaker 4: Our strong balance sheet continues to be an asset in this competitive landscape and has allowed us to make investments in synergistic companies while maintaining our competitive edge in both consumer centric innovation and production efficiency.
Speaker 4: In March, we made a $4 million US investment into green tank technologies.
Speaker 4: The investment provides Organigram with access to new, industry-leading vaporization technology that will be exclusively available with Organigram products for a period of 18 months post-commercialization.
Speaker 4: This technology not only solves the clogging and declining flavor performance issues we see in the legacy vapes in the market, but we anticipate that consumers will experience a noticeable difference in potency.
Speaker 4: Green tank enabled base cartridges are slated to hit the market in Q4 with two new SKUs and an additional SKU extending through into 2024.
Speaker 4: Our investment in Green Tank reaffirms our commitment to accelerating our focus on the debate category by delivering meaningful differentiation to consumers.
Speaker 4: Yet another example of our commitment to innovation is the strategic investment we made in May into Phylos Bioscience, an industry leader in seed genetics.
Speaker 4: Aside from being our first US investment, this arrangement is exciting from multiple perspectives.
Speaker 4: First, Phylos has delivered cultivars with THC concentrations that are significantly higher than anything else we've seen in the market.
Speaker 4: This makes these cultivars commercially viable for extraction for derivative products containing THCV.
Speaker 4: Given that it's very difficult to grow cultivars with high concentrations of THCV, it is our belief that we will maintain a competitive advantage in whole flower derived THCV products.
Speaker 4: Now consumers are excited about THCV because, like CBD, it is non-psychoactive and acts as an antagonist for some of the qualities associated with THC. For example, THCV is reported to mitigate the appetite stimulation associated with THC, earning it the nickname, diet weed in the media.
Speaker 4: Further, it is reported to enhance focus, creativity, and calmness.
Speaker 4: We intend to incorporate THCV into various formulations across different formats, starting with gummies followed by vapes.
Speaker 4: Our investment in phyllos goes beyond THCV. Our technical relationship with phyllos will allow us to convert a portion of our garden to seed-based production as opposed to the clone-based propagation we see across the industry today.
Speaker 4: This is exciting because seed-based production is cheaper, faster, and results in more robust, disease-resistant, and consistent plants across key characteristics such as potency, chirping content, and aroma. Clone-based production has a foothold in the industry now as it is faster for creating and experimenting with different cultivars.
Speaker 4: However, given its many advantages, we believe that seed-based production is the future of this, while clone-based experimentation will remain on a smaller scale.
Speaker 4: We have already begun converting a portion of our garden to seed-based production and will increase our seed footprint over time.
Speaker 4: Our investment of Phylos is consistent with our commitment to becoming the most advanced cannabis company in Canada.
Speaker 4: On the international front in May, we added Germany to our list of export partners for medical cannabis through our supply agreement with Sanity Group. We continue to grow our list of international business partners and are actively pursuing opportunities in this business segment.
Speaker 4: Operationally in Moncton, we have invested in a variety of efficiency improving and cost cutting CAPEX project that will realize $7 million in annualized savings.
Speaker 4: We have internalized some of our testing requirements, implemented remediation in-house, commissioned rapid drying machines which decreased drying time while increasing the available footprint in our Monckton facility for hang-dried flour. We automated our shred packaging which reduced headcount. Our new Kanto's pre-roll machine is producing tube-style pre-rolls at scale.
Speaker 4: And our new speed mixer has allowed us to infuse our milled cannabis for infused pre-rolls with distillate, diamonds and botanical terpenes in a one-step process.
Speaker 4: In addition to these initiatives, we are currently targeting further productivity savings of $8 million over the next 12 to 18 months.
Speaker 4: It's amazing to see how our motion facility has developed over the 10 years Organogram has been in operation.
Speaker 4: This quarter we achieved a company milestone, our 2,500th harvest.
Speaker 4: Over a decade ago, our first harvest tested a 13% THC. Given our steady approach to growth and our discipline data-driven strategies to optimize micro environments, our 2,500th harvest tested over 26% THC with over 3% chirping content.
Speaker 4: Incredibly, we have now cultivated and harvested over 200 different cultivars.
Speaker 4: At our Hash & Craft Cannabis Facility in Lac-Superieure, our newly commissioned ultrasonic knife and automatic labeling has allowed us to keep up with the strong demand for our newly launched Shred-X rip strips while cutting headcount by over 50%.
Speaker 4: further construction of our craft grow rooms is complete and we expect them to come online this October .
Speaker 4: In Winnipeg, our state-of-the-art edibles production facility continues to drive impressive results, producing approximately 3.2 million gummies per month to support our shreddens and monger brands.
