Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings, Inc.’s Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

We ask that you please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. As a reminder, this conference call is being recorded and a replay will be available on Organigram’s website. At this time, I would like to introduce Amy Schwalm, Vice President, Investor Relations. Ms.

Schwalm, please go ahead..

Thank you, Lisa. Joining me today are Organigram’s Chief Executive Officer, Greg Engel; Chief Financial Officer, Derrick West; and our Chief Strategy Officer, Paolo de Luca. Before we begin, I would like to remind you that today’s call will include estimates and other forward-looking information from which our actual results could differ.

Please review the cautionary language in today’s press release regarding various factors, assumptions and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS financial measures.

These measures do not have any standardized meaning under IFRS and our approach in calculating these measures may differ from that of other issuers and so may not be directly comparable. Please see today’s earnings report for more information about these measures. I will now hand the call over to Greg..

Thanks, Amy. Good morning and thank you for joining us today. This morning, we reported results for our third quarter which ended May 31, 2020. I will provide some overall remarks on the quarter and discuss some recent product launches and then Derrick will take you through our financials in more detail.

All three of us will be available to answer questions following our prepared remarks. Our Q3 fiscal 2020 results reflected some challenges that we have had and that the industry is faced as well as those that were exacerbated by COVID-19.

Some of these headwinds are temporary, but we have taken several key actions as an organization, which we believe will lead to improved results moving forward.

As we have continued to see progress in the efforts to contain COVID-19 in Atlantic Canada, it is important to keep in mind that at New Brunswick where our facility is located took early and decisive action in the battle against COVID.

Since the start of our Q3 align closely with the actions taken in the province as well as the actions taken by our organization to protect the health and safety of our employees and their families, our ability to launch new products according to our original plan and to supply existing product lines was hindered.

For example we needed to pause pre-roll production, a product line, which comprised 14% of our revenue in our Q2 2020. Recall that for most of Q3, the company was working with a substantially reduced workforce.

As a result of the global pandemic, we announced in early April that about 45% of our workforce, were temporarily laid off in an effort to protect the health and safety of our employees and allow for physical distancing within the facility.

While we began recalling some of the temporarily laid off employees in mid-May, ultimately, we laid off approximately 25% of our workforce in order to better align with prevailing market conditions.

Not unlike many of our peers, we had overbuilt and we are overproducing for the current market demand, which resulted in the asset impairment and some of the inventory write-offs we faced this quarter. However, we have a strong track record improving history of managing our costs compared to our peers.

Notwithstanding the write-offs, many of them non-cash to the quarter, we were able to generate positive operating cash flow in Q3. We were able to do this even before we right-sized our labor for us and despite softer revenue in the third quarter.

Now, we are moving forward with a leaner workforce and only modest capital investments remaining to complete the plans for our facility.

And to drive the top line, we have a very focused strategy, one that prioritizes competing successfully in the dried flower market in Canada, which is the largest product segment in cannabis and a strategy that ensures a continued focus on Rec 2.0 products as that market evolves.

We are in the middle of the revitalization of our product portfolio and have launched a number of new products with more to come in the near-term, which we believe have the ability to compete with the market leaders in their respective categories. We estimate 18 additional SKUs will be launched in the next 6 to 8 weeks alone.

Now, I will provide a little more context on revenues and gross margins for this past quarter. As we disclosed in our press release earlier this month, net revenue declined sequentially from Q2 largely due to significantly less wholesale revenue as orders slowed.

To-date in Q4, we have already seen reorders for wholesale revenue and recorded wholesale revenue. In Q4 fiscal 2020, we also expect to start shipping to Candoc subject to the receipt of an export license. Candoc is one of Israel’s largest medical cannabis producers.

Under the terms of the agreement with them, we will provide a guaranteed 3,000 kilos by December 31, 2021 for processing and distribution into the Israeli medical market. We may provide an additional 3,000 kilos during the same time period at their option. Q3 adult recreational revenue was up slightly from Q2.

Excluding provisions, Q3 rec revenue increased 14% from Q2 2020. We have conducted consumer research and leveraged a detailed analysis of consumer purchasing behaviors in an effort to better align our products with evolving consumer preferences.

Although we launched a number of new products in Q3 fiscal 2020, as previously noted, some product introductions were delayed from the original expectations due to the impact of COVID-19 on commissioning equipment and/or due to our reduced workforce.

We have noted the significant growth in the dried flower value segment of the adult use recreational market, including the larger SKU format offerings.

Competition continues to intensify and new entries have caused substantial market share shifts within the segment as well as an overall shift from the mainstream devalued segments within the dried flower category.

Value-priced products in larger format sizes became increasingly popular during the pandemic as consumers look to pantry load in the early stage and later became more comfortable with ordering online. We expect this trend to continue during the pandemic.

Unfortunately, our increased offerings in the value segment and in the largest SKU formats were later to launch than we had expected. This was primarily attributable to reduced workforce and delays on packaging equipment and some new packaging materials due to the COVID-19 disruptions impacting the global supply chain in late winter to early spring.

Notwithstanding these comments we have and continue to rollout value and large SKU offerings. During the last week of April, we launched Trailer Park Buds, our first value-priced product in a large format size of 28 grams. We believe we are offering a differentiated product, which doesn’t just compete solely on price.

Trailer Park Buds is a strain specific dried whole flower and is indoor-grown unlike much of the greenhouse competition. It is being very well received since its launch and sold out in many of the early entry provinces. After discussion with Health Canada following the launch, we decided to make changes to the brand and the logo.

There was about a month of supply disruption while we changed the interim branding from Trailer Park Buds to Simply Buds. In Q3, we had listings in Alberta and 5 other small provinces and launched in Ontario last week, where you will see the interim buds brand until we have the new permanent brand name in market.

Buds should be available on the OCS website and on – in Ontario retail stores later this week. Looking back, our value line in the large format offering is expected to be under the Trailblazer brand and anticipated to launch in Q1 of fiscal 2021.

