Earnings Call Transcript - OGI Q2 2023

Operator, Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings Second Quarter 2023 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. Thank you. Max Schwartz, you may begin your conference.

Max Schwartz, CEO

Good morning, and thank you for joining us today. As a reminder, this conference call is being recorded, and a replay will be available on Organigram’s website. Listeners should be aware that today’s call will include estimates and other forward-looking information, from which the Company’s actual results could differ. Please review the cautionary language in today’s press release on various factors, assumptions and risks that could cause our actual results to differ. Further, references will be made to certain non-IFRS measures during this call, including adjusted EBITDA, free cash flow and adjusted gross margin among others. These measures do not have any standardized meaning under IFRS and are intended to provide additional information and as such should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today’s earnings report for more information about these measures. Listeners should also be aware that the Company relies on reputable third-party providers when making certain statements relating to market share data. Unless otherwise indicated, all references to market data are sourced from Hifyre in combination with data from Weedcrawler, provincial boards, retailers and our internal sales figures. I will now introduce Beena Goldenberg, Chief Executive Officer of Organigram. Please go ahead, Ms. Goldenberg.

Beena Goldenberg, CEO

Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today’s call, we’ll discuss the results for the three months ended February 28, 2023 and the general business update. We continued to generate solid financial results from the second quarter of fiscal 2023. We achieved a 24% year-over-year net revenue increase. The quarter reflected the typical seasonality we have seen in previous years, where sales into provincial boards declined from December through March. We delivered record adjusted gross margin and our fifth consecutive quarter of positive adjusted EBITDA, while maintaining our number three market position among Canadian LPs. In Q2, we were number one in the milled flower segment, number three in gummies overall, number one in pure CBD gummies and had the number one hash brand nationally. I’d like to point out that the wins we’ve had in the hash segment are a great illustration of our core strength. We acquired Laurentian Organic in December 2021. We leveraged our in-house sales and marketing team to achieve national distribution for Tremblant Hash. We then expanded our presence in the segment by introducing Wô Lá and Holy Mountain pressed hash. Additionally, we innovated in the category with the launch of SHRED X Rip-Strip Hash, the first product of its kind in Canada. So, to sum it up, we identified the right acquisition, applied our CPG expertise to gain share in a new segment, and introduced a new product that created consumer excitement. Now, let’s talk about SHRED. It is a well-recognized cannabis brand in Canada with SKUs in the most popular market segments. SHRED milled flower holds the number one position in its category by a wide margin, and with three of those SKUs, Tropic Thunder, Funk Master and Gnarberry have been the top selling SKUs nationally for the six months ended February 28, 2023. SHRED products are now available in almost 90% of retail stores in the country, and the brand has generated $190 million in retail sales in the past 12 months. This is a brand platform that continues to deliver success. Looking at regional board data, we have the leading market share in the Maritimes, and we’re number one in milled flower, gummies, and hash. In Ontario, we were the number two LP. We were number one in milled flower and capsules, number one in hash, number three in gummies. We are also very pleased with our growth in Quebec where we have held a strong number three position. This is partly from the addition of Laurentian’s products, but also due to significantly increased sales of our overall portfolio. Based on the data from Weedcrawler, we have the number one hash SKU, and we’re number one in milled flower. Our strong position in the market and our continued success comes from our focus on creating innovative products that excite consumers as their tastes evolve. In Q2, we introduced 18 new SKUs, including eight new Holy Mountain SKUs. As I mentioned, we launched SHRED X Rip-Strip Hash at the end of Q2, and the response has been extremely strong. It is an exciting new hash format that addresses many pain points consumers report when using hash products, and opens the hash segment to new consumers. The hash is formatted in 10 pre-cut strips that can be used to make your own infused pre-roll and offered in Tropic Thunder and Blueberry Blaster flavor profiles. Our patent pending Edison JOLTS continued