Speaker 4: Finally, I'd like to provide an update on our research and development activities with BAT at our Centre of Excellence in Moncton. Both the product development collaboration and the organogram commercial business are seeing significant benefits from a scientific development standpoint and in terms of revenue driving commercial capabilities.
Speaker 4: The in-house extraction laboratory has resulted in the imminent commercialization of high-potency THCV extract derived from exclusive whole plant flour.
Speaker 4: Organogram has been able to test and learn about the inclusions of several minor cannabinoids, which has allowed it to expand into more complex minor cannabinoid stacks across several brands in the Winnipeg facility.
Speaker 4: The PDC is in late stage development of a suite of emulsions, novel vapor formulations, flavor innovations, and packaging solutions, which are planned to be used alone and in combinations across the Organogram portfolio products.
Speaker 4: The broad focus of the PDC has been the development of improved cannabinoid delivery, rapid and predictable onset, and products that target and satisfy a range of consumer needs.
Speaker 4: For ingestible innovations, Organogram is currently beginning recruitment for clinical studies so that the company can quantify and substantiate the benefit of these innovations.
Speaker 4: So after two years of R&D with the PDC, we are excited to begin commercializing the technologies developed within the Centre of Excellence.
Speaker 4: And so to recap, we continue to grow our recreational business in Canada and despite the softer net revenue and gross margin in Q3, we feel confident that we are entering Q4 in 2024 with a strong foundation in place that sets us up for long-term success.
Speaker 4: We have positioned ourselves to drive further costs out of our facilities, we continue to focus on the consumer with our investments and innovation, and we have a strong balance sheet with responsible stewardship of capital, all geared to delivering shareholder value in the long run. And on that note, I'd like to invite our Chief Commercial Officer, Tim Enberg, to come up.
Speaker 2: to provide his insights on Organogram's market share performance this quarter, new product performance, and commentary on trends we are seeing in the market. Thank you, Bina. And good morning, everyone. As Bina mentioned, Q3 saw the continued growth of Canadian recreational business.
Speaker 5: This increase is a testament to our continued focus on growth here in Canada by bringing innovative and consumer-focused products to the market and by executing with excellence at retail.
Speaker 5: While our overall market share dipped in Q3, we quickly reversed this trend at the midway point in April and regained the number 3 position nationally in May and June with solid market share gains and positive momentum on several fronts.
Speaker 5: We continue to strengthen our market share position in Gummies in Q3, growing 1.2 market share points versus Q2, and reaching the number 2 position nationally in May.
Speaker 5: We also maintained our strong number one position in pure CBD gummies driven by continued success with our Mojo brand which holds more than half of pure CBD gummy sales in the country increasing our share in Q3 to 50.2% from 48.2% in Q2.
Speaker 5: In Q3 we maintained our leadership position in the hash segment, achieving a 25% growth versus Q2, which was heavily driven by our truly innovative ShredEx rip strips. We increased our overall market share by 2.5 points, moving from 19.3% to 10.3%.
Speaker 5: to a 22% overall national market share. Our success in hash and gummies highlights our strength of identifying right targets for M&A that are complementary to our business and leveraging our expertise in consumer insights, marketing, sales and operations to deliver maximum value to the business. Our acquisition of both EIC and Lorengine Quebec
Speaker 5: have proven to be accretive to our business.
Speaker 5: From a flowers standpoint, we are really happy to experience a rebound in Q3 with sequential quarter-over-quarter growth.
Speaker 5: while our flour volume remains stable year to date.
Speaker 5: Flower dollar sales were down versus the same period last year due to inflated TET levels in the market Essentially forcing us to reduce our prices to maintain our competitiveness in the marketplace.
Speaker 5: Given our high market share in flower, any type of price compression or questionable competitive practices
Speaker 5: do we impact our flower business disproportionately. As mentioned previously though, we are actively working on industry-wide solutions to this issue and at the same time we continue to improve our THC levels on all of our flower SKUs.
Speaker 5: It's no surprise that we continue to dominate in the milled flower segment with our phenomenally successful shred brand.
Speaker 5: In May, we achieved our highest market share since November of 2022 at 53% of the milled flour segment. So, in other words, one of every two Canadians that go into a retail store or buy a milled flour online are purchasing our Shred branded milled product.
Speaker 5: From a pre-roll standpoint, we expanded significantly into the fast-growing infused pre-roll segments with our Shred-X Heavy.
Speaker 5: which are performing extremely well after initial shipments, helping fuel our growth in this segment. Our heavies clock in at over 40% THC and are infused with both botanical terpenes as well as diamonds and distillate.
Speaker 5: We're going to continue to expand nationally in Q4 and are committed to further disruption into this fast growing category. We were very active in Q3 with product launches and we listed and rolled out the highest number of launches for us at any given quarter with 28 new SKUs.
