Good morning. My name is Jack, and I will be your operator today. At this time, I would like to welcome everyone to the OrganiGram Holdings Inc.'s Second Quarter Fiscal 2021 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 any 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 of Investor Relations. .

Thank you, Jack. 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, including adjusted EBITDA and adjusted gross margin.

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

gummies and chocolates. The largest subcategory is gummies or soft chews. With our acquisition of EIC, we can enter this market quickly backed by proven confectionery experience.

The EIC equipment is designed to produce craft and large scale nutraceutical-grade cannabis edibles, including pectin, gelatin, and sugar-free gummies, toffee and caramel with novel capabilities such as infusions, striping, and the possibility of using fruit purees.

Chocolates are the second most popular edible category and our Moncton facility houses our world-class chocolate production and packaging line. Concentrates are another subcategory of Rec 2.0 that have seen meaningful growth and appear to have a lot of upside when you look at the popularity of these products in the U.S.

We have plans for in-house hydrocarbon extraction for the production of concentrates and other unique products. Currently, we expect to begin commissioning of this equipment in Q4 fiscal 2021.

In the interim, we've continued to revitalize our product portfolio with 63 new SKUs launched since July 2020 and up to 31 more SKUs still to come in Q3 fiscal 2021. Ontario SKU rationalization mandate has not negatively impacted us today.

As a result of us revamping our portfolio, we were able to trade up some of our slower moving older products, and we're ready to replace them with new listings. I'll take a moment now to highlight some of our new key listings and launches.

As we discussed during last quarter's earnings call, we are very focused on revamping our higher margin Edison portfolio. After launching three new Edison Indica strains in late December 2020, we introduced these strains, Black Cherry Punch, ICC, and Slurricane in three packs of half gram pre-rolls.

We expect to launch more high THC strains under the Edison brand in Q3 2021. Edison was among the most search brands on the Ontario Cannabis Store website in November 2020, as well as January in February of this year.

Also, in late March, we introduced a new brand called Indi, one of Canada's only cannabis brands dedicated exclusively to indica cultivars. Skyway Kush is the first strain in the company’s Indi portfolio and currently offers THC in the range of 20% to 23%.

In the popular value segment, we leveraged our successful SHRED brand by launching Jar of Joints, a convenient jar of 14 x 0.5g pre-rolls in SHRED’s Tropic Thunder. SHRED has been the number one most search brand on the OCS website for the last five consecutive months.

In terms of Rec 2.0 products, we introduced milk chocolate Trailblazer SNAX bars, the third flavor to be added to the initial launches of mint and mocha flavors. We also plan to launch further Edison byte truffle products in the next few quarters after the success of our seasonal gingerbread offer in last fall.

We look forward to improving revenue from our vape portfolio with the launch of two new products with higher THC concentrations. These include an Edison + feather disposable vape pen at a very competitive price point, as well as a new 1 gram Edison cartridge for the 510 vaporizer, both products will be based on our popular Limelight strain.

These two additions will add to our portfolio, which already includes the value segment offering of Trailblazer Sparks, Flicker, and Glow 510-thread Torch cartridges in 0.5 gram and 1 gram formats, and the premium Edison + PAX ERA distillate cartridges. With last quarter's results, we indicate that we were scaling operations.

We've made good progress hiring more staff and ramping cultivation, which we expect will improve demand fulfillment and drive higher net revenue in Q3, as compared to Q2. We do caution that net revenue could be negatively impacted should we identify any positive COVID-19 cases in the future and need to take similar measures to Q2.

We essentially shut down the Moncton facility on two occasions in Q2 sending employees [home to isolate], as well Ontario announced its third state of emergency last week shuttering cannabis retail stores to foot traffic and limiting purchases to online shopping, click and collect, and local delivery, which could also impact Q3 revenue.

Beyond Q3, we're targeting first sales of soft chews in fiscal Q4, 2021 subject to certain progress including but not limited to the receipt and commissioning of certain equipment, the completion of QA documentation, the hiring of requisite staff, and obtaining listings for provincial boards.

Also, we expect to resume shipments to Candoc in Israel in the near-term. We're seeking good agricultural practice certification from the Control Union Medical Cannabis Standard to comply with Israel's updated standards for imported cannabis.

Subject to successful completion of required inspection likely to be conducted remotely, we anticipate being certified as early as the end of our fiscal third quarter.

Shipments to Candoc are expected to resume in fiscal Q4, 2021 contingent upon regulatory approval from Health Canada, including obtaining an export permit, and availability of the desired product mix. In terms of gross margins, we see the potential for significant upside here. We have identified a number of opportunities to improve levels over time.

We expect to gain economies of scale and efficiencies as we continue to scale up cultivation. There’s potential for greater contribution from higher margin products and formats, including new strains under the Edison and Indi brands.

International sales to Candoc, as well as for multipack pre-rolls and 1 gram vapes, which attract higher margins and singles and 0.5 gram vapes. We also continue to invest in automation to drive cost efficiencies and reduce our reliance on manual labor.

For example, our new pre-roll machine has been up and running since March consistently churning out 25 to 30 pre-rolls per minute over time, with the potential for further improvement. Over the last week alone, we've seen it consistently turning out 40 pre-rolls per minute.

And finally, we're looking at more cost efficient packaging as part of our packaging taskforce mandate. I'll now pass the call over to Derrick to go through the financials in more detail before I wrap it up..

Thanks, Greg. As I usually do, I will start with our financial position. Last week, we repaid our entire term loan balance of 58.5 million such that no amounts are owing under our credit agreement, and at the present time we intend to terminate the credit agreement and discharge to the related security.