The Trailblazer brand was our only value-priced offering until now in the 1 gram, 3.5 gram and pre-roll formats. We recently launched Trailblazer dried flower in larger formats sizes of 7 gram and 15 grams. The brand offers higher THC potency from when we originally launched Trailblazer just after rec legalization at competitive price point.

Subsequent to quarter end, we also began rolling out further line extensions on our Edison brand strains. Specifically, in June of 2020, we extended our most popular strains such as Edison Limelight and Edison Blue Velvet to offer new size formats and 3 pack pre-rolls.

Lastly, we anticipate launching new core strains with higher potency THC in Q4 2020. These new strains will be sold under Edison brand and will infuse novelty to the brand.

Turning to the Rec 2.0 market in Canada, during our fiscal Q3, we launched our premium vape product, Edison plus PAX Era cartridges, the last of our vape products to launch and rounding out our vape portfolio which addresses the value mainstream and premium segments of the market.

We are excited about the upcoming launch of our high-quality value chocolate bar under the Trailblazer brand. This will be our second product offering in the chocolate category after the introduction of our premium Edison Bytes earlier this year.

We believe that Trailblazer chocolate bar is superior quality to the current leading value brand and will be available at a competitive price point. The bar will be available in two flavors, first mocha chocolate and soon thereafter mint chocolate and both expected to launch in Q4 fiscal 2020.

We now expect to launch our powder beverage product in Q1 fiscal 2021 after facing delays in part due to COVID. As we have said, there has been a lot of interest from provincial category buyers in this product. We acknowledged the beverage category is still relatively small, but it’s been fast growing.

This dissolvable powder can be added to a beverage of the consumer’s choice and is anticipated to provide an initial absorption of cannabinoids within as few as 10 to 15 minutes. In summary, we have a lot of new entries into both the dried flower market and the Rec 2.0 market in Canada. We look forward to them gaining traction over the coming months.

A consumer walking into a retail store or visiting an online website in August this year should see an improved and expanded product offering for OrganiGram compared to earlier in calendar 2020. I will now turn the call over to Derek to go through more details on our financials..

Thanks, Greg. I will go a little deeper into our quarterly results and discuss our financial position. Third quarter net revenue was $18 million compared to $24.8 million in Q3 2019 primarily due to lower flower sales volumes and a lower average net selling price as well as the net provision for sales returns and price adjustments of $3 million.

Sequentially, Q3 net revenue decreased from Q2 largely due to less wholesale revenue as Greg mentioned. Q3 adult-use recreational net revenue of $15.3 million was up slightly from Q2 rec net revenue of $15 million. Excluding provisions, Q3 net revenue increased 14% sequentially to $18.3 million from $16 million in Q2.

Q3 2020 cost of sales was $44.4 million compared to $12.5 million in the same prior year quarter primarily due to non-cash inventory provisions and COVID-19 related charges. We wrote-off $19.3 million in excess and unsalable inventory, of which $11.9 million consisted of a provision related to excess trim and concentrate.

While we haven’t destroyed the inventory provided for, we have determined that this inventory could not be sold within a reasonable amount of time, another $2.87 million related to inventory write-downs to an estimate of net realizable value on account of declining market prices.

Lastly, $7.9 million of charges related to a reduced workforce due to COVID-19.

This amount was comprised of $5 million for plant culling due to an insufficient workforce to manage plants in various stages of their growth cycle, $2 million in unabsorbed fixed overhead as a result of lower production volumes, and $0.9 million mostly for lump-sum payments to temporarily laid off workers to bridge them until they could receive their serve benefits.

Gross margin before fair value changes to biological assets and inventory sold was negative $26.4 million compared to a positive $12.3 million in Q3 2019. This was due to lower net revenue and higher cost of sales as I have just described.

In Q4 2020, we do expect an improvement to gross margin before fair value changes to biological assets and inventory sold as we anticipate there will be fewer inventory provisions than as compared to Q3 2020.

As indicated in prior quarters, we do expect some production inefficiencies to persist and impact gross margins in the near-term, while we continue to launch new Rec 2.0 products and optimize production. Our portfolio revamp is only partially complete and we expect to gain efficiencies when the product launch schedule normalizes.

A negative non-cash adjustment to cost of sales for unabsorbed fixed overhead cost is also anticipated to persist since we intend to cultivate less than the target capacity of our facility for the foreseeable future. In Q3, we decided to indefinitely defer the completion of 4C as originally designed.

Phase 4C has been partially completed, but without any foreseeable near-term use for the space, we recognize an impairment charge of $37.7 million in the third quarter. As we previewed in our July 3 press release, Q3 2020, SG&A expenses of $10.3 million decreased approximately 26% sequentially from the $14 million in Q2 2020.

Our Q2 included marketing and other costs related to the initial launch of our Rec 2.0 products. SG&A in Q3 2020 increased from $9.1 million in the prior year’s quarter as we continued to scale operations for ongoing Rec 2.0 launches as well as due to some charges related to COVID-19.

Unique to this past quarter, we recognized government subsidy income of $3.2 million, which related to the Canada emergency waste subsidy paid to eligible employers whose business has been impacted by COVID-19. For Q3 2020, we are reporting a negative adjusted EBITDA of $24.7 million compared to Q3 2019 adjusted EBITDA of $7.7 million.

The current period’s negative gross margin before fair value changes was primarily due to the aforementioned inventory provisions and adjustments in the cumulative amount of $22 million. For Q3 2020, we are recording a net loss of $89.9 million compared to a net loss of $10.2 million in Q3 2019.

This was primarily due to the negative gross margin combined with the non-cash impairment charge for property, plant and equipment. As Greg mentioned, we generated positive cash flow from operating activities of $8.5 million in Q3 2020.

This was accomplished through the monetization of receivables and inventories and a deliberate decision to calibrate our investment in cultivation and inventories to a level that better matches or near and medium term needs.