Speaker 5: Many of these new innovations are performing well above expectations with holy mountain tropical rain, shred, desert storm.
Speaker 5: and ShredX Rift Strips hash which was launched in Lake Q2 leading the way. The success of ShredX Rift Strips is yet another first to market innovation similar to what we've done with ShredBlends and Edison Joltz. It highlights our continued success in delivering consumer centric innovation and addressing unmet needs of cannabis consumers in Canada.
Speaker 5: From a provisional perspective, we continue our growth momentum in the second most populated market in Canada, Quebec.
Speaker 5: And based on the latest WeCrawlr data, we increased our market share by 0.7 points in the province, moving from 7.6% share in Q2 to 8.3% share in Q3. This was our highest market share ever in the province and we continue to grow, hitting the 9% market share mark for the month of May.
Speaker 5: We grew by 17.6% sequentially and almost 28% versus Q3 of last year. We are very much looking forward to our craft grows rooms at Laxapedia, our facility, coming online in October to help meet this growing demand.
Speaker 5: In Ontario, the largest addressable market, we continue to be one of the top LPs in the marketplace. In May and June , we maintain the number three market position in the province.
Speaker 5: And we continue to hold the number one market position in Atlantic Canada in Q3 with a whopping 14.8% overall market share.
Speaker 5: As we look to continue our rebound and flower, we are also focused on growing our foothold in our under indexing categories of regular prerolls, infused prerolls, and vapes.
Speaker 5: and we are extremely bullish about our innovation pipeline, including the launch of TECV.
Speaker 5: a full portfolio of new tube style pre-rolls, and a new and innovative vape technology, which we expect will offer consumers a differentiated experience.
Speaker 5: We believe this new line of products will help drive growth across these categories as consumers discover the next big thing in cannabis through organograms to a relentless focus on innovation.
Speaker 5: With that, I will now turn the call over to our Chief Financial Officer, Derek West, to review our financial results for the quarter.
Speaker 6: Eric? Thanks, Tim.
Speaker 2: In fiscal Q3, gross revenue decreased 12% while net revenue decreased 14% compared to Q3 fiscal 22. The decrease over the previous year was primarily due to market share fluctuations and recreational flower sales.
Speaker 6: As Tim mentioned, price compression in combination with THC inflation did have an impact on the quarter.
Speaker 6: The cost of sales in Q3 fiscal 23 was $32.3 million compared to $29.4 million in Q3 fiscal 22, an increase of 10%.
Speaker 6: The increase in the cost of sales on a year-over-year basis was due to a $2.8 million net realizable value adjustment on low potency flowers repurposed as inputs for Danny Graham's growing derivative business and a $2.8 million provision for excess and unsellable inventories.
Speaker 6: We harvested approximately 19,000 kilos of flour during Q3, compared to about 13,000 kilos in Q3 of the prior year, which represents an increase of 46%. During Q4, we accelerated a change in the operational conditions for plant care.
Speaker 6: to increase THC levels.
Speaker 6: This resulted in a decrease to plant yields, which had a negative impact to our cost of cultivation, which temporarily reduced the company's gross margins and gross margin rate.
Speaker 6: We have optimized growing conditions during Q3 and we have now realized higher flower yields commensurate with historical levels during June and July while maintaining increased THC levels.
Speaker 6: These higher yields will reduce the cost of cultivation during Q4 and as this flower is sold, we will achieve a higher gross margin rate.
Speaker 6: Furthermore, we expect to be able to consistently achieve these higher flower yields and lower costs of cultivation through 2024.
Speaker 6: On an adjusted basis Q3 gross margin was $6.1 million or 19% of net revenue.
Speaker 6: compared to $9.3 million or 24% in Q3 Fiscal 22.
Speaker 6: The compression and adjusted gross margin was primarily attributable to lower net revenues and higher flower costs, combined with the impact of the lost contribution from the sale of edison jalps.
Speaker 6: occurring as a consequence of restrictions imposed by Health Canada. SG&A, excluding non-cash share-based compensation, increased to $19 million in Q3-23 from $17.5 million in Q3-22. The increase in expenses was largely due to higher audit and legal costs.
Speaker 7: rate.
Speaker 6: However, looking at a broader picture, adjusted EBITDA for the first nine months of fiscal 23 was $8.3 million, exceeding the $3.5 million realized for the full fiscal 2022 fiscal year by 137%.
Speaker 6: As we dial in on further production efficiency, consumer trends, presume international shipments to Israel, and begin shipments to Germany, we anticipate an improvement in our adjusted EBITDA on Q4.
Speaker 6: International shipments, which for the first nine months of Fiscal 23 was $18.3 million, exceeded the $15.4 million realized for the full Fiscal 2022 year by 19%, and we expect international growth to continue through Fiscal 24.