The term loan repayment amounts to 2.7 million in annual interest savings. In terms of balance sheet liquidity, the company currently has 232 million in cash and short-term investments. Q2 2021 net cash used in operating activities of 10.4 million was similar to the 10.9 million used in Q2 2020.

The current quarter had a lower gross margin, but this was offset by nominal changes to working capital as compared to the cash outlay in the comparative period, which was largely due to scaling operations just ahead of Rec 2.0 launches. Turning to our results for Q2, net revenue declined to 14.6 million from 23.2 million in the prior year quarter.

This change was primarily due to a decrease in wholesale revenue, and a lower average net selling price impacting all product lines. It should also be noted that the higher wholesale revenues in the prior year's quarter were opportunistic in nature and largely consists of sales to a single licensed producer.

Net revenue from the Rec market decreased from Q2 2020 to do lower volumes as a result of the prior year quarter's being the first quarter for Rec 2.0 sales and a lower average selling price, as well as higher proportion of value products being sold in the current quarter.

As Greg mentioned, Q2 2021 net revenue was also impacted by temporary shutdowns of the facility and isolation of certain staff after the identification of positive COVID-19 cases. In total, we were unable to fulfill approximately 7 million of demand for our products in Q2 2021 due to various production and processing constraints.

As we have heard from other LPs recently, many of the provinces have been reducing their inventory levels to free up working capital. Alberta is one such example. This also had an impact on net revenue during the quarter.

Q2 2021 cost of sales increased to 31.1 million from 15.8 million in Q2 2020, primarily due to the current quarter’s higher inventory provisions, a higher cost of production and a charge related to unabsorbed fixed overheads as a result of lower production volumes in Q2 of 2021.

As we expected and indicated in our Q1 2021 disclosure, discharge declined sequentially from last quarter and is expected to decline further in Q3 2021 as we continue to ramp operations. We harvested 5,028 kilos of cannabis during the quarter, compared to 5,023 kilos in Q1 2021.

During Q1, we were using 40% of our growing rooms on average and during Q2 this was increased to an on average of 54%. As of the date of our MD&A we're currently using 69% of our grow rooms. Also encouragingly, during the quarter, we achieved higher plant yields and a meaningful sequential decrease in the cultivation cost per gram.

As a result of optimizing the density of plants per room and decreasing the time spent in vegetation, the average yield per plant increased. This lower cultivation cost during a quarter lowers the cost of inventory compared to earlier quarters, such that when this inventory is sold, this will positively impact gross margins.

Note that the overall level of Q3 adjusted gross margins compared to Q2 will also depend on other factors, including, but not limited to product category and brand sales mix.

Adjusted gross margin decreased to a negative 0.7 million, compared to a positive Q2, 2020 gross margin of 8.4 million, largely due to lower net revenue as described above and value segment offerings comprising a larger proportion of total revenue in Q2 2021.

Negative IFRS gross margin of 17.2 million declined from a positive gross margin of 11.3 million, largely due to lower net revenue and higher cost of sales as just described, as well as net non-cash fair value changes to biological assets and inventories sold and other charges in Q2 2021 versus positive changes in the prior year's quarter.

Q2 2021 SG&A, excluding non-cash share based compensation decreased to 11.1 million from 14 million in Q2 2020, largely due to higher professional and consulting fees in the prior year's quarter related to project specific work, including the launch of REC 2.0 products.

Q3 2021 SG&A is expected to be higher than Q2 2021 largely due to an increase in staffing related to the EIC and BAT transactions.

The net loss of 66.4 million or negative $0.29 per share on a diluted basis during the quarter, compared to a net loss of 6.8 million or negative $0.04 per share in the prior year quarter was primarily due to the current periods negative change of 37.7 million in the fair value of the derivative warrant liabilities and the negative gross margin.

That concludes my remarks. So, I'll pass the call back to Greg..

Thanks, Derrick. After a 13% decline from 2020 to February 2021, Rec retail sales rebounded in March, according to high fire data, a widely used digital retail platform that tracks and estimates National Retail sales. March recreational sales reached an all time high of 305 million and find an annualized run rate of 3.7 billion.

Retail stores continue to open with Ontario driving the growth and targeting 1,000 stores open in the province by the end of the summer. Since July, the store count in the provinces grew by 87% to just over 1,790 stores currently, driven by Ontario growing 468% to nearly 580 stores.

And in mid-February, Ontario announced it is authorizing 20 stores to 30 stores per week or up to 120 per months. Longer-term, the Brightfield Group estimates Canadian adult Rec sales closer to 8 billion by 2026. Other analysts have estimated as high as 10 billion by that timeframe.

This is expected to be driven by retail store footprint expansion and the introduction of new product formats. And there is room for more upside depending on regulatory amendments starting with the mandatory review of the Cannabis Act, which starts in October of this year.

In closing, we are laser focused on operational execution to drive top line growth and greater economies of scale and cost efficiencies. Our team has benefited from increased staffing and expects to leverage the experienced leadership technical capabilities and resources obtained via the recent BAT and EIC transactions.

And of course, we're investing in the future of innovative cannabis products for the long-term competitive advantage in the industry. We are doing all this against the backdrop of solid industry growth and one of the strongest balance sheets in the company's history. So, that concludes my prepared remarks.

Operator, if you'd like to go ahead and open up the line for questions..

Thank you. [Operator Instructions] Our first question comes from line of Andrew Partheniou with Stifel. Your line is open..

Hi, thanks for taking my questions. Maybe just to start off with, you know, you have a strong balance sheet, you guys recently announced the acquisition of EIC and strengthening your edibles offering.

You know, do you see any more whitespace in Canada? And, you know, if not, could you also provide a little bit of color on your international expansion strategy? Just trying to get a sense of, you know, what are your focus and priorities on deploying this cash?.