We ended the quarter with $44.8 million in cash and short-term investments and have continued to strengthen our balance sheet subsequent to quarter end. Also worth noting, we only had $4 million of remaining CapEx at the quarter end needed to complete our existing plans for Phase 4 and 5 of our Moncton campus facility.

During Q3, we successfully amended our credit facility agreement sets that we could access of $30 million in available capacity on our terminal. We raised money under our at-the-market or ATM equity program announced in April of 2020.

In Q3, under the ATM program, we issued about 14 million common shares for gross proceeds of $31.1 million at a weighted average price of $221 per common share. The net proceeds were $29.8 million after agent’s commissions and other fees.

Subsequent to quarter end, the ATM was completed with a final raise of $17.9 million in gross proceeds on the issuance of about 7 million common shares. We also drew down the remaining $30 million available under the credit facility’s term loan.

As at July 17, 2020, excluding the $8 million GIC that is the restricted investment, the company had approximately $78 million in cash and short-term investments. We feel very good about the strength of our balance sheet, which is critical in this volatile industry and during the uncertain times of this global pandemic.

That concludes my formal remarks. So, I will turn the call back over to Greg for closing comments..

Thanks, Derrick. There is no question it’s been a challenging time for the Canadian cannabis industry and the pandemic certainly exacerbated some of our own challenges in Q3. Again, some of these headwinds should only be temporary in nature.

For example, we did miss out on some opportunities to capture revenue in Q3 as I have discussed, but we believe our new products have the potential to put our revenue growth back on track. We expect it to take some time as the new product launches are fairly recent and some are still to come.

We encourage interested observers to regularly visit the online websites or stores to see our progress in rolling out new products and extensions. We anticipate it will take until Q1 fiscal ‘21 before there is the potential for OrganiGram to reflect any meaningful incremental sales from the adult-use recreational market.

We are excited about these significant rate vitalizations to our product portfolio and we believe we have made necessary changes to right-size the company as we continue to relentlessly focus on building the business that generates attractive return on investment for our shareholders. That ends my prepared remarks.

Operator, if you could go ahead and open up the line for questions?.

Thank you. [Operator Instructions] And our first question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open..

Hi, good morning and thanks for the question. First one for me is around gross margins, thanks for the color that you offered there.

Just wanted to dig a little bit deeper in terms of how to think about the gross margins in the near-term, I know you said, there were still going to be some inefficiencies kind of going forward near-term and then you kind of gained more over time as it normalizes.

So, just how best to think about gross margin profile because there was a lot of kind of one-off puts and takes during this quarter? Thank you..

Sure. Aaron, it’s a good question. I will take that. And then if Derrick has any color he can add. So I mean, certainly, as you outlined, I mean, we don’t give guidance necessarily in gross margin, but we know we do expect an improvement from Q3 due to fewer inventory provisions.

For Q4 net revenue, I think as I mentioned, it’s going to take time for new products to really gain some traction as many of these launches are recent and we did have supply disruptions during the quarter related to re-branding buds for about a month.

Any potential meaningful incremental revenue will not occur until Q1 more than likely as I outlined earlier. And we will see, continued pressure on ASP due to value offerings increased competition in the space.

We do expect though, for increased pre roll Sales with a return to production of that line because again in Q3, we have temporary halted production. And we have recorded wholesale revenue in Q4 to date but don't expect it to be at the same magnitude that we have had in Q2. And as noted, we expect to start shipping to Candoc.

So certainly, in Q4 I mean cost of sales, we do expect some negative charges for unabsorbed fixed overhead costs to persist as we continue to produce below our target capacity. And there will be a higher cost of cultivation as we are no longer harvesting trim.

So that higher costing inventory flowing through into Q4 we do expect some production efficiencies to persist as we continue to launch new products. And we have given guidance on this before, as there is always a learning curve to optimize the production process.

Although again, as we have outlined previously larger format skews will lead to better cost efficiencies when it comes to packaging of things like 28 gram and 3 pack pre-rolls, so..

Yes, I would add to what Greg said. And again, we are not in a position where we are going to provide forward guidance.

But when you look at Q3, there are approximately $22 million in adjustments to inventory values from an obsolescence or net realizable value that would be considered more normal and unique in this quarter due to a combination of events.

And in addition to the $22 million, there is $7.9 million in direct costs related to the COVID-19 which was made up of the plant culling and other associated costs. So cumulatively, those two numbers are over $29 million, and we adjust that against the margin that is otherwise recorded.

You can get a better indication of the quarters of the Q3 quarters margin..

Okay, thanks for that. That's, that's really helpful.

And then just one follow up for me would be mostly around your vape line, it's like it had a little bit of an uptick there, great color that you gave on edible side, but just as we look at vape, which is, certainly been the biggest category, for 2.0 products in the Canadian market, any color you can offer in terms of the competitive landscape you are seeing there, how your offerings are faring in terms of sell through and reorder rate? Thank you..

Yes, no, certainly you don't think some general commentary area, again, as we had expected, and we timed and staggered our launches accordingly. So, our value line with our Trailblazer, mine is the first one to 510 cartridges came to market.

And then we launched with follow-on with our Edison feather disposable and then more recently, our Edison plus PAX premium line, and we did that because of the size of the category. So the larger categories, the 510, the disposables would be next and then that premium kind of ultra premium line would be the following.

So good response to date I think, the only comment I would make overall is that without a fulsome offering for the PAX platform and more recently, some of the other companies that were making PAX era's have come to market. So now there is a more broader offering in the stores.

So I think I think that was hindering PAX in general a little bit only having, initially one company, and then we were one of the first three to have the product in the market, and we are seeing PAX now really kind of key up their efforts on, digital marketing, and now that, reps can visit stores again, and doing that, and that should help the PAX line kind of grow and evolve.

So, overall, we are happy with where we are, I think, we are still continuing to see that this is a market that is, growing and evolving and consumers one thing that's interesting as consumers have come to the legal market, because of the value skews.