Speaker 6: Sharing Q3, Swip3, as a consequence of the company's market capitalization trading significantly below its shareholders' equity.
Speaker 6: Sharing Q3, as a consequence of the company's market capitalization trading significantly below its shareholders' equity, combined with the current quarter's operational results,
Speaker 6: Management determined that there were economic indicators of impairment warranting a calculation of the recoverable amount of the assets.
Speaker 6: This analysis was done on a consolidated basis and also by cash generating units.
Speaker 6: The impairment test considers several factors, including forecasted operational cash flows, net of the tax impact, ongoing investments into working capital and sustaining capital expenditures,
Speaker 6: post-tax discount rates, terminal value, growth rate, and this analysis resulted in the recognition of an impairment loss of $191 million. A meaningful contributing factor to the quantum of the impairment charge was related to the impact to flower sales and margins due to THC inflation. When considering the significant sales and margin that flower product categories,
Speaker 6: $53 million in relation to property, plant and equipment.
Speaker 6: In the quarter, we had a net loss of $213 million compared to a net loss of $3 million in Q322.
Speaker 6: And this was mainly driven by the $191 million impairment charge.
Speaker 6: It should be noted that, all things remaining equal, this impairment loss recorded on the company's PPE will result in an approximate 5% improvement to the gross margin rate as we move forward.
Speaker 6: From a statement of cash flows perspective, net cash used in operating activities before working capital change was $5.5 million in Q3 fiscal 23 compared to $6.4 million in the prior year period, which is primarily due to favorable changes in working capital partially offset by lower adjusted EBITDA.
Speaker 6: Cash used in investment activities in Q323 was $3.5 million compared to cash provided at $51.7 million in Q322.
Speaker 6: The net cash outflow for Q3 was primarily from the $8 million related to CapEx at the facilities, combined with the $10 million cumulative investment in green tanking silos, and their redemptions on short term investments.
Speaker 6: On a year-to-date basis, the company utilized cash for capital expenditures of $22 million, investments of $10 million, and $5 million was invested into its network and capital assets.
Speaker 6: In terms of our balance sheet, on May 31st we had unrestricted cash of $53 million and restricted cash of $22 million for a total of $75 million with very low debt.
Speaker 6: We believe our capital position is healthy and that there is sufficient liquidity available for the near to medium term. While the company expects to resume generating positive adjusted EBITDA in Q4-23, periods when the company achieves significant increases to sales will result in increases to receivables and increases to sales.
Speaker 6: and this will negatively impact cash from operating activities. The company forecasts a remaining cash cap expand of approximately $10 million for fiscal 23 and if completed as planned during this fiscal year, the company expects to generate positive free cash flows by the end of calendar 23.
Speaker 6: This concludes my comments. I will now turn the call back to Vina.
Speaker 4: Thanks Derek. As a leading pure play cannabis company, we are constantly evaluating market opportunities, investing in the industry leading R&D both internally and in partnership with BAT, and fine tuning our long term growth stress, drive down costs, and gain market share domestically and internationally.
Speaker 4: We continue to position Organogram to deliver long-term shareholder value through industry-leading production facilities, compelling and differentiated consumer product introductions that leverage our highly successful brands, and synergistic strategic investments. This vigilant and consistent long-term focus, combined with our financial discipline, is the key to our success.
Speaker 4: are expected to deliver solid results through 2024.
Speaker 4: Now, on a final note on the state of the industry, we take no pleasure in saying this, but the majority of Canadian publicly listed LPs are now trading at market capitalizations of less than $50 million and in many cases are carrying material debt balances, stretching payables, are in arrears on paying their excise taxes to the Canada Revenue Agency and regulatory fees to help Canada. For more information, visit www.fema.gov.au
Speaker 4: Many may not have enough cash to operate as going concerns. We've also seen trading stock market volumes shrink for many of these players, and the ability to successfully pull off financing diminish.
Speaker 4: As a result of this, we believe we are going to see the pace of corporate restructuring, including bankruptcies, increase. And as this unfolds, we will capture market share that becomes available. Our plan is, as it has always been, to remain prudent from a financial management perspective and to ensure that our actions are aligned with being a respected industry leader. Thank you for joining us today. Operator, you may open the call for questions.
Speaker 2: At this time I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up question.
Speaker 4: Your first question comes from a line of Tammy Chen from BMO. Your line is open. Hi, good morning. Thanks for the question. I wanted to ask about the the THC inflation. The phenomenon you're describing, I think it's been happening for quite some time now just given consumers are very fixated on higher THC.
Speaker 4: So I'm just wondering why all of a sudden this quarter you're calling it out and it seems to have quite an impact on your flower business.