Yeah, Andrew, thanks. It’s Greg here. I'll take the question.

So, I mean, certainly, you know, as you saw and mentioned, our EIC acquisition was really about entering the category with the kind of, you know, an entry point with a proven operator that has potential to really, you know, scale up and prove the proven ability to produce very high quality products and get those to market, you know, in the near term.

I think when we look at other whitespace for us as an organization, I mentioned early in the call, you know, we're not playing in and participating in some of the concentrates areas or some of the more advanced products.

So certainly, you know, our hydrocarbon extraction equipment, which you know, has been delayed in terms of getting it, you know, fully operational due to some of the certification processes. But we do expect in Q4 to have that hydrocarbon extraction equipment up and running and being able to begin, you know production of those products.

So that's, again that’s a category we're not playing in today. You know, I think we as a company are very focused on continuing to drive and improve the quality of our flower in the facility. And as you can see from the recent launches, and if you look at, you know, the reviews online, there is improvements there.

You know, we still are contemplating how do we play in the ultra premium area, which is an area that we're not participating in, but we certainly are seeing, you know, the strength of our flower production and the new cultivars we're bringing to market continue to improve and drive kind of responses there.

So that may be one area we continue to look at is, you know, how do we continue to expand into that area? I think, on the international front, I mean, you know, we've been vocal before and open about the fact that, you know we continue to look at primarily the CBD market in the near-term, because that is a more larger, more addressable market, even with our collaboration and product development, collaboration with BAT, the initial focus on products is on CBD-based products because it's a large global addressable market, whether or not that's in the U.S.

or in Europe or elsewhere. You know, with THC markets, I mean, we've been exporting to Australia for a few years now, and we, you know, are working towards, you know, recertification to be able to export into Australia, which also has the potential to serve as an entry point through Candoc in Australia, into other markets.

So, you know, I think as we kind of work through that process it will give us an opportunity for continued and growth in the international sales market, potentially with that certification..

Thanks for the additional color.

And maybe just switching gears and talking about, you know, your outlook, you guys already mentioned, you know, next quarter revenues should be up versus this quarter, you know, absent any kind of COVID risks, you know, further shutdowns of your facility and things like that, is it possible to give any kind of indication as of magnitude of what you could expect? Maybe, you know, tying into the recent SKU launches, you know, and more SKU launches that you guys are planning to do in the quarter? You know, should we be thinking about, you know, Q3 returning to Q1 levels, or potentially Q4 levels? You know, any kind of further color would be very useful..

I guess, I’ll answer it by saying, I mean, you know, as you said, Andrew, and we do expect revenue to be higher in Q3 over Q2, you know, and there are a number of risk factors, which you outlined, some of them certainly COVID-related, and or even, you know, the state of emergency we've seen in Ontario, and the impact that could have, and we could see that roll into other provinces.

You know, I think it's – we're not in a position to give, you know, guidance on what that quarter is going to look like fulsomely.

But I think, you know, the key things for us is, as you said, you know, great response to our new genetics that we've seen, you know, we've got 31 new SKUs launching before the end of this quarter, you know, we have seen the market growth, kind of bouncing back at us, you know, in March, based on the [high fire] [ph] data.

And I think, you know, we've ramped up operations, I think our biggest challenge, you know, in Q2 was a combination of, you know not enough supply or not enough processing capacity to respond to the, you know, the response from the market. So, we did leave significant revenue on the table as Derrick outlined.

So, you know, ramping up production and ramping up, you know, cold processing staff and our packaging ability is one of the key aspects for us and I think, you know, I mentioned this slightly, we are focused on operational efficiency.

So, some of the key things that are really improving for us is, you know our packaging costs on a per unit basis for many of the products have gone down.

I mean, I've mentioned on our previous earnings call, for example, that you know with the automation and pre-roll equipment that we have, we went down from, you know 20 - 22 operators to five staff, kind of running that line, you know, with a consistent constant, you know output and things like that will help margin overall, but that also improves the top line because you're able to significantly increase the product availability for that market segment, which allowed us again to launch the, you know, the 14 Jar of Joints under the SHRED brand, which has been extremely well received..

Thanks for taking my questions. I'll get back in the queue..

Your next question comes from the line of David Kideckel with ATB Capital Markets. Your line is open..

Hi, good morning. Thanks for taking my questions. I just want to go back, Greg and team for a second with the 7 million in unfulfilled demand, just due to the COVID closures.

Just wondering if you could provide us any color with respect to what that demand was for, or for example, was it to 1.0 products, 2.0 products? And if 2.0, what product segment was that in? And also, what measures do you think you can take so as to prevent something like this again? Especially given you know, we're already a month and a half into Q3? Thanks..

Yeah, I mean, I can answer and say, I mean, it was predominantly 1.0 products in terms of, you know, so again, it was a combination of, you know, reduced staffing and/or the shutdowns because, you know, it wasn't just the, you know, the shutdown of the facility for a couple days.

In both instances, there were significant staff that had to self isolate for up to 14 days, right. So, but it was predominately 1.0 products. There were some 2.0 products in the demand there. You know, I think, for us, I would say, you know, we have put very strong and stringent measures in place.

And I think one of the key aspects of, you know, one of the cases, for example, was identified by us in our screening, right, and, you know, we're just that individual to be tested and went and got tested, and was pretty asymptomatic.

And I think, you know, again, we're working closely with the provincial government in New Brunswick, and our facility and collaborate, and you know, we immediately took it upon ourselves to do a thorough, deep cleaning the facility, and you know, testament to our staff to, you know, wasn't just, you know, cleaning sanitation staff that were part of that we had, you know, levels of management and a lot of volunteers, you know, helping out with that, that people said, you know, let's get this done as quickly as possible.