They are looking at the high quality hardware that is being provided in, in the legal marketplace and potentially choosing those options.

We are hearing that anecdotally from many other retailers that people are coming in for the large volume value flower product but then now they are looking at the vape pens that are available because the quality of the of the hardware in the legal market.

Thanks for that call. Appreciate it..

Our next question comes from the line of Andrew Partheniou from Stifel GMP. Your line is open..

Thanks for taking my questions. I was hoping we could, I guess center my questions around your production and inventory. Right now you have about $100 million in inventories in biological assets.

And I am just wondering if you can give a breakdown of how much of that is your old strains versus the new strains that you have already launched like Limelight that those that you have yet to launch? And also you mentioned that you guys are going to launch 18 new SKUs very shortly, how much of those 18 SKUs are new strains, just trying to get a sense of the magnitude of the new strains coming online? And if you guys are going to be capacity constrained at all to meet demand with those new strains going forward?.

Andrew, maybe I will start off and answer the question relative to the second part and then turn it back to Derrick to comment on the kind of overall mix of our inventory. So, we have three new strains coming to market in the near-term. So, these have been strains we have been working on for a while.

So those strains in addition to as I mentioned, during the call kind of additional offerings of both Limelight and Blue Velvet kind of expanding and those have been top sellers for us expanding our strain offering.

In terms of the SKU mix, there is a combination of new products and there are other value products coming to market as well as these core Edison strains. So, it’s across each of our kind of offerings as we look to bring new products out and the Trailblazer flower as I said it’s two of those coming in the not too distant future.

They are going to know if you want to add any additional color on the relative inventory levels overall across what we have available. We may not be able to provide full details on that, but maybe, Derrick I will turn it over to you..

Yes. I don’t have all the exact breakdown by the different strains. I would say it is a mix. Any of the inventory values that were related provided to strains relating to products that are either been de-listed and/or became more stale dated we have provided full allowances for. And so they have been reduced out of our inventory values.

And so it would consist mainly of relatively current production levels and which again would have a mix between the new streams and some of the old..

Sorry, I was on mute there. Thanks. Thanks for that additional color.

And maybe as my follow-up to talk a little bit about your Phase 5, you guys don’t have that much left for that and it could give you maybe some greater ability to create new types of products, maybe in the concentrates area, if I am not mistaken, wondering when that could come online? And if you guys need that Phase 5 in order to create products like hash for example?.

Yes, it’s a good question, Andrew. So, Phase 5 as we noted, we have only got a couple of million dollars left and that really is just final equipment going in. So I mean, we have already prepaid and already have on site expanded extraction for both hydrocarbon and CO2.

And I think as you alluded to, I think hydrocarbon extraction is the one area to allow us to bring many of these new products, right? I mean, not hash in particular, but some of the other types of products, where you are looking to take flash frozen material and produce potentially live resin and things like that.

So, we are looking to kind of build out capacity to have those future offerings and hydrocarbon extraction is necessary for that.

So, one of the challenges, during COVID, has really been in Atlantic Canada is within a bubble and is allowing kind of movement between the four provinces, but to get final commissioning of equipment and I will give an example for our Trailblazer launch. I mean, we work with a Danish company [indiscernible].

We had to do virtual commissioning of the kind of changeover to produce Trailblazer chocolate bars and it’s was much more challenging because we weren’t in a position to bring over kind of the people from the OEM with the hydrocarbon extraction, we have got internal experience and expertise, but ideally we would love to be able to bring people into the facility.

So, it just drags out.

So, I don’t want to give it directionally to say here is when it will be up and running, because it does take longer having to do things through kind of videoconferencing with the OEM and just making sure, but I mean, certainly that is our plan of the investment in expanded, extraction methodology, especially with hydrocarbon to bring out some of these new products in the future..

Okay, thanks for that.

And any color on the hash?.

It’s currently not in our plan at this point..

Okay, thanks..

Our next question comes from the line of Tamy Chen from BMO Capital Markets. Your line is open..

Hi, thanks for the question. I had a first housekeeping one.

Just wondering, Derrick if you are able to provide at all figures for net selling price in the overall medical market as well as the net selling price for flower in the rec market and also if you have any pricing for your 2.0 product as well?.

I don’t have that power. Do you happen to have that average selling price on the medical versus – I mean, there has been a decrease over the last quarter as it relates to the average selling price of the flower, but the breakdown between the two, I don’t have it in front of me, but I can circle that back to you after..

Okay, sure. So first question is, wanted to just ask specifically about the store rollout in Ontario, I know you talked about that in terms of the product launches because of that.

It will take a bit more time to see meaningful incremental revenues, but from a store rollout perspective, that was one thing that I think you have mentioned as a key bottleneck in rolling out more revenues for the industry as a whole. And now we are seeing Ontario increase stores, I think there is just over 100 now in the province.

So I am just wondering, from your vantage point, I mean, is this something that is starting to have an incremental benefit for revenue trajectory?.

Yes, Tammy, it’s a great question. We are seeing for the industry as a whole, I mean, Ontario for the last few months as you know and you see the reporting, I mean, it surpassed Alberta in terms of revenue. I mean, that’s a combination of online and stores.

And you know, as new stores come online and digital consumers have access to purchase in store and with the restrictions lifted related to store visits on COVID, we certainly expect that to continue to kind of drive an increase market potential in the province of Ontario.

You know, we have seen kind of mixed communication in the media at different times about what AGCO was going to do and not going to do.

I did see yesterday another notification that they are going to limit store – on a report that they are going to limit the store openings to 5 per week, but certainly that still keeps them on 20 per month, which puts us on a good run-rate to be well over 200 before the end of the year.

So, yes, so we definitely are seeing an increase across the board with new stores coming online..

Okay.