Speaker 4: the next question. Thanks for the question, Tammy and yes, while it might have been happening for a very long time, it really just increased the it was more widespread in the last year. I would say really started to unfold and just to give you some stats on that we
Speaker 4: 50% of flower sales came from 26 plus THC flower. And the number of skews that have THC labeled values above 26% has doubled in the last 10 months.
Speaker 4: And really, another stat that we look at is the number of SKUs labeled above 30% grew tenfold versus last year. So while this might have been out there for longer, the really, the prevalence of this has really shown up in the last year, in the last ten months.
Speaker 4: And in particular, and where the impact has really been felt by us, has been in the 28 gram flour category, where the number of skews above 27% THC has increased fivefold since last July , where historically there's been no product selling on 28 grams at that level.
Speaker 4: So, you know, we look at this data and there is a national retailer out there that does post data flower sales based on the different THC levels. And we see that there are some licensed producers who were averaging, you know, sales of flower in the 21-22% range and all of a sudden have step change and now are showing 28-32%.
Speaker 4: This is not something that even the most advanced cultivation techniques could make happen. There is something, and I think it's the increasing behavior that's really starting to impact the results. And as we said on the call, really we get the impact disproportionately because...
Speaker 4: of our reliance on whole flour, especially in the 28 gram. So it started to have its effect. We did have to respond by taking pricing down so we could address the value equation to consumers because as it actually began, we did use different settings to address and adjust bread feelings.
Speaker 4: our lower potency and I'd say that you know potency at 23% flour should be considered good quality product and yet we had to discount our pricing to get the movement because they were seeing a lot of product you know at the 27-28%.
Speaker 4: But then when you test it, it's not really 27 or 28%. So it's that substantial impact and the more widespread of this practice that has been impacting our results. Basically, we start to see the dip in our flour.
Speaker 4: market share in January . You know, we took actions in our own facility. We accelerated some changes to really get to the higher potency product to get it out there to compete. And it did have a short-term impact on our cost of flour as we made those changes in our facility. But we're doing what we can to move up our intensity.
Speaker 4: our potency in a proper way with proper testing. And at the same time, we have been talking to key stakeholders. We've been speaking, you know, sending in comments to Health Canada. We've been talking to the boards.
Speaker 4: And we've been talking to other labs and really looking at finding solutions to address this issue, because we feel strongly that is not fair to our consumers, it's deceiving them. And so that's, you know, our way of approaching this issue and what we consider a leadership position. I see. Okay. Thank you 12, 11, 12 for the call.
Speaker 4: Thank you for the added context on that. So it impacted particularly the 28 gram format for you. We also noticed looking at HiFire, the top products that are sold every month, I think Shred before would quite dominate the top five. I think three of your products before were in the top five but it since dropped out of that.
Speaker 4: Did this THC phenomenon also impact shred and your milled flour products too?
Speaker 4: certainly it impacted all flour. It affected pre-rolls, it affected our milk flour. But you could find milk flour out in the marketplace that claims 30% plus. And everybody knows that when you milk flour you lose tricones and that's just not and that's just not.
Speaker 4: something that could happen like that that's just not a correct label so there is impact there as well but I think the other impact to our shred milled flour is that because pricing has come down so significantly on whole flour the value equation of milled is not as it used to be
Speaker 4: as people are getting higher potencies at lower prices on just whole flour. To address this on milled flour, we started to see again some good momentum as we moved out of the quarter. We started to introduce some new flavors. We brought in a strong Desert Storm offering that has received great reviews.
Speaker 4: but on top of that we started to introduce a 14 gram offering. So we have historically been in seven grams. So we are addressing it but yes absolutely we're seeing it in mill flour. And just one more comment around pre-rolls. You're seeing it in pre-rolls as well and we had a third-party lab go out and had
Speaker 4: sorry, eight different labs testing a sample of pre-rules for their potency. And the eight labs on average came in at 18.7 potency for those pre-rules and yet the package was labeled at 25.5%. So we are seeing this across formats in flower and pre-rules and it's an issue and it's why we highlighted as a big important issue the industry.
Speaker 8: this KTC inflation topic and you know this higher KTC trend
Speaker 8: I'm curious, what is this strategy to better compete with these higher THC flower pre-rolls going forward? Is it just about adjusting your cultivation or is there anything else you can do to differentiate your product?
Speaker 8: given that no consumers are mostly interested about JT content. And then longer term, what is your view on this sort of JT race? Well, where are we going to end up here as we continue to get flowered with higher and higher JT levels?
Speaker 4: Thank you. Right. Thank you, Fred. And yes, there's a lot of things that we're doing and there's sort of short term and then there's longer term. We recognize that going to government and you know, to Health Canada, those are the right things to do. We need to get standardized testing protocols.
Speaker 4: you know, regulated from Health Canada, but those things take longer term. We have approached the provincial boards and they are exploring the potential of requiring a second certificate of analysis from.