So then get reopened. So, preventing, you know going forward, we are very confident in our, you know, in our own activities, you know, we certainly have no reason to believe nor does the province have any reason to believe these case were linked to the facility.

They just happened to be individuals that work there and more than likely contracted COVID out in the marketplace..

Okay, thanks. That's very helpful. Thanks again, for the color. Moving along here as well, I think, Greg, you mentioned in your prepared remarks with your early investment into Hyasynth, the biosynthesis play here.

I'm just wondering, especially with the investment now from BAT, are you able to provide any sort of general color with respect to what products or category of products you expect biosynthesis to play in OrganiGram, and any indication of timing, when that can occur, especially just given to Derrick remarks with net selling price going down even further this quarter? Thank you..

Yeah. David it’s a good question. And I know you spent a lot of time about and this is I think when, you know, when we look at that market, potential in the segmentation, I mean, you have to look at it at two ways as we've outlined before.

There's major cannabinoids production and doing that a large scale for, you know CBD or THC or you know, different versions of those two major cannabinoids. You know, I think that, as well as the potential for minor cannabinoids is a key driver in our investment.

You know, when certainly was one of the reasons that BAT, one of the many reasons that bat was excited and interested in, you know, this collaboration agreement was that we are one of only two cannabis companies to really be at the forefront of investing there.

And I think, you know, when we look at the novel minor cannabinoids, I think that is the one where, you know, future products where you can bring those novel cannabinoids, you know intra product mixes for both, you know, medical and recreational use, I think is going to be the exciting part.

So, you know, and again, when we talked about the collaboration and under the COE, you know, a big part of that collaboration is product development, and then making sure that those products are tested at a very high level and to a high standard, and I think that's going to be important.

So, I mean, you'd have to speak to highest interaction directly to get an, you know, an indication of kind of their timing and plans, but we're certainly, you know, optimistic in the future that we'll see both, you know potential for major cannabinoids, but more importantly minor cannabinoids that could be utilized in some of these products..

Okay, that's very helpful. Congrats again on the quarter. I'll hop back in the queue. Thanks..

Your next question comes from a line of Tamy Chen with BMO. Your line is open..

Good morning. Thanks for the question. First is, I wanted to go back to on the production side, so, you know, Greg, you've talked about this a number of quarters ago where the company has been doing a pivot to change what you've been growing. So, it's more in line with consumer demand.

So, I'm just wondering first, where the company is at with respect to climbing up the learning curve of these new strains, because we're, you know, we're sort of continuing to see inventory provisions, I think there was last quarter, and now there's additional this quarter.

So I’m just trying to understand like, is that a result of, you're still going up the learning curve of these new strains? And you know, will these write downs continue?.

Yeah maybe I’ll – thanks Tamy for the question. I'll start off and then maybe turn to Derrick to answer part of the question. But so, you know, the majority of the inventory provisions were related to, you know, when you think on a product side, were related to, you know, extract and/or extractable material, right.

We've got sufficient inventory of extract that carries. So for a significant amount of time going forward, based on that demand on 2.0 products at this point, you know, although, again, with hydrocarbon will produce uniquely new products in the future.

And there were certainly packaging and even some, you know, some vape hardware that was part of those provisions.

So, you know, certainly always including provisions, discounts that are taken, you know, with the provincial boards, if something's a slow moving skew, and one of things I outlined in our prepared remarks was that, you know, we've been very, you know, very active in working with the provincial boards to ensure we don't get into return situation, you know, looking to a, you know, reduce the skew average selling price, if it's not moving, or, and then more importantly, for us transition and flip that skew to a newer product.

So, and the last element of it is the, you know, there is some R&D work that happens. So, certainly, you know, as part of the growing process, you're going, you know, to get to three star strains or five star strains, you're producing, you know, 15 or 20. So, you do have some losses, that's not a significant number.

But, you know, I think, very optimistic with what we're seeing, and very good numbers in terms of a, what we're seeing from a production capacity perspective. You know, as Derrick indicated, when you look at where we were two quarters ago, you know, we were only producing kind of on average in about 40% of our rooms. We're now you know, at 67%.

So, we've increased production capacity significantly. And we are seeing no question, you know, better yields, better THC numbers coming out. So, we expect to see good progress. Derrick, I don't know if you want to add any color to that..

I guess the only thing I would add to what Greg has outlined would be that, when we look at our overall carrying value of inventory, we have to take a look at each [indiscernible] and forecast out and utilize, you know, the latest pricing in the marketplace as well, which and that considers the markets pivot more towards value from mainstream pricing.

And when you apply some of that lowered pricing against the existing carrying value of the inventories that are valued at fair value, it does end up with a non-cash carrying value adjustment that's required.

And that's also embedded into the numbers that negatively impacted the quarter, which would be the only item in addition to what Greg has already outlined..

Okay, thanks.

And my follow up is, I'm wondering if you could talk a bit about the – your different brands in flower, primarily between Edison and SHRED, are you seeing over the last [little bit] and now? Are you seeing more velocity more demand on the value side? So, you're SHRED products or are you seeing some more relative velocity and more traction on more mass to mass premium products like your Edison brand? Thank you..

Tim, it's a good question. I think, so certainly, you know, one of our challenges. I mean, you know, SHRED has been an extremely successful launch for us, as I indicated, you know, number one searched product, or brand on the OCS website for five months in a row. So, the demand is there.

We have not been able to fulfill the demand for it, because of the demand being so much higher than we had expected. Although, again, we did launch the SHRED Jar of Joints as a way to kind of supplement that as well. So, it's, you know, certainly demand is very high there.