to lead in the ingestible extracts category with 85% growth in sales compared to Q2 of fiscal 2022. On March 13th, we announced that Health Canada determined that Jolts lozenges in the 100 milligram THC per package format were improperly classified as an extract rather than an edible. Health Canada has allowed us to continue to sell and distribute our inventory of JOLTS until May 31st. Now, Organigram launched JOLTS in 2021, following significant research, development, and regulatory work. We remain of the view that the patent pending JOLTS are properly classified as cannabis extracts and compliant with cannabis regulations. We have filed an application with the Federal Court of Canada seeking judicial review of Health Canada’s determination. As court proceedings can take some time, we intend to file a motion for a stay, seeking to satisfy the decision in the interim. In terms of production at Moncton, we are achieving scale benefits from the completion of the 4C expansion. We continued to implement environmental and technology improvements designed to increase both yields and cultivar quality. Also, new cultivars, including several developed by our plant science team, are being screened with a view to be added to our portfolio. Finally, CO2 extraction has been optimized to generate higher yields. In Winnipeg, we continued to increase our capacity to meet the high consumer demand for Monjour as of February 2023, the facility produced an average of 3.1 million gummies per month. We also continued to see solid productivity on the packaging line with 35,000 to 40,000 pouches per day being produced. Construction is complete at Lac-Supérieur. And while we expect the greenhouse to come online in summer, we have moved our hash production into the new facility. In February, we commissioned an ultrasonic blade with a capacity of 150 units per minute and automatic labeling equipment to help us meet the demand for our new SHRED X Rip-Strip Hash. The vape category is an area focus for our product development collaboration with British American Tobacco. This includes analysis of vape volume, particle size and pressure. This will help us assess the quality of different devices. In parallel with this, we are conducting a quantitative sensory analysis with our in-house expert trained panel of over 200 individuals. This research will serve as a foundation for future development activities, including consumer safety, product quality, and performance. Further, these insights are expected to enable Organigram to capitalize on the new vapor heating technology garnered from our $4 million investment in Green Tank Technologies, a leader in vape hardware and technology. This investment, which took place after quarter end, is reflective of our commitment to grow in the vape category. We believe Greentank’s technology is the first true innovation in vaporization in almost a decade. It solves many of the clogging and performance issues associated with vapes and may also increase the perceived potency per puff. We have obtained exclusivity for this new technology in Canada for 18 months after it is introduced to the Ontario market and expect to launch this improved 510 format product by the end of our fiscal year. Moving on to international sales. In Q2, we delivered a record $10.7 million of dried flower to Israel and Australia. For the first six months of fiscal 2023, our international sales have reached $16.6 million, exceeding the $15.4 million of sales in the full year of fiscal 2022. The significant international sales in the quarter reflected the introduction of several new SKUs in Australia and Israel. Going forward, we expect international revenue to normalize to the level seen in the past two quarters. Now, before I turn the presentation over to Derrick, I’d like to comment on the continued pricing pressure we are seeing in the market. While many producers have discussed not wanting to participate in a race to the bottom, we are seeing the opposite in the market. Large format, 28-gram offerings with a sub $100 retail price point increased by almost 300% over the past six months. Large format pricing in some markets has reached the point that, considering the cost of production and the excise tax burden, the products are being sold at a loss. This is not sustainable and hurts the cannabis industry. While our low cost structure allows us to compete at these reduced prices, we have not matched the aggressiveness of our competitors and have seen some market share erosion in our large format flower. At Organigram, we are focused on delivering value to all stakeholders. We are confident that our branding and marketing expertise, proven track record of innovation and operational efficiency will provide long-term success and leadership in the cannabis industry. This is supported by our strong balance sheet, which allows us to continue to evaluate investment opportunities that increase our competitive advantage. Over to you, Derrick.