And my second question is with this whole shift towards value, so I guess it’s bit of a two part question as my follow-up is one, is this your view of where this industry is going and that it’s going to be predominantly essentially a battle in the value segment or do you see there is opportunity to create brands outside of the hard value segment and how? And the second part of that question is if we do continue to shift both flower and as well as some of the 2.0 categories into much more value? From your cost perspective, I mean, is it flexible enough to participate in even additional pricing competition or is there certain level where from a cost structure perspective for you, it will become incredibly uneconomical? Thank you..

No, it’s a great question. So I mean, I think as I said earlier, that part of the shift in value has been exacerbated by COVID, right.

We had more people by mail order when you are going to purchase mail order you are typically buying more volume or even when you are, like we’ve seen in people buying groceries, they do less frequent trips, they are more likely to go when they do go to a store buying – you know buying more product one, so kind of that value growth has, I think, been increased because of COVID in part.

But it’s certainly our understanding from everything we are hearing is expanding the base of consumers and it’s drawing consumers from the current illicit marketplace. And I think value is here to stay there is no question, but we do continue to see a demand for high-quality products in every category, right.

There is a mix of kind of consumers, as you would see whether or not it’s in craft beers versus value beer and mainstream or its different wines at different levels. I mean, this is a market while value has grown, I think there is still an opportunity to build brands and kind of build brand resonance.

I mean, we know, again, we talked earlier about Limelight and Blue Velvet, two of our leading streams. You know, those products when they go up and are available for sale, they move pretty quickly in general. And so there is a demand there for products in Iran.

I think when you talk about cost structure I think we have always been a company that’s focused on operational efficiency. We are continuing to do that.

I think one of the things that COVID has allowed us to do is because of reductions in staff with our 45% temporary layoffs, we were forced into a position where we had to do more with less and really focus on automation and focus on areas we could get higher throughput with fewer people.

It has led to some efficiencies that are sustainable in certain areas, where the methodology of the way we do certain things does require less labor, fewer people. We are also looking at inefficiency.

And while we have no plans for significant CapEx, I think there is some add-on equipment of $100,000 here or $200,000 there that could have a positive impact on just improving our current packaging. And we are evaluating that as a company right.

So, I think you know, you have got to always be continue to focus on are there ways to continue to improve cost as an organization.

But back to your first part of your question, I think there is still very strong demand and we have seen you know, at the high end of it, you still continue to see kind of more boutique kind of craft grow like whether it’s Canada [ph] farms or broken co sustain a very, very high price, right.

So, there are consumers across each category, no question..

Okay, that’s helpful. Thank you..

And our next question comes from the line of Adam Buckham from Scotiabank. Your line is open..

Good morning and thanks for taking my question. So, you just touched on it, but I wanted to maybe get some color on your higher THC SKUs within the flower segment. It seems as though high THC product is seeing strong demand in the market with the OCS highlighting that products north of 20% THC were some of the highest velocity SKUs.

On the back of that, can you maybe provide some comments on the velocity of your SKUs within your current portfolios, are they maybe trending and what percent of volumes or sales they make up?.

Yes. Maybe I will turn over to Derrick, but I would just give caution that we don’t necessarily give a breakdown by product type or give feedback, because as you know there is market data available from provinces. So we get sell-in data, but not from every product.

We get selling data for everybody, but we only get kind of market data from 5 provinces in terms of sell-through. So, we don’t have that necessarily and we haven’t given color on it in the past.

But I mean, I would agree with your comment that we have seen in Limelight, one of the reasons it’s, for example, been a strong seller for us is in most cases, it’s averaging between 20% and 27% THC, right.

So, it’s been in high demand because of that, so Derrick, I don’t know if you want to add any more commentary?.

Yes. I would just echo Greg’s comments and we don’t provide that type of detailed disclosure, but clearly, the market has pivoted more towards higher THC in larger formats and we are aware of that. And so higher THC products will move faster, but in terms of a granular disclosure on these levels, that’s just not something we provide..

Yes. And maybe I would just add – sorry just add some color too like, I mean, the reason, when I was saying earlier, we are kind of optimistic on a go forward basis, as we have looked at new products and kind of expanded strain offerings.

I mean, we do look at the portfolio that we have and kind of how do we supplement it and bring these new strains this goes back to Tammy’s question as well, where it is important to bring those higher THC products into market and certainly expanding the offering and the availability of those.

So, this has not been done in isolation, it’s been done both through looking at market data, but also through doing market research with consumers to understand what the trend of the marketplace is. So anyway, sorry to interrupt, but…..

Yes.

I was just going to maybe ask it a different way and in terms of your production capabilities to meet that demand in that higher THC segment like are you able to quantify on a quarterly basis giving your restructuring like how much you guys think you can produce that’s above that?.

The only – I guess the only guidance I could give is that we have shifted in the current production cycle right now, roughly 35% to 40% of our production is of kind of these new strains, because as they come to market and we expect them to do well, we definitely put a big focus on them, but I can’t give any thinking beyond directionally on that..

Okay, that’s great. So, just wanted to touch on 2.0 secondly, particularly within the vape segment, it seems as though the breadth of the catheter category, particularly within the 510 segment has expanded rapidly over the last couple months. I am just wondering how the team views the evolution of that category.

Do you think that it’s going to be so much without a flower with the value segment eventually being the large driver of volumes or do you think products are able to differentiate based on their internal qualities?.

I think there is a combination of differentiation. I mean, we get data from the U.S. and we work closely with the green solution in Colorado and understand kind of what’s happening in that market very intimately.

And I mean part of what we are seeing right now, some of the pricing approaches that some companies have taken on their 510 cartridges is in part a dating issue is our understanding when we speak to the provinces, they have got limited amount of time left on those cartridges. So they are trying to move them out quickly.

So, it’s been from that side, it’s been a bit more aggressive with a few companies taking that approach, but I think we will see an evolution, this is the California market for example, like today, the predominant product is distillate.

If we look into 2021 and beyond, we will start to see more whole resin kind of live resin type products in the future, which are more of a premium end. And I think there is always a place for distillate products and they continue to do well in U.S.

states where we have had years of experience, but I think the market will evolve and that ultra-premium platform will be also additive in the future..