I don't know what the cap on the demand is because we're not – we have not been able to consistently supply that historically. On Edison, you know that is where, you know we're continuing to improve and increase our product mix. You know, with the new, you know, the three new indica’s I mentioned earlier and getting new products to market.

We've got another three new products coming, you know coming up in the quarter in terms of new strains. And I think, you know, we are seeing, again it's, when you get the product out in market, there is good demand.

So for example, one of our strains in that mix is Black Cherry Punch, there's a few other companies that have Black Cherry Punches, but our Edison Black Cherry Punch outsells them from the data that I've seen. So, there is strong demand there.

And I think, you know, by launching recently, Indi, which is an Indica focus brand, it diversifies our brand portfolio a little bit in terms of, you know, specifically saying, going forward, this is going to be kind of an Indica brand.

And, you know, I think, again, our challenge has been, it's been, you know, an inability to fulfill, in part because of the production levels, you know, and what we are growing because, as you know, it takes, you know, it takes 12 weeks to 16 weeks of the growth cycle, and then, you know, another month to get product processed and out the door.

So when you make a decision to pivot, you know it doesn't have an immediate impact. So again, we are seeing continued demand.

And as I outlined, that means, you know, a big part of those [miss Pos] was simply, you know not having either the product or the ability to process it, but I mean, we've made big changes in our facility, on operational efficiency to really, you know, improve our packaging throughput, you know, where we are continuing to add, you know, in automation on some of the areas with, you know, with minimal investments to improving lives..

Got it. Thank you..

Your next question comes from the line and John Zamparo with CIBC. Your line is open..

Thanks. Good morning.

I wanted to ask about the recent EIC deal, and just would like to get a sense of what you think the reason is that edibles in the category is larger than it is currently? And assuming that part of the reason is regulatory restrictions on potency or quantity, however you want to describe it is, is there any reason you would expect Health Canada to liberalize regulations on edibles as part of the upcoming mandatory review?.

Yeah, John, it's a good question. I think, you know, initially or for certainly a part of the, you know, since 2.0 has been launched, it feels like, you know, part of the, you know, the lower revenue versus a comparative state data. You know, but certainly, and so, but that's caught up.

I mean, certainly, there is a good supply and a good brand and makes our products, I think, again, still, like any category, there's a different quality of products there. And consumers make choice over time.

And, you know, it's one of the reasons we're very excited about EIC is, you know we are confident in the quality of the product they're going to produce and be able to produce it at a very low cost based on, kind of, you know, the equipment they have and the proven history of manufacturing. But to your point, how do we, you know, if U.S.

data is 12% to 15%, and Canadian data is just over 4%, how do we improve that? I think, you know, one of the key drivers has to be, you know, this change to get away from the 10 milligram maximum per package.

You know, I think in the marketplace, you know, one of the important things is going to be as well as is you know, better differentiation between the products right, many of the products that we've seen to date are very similar, you know, in terms of the quality and the experience for consumers has to, you know, has to continue to evolve and you know, if you go into a Canadian retail store versus, you know, a U.S.

dispensary, the diversity of products is extremely different there. So, I think it is a combination of the packaging limitation, I think it's combination of, you know, the kind of limited scope of some of the products, many of them are kind of me-too type products.

And again, our investment in EIC is one where we believe it has potential to produce some very differentiated products based on the type of proven confectionery products. We've, you know, we've already seen test runs with the equipment to understand what the equipment can do and produce and it's a pretty diverse range of products.

So, we're excited about it..

Okay, that's helpful thanks.

And then my second question is on the margin side, and I just like to better understand the expectations for margin expansion, and certainly increased utilization seems like a positive driver, but if we think about SHRED being a bigger proportion of your flower revenues, and you're leaning more into 2.0, that category hasn't been the margin driver, some of the industry thought it would be in probably means more startup costs in the near term.

So, should we interpret the commentary on improved margins to be more likely as a longer-term development rather than something you will see over the next 12 months..

John, maybe I'll get Derrick to answer that question..

Yeah, I would say, generally that margins is a, you know, we expect to see gradual improvements over time with a long-term look. One of the things that did occur during the quarter is that we have lowered our production costs in terms of the dollar per gram to create the flower and flower is still the largest product category.

And most of those costs would then be into our inventory.

And so as we sell it, during Q3 that would, you know, as it relates to that component, by decreasing our current run rate of production costs, we will achieve a level of saving, but I would note that the amount of our mergers will be dependent on product categories and brand sales mix, and we are focused on continuing to ensure that we can place as much product as we can into higher margin areas.

And while we're also focused on improving our cost efficiencies at the facility so that we can continue to achieve lower cost metrics that we achieved in Q2..

Excellent. Thank you very much..

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

Hi, good morning. This is actually Madeleine Stone on for Rupesh. Thanks for taking our questions.

So just first, and from of the industry headwinds out there, so how long do you currently see some of these COVID-19 related industry headwinds lasting?.

Yeah, Madeleine it's a tough question to answer. I mean, certainly, you know, Canada is in the midst of a third wave right now. And certainly we're seeing, you know, Ontario, Quebec, Alberta, BC, Manitoba, in particular, being hit hard, and we're seeing kind of, you know, stay at home orders and restrictions.

So, you know, on one hand, though, we did see during the previous shutdown, I mean, cannabis is a, you know, cannabis stores have been allowed to remain open for, you know, curbside pickup and local delivery, you know, click and collect type.

And certainly, you know, it did blend we believe some of the sales and maybe shifted more sales to the online purchases, as well. But without that in-store experience, some consumers, you know, may have reduced their, you know, may have reduced their purchasing habits.