Derrick West, CFO

Thanks, Beena. As Beena mentioned, in the second quarter of fiscal 2023, we benefited from the increased efficiency and scale we created in fiscal ‘22 and Q1 of ‘23, supported by strong international sales and product introductions. In fiscal Q2, gross revenue increased 20%, while net revenue increased 24% compared to Q2 fiscal ‘22. The increase over the previous year was primarily due to increased adult-use recreational and international sales. As Beena mentioned, price compression across the market did have an impact in the quarter. The cost of sales in Q2 fiscal ‘23 was $29.6 million compared to $24.9 million in Q2 of the prior year, an increase of 19%, which is 5% lower than the gross to net revenues. The increase in the cost of sales on a year-over-year basis was due to higher recreational and international sales volumes for the same period. A $2.5 million net realizable value provision from saleable inventory is included in the Q2 ‘23 cost of sales figures. We harvested approximately 21,000 kilos of flowers during Q2 fiscal ‘23 compared to about 10,000 kilos in Q2 fiscal ‘22, which represents an increase of 110%. In Q2, the harvest continued to benefit from the increased annual capacity at the Moncton growing facility. We expect similar harvest levels to continue through fiscal ‘23, which positions us well to meet Canadian and international sales demand. On an adjusted basis, Q2 gross margin was $13.4 million or 34% of net revenue over the $8.3 million or 26% in Q2 fiscal ‘22. Despite price compression in the market, this is our highest adjusted gross margin rate in the past three years. The significant improvement in adjusted gross margin was primarily due to the higher overall sales volumes, combined with a lower cost of production and increased international shipments. SG&A, excluding noncash share-based compensation, increased to $16.1 million in Q2 ‘23 from $14 million in Q2 ‘22. While there was a small increase to the total dollar spend, as a percentage of net revenue, SG&A expenses decreased to 41% from 44% in the previous year’s quarter. The increased dollar amounts over the prior year’s comparison period was primarily due to the following: the increased general, corporate and office expenses as a result of the Company’s growth, increased employee costs and ERP implementation costs. In the quarter, we achieved positive adjusted EBITDA of $5.6 million compared to $1.6 million in Q2 ‘22. Adjusted EBITDA for the first six months of fiscal ‘23 was $11.2 million, exceeding the $3.5 million realized for the full fiscal 2022 year. The primary drivers of this significant improvement in profitability were the higher volume of products sold, the lower per unit cost of production and increased international shipments, which collectively contributed to our increased gross margin. Q2 ‘23 was our fifth consecutive quarter of positive adjusted EBITDA. Based on our outlook for revenue, including international sales and improved efficiencies, primarily achieved through scale and automation, we expect this trend to continue. In the quarter, we had a net loss of $7.5 million compared to a net loss of $4 million in Q2 ‘22. The increase in net loss was primarily due to a lower gain in the fair value adjustment to derivative liabilities. From a statement of cash flows perspective, net cash used in operating activities was $19.7 million in Q2 ‘23 compared to $803,000 in the prior year period. The increase in cash used is primarily due to the increase in accounts receivable in the quarter due to increased sales, including significant international shipments during February. As well, there was a large decrease to payables at the end of February as the Company reduced their obligations in preparation for the Phase 1 ERP go-live, which was done on March 1st. Cash provided by investing activities in Q2 ‘23 was $11.7 million compared to cash used of $22.6 million in Q2 ‘22. The current quarter’s cash was provided from a $15 million redemption of GIC, net of $5.6 million in capital expenditures. In terms of our balance sheet, on February 28, 23, we had $72 million in unrestricted cash and short-term investments compared to $99 million as at August 31st. The decrease is primarily the result of capital expenditures of $14 million and an increase in net working capital assets of $6 million. With Organigram generating positive adjusted EBITDA, the stabilization of net working capital assets, combined with the completion of the fiscal ‘23 CapEx spend, we expect to generate positive free cash flow by the end of calendar 2023. This concludes my comments. I will now turn the call back to Beena.

Beena Goldenberg, CEO

Thanks, Derrick. As a leading pure-play cannabis company, we aren’t just looking for short-term wins. We’re invested in and advocating for the success of our industry for years to come. We have put in place industry-leading production facilities to achieve our goals and are committed to continuously improving our efficiency. We have brought CPG expertise to the industry and are committed to exciting consumers with novel products that build our brands. This focus and our financial discipline are expected to deliver solid results through the rest of the fiscal year. Thank you for joining us today. Operator, you may open the call for questions.

Operator, Operator

Your first question comes from Andrew Partheniou from Stifel GMP.

Andrew Partheniou, Analyst

Just wanted to talk a little bit about the rec channel and the pricing environment that you were talking about during the call. You mentioned that you’re not necessarily going to compete at these irrational price levels that you’re seeing on the value side. That has resulted in a little bit of market share loss and you’ve introduced some new products to try and compete a little bit differently in that market. But inventory seems to have increased this quarter as you expanded production. So, I’m just wondering what kind of inventory level do you think is adequate for the business? And how are you thinking about this, given it sounds like it may be challenging to drive volumes in the segment that’s responsible for a large majority of your sales in this irrational price environment?