Great. Thanks..

And our next question comes from the line of John Zamparo from CIBC. Your line is open..

Thanks. Good morning. The minimum EBITDA covenants in the amendment to the credit facility seem to suggest that just look Q1 and even Q2 are more challenging than fiscal Q4.

Is there any particular reason for that other than maybe seasonality of consumption or is it that new product launch costs are expected to fall into Q1 rather than – or maybe Q1 and Q2 rather than Q4, just any commentary there would be helpful?.

Yes, I will let Derrick answer that..

Yes, I wouldn’t read too much into the exact covenant by quarter or in discussions with the lender. We discussed a robust review of various scenarios and it ended up settling on a certain amount per quarter, but there is based upon production timing and product launches and even overhead expenses, a bit of fluctuations.

And so I just wouldn’t read too much into the quarter-over-quarter change to the covenant and it was just what ended up after the discussions with the lender..

And maybe important to add to, John, that in our credit facility EBITDA, it does allow for more add-backs into the calculation on things like non-cash areas like inventory provisions or certain returns provision. So, it’s not a straight up calculation. It does have more flexibility from that perspective..

Okay, that’s helpful. Thanks. And then on the Trailer Park Buds, you have a way you can keep to communicate some elements of this brand with consumers given the truncated name.

There was a comment in the press release about competing not just on price and emphasizing indoor grown, how do you plan to market this brand given your recent discussions with Health Canada and how do you communicate the overall brand to consumers?.

Yes. As noted, I mean we work closely with Health Canada kind of on amending the brand to buds and we continue to see whether or not it’s under the Trailer Park Buds name or buds alone strong demand for the product. I think what consumers are seeing and hearing is that, it is an indoor grown product that is strain-specific.

And I mean, now that in Ontario in particular and even in Alberta, where a number of stores were closed and Canopy for example had some of their stores closed.

I think one of the key things is our reps and our sales teams spending time with the bud tenders of the staff in the store to make sure they understand that differentiation, because ultimately, they do help guide consumers in that decision-making.

And so certainly, the feedback we are getting on it, the posts on areas like Reddit have been extremely positive about that differentiation. So, whatever brand we end up choosing kind of in the future, it’s going to be the same product, it’s going to be single strain indoor grown. And I think that’s resonating well with people.

We are not promoting the brand itself we are promoting the content of the product at the end of the day, so..

Okay, that’s helpful. Thank you..

And our next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open..

Good morning. Thanks for taking my questions. So I guess I guess to start off with an industry question.

So if you look at as you look at the coronavirus pandemic in the retail footprint, are we back to normal or what do you guys I guess seeing on the ground right now in terms of stores reopening?.

Yes, as far as we know, I mean, we are back to normal, really across the country. I mean, there were still a small number of stores in Alberta that were and we have seen some Alberta stores closed permanently. I mean, maybe they were, they were in areas that were, there was too high, too many stores for the area and things like that.

So we have seen a small number of stores, close their doors, I mean, the area I live in Toronto, there is five stores within walking distance for me, that are going to open within the next few weeks. So I mean, definitely, there is a lot happening, but yes, so in general, the stores are open, I think, like any environment.

They are still limiting the number of people at any one time but I think, Canadians have done a very good job and whether it's at grocery or liquor or drug stores, I mean, people are patient, they will wait in line and even with limited staff in the store there that's that one other things with cannabis stores, that's always been the case right limited number of people in the store, kind of, having bartenders working with them.

So people are used to that when they go into the store. So it's a positive thing. .

Okay, okay. That's, that's helpful.

And then as you as you look at your – I guess, your evolving product mix, what portion of your mix today is valuing, how do you see that trending over time?.

I don't have a specific breakdown Rupesh in terms of like, what portion is value but I think, we've always wanted to play and we always have played and in value mainstream and premium and look to point each category. I think, where we are under index today is on value.

We were late, as I mentioned in launching buds, and although, we do have Trailblazer out there. We are amending that and bringing new products under both banners and there will be a re-branding under buds as well.

So, so we are not, we don't have the same mix of value today that we expect to have going forward and that we see in the market but even in categories like chocolates, I mean, our Trailblazer bar will snacks will be, will compete in that value line.

And, as I mentioned earlier, we see it as, very good quality chocolate at a very competitive price that, has very strong potential in the marketplace, relative to what's available today. So, the market is shifting, in part to value but I think at the end of the day, we want to play in every category and be diversified..

Great, thank you..

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

Good morning, everyone. Thanks for taking the all the questions. I just wanted to go back to one of the earlier questions on trying to normalize some of the noise that was in this quarter with a lot of non-cash charges and other and other provisions.

We are just wondering, Greg, if you can comment on one of the silver linings here is in the quarter you were cash flow positive from operations. And I guess what I would like a little more color on is how much of that is.

And I know you touched on this but timing differences of some of these positive working capital adjustments, given that for the nine month period, obviously, still not profitable enterprise, just from operations alone. So how much of this can we expect going forward without, trying to tease, guidance out of you.

But just given the fact that you are expecting, more of a flat contribution from your recreational penetration or sales rather, in the near term here is it something that is sustainable going forward or are there other timing differences in your working capital or other factors that we consider?.

Maybe I will let Derrick answer that question..

Sure, I would say that, that we are not providing guidance. As there are too many moving parts on uncertainty however we have right size the business. We have as noted before laid off 25% of the workforce, and we do have a strong track record of managing costs.

Generally speaking, we did a thorough review of the inventory as mentioned in the quarter whereby we did take these allowances of we have near term visibility and have matched production to sales demand at this time.

And so given that, our expectation would be that you would not see significant movements in working capital in one way or another, but I still could not get granular and provide anything more than that in terms of future guidance..