You know, at this point, as far as we know, for example, in Ontario, there's still more than three weeks to go in that existing state home order. You know, I think this is more of a more of a larger question.

I mean, Canada, is accelerating its vaccination programs, and was far behind, you know, many other parts of the world, but saw more recently is in a catch up.

So as that starts to improve, you know, we would expect at some point, you know, this summer, things to start to return to some level of normalcy, but I mean, the focus right now is just on blunting or reducing the current third wave that is hitting many parts of Canada..

Okay, great, that's helpful. And then just switching gears, the EIC acquisition, so how should we think about the near-term revenue opportunity for the business and then just anything else you can share for longer-term margin dynamics of acquisitions such as accretion or anything like that? That would be great..

Yeah. I mean, certainly, you know, we look at, you know, EIC it has two levels of manufacturing equipment. You know, one is more craft focus, and another is large scale production capacity.

And again, part of our rationale for, you know, this acquisition is that, we see that, versus what we've seen in the market to date with, you know, soft chews in particular, but other categories and confection that, you know, the amount of throughput and the automation that's there, you know is very high, so that, you know, definitely the ability to produce product at a low cost.

So, I think certainly, you're going to see some unique and interesting products come out of EIC, you know, hopefully in our Q4 this year.

You know, again, that is dependent upon licensing and commissioning of equipment and everything, but certainly, you know, we do expect them, you know to be strong in terms of, you know, what their cost of goods is going to be relative to the competition. The thing you can't control is the market dynamic in terms of where pricing is.

So, you know, we’re excited about EIC. It's why we made the investment. We certainly think that they're going to be able to do things that the majority of other companies cannot do from a costing basis and a consistency basis. So, you know, that should definitely be a big contributor to, you know how that product contribution looks like..

Okay, great. That's helpful. Thanks so much. I'll pass it on..

Your next question comes to the line of Aaron Grey with Alliance Global Partners. Your line is open..

Hi, good morning, and thanks for the question.

So quickly, I mean, just given the drop in the average price per gram, and the higher mix from SHRED that that was attributable to, I just want to know, if you had any kind of goal in terms of the mix value of your portfolio and what you expect it to be kind of going forward? Whether or not you look for that to be, you know, more in line with the industry, you know, below the industry, because you did speak to, you know demand for SHRED still remaining very high.

So, just curious as to how that plays into your own cultivation plans and thinking about flower coming out in the next few months, because you've also mentioned, kind of the desire for a more high THC Edison products becoming out too? Thanks..

Yeah, I mean, our goal, Aaron, and thanks for the question, is very much to continue to drive more, you know, higher THC product higher, you know, differentiated product in terms of, you know, new and interesting strains, or kind of star strains that have had good response in the marketplace.

And, you know, SHRED was really created as a way, you know, there was a whitespace there, and certainly, in terms of the marketplace where, you know, we had seen some blends in the past, but they weren't curated and we look at SHRED being kind of curated were a unique mix of a couple of two strains to get up with a premium flavor profile.

And again, the demand is very, very high and strong. Ultimately, we, our production, you know, is shifting more and more to the higher THC and higher margin products with Edison, as Derrick alluded to earlier. And I think, you know, it's important for us because, you know, there is strong market demand there.

There is strong demand, not only in Canada, but you know, internationally, and even the B2B in Canada, because, you know, we've seen it recently, for example, you know, with the announced acquisition of, you know, supreme by canopy where, you know, canopy in the past has shuttered, you know, numerous facilities.

So, they're not, you know, my assumption, certainly as the purchase wasn't based on cultivation capacity, it was based on improved, higher quality product in terms of, you know, how product is perceived.

And I think we have the, you know, we have the advantage with our Moncton facility and the way it's designed to continue to kind of drive and improve the quality of what we're producing.

You know, whereas, as we've seen, I guess, at least in this one case, where companies had to go out and do an acquisition to backfill some of their own production capacity..

Okay, great. Thanks. That's helpful. And the second one for me is just on the expected return of shipments to Candoc, I think expected in the fourth quarter of the fiscal year.

Just want to get your take on, kind of how to expect sales for that, they're actually still expect to be lumpy on a quarter-to-quarter basis, perhaps? Or how should we kind of look at the growth of those sales internationally? Thanks..

Yeah. Aaron, it's still tough to predict. I mean, certainly of the initial shipment that we made to Israel, two of the three strains sold out within a matter of weeks, very quickly. So very good response and they were ready to purchase, you know, certainly make additional purchases pretty quickly after those first shipments went out.

So, but understanding there's a process with, you know, import permits from Israel and export permits being issued by Health Canada, but, you know, the demand is there. And certainly, you know, it's first of all getting through with CUMCS, the GAP Certification Process, so that we're able to begin importing to Israel again.

And then, you know, again, getting through the process, you know, for every shipment, because you have to kind of go through with each shipment.

But, you know, we certainly expect to return, you know, at this point by the end of Q4 to shipping again, based on product availability to shipping there, and it's going to depend on the, you know, the market response has been very strong to our products in Israel, and I think, you know, Candoc is very excited to get our products back in inventory.

We're not the only supplier, but we are the only indoor supplier for them. And they've certainly noted that that's a big differential in quality in the market in terms of the consumer response..

Okay, great. Thanks..

Your next question comes from the line of Graeme Kindler with Eight Capital. Your line is open..

Hi, good morning, and thank you for taking my question. Greg, I wanted to follow up on your comments earlier about M&A and there's been a number of your competitors turning to M&A to drive growth and consolidate market share.

I'm wondering if that's been a strategic consideration for OrganiGram, clearly as it's a very difficult landscape to drive incremental share in adult use, you know, impacted by both the competitor and provincial level, but, you know there's a lot of initiatives going on to rebound the product portfolio and cater to consumer needs.