Beena Goldenberg, CEO

We are currently comfortable with our inventory levels. Last year, we had difficulty meeting consumer demand and often found ourselves short on supply. We relied heavily on purchasing flower from other licensed producers to fulfill our commitments and had limited international sales. At this moment, we are monitoring our inventory closely and do not foresee production issues, as we believe we have enough to satisfy our demand for both recreational and international markets. We have built extra safety stock to enhance our customer service levels, addressing last year’s struggles with timely deliveries. While some focus on market share erosion based on revenue, it’s important to note we are selling more kilograms to maintain our position. Currently, there is a difference of about 1.5 market share points between our kilo sales and revenue. We need to prioritize volume to remain competitive, even if it means stepping back from less rational markets. Our Big Bag O’ Buds SKU continues to perform well at premium prices, and our new large-format flower under the Holy Mountain brand targets a specific consumer group. We will continue to compete in larger flower formats and introduce high-quality strains with higher THC content but will not engage in low-price competition as it is unsustainable. We've discussed with various boards the challenges posed by a lack of price floors in the market, noting that prices below $100 are difficult to maintain without adversely affecting consumer expectations. We recognize the need for industry standards and remain committed to long-term, responsible growth, even if it means accepting some short-term market share loss as we proceed.

Andrew Partheniou, Analyst

I'm interested in your gross margin outlook, international sales outlook, and operating cash flow. You achieved the best gross margin in three years and it seems you've adjusted your gross margin outlook higher for this fiscal year. You mentioned that international sales might normalize below what we experienced in Q2. Can you elaborate on this? What are the drivers behind the improved gross margin outlook for this fiscal year, and how does the negative operating cash flow before working capital fit in? Is there a possibility for that to improve in the next quarter?

Beena Goldenberg, CEO

So, let me maybe talk a little bit about international sales, and then I’ll turn it over to Derrick to respond to your gross margin question. So, just to be clear on international sales, as I mentioned earlier, last year, we were restricting our sales in international markets because we just didn’t have the flower input. With the completion of our 4C expansion, we were able to build our flower inventory that allowed us to do a certain amount of pipeline fill to Australia and Israel in this quarter with some new cultivars in the market. And so, that was a higher-than-expected growth in international sales. We do expect it to normalize back to the level of repeat purchases that we’re seeing in the last two quarters. So, this was really a pipeline impact on international sales after not being able to supply last year. But with that note, I’ll pass it over to Derrick to talk about gross margin.

Derrick West, CFO

Thank you, Beena. To address the question regarding the increase in our adjusted margin to 34% this quarter, it was aided by larger international shipments. Additionally, there are other contributing factors that helped us reach this margin, primarily the reduced cost of cultivation. This is due not only to the expansion of 4C but also to higher flower yields we achieved at the end of Q4 last year and in Q1 this year, which lowered overall cultivation costs and improved our flower margins across all product categories. However, it's important to consider that our margins moving forward will be influenced not just by the mix of product categories but also by the sales channels, whether recreational or international. We anticipate that our margin rate will vary somewhat from the Q2 figure we just reported, but we are confident in our guidance that we can maintain a gross margin rate above 30% for the remainder of this fiscal year despite price compression. This is due to a combination of lower operating costs and ongoing efforts around automation and process efficiency. Regarding our operating working capital, we experienced a negative adjustment that affected our operating cash flow this quarter. Some of this is reversible, while part of it is related to sales growth. In February, we saw an increase in receivables and a slight rise in inventory, but we don’t expect significant changes moving forward as we've been operating at a higher level for a couple of quarters. We also reduced our payables by over $13 million this quarter, which significantly impacted our cash position and cash flow working capital change. Part of this was due to the Phase 1 implementation of our new ERP system. We had to make early payments on payables by the end of February before our go-live on March 1, leading to an unusual adjustment that negatively impacted this quarter's operating cash flow. Some of this will normalize as we adjust our working capital assets and liabilities over the next few quarters.

Operator, Operator

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

Tamy Chen, Analyst

First question is I want to go back to your flower sales in the recreational market. It was quite a decline sequentially. Beena, I know you called out seasonality, but I guess I’m just surprised that it was such a large sequential decline. You also then mentioned some of the share erosion in large-format flower. So, I was wondering, can you help us understand, I guess, how much was seasonality, how much was that share erosion in large-format flowers?

Beena Goldenberg, CEO

Certainly. This is similar to what I discussed last year. This quarter typically shows the lowest sales each year due to seasonality, which complicates sequential growth measurements. We did experience year-over-year growth, which highlights our performance when excluding seasonal effects. We noticed a decline in large-format flower sales, and we chose not to pursue some low-margin sales. However, we are seeing strong growth in other categories that excite us, particularly higher-margin hash and gummies. We maintained robust sales of our JOLTS during the quarter. These are areas where we want to invest our efforts as they promise profitable growth rather than just increasing sales figures without profit. Our approach has been to focus on revenue generation that boosts gross margin and EBITDA, even if it means not pursuing high volume in certain categories. We opted not to chase lower volume sales, as that would have diluted our margins. This decision reflects how we aim to operate in this sector.