Speaker 4: licensed producers on any flower over a 27 or 28 percent potency. And they're exploring it and what's interesting about this is that has been put into place in Michigan where they saw similar issues with elevated potency levels. So this isn't a unique phenomenon in Canada, it happens wherever cannabis is sold and in the legal market.
Speaker 4: So there is an opportunity to force secondary certificates of analysis in the short term that might cut down on this. But interestingly yesterday Health Canada came out with an article in which they were saying that they are now going to start
Speaker 4: testing potencies. So they're feeling the pressure because this is widespread and they're looking at ways to address it as well. So I think you know from a marketplace there are some things that could impact short term. For us internally we are working on you know new cultivars.
Speaker 4: example in Q1 of this year, 25% of our flour was above 23% and in Q3 almost 50% of it is above 23%. So we're making the moves internally as well and you know while this is going on our focus really will be on our gummies.
Speaker 4: our hash, bringing innovation to the market. And really, while we have to make sure we have the right value equation out there for consumers, we're looking at putting in these cost savings initiatives to drive our costs down to improve our margins.
Speaker 4: There was a lot of talk about how much capital we were invested in our facility, but we're starting to realize the savings. We've identified the $7 million that will start to flow through our P&L, and we have $8 million more in savings that we expect will come. So we're here for the long term. Fred, we're here. We have the balance sheet to live through this short term issue.
Speaker 4: we're doing the right thing and trying to address it, you know, through all stakeholders. But at the same time, we're working on getting our costs down so we could become again, you know, improve our margins in this, you know, price compressed margin. And sorry, I forgot one last thing. As you know, the Ontario the OCS has changed their markup model.
Speaker 4: We're working with other labs to get this addressed.
Speaker 8: Thank you. And then just about your investment on seed-based production.
Speaker 8: Can you maybe provide a little bit more color about why have you decided to make this investment?
Speaker 8: at this moment, given that it appears that you are one of the first movers in this regard, and when should we expect to see some impact of that in your financials, as well as what are the potential risks that you see in that initiative, given that again, you are one of the first movers to try to move to a...
Speaker 4: seed-based production at scale. So how should we look at those risks? Thank you. Great, thanks for that question. So we're going to be rolling out our seed-based production slowly with a test and learn.
Speaker 4: We're not obviously going to go out and convert our whole facility. So this is going to be something that rolls out. We have started already in four grow rooms. We're excited about this because it is a significantly faster grow. So when you have cloning and propagation it takes
Speaker 4: And when you cultivate with seeds, it's zero days, right? Just put a seed into the pot. You know, the flower grows probably in the same amount of time, but in total, you know, you're going from what is like 100 days to like 65 to 80 days. So you're reducing significant number of days in the.
Speaker 4: like in the grow, but that reduces significant amount of labor. And then, you know, one of the things that's really great about working with seed production is that you don't have some of the disease that you would get in normal clone production. So something like powdery mildew. You know, you have the every seed is clean and grows clean.
Speaker 4: going to change our whole production facility over. There is currently still a need to experiment with new cultivars, bringing new, you know, because new is always what consumers are looking for, so there will always be a portion of our garden that's going to be cloned. You get that faster because it takes a long time to get F1 seeds that are strong and will be able to produce, you know, predictable plants.
Speaker 4: So this is going to be a process. We expect to see some cost savings into next year. Part of the $8 million that I identified as next year's over the next 12 to 18 months, part of that is coming from the benefits of seed-based production.
Speaker 8: Thank you. I'll hop back to you.
Speaker 2: And your next question comes from a line of Aaron Gray from Alliance Global Partners. Your line is open.
Speaker 5: Hi, great. Thanks for the question. Just one for me. So just in terms of your commentary at the end, Veena, in terms of the restructurings and bankruptcies increasing that you're expecting to come, can you talk more about the timing that you might expect this to come in to fruition? It's something that a lot of people call for in the industry sometimes.
Speaker 3: consolidation, now actually more of a shift to people saying that we need shakeout. So what are you seeing kind of giving more of the confidence that we might start to see that now? You talked about some of the payments in arrears, some of the taxes. So do you think there's going to be more enforcement of that? Can you just talk about some things you're seeing in the industry and why that mark is out? Start to come to fruition? Thanks.
Speaker 4: Sure, thanks. So, look, we're already seeing it. I think somebody said the stat last year was I think 40% of bankruptcies in Canada last year were cannabis companies. We've seen a handful of companies just in the last two months that have announced restructuring. So, it's happening now. We track.
Speaker 4: how much cash these players have and what their payables look like. And we see the stretch payables. You know, this isn't new news. CRA has identified over 70% of LPs out there that are behind on paying their excise taxes. And they actually sent out an article saying they would work on payment plans.