But I'm wondering, you know, if the general consolidation of that market share is something where you see an opportunity to consolidate some share in the adult use market there? Thank you very much..

Yeah, Graeme, you know I think when we look at the marketplace, you know, again, it's been key for us is, you know, again, as I've talked about on the call, and previously is, you know, continue improve our quality and hitting, you know, the product specs and getting the product out the door, that the market demand is there.

I think, you know, one of the things we've done and to look to expand, you know, with a recent launch of India's to expand our own brands in-house, so that, you know, we can target a different consumer with that. You know, I think certainly we are always, you know open to looking at M&A.

And when we look at targets for ourselves, I mean, as you saw with EIC, you know we focus on two things.

One is, is there kind of innovation in technology or something unique that comes with it, or, you know, secondly, as in any consumer packaged goods area, you know, if, you know, co-acquiring brands, which we've seen, you know, canopy do with both their acquisitions recently has been more of a brand play.

You know, and I think that's something you need to be open to, are there strong brands out there, I think, you know, seven acres, you know, is a relatively strong brands. So that was an acquisition, that made sense, but there's not a lot of them out there which is the challenge, right, when you look at consolidation targets.

I mean, you know, there's a couple that could be of interest, but at this time, you know, they're not necessarily interested in discussions.

So, I think it's something you need to always be evaluating because, you know, if you can expand through innovation technology or acquire brands that really resonate with consumers, those are the two key things that, you know we focus on..

Okay, understood. Appreciate the color there.

Then as a follow-up with, based on your comments on brand, and creating the products that that consumer wants, when we think about the CBD market, which is going to be the focus of initial product launches with the BAT deal, you know that’s a highly competitive market where there's thousands of brands and regulations can make it difficult to get tier-1 shelf space when looking at the market on a global scale.

So, I'm wondering if the strategic plan to launch products in that market has any expectation of some sort of regulatory reform, or is this something that you think presents a bit of a challenge in the near-term, and it's more of a longer term opportunity there. Thank you..

Yeah, Graeme, it's a great question. I think both ourselves and BAT, I mean, our perspective and the reason that I've stated it repeatedly, the reason, you know, we're investing heavily in this center of excellence on the product development, is that we believe there are going to be new standards, right. You know, for example, if you look at the U.S.

market today, very limited regulations on CBD, right, there are limitations on what you can source the product from so has to be hemp with THC less than 0.3. And there are limitations on health claims that you can't make and the FDA has gone after people for making health claims, but beyond that, there's very little or no restrictions or oversight.

We do expect there to be a regulatory regime on CBD products in the future. And I think it's important that when you're developing CBD products, that you develop them to rigor, that the current products are not developed to, right. And I think that's one of the key aspects from an investment in our marketplaces.

You know, CBD is metabolized in [the liver]. So, it's not without, you know potential effects.

And so, I think it's important that, you know, through this collaboration and the way we operate that we, our goal is to set new standards, right and be at a level above, and I think that's where there's a, you know, a competitive advantage that, you know, we will have with the products that are developed through this collaboration is that they're going to go through more rigor and at a higher standard that competitors can meet.

And then, you know, it's not if, but when stricter regulations come into place, these products are, you know, meet the standards that are required, and it could put other companies and this, you know, very wide range of products are on market today into a difficult situation.

And that, you know that carries over to Canada when we expect new regulations are going to happen here. In Europe, there is movement towards some changes as well. So, I think it's important when you think globally in terms of CBD market about setting the standard and being a leader there..

Understood, appreciate the color. Thank you very much..

Our next question comes from the line of Rahul Sarugaser with Raymond James. Your line is open..

Good morning, Greg, Derrick. Thanks so much for taking our questions.

So, I'd like to focus on the BAT partnership, given organic ground strength in the edible segment of the markets and accompanying that doubling down on the segment with the acquisition of EIC, I guess there's a bit of asymmetry with BAT, which is probably fair to assume it's more [innovation focused], sort of ask whether the IP sharing deal would potentially benefit both sides, the edible and [inedible] format?.

Yeah, so when, you know, again, we did disclose in our announcement, you know, that the focus of the product types is both on vapor and oral, and oral is a pretty broad category. [Whole] it, you know, it doesn't, it's not just, you know, it could be again, I'm not, I can't, I'm not in a position to disclose all the products specifically.

But you know, you think of oral consumption, whether that's edible or a tincture or it's an oral mucosal, oral buccal form. So, there is a pretty comprehensive list of potential products there. So both parties, including, you know, we did contribute intellectual property into, you know, into this as well.

So, it's kind of a pretty broad product development agreement..

Terrific, thanks very much.

And so, you know, further to the BAT, and their channel, will there be any opportunity for, again, to leverage BAT distribution, particularly massive international channels, as you begin to broaden your footprint outside of Canada, also, given, given the other partnerships that we see in the space do leverage the distribution networks of their partners?.

Yeah, so at this point the collaboration does not contemplate that necessarily, each party is, you know, we, both ourselves and BAT are having the ability to commercialize and launch all of or any of the products that are developed through the collaboration under our own brands in any markets.

They can be even sub licensed to some degree with some restrictions in those markets. So, you know, at this point, that's not what the collaboration is focused on. It's really focused on the product development side of things..

Terrific. Thanks very much. I'll get back in the queue..

Thanks Rahul..

Your next question comes from the line of Douglas Miehm with RBC Capital Markets. Your line is open..

Yeah. Good morning, Greg. Quick question with respect to the strategy, you know, going more up market, better streams and those sorts of things. We're hearing the same thing from almost every single company out there.