Tamy Chen, Analyst

And my follow-up is on a separate topic, the Greentank investment. Can you elaborate a little bit more on this all-in-one product or technology that they’ve got? So, is there nothing else like it in the market right now? I guess, it sounds like it’s something they’ve recently developed. Do you know that this is something consumers would want and would attribute a higher price point to? Thank you.

Beena Goldenberg, CEO

Certainly. Let me begin by stating that we believe Greentank technology is truly transformative in the vape industry. This new technology aims to resolve some of the common issues associated with vaping. To answer your question about the all-in-one product, we will initially launch a 510 option, as over 90% of the current vape market consists of 510 products. Our plan is to introduce a 510 offering equipped with this new technology, and later we will present the all-in-one model, which combines the battery and cartridge calibrated to optimally power the heating element. For now, our focus is on the 510 since that is where the market currently exists. The innovative feature of this new technology is that it replaces ceramic coils with a precision heating biocompatible material, which ensures that all the oil in contact with it is vaporized during each puff. This eliminates the issue of partially cooked oil found in older ceramic coils, which often leads to clogging, leaks, and undesired flavors. In our analysis of the vape market, particularly in mature regions like California, where vapes account for 29% of the category, and Canada at 17% (excluding Quebec), we see significant growth potential. We believe our technology addresses the prevalent pain points in the market. Additionally, we expect Greentank's technology to produce a higher quality vapor cloud, potentially enhancing potency per puff. Regarding our research efforts, we have conducted extensive testing in our R&D facilities and product development labs, with Greentank also performing their tests on the technology. We are enthusiastic about this development as it signifies a notable advancement in the 510 vape offerings that will help us distinguish our products in the market. We acknowledge that we are not yet fully developed in the vape segment compared to other competitors. However, we firmly believe that introducing differentiated products that consumers can readily recognize will set us apart and provide a solid foundation for expanding our presence in the vape market. Regarding margin, while our cartridges may be slightly more expensive than traditional options, we are a smaller player in this higher-margin sector, which presents a genuine opportunity for us to excel in the vape category.

Operator, Operator

Your next question comes from the line of Frederico Gomes from ATB Capital Markets.

Frederico Gomes, Analyst

My first question is on your revenue outlook. So, you guided for sequential growth in Q3. And obviously, as you mentioned in Q2, you had a large contribution from international, which you expect to normalize. So first, when you say normalize, what sort of level of repeat purchases are we talking about? And then second, I imagine that, because of that, most of the sales growth that you’re expecting is coming from the rec side. So, what’s the key driver here? Is it about timing of shipments, or are you regaining share this quarter? Can you talk a little bit about that?

Beena Goldenberg, CEO

Sure. First, let me address the question about international sales. When we refer to normalizing back to the last two quarters, if you examine our run rate for international sales in Q4 and Q1, that represents our normalized level. The additional sales in Q2 were primarily due to a pipeline of new SKUs entering our markets. This indicates the expected normalized level for international sales, which remains significantly higher year-over-year compared to Q3 of last year. We anticipate higher sales, but not at the level experienced in Q2 of this year. Regarding our sequential growth, we typically see an improvement in Q3 over Q2 each year, followed by another increase in Q4 over Q3. This trend is influenced by seasonality, with Q4 being our strongest quarter due to a notable increase in consumer consumption during the summer. Some of this sequential growth is a result of category dynamics and seasonality. However, we do foresee challenges with flower sales in the short term, although we have a robust innovation pipeline to boost our revenue in the latter half of the year. We are still ramping up Holy Mountain; we launched 18 SKUs this quarter, eight of which were associated with Holy Mountain. This brand introduction allows us to tap into a value offering with smaller formats rather than just the 28-gram large-format flower, expanding to 3.5-gram options. We're eager to increase distribution of this brand nationwide. We're also excited about our hash introduction SKUs and have a strong pipeline for pre-rolls, which have a significant growth rate in the summer months. We've invested in a high-speed pre-roll machine and new technology to enhance the efficiency of infused pre-rolls. Our innovation pipeline will introduce these items at the end of Q3 and into Q4. Additionally, we're planning to launch a new premium brand in the fourth quarter that will feature high-potency THC from hang-dried flowers. We've incorporated hang drying into our facility along with unique genetics and improved terpene profiles. We're enthusiastic about diversifying our portfolio with more premium brands while transitioning the Edison brand into a more mainstream market position, given its value to consumers. We also expect Lac-Supérieur products will contribute to this momentum. Overall, we have numerous innovations on the horizon, stronger entries into the flower segment with 3.5-gram and premium brands, and we are confident in our ability to succeed with these products.