Okay, appreciate that. And just to follow-up on one of the sort of levers here for increased revenue in the Israel exports, can you give any color on the 6,000 kilogram commitment for orders here, what the actual time period actual time period is to that? I believe it’s more than a year.

And if there are certain quantities within that, that we can expect and given the licensing and everything else that comes with it that we can expect in the near-term? And without giving pricing information, if you are not able to, can you give a magnitude with respect to what you think maybe the margin profile is on those exports versus what you are doing in Canada?.

It’s a good question, Matt. So, I think we and in the press release saw on this we did outline that 3,000 kilos was really kind of a committed number and then the additional 3 to bring the total to 6 by the end of 2021 is the target timeline.

So that being said, as I mentioned earlier, pending receipt of an export certificate from Health Canada, we expect to be in a position to ship a pretty significant portion of that initial 3,000.

So, I can’t necessarily give any guidance on kind of pricing relative to, but again, I mean, the strong part relative to selling bulk wholesale product at the end of the day is there is no packaging, there is very limited labor associated with it. So again, I think it’s a great deal for us. We are looking forward to working with Candoc.

They have proven themselves to be a leader. And they are also looking at not only in the Israeli market, but how do they continue to expand into other parts of Europe and possibly that could be a use for some of the product going forward..

Perfect.

And is it fair to assume that those 3,000 kilograms, if will be sold and shipped over, would that be accretive to the existing margin profile or can you not comment on that?.

Again, I wouldn’t necessarily give we don’t disclose pricing on the agreements, I think, once, I mean, certainly, you can always when we have done wholesale sales or other sales, you can back out pricing, but that’s proprietary to the agreement, unfortunately..

Okay. Thanks, guys..

Our next question comes from the line of Pablo Zuanic from Cantor Fitzgerald. Your line is open..

Yes, good morning. Thank you. So just a housekeeping question first, so you talked about 14% growth in the Rec business in the third quarter and you are guiding for flat for the August quarter.

So, just trying to understand based on my numbers that would mean that in the third quarter you were pretty much in line with the market, you maintain share, if you can correct me on that, if I am wrong? And then what are you looking at in the August quarter? Is it that you are losing share more so than in the third quarter or is there that you are predicting a slowdown in demand just some more color if we can start with that? Thank you..

Yes, Pablo, we just wanted to be cautious in terms of I mean, we historically did not give guidance right in terms of as an organization.

I think one of the things we are signaling that we have launched and are continuing to launch a number of new products, but as we are already more than halfway through the current quarter, we did not want to set unrealistic expectations from people that those new launches would have a really huge impact on revenue in the quarter.

We expect them to have a significant impact in Q1 as uptake kind of or optimistic based on consumer feedback so far from the products we have launched, but we just wanted to be again, we don’t give guidance, but we want to be cautious so that people did not expect all of these new products to have a huge impact in the current quarter..

Right.

But from a market perspective, when we look at March bump in retail sales and then April stable, how would you characterize sales in June July compare would say the main quarter for the industry and if you can give the new ones there, in terms of any variance within the actual retail sales and how the boards are ordering and shipments from LPs to towards, I am talking more broader market level, if you can give color there? Thanks..

Yes. Again, I – again, we don’t give guidance necessarily. I will say we are seeing increasing demand in Ontario in particular.

And certainly when you look month over month since January in particular, I mean there has been really strong growth in Ontario and as these new stores come online, but again I can’t comment specifically on different markets or kind of our position in the market. So, we don’t give guidance..

And just a brief follow-up, and if we – for us looking from outside right, we obviously some companies are gaining share, some are losing share, obviously there are many factors, but if you guys put your finger on one of them, what would it be just having the right product availability, I mean from outside it seems like sometimes your scale some people cannot get in the door we have to sell wholesale bulk or sell finished product to others to re-brand is about the relationships with the boards.

If you can just talk about that, in general having an right price segments, I mean, what are the key factors because some are gaining and some are losing. And it seems that right now, you have lagged recently.

But just if you can expand on that, in terms of what is the key issue?.

Yes, I mean, I will say there’s no question part of why we have lagged recently, to some degree, not in every province, and certainly not in all categories. But I mean, is, we didn’t have a fulsome offer, and we didn’t have enough of the value category. And we are looking, we have addressed it, and we are looking to further address that.

so, you know, I think I think that part is having the right mix. I think, we have always shown an ability to get product to market we were impacted by COVID.

I think, one things I mentioned this early in the call, the province of New Brunswick facility is, was more aggressive than most parts of the country, BC and Alberta and New Brunswick all declared as state of emergency early, but the schools were already closing in New Brunswick, so kids, kids were at home and people couldn’t come to work.

So we were already even before we announced our temporary layoffs, we were being impacted And so, the quarter lined up, unfortunately for us perfectly with, with COVID. So, that’s kind of where they overall is.

If I can ask you one last one here when we hear about, potential mergers within other LPs, I mean how would you characterize your scale? I mean, do you have a scale disadvantage or even in your size, you can still operate? Well, that’s not an issue.

How do you think all that, especially the industry begins to consolidate?.

Yes, it’s, one of our key facets and Derrick alluded to it earlier. I mean, we have always been one of the most efficient operators in this space, right, between how we produce how we package how we process so it’s been one of our core focuses.

And I think, one of the challenges sometimes with consolidation is you are consolidating multiple facilities, right? So having one single facility for us, I mean, not to say there aren’t values in consolidation.

But, for us, we have always been able to be very efficient from a scale perspective and we are not producing, we have reduced part of our production current and we have an ability to scale that up if necessary. So I would just answer it that way so….

Thank you..

And our next question comes from the line of David Kideckel from ATB Capital Markets. Please limit to one question. Your line is open..

Hi, good morning, everybody. Thanks for taking my question. So the inventory write-downs you announced, in particular with concentrates in the trim quite significant data. And I am just wondering, with additional inventory or outdoor cultivation coming online in Canada, in the fall, I think was in October approximately.