Can you tell us how you're going to be able to differentiate yourself, and if you think there's going to be any pricing pressure as people all start to move in that direction? And it's not so much that this market is going to change overnight, but it seems that within the next quarter or two people are going to have multiple strains available in this marketplace.

.

Yeah Doug, you know, it's a good question. And, again, I would point to the canopy acquisition of Supreme, right, where, you know, companies are focusing on it. They're looking to do it, but they may not, with their in-house capabilities be able to do it.

I mean, you know, if we look at, you know, some of our peers who have closed facilities, the reason they've closed those facilities is they were not, you know, either cost efficient or more importantly, they weren't capable of producing, kind of products in that range, right. So, I think that's the advantage, you know, of our facility.

And, again, a key part of it's not just the facility, it's the staff and the people, we have overseeing things, but it's also been the genetic acquisition, right. I mean, getting access with once, kind of, you know, the nursery programs were open these licenses has allowed us to really obtain a very deep bank of genetics.

And, and also bring back some of the genetics we had in our own reserve to market and work on the conditions for them. So, while a lot of companies might be indicating they're moving in that direction, you know, we have not seen that from some companies as of yet.

And I think, you know, again, we're, certainly optimistic based on the data we're seeing right now in the products were growing, and what's coming off harvest that we have moved the products up into those categories. So, you know, people are talking about it, but I'm not sure everyone's able to execute on it..

Okay, that's fine.

And then with respect to the 7 million, and maybe you answered this already, but what was the breakdown? Was it primarily SHRED or what did you miss out specifically?.

Yeah, we wouldn't give a full breakdown on it. But I mean, certainly, you know, you could imagine that value products because they have made up a significant portion of our revenue was a significant part of it, but it was also demand for Edison strains and new products and some of our 2.0 products as well.

So, it was a mix and you know, certainly, again, as I said it was a combination of what product was available, but also the processing and packaging capacity with some of the impacts we had from COVID staffing reductions..

Alright, thanks..

Great, thanks Doug..

Our next question comes from Matt Bottomley with Canaccord Genuity. Your line is open..

Good morning, all. I just wanted to go back to that 7 million that Doug was just talking about.

With respect to, I guess relationships with the provinces and the ability to carve out additional market share in these various skews? Are there any near term implications for not being able to fill certain orders as I know, there's a, you know, very strict, you know, fulfillment policy that many of the provinces, particularly Ontario have, so just any color on how that may or may not impact relationships with these buyers?.

Yeah. So, I think, you know, first of all, I'd start off and answer the question Matt that, you know, we and our sales team have very strong relationships with the provincial boards.

And I think when we talk about, you know, missed opportunities here, you know, certainly, and what you're alluding to is, you know, Ontario and Alberta in particular, that have and Ontario is implementing very strict kind of guidelines, in terms of listings is, you know, you've got to manage that relationship and manage against future.

So, you know, the way that it works in a couple provinces is, you know, you kind of get a [rolling PO] within a window, and you have to fulfill within the timeline. So, when we talked about missing it, you know, part of that miss happened in the quarter, part of it would have rolled into the next quarter, right.

So, you know, it's not necessarily but again, it was issued, and was, we could have fulfilled it in the quarter if we'd had the product available at that time.

So, I think, you know, we're not concerned at this point, I think we've done an excellent job, our sales team of transitioning out, you know, slower selling skews for new listings and new skews.

And I think that's critical, but again, as you say, it's going to be even more important going forward with the fulfillment demands that you focus on what your core listing are, and make sure that you're hitting those numbers, right. So, it is a shift for the industry, it's a shift for the company.

And, you know, to be honest it may have a detrimental effect on, you know, across the industry on some of the other provinces as people are rushing to fulfill Ontario, because of penalties that are there not that other provinces don't also have that kind of commitment levels.

But, you know, just one thing in general trend in the industry to be cognizant of..

Great, that's helpful. And then just one more question for me on sort of market share. And just tying back to some of your comments, you mentioned that the, I guess pool of brands to be purchased, like a supreme or like something else you’ve seen isn't as deep where, you know, there'd be sort of mass M&A expected in the near term just for brands.

So, if you kind of look at where your market share is today, and how much growth is left in the sector, which is still quite a bit, but we are, like you said, I think 3 billion plus on a run rate.

What's the best way to, in your view to gain that incremental share, if not through M&A? You know, obviously, you guys are focused a lot on the edibles and chews, and maybe that's an undersized proportion of the market today versus where it is at maturity.

But just any color that ex M&A, you know how market share can be gained, in your view in the coming, you know, months and quarters?.

Yeah, I think it stems down to three key things. One is, you know, continue to focus on improving the quality in new product offerings that you have, right, just in terms of what the consumer demand is. I mean, you can spend five minutes on Reddit and see what the comments people are making on product reviews.

And they're consistently regardless if it's flower or a pre-roll or an edible, it's about quality. So companies, you know, and we're very much focused on improving that quality. I think the second is diversifying your own in-house brands.

As I said, recently, we launched you know, Indi, and, you know, we have a select target group of consumers that that products targeted for, you know, SHRED was a new launch for us.

And I think as you continue to look at how do you diversify, and really do more targeted segmentation for consumers, and so far, you know, again, with those product launches we've seen good response. And so that's another way to grow organically.

And I think the third is still and I mentioned this a few times is just innovation, right? Bringing new innovative products, you know, we're very excited, you know about the EIC acquisition in terms of some of the products in the product quality and we can bring to the market because as I said, what you see today in the soft chews for example is, majority of the products are quite similar.

And we're, you know, we're excited about bringing, you know, some unique and innovative products to market through EIC and then the more mid-term, you know, products through the collaboration with BAT and that's going to be important as the market evolves..

Right. Thank you Greg..

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..