Frederico Gomes, Analyst

My second question is about your balance sheet. You ended the quarter with $72 million in cash and no debt. However, you are also investing for growth for the rest of the year and have an ambitious CapEx plan. How should we view your cash balance? What is the minimum cash balance you are comfortable maintaining?

Derrick West, CFO

Yes, during the quarter, we experienced a significant decrease in our operating cash that caused our expected cash levels to drop slightly below normal. However, we anticipate a partial reversal, particularly due to a large accounts payable pay down. We are also in the midst of a substantial capital expenditure program this year. We expect to complete this program, which includes the expansion at Lac-Supérieur and automation across all facilities, by year-end. Consequently, we will end the year with a lower cash position compared to today because of this spending. Nevertheless, we forecast that our profitability metrics, along with the stabilization of working capital assets and completing our CapEx spending, will lead us to be not only cash flow positive but also free cash flow positive by the end of the calendar year. We anticipate a strong balance sheet by year-end, although it will not be as robust as it was at the beginning, as we expected due to our necessary investments in CapEx and net working capital to support business operations. We believe we will reach this goal by year-end with all three facilities operating at full capacity. While we are not providing specific guidance on a minimum cash balance, we are confident in our ability to manage cash flows without needing additional capital. Of course, we will always consider any available options, but at this point, we are not worried about our cash liquidity.

Operator, Operator

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

Aaron Grey, Analyst

I want to discuss the value segment a bit. I understand your reluctance to engage with lower prices. However, I’m curious if you’re beginning to notice any signs of stabilization. Do you think we are witnessing a sell-off of excess inventory for cash, or is this situation more indicative of structural issues in cultivation efficiencies given its duration? If it is a structural problem, how long do you think it could last? It's clear that sometimes sales occur below cost, so I'm interested in your thoughts on the longevity of this dynamic and what you’re observing regarding lower price offerings.

Beena Goldenberg, CEO

Certainly. I believe it's a mix of the factors you've mentioned. Regarding the low prices, we've observed 28 gram products priced at $70 in Alberta. When you apply the markup model and deduct the $28 excise tax, there's hardly any profit remaining. As you can guess, this situation is primarily driven by companies selling off either surplus inventory or stock they can't utilize, accepting any cash they can get. I don't see this as a long-term trend. It reflects a current challenge in the industry due to excess capacity. On a positive note, we're monitoring the market closely, and some licensed producers with significant market share are facing financial struggles that could intensify by year-end. We're optimistic that as companies undergo restructuring, removing cultivation from the market will improve the situation. Additionally, it's encouraging to see some competitors transition their cultivation facilities to grow vegetables or fruits. Canopy and Aurora have both reduced their cultivation. Furthermore, with the recent announced acquisition between Tilray and HEXO, they're also cutting back on HEXO's cultivation. I believe that as the Canadian market stabilizes, where cultivation levels align more closely with demand, we can expect changes in pricing behavior. We might deal with this scenario for another year as we see further reductions in cultivation capacity. However, I don't believe this situation is sustainable long-term, and I expect prices to eventually increase. It's promising that Ontario has set a pricing floor for large-format flower just below $100 per ounce, and it would be great to see improvement in Alberta as well. One of our competitors, reflecting on the past year, noted potential price increases. This is a positive indication, suggesting that as quality products are available, we should set prices that are attractive for consumers while still allowing companies to achieve reasonable margins. There are signs that the market will shift, but I anticipate we’ll experience this pricing pressure for perhaps another year until cultivation capacity stabilizes.

Aaron Grey, Analyst

I have a quick question about Edison JOLTS. I've noticed some nice growth there. Can you discuss the potential timing and options? If you don't achieve the classification you believe is appropriate, what other options do you have? Should we assume that it might be taken off the market until you get the results? I would appreciate any clarity regarding the pause in production mentioned in the press release and the possibility of resuming it based on our results and timing.