How likely do you think it is not only for you OrganiGram, but for others across the board, to really see additional write downs, because I think a lot of analysts thought this might have been one, maybe a couple to a few quarters of write downs, but I think we’re Seeing this consistently across the board.

And I’m just wondering, from your perspective, Greg, is there something we should expect moving forward into the fall as well? Thank you. .

It’s a great question, David. And I think where we, we have made, as we’ve outlined on the call and, in our MD&A. I mean, we have made decisions to scale that production so that we don’t get caught in that situation right in the future.

And I think where, and as Derrick mentioned in an answer to an earlier call, we have made inventory provisions against product that we don’t believe we have a market for I can’t, necessarily comment on other companies per say, but I think that has always been one of the challenges in the space has been Do you have the right product for sale in the marketplace? And I mean, part of our shift in some of those write downs was driven by, a shift in marketplace to newer product higher, higher, higher THC skews and kind of far more focused core strains.

So, I think I don’t expect necessarily, that, if I you asked about outdoor production, for example, I mean, we have seen my understanding, for example is the bulk of the outdoor production that was produced last year is just predominantly gone for traction, right.

And that’s what the, the total extractors have been using it’s driven down the total, that the total price for it, but, we that’s why we have gone through such an extensive review of our, strain mix and doing market research and looking to understand the consumer so that we are positioned for the right products for the right consumers, so…..

Thanks very much. That’s it for me..

And our final question today will – we will have time for two more questions. Our next question will come from Graeme Kindler from Eight Capital. Your line is open..

Hi, good morning and thank you for taking my question here. Just one question, I want to follow-up regarding putting together some of the pieces from the forward-looking commentary, which I appreciate and the minimum EBITDA on the revised credit agreement here.

So, for fiscal Q4, looking at no real incremental growth there, Greg, you mentioned till fiscal Q1 and still expecting some drag on gross margins as you introduced some new products there. And thinking about the fixed cost side of things, it did decline sequentially. And there might be some further savings because of labor force there.

Now, I know you mentioned that the calculation is a bit different from the credit agreement versus how it would show up on the financial statements.

But what I am wondering is based on everything that was laid out there and not expecting a lot of growth, is it possible that reaching that positive EBITDA might be at risk in the fiscal Q4 here depending on how the next month goes? Appreciate some color on that. Thank you..

Yes, again I – maybe I will turn over to Derrick, but I mean, we do have as I outlined when have got new products that have launched, we have got new products that are launching kind of in the currently in the next month. And I think we are optimistic, but it just takes time for them to have a dramatic impact, right.

But I will give you an example though when we did our first sell into our first province of Trailer Park Buds. It was a $1.2 million order. So, it was a major province and it was a big order. So, it's dependent. So, I don’t want to give guidance directionally.

But Derrick, if you want to add some color to Graeme’s question?.

Yes, I would indicate that as we have stated, we are not going to be provide specific forward-looking guidance. But what I will say is that we aim to be in compliance with any covenants related to our debt. And we do understand some of the near-term challenges and we believe that’s been factored in at the time we did the negotiation.

And so again we plan to be in compliance with the covenants, but it’s based on a future event and that’s all I can comment at this time..

Okay, thank you very much for that. That’s it for me..

And our next question comes from the line of Rahul Sarugaser from Raymond James. Your line is open..

Great. Good morning, Greg, Amy, Derrick, Paolo. Thanks for letting me slide in with the last question here. So, really, I have sort of one macro question, Greg, in your comments, you noted that the market has really quickly shifted towards the value segments.

And you also noted that OrganiGram has been a little bit slow and adjusting to the shifting consumer preferences. So, I am sure that we agree the market will continue to be quite dynamic. And you may have already answered this in pieces.

But to summarize my question is, what strategic management and operational changes are you undertaking to make OrganiGram were more nimble in the future and then hence give shareholders confidence in your outlook for 2021 onward?.

Yes, it’s a great question, Rahul. I think, as I outlined earlier, I mean, we were slow in part predominantly because of COVID and some of the things that were impacted by COVID, not only in staffing and kind of equipment and materials, so that unfortunately did have an impact in us getting kind of our plans out to marketplace.

And I think – so we were planning and we started that planning process last year, but I think we have gone and this was part of the move of having Paolo move into the Chief Strategy Officer, right is having someone dedicated to strategy, having someone dedicated to product developments and working with our marketing and sales teams and operations team to look at product trends and what, not only we have always been a company that has wanted to be out in front on certain products.

An example when we on pre-rolls when the rec market opened, we were really a dominant player there, because we saw the opportunity if you guys we have look to future products we have to maybe do that.

So, I think from a consumer perspective, our focus is looking to bring continue to bring differentiated products as I said, for example, that we are bringing a value chocolate bar to the marketplace, but it’s a very high quality chocolate right.

So we believe that while it’s going to be priced in the value category, it’s going to differentiate itself.

And taking an approach like that and we are looking to future products right as I said having harder carbon extraction puts us in a position to in the future bring differentiated products beyond simply distillate vape pens to the marketplace and I think companies have to be thinking that way for the future..

Great, that’s really helpful. And then of course you know me, I will ask for an update on the partnership with Hyasynth.

So, how are those plans towards manufacturing and formulation of cannabinoids by Hyasynth, particularly given the real shift towards kind of the 2.0?.

Yes. I mean, you would have to ask Kevin and the team at Hyasynth. I do know certainly they were because of the facility in the space they were temporarily shutdown completely for a number of months. They have returned to partial activity in the facility. So that has had an impact on them.

But I think we again as I mentioned before I think one of the key things is a shift in the future towards minor cannabinoids as we see the price of isolate and distillate community to be driven down. I think the real tremendous market opportunity is on minor cannabinoids through biosynthesis, so….

Great. Thanks so much. That’s all for me today..

Thanks..

And our final question today will come from the line of Doug Miehm from RBC Capital Markets. Your line is open..

Hey Doug, you maybe on mute if you are still there..

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