Speaker 4: Like this is again not a level playing field they're using borrowed money. You know their runway is going to run out and so we've heard from CRA the Health Canada stat just came out in an article last week that people the people that haven't paid is up 225 percent. So you know back to your original question how long do I think this is going to happen.
Speaker 4: And we're going to go after listings where a company who's gone into some form of restructuring is likely not going to continue to replenish at that level. And if we have competitive products, we're using our data, which stores, where are the listings, how do we gain that market share and continue to strengthen our business as this turbulence. We're going to go after the listings, where are the listings, how do we gain that market share and continue to replenish at that level. And we're going to go after listings, where are the listings, how do we gain that market share and continue to replenish at that level.
Speaker 4: that goes on through our industry. I think your comment is right. We need to see consolidation in the industry. It is way too fragmented. And I think the dynamics in the market will see that happen over the next 12 months.
Speaker 2: Okay great, thanks very much for the commentary. I'll jump back in the queue. And your next question comes from the line of Andrew Partenew from Stevell. Your line is open.
Speaker 9: Hi, good morning. Thanks for taking my questions.
Speaker 9: Hi, good morning. Thanks for taking my questions. I wanted to talk a little bit about
Speaker 9: your guidance and as well as the impairment reported. So you had lower international sales this quarter that was just delay and higher production costs from lower yields among some other things. But these
Speaker 9: to us seems to be the main causes of the of the lower ibidah
Speaker 9: But both of these things seem to be quickly reversed and you're guiding for positive keep it down next quarter. There could be a rather large international shipment in Q4 and that could bring your sales back to the levels that we saw.
Speaker 9: in prior quarters in the low $40 million range. So that all suggests a pretty quick rebound, but at the same time, you had $190 million impairment.
Speaker 9: in prior quarters in the low $40 million range. So that all suggests a pretty quick rebound, but at the same time, you had $190 million impairment. So and again, you offer on key
Speaker 9: Just a two-part question. First is, on the positive EBITDA guidance for next quarter, do you think that could occur, including R&D costs? And the second part of the question is just to reconcile the quick rebound and...
Speaker 9: And the large impairment that. If that could if you could talk a little bit more about that, it could be helpful.
Speaker 9: and the large impairment that, if you could talk a little bit more about that, it could be helpful. Okay. Thank you.
Speaker 6: Thanks for your question Andrew. I think I'll start first with with EBITDA and the turn that we would see. There's no question that the current quarters was impacted just where we're heavy in flour and where we did have a significant decrease in our yields as we were modulating some of the plant sciences.
Speaker 6: of Q4. We have returned to prior higher yields and that is the main driver on the overall cost of cultivation and the cost of cultivation is the main driver for our flower emergence which accounts for 70% of our revenue. So that flower will need to push through our P&L. I would say we'll get a part pickup during Q4.
Speaker 6: on the lower cost of flower that we're starting to harvest now. There will be a bit of a drag still from some of the higher costs that did occur during Q3, but overall we will see an improvement to our flower margins. I think that...
Speaker 6: our international, our B2B sales were lower in Q3 than one would be on a normalized quarter for us. Those tend to be higher emergent category for us, so we do see a pickup there for Q4. As well, we have other cost initiatives that we have done that Dina spoke to, and more automation that allows for throughput.
Speaker 6: So we do feel that we will be able to further improve our mergens and through the facility with the automation helping us for Q4 to get back to positive. We'll cover the RD and I'm not going to provide specific guidance on that, we're getting too exact, but we do believe that we'll get back to a positive epidemic in Q4 and into fiscal 24.
Speaker 6: Secondly, when you consider that our Q3 operational results are below our internal expectations, and that...
Speaker 6: those two combined together to lead us to require to do a detailed analysis and review. As we did this review, you know, we're starting at a lower point than we were when we did this review in the past in the sense that there is with THC inflations and headwinds in the near term on this that
Speaker 6: does somewhat impact the modeling as we look out despite, you know, optimism and innovation that we do plan to bring to the table, allowing for growth to sales and margins. As well, the interest rates have gone up, the risk factor for cannabis companies and for forecasting is higher.
Speaker 6: So the lack of the discount factor is higher than it would have been in the past. And I think that combined to result in the need to book an impairment this quarter. I would say that the small benefit from doing this adjustment is that
Speaker 6: the allocation to property plant and equipment will decrease our depreciation and our cost of goods sold moving forward and we do expect a five-point improvement to our merging rate as this is fully flowed through the P&L. But based on the economic conditions of the market of the industry it did see us to do this reviewing.
Speaker 9: and given all factors, it did require us to make this impairment. Okay, thanks for that. And then maybe talking a little bit more about your yield. You talked about changes to your growing conditions, which lowered yields, but it increased THC potency.