Beena Goldenberg, CEO

Yes. It’s a good question, and I’d love to be able to answer it. Listen, we fundamentally believe in the strength of our position on JOLTS. We believe they are properly classified as ingestible extracts. We really can’t comment further on what is a pending legal matter between Organigram and Health Canada. We hope that we’re able to achieve a stay, which will allow us to continue to sell our products while we go through this traditional review, but that is still something that is underway, and we don’t know the answer whether we can. So, that’s our approach right now. Love to be able to get this product back on the market. We’re still in the market until May 31st, but get it back into the market. We know and we have consumer research that shows that if consumers can’t buy this product in the legal market, they will turn to the illicit market. And we have expressed that concern to Health Canada as they claim concern over product health and safety. We’ve been on the market for 18 months. We don’t have any issues. And if people turn to illicit market, we know that that’s where the problem exists with product health and safety. So, it is our position that we believe we are in ingestible extract. We’d love to be back full time in the market for the balance of this year with our product. And we’re going to go through the motions because we just don’t feel like shutting it down when we feel strongly that we’re compliant is the right move. As a leader in the industry, this is a battle we feel is right to fight.

Operator, Operator

Your next question comes from the line of Michael Freeman from Raymond James.

Michael Freeman, Analyst

I wonder if you could provide an update on the production capacity levels at each of the facilities, Moncton, Lac-Supérieur and Winnipeg, perhaps percent of the total or sort of units per year basis?

Beena Goldenberg, CEO

Derrick, do you want to go with this one?

Derrick West, CFO

Sure. For the Moncton flower facility, a conservative estimate would put our production at 85,000 kilos of flower per year. Additionally, we will fully utilize the trim for our derivative products. At Lac-Supérieur, our capacity for hash is approximately 2 million units per year, based on the current shifts we have. The craft flower production there would be around 2,400 kilos. For Winnipeg, we measured gummies in units, but I don’t have that number readily available. I understand you were looking into that yesterday. Do you have that figure?

Beena Goldenberg, CEO

Our average monthly volume is 3.1 million gummies. To provide some context, this figure is based on operating approximately a 10-hour shift, five days a week. Therefore, there is a significant amount of excess capacity if we were to implement a second shift and operate seven days a week.

Michael Freeman, Analyst

I wonder if you could provide some insights on the available capacity in Winnipeg. Where do you see significant opportunities for increasing capacity in your other facilities?

Derrick West, CFO

I want to make a general point that we have made significant investments over the past year and this year to ensure our three facilities reach a certain capacity level that allows us to operate efficiently and sell our product. By the end of this fiscal year, we expect to have completed our spending to maximize that capacity. While there's always the option to run extra shifts, particularly in Lac-Supérieur and Winnipeg, which could help us adjust capacity, we believe that without major changes to our structure, we will be approaching the capacity of all three facilities this year.

Beena Goldenberg, CEO

Let me expand on what Derrick mentioned regarding automation. While we discuss capacity, the automation has enabled us to enhance our throughput in packaging, milling, and significantly in pre-roll operations. Therefore, we have increased capacity in these areas simply through the automation investments we've made.

Michael Freeman, Analyst

Now, looking at international sales, I wonder if you could give us, I guess, your most recent understanding of price fluctuations in Israel in particular. Wondering if you’ve seen any variations or compression in price in that market?

Beena Goldenberg, CEO

We’ve certainly seen commentary out of the market. There is price compression happening in Israel. From Organigram’s perspective, we offer a product that is viewed as premium in the market. It’s Canadian indoor grown and is distinct from what is available in the domestic market. Therefore, we haven’t experienced pressure on pricing from our end for international shipments. However, there is a domestic industry in Israel that is lowering the value segment, which is not where we are currently competing.

Operator, Operator

And there are no further questions at this time. Ms. Beena Goldenberg, I turn the call back over to you for some final closing remarks.

Beena Goldenberg, CEO

Perfect. Well, thank you, everybody, for joining us this morning for our call. We’re very excited about the results that we announced this morning. We’re happy with our improved gross margin, adjusted gross margin. We’re very happy reporting the fifth consecutive quarter of adjusted EBITDA, providing an outlook that we will grow Q3 over Q2 in terms of net revenue and still holding to our forecast on positive free cash flow by the end of the calendar year. So, we continue to navigate this challenging industry. We have some great products, some great brands, and we’re excited to continue to grow in this space. Thank you, and have a good day.

Operator, Operator

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