Speaker 9: In the last month of the quarter, the yields rebounded and the THC levels remained strong. I'm not sure how much you want to go into detail here, but any kind of detail would be helpful to talk about. What kind of changes did you make that resulted in a temporary loss of yield? I would imagine.
Speaker 9: you know, if you're changing growing conditions in an environment and then keeping those growing conditions stable, then that yield loss would be permanent. Yes, so, Andrew, good question, and let me explain that. I think we've talked in earlier calls about the implementation of fractional watering in our facility.
Speaker 4: And we had done a lot of work in our plant science area on the benefits to fractional watering over the course of the day rather than, you know, flooding in an approach to watering the plants. We ruled out our fractional watering because we...
Speaker 4: growing those plants and unfortunately you kind of have to wait three months to see the impact of the implementation. As such we started to adjust our approach to fractional watering. We got it right. We were able to reproduce what we saw in our plant science area so we were able to get back to our historical yields yet keep the higher potency that we saw as a result of moving to that.
Speaker 4: the yields did come back. So, you know, I think that the lesson here was move a little bit slower, but we felt the urgency in the market because, you know, our value equation to consumers wasn't working and we needed to get, you know, faster, higher THC levels into our flower to sell.
Speaker 9: Thanks for that additional color. It's nice to hear that everything is back on track now.
Speaker 9: It's nice to hear that everything is back on track now.
Speaker 3: And your next question comes from the line of Ty Collin from 8 Capital. Your line is open. Hey good morning and thanks for taking my question. Just wondering if you could comment on the price reductions you took in the quarter. Were these applied pretty broadly across the product portfolio or really kind of.
Speaker 4: I'm going to turn this over to Tim.
Speaker 5: Sure, thanks for the question, Ty. So we did start looking at price adjustments and primarily on our 28 gram size format. If you look at our overall skew mix, 60% of our flour volume comes from shred and 40% comes from whole flour. And really the impact to us was really around the 28.
Speaker 5: gram value equation that being a reference to. So we look to do a price increase on our big bag of buds in early spring. And so that's where we had the biggest impact. In some cases we took a price decrease of about 20%. So we were retailing at about 142 originally went down to 119 and then TEC continued to go up.
Speaker 5: But our value equation was in balance, so our price to THC ratio was off. So we had to, in order to be more competitive, we had to lower our price even further. So we went down to the floor for our big bag of buds, so about a $99 ounce in Ontario. And in some other province, it depends on the province. It wasn't across the board. But we did make some changes in certain provinces to ensure that our value equation was balanced.
Speaker 5: If we look at the overall market right now, volume growth is growing in flower. Now your last six months versus the previous six months, we're seeing volume go up by about 10%. We're just seeing sales dollars go down by about 3.5%. So there is price compression in the market and likely due to most competitors or most LPs in the market making adjustments.
Speaker 3: to balance off that value equation or the price to THC ratio. In our case, we've gone as deep as a 20% adjustment, but in some cases it hasn't been that deep. Okay, great. Thanks for that. Bina, regarding your continued interest in the US market, obviously a couple of key catalysts in play there before year end, including Safe Banking and the Biden Admin Scheduling Review. Are those catalysts influencing your thinking on how and when to make additional investments in the US?
Speaker 4: and ASAC's listings. But we're watching it carefully. I'm not sure safe banking makes it a big change but certainly the de-scheduling is something that we are looking at to understand our opportunities. But at the same time, you know, when you think about what we did with Philos, we dipped our toe into this into the U.S.
Speaker 4: in the US that are depressed as well and there are opportunities out there. So we do have the balance sheet, we do have a great strategic investor in BAT and we'll continue to look at ways that we can take advantage of the market conditions while we you know focus on you know strengthening our business in Canada.
Speaker 4: US that are depressed as well and there are opportunities out there. So we do have the balance sheet, we do have a great strategic investor in BAT and we'll continue to look at ways that we can take advantage of the market conditions while we focus on strengthening our business in Canada. Great, thanks for that Pina.
Speaker 2: And we have now reached the end of our question and answer session. I will now turn the call back over to Bina Goldberg for some final closing remarks.
Speaker 4: Well, thank you everybody for joining today. We're really playing the long game here at Organogram. We're focusing on what is the right thing to do for this industry. We're focusing on innovation and differentiation and getting our costs lower so we can improve our margins. We feel very confident that we have a winning formula here and we look forward to updating you again on our Q4 results.
Speaker 4: Today, we're really playing the long game here at Organogram. We're focusing on what is the right thing to do for this industry. We're focusing on innovation and differentiation and getting our costs lower so we can improve our margins. We feel very confident that we have a winning formula here, and we look forward to updating you again on our Q4 results. Thank you for joining.
Speaker 2: This concludes today's conference call. Thank you for your participation. You may now disconnect. Please wait, the conference will begin shortly.