Earnings Call Transcript - OGI Q4 2020

Operator, Operator

Good morning. My name is Michelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to OrganiGram Holdings Inc.'s Fourth Quarter Full-Year 2020 Earnings Conference Call. As a reminder, this conference call is being recorded, and a replay will be available on OrganiGram's website. At this time, I would like to introduce Amy Schwalm, Vice President, Investor Relations. Please go ahead.

Amy Schwalm, Vice President, Investor Relations

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

Greg Engel, CEO

Thanks, Amy. Good morning, and thank you for joining us today. This morning we reported our fourth quarter and full-year fiscal 2020 results for the period ended August 31. For the full year, gross revenue was $103.4 million; and we grew net revenue, which excludes our excise taxes to approximately $87 million. We're also very pleased to report positive adjusted EBITDA for the second year in a row. Most of our discussion today will be centered on our Q4 results as the first three quarters of the year have been addressed in past calls. Since we last spoke with you in July, our product portfolio has changed quite dramatically as we said it would. We've launched 40 new SKUs, including some novel products across a number of categories and segments, and there's still more to come. At the same time, this is all being against the backdrop of meaningful growth for the Canadian adult recreational market. It's been exciting to do this as we continue to plant the seeds for long-term growth in the challenges presented by the global pandemic. Our Q4 2020 net revenue grew 25% from the prior year period and 13% from Q3 2020. We had higher flower sales in Q4 2020 as the large format value segment continued to grow and our expanded offerings in this segment resonated well with consumers. And of course, recreational 2.0 sales contributed to our growth as a year ago the products were not yet legal. Lastly, we were extremely pleased to make our first shipment to Israel under our supply agreement with Canndoc, a leading Israeli medical cannabis producer. To date, this is OrganiGram's largest international deal, and we're Canndoc's exclusive supplier of indoor grown cannabis. As you may know, the Israeli Ministry of Health recently amended its quality standards for imported medical cannabis. Very encouragingly, we recently identified a plan to comply with these updated standards and believe that we can continue to supply the product into the Israeli market once it is successfully implemented. Q4 2020 gross revenue increased 32% versus the net revenue increase of 25% from the same period last year. Gross revenue better reflects the magnitude of sales volume shipments, especially since dried flower represents the largest category in cannabis by far. As average selling prices per gram had decreased in the industry, the percentage of excise tax of the gross sale price has increased significantly. Therefore, to achieve the same level of net revenue, more dried flower has to be sold as compared to last year. As we guided with last quarter's results, we did not expect significant growth in our adult-use recreational sales in Q4 due to the timing of our launches as part of a broad portfolio revitalization. Introducing 40 new SKUs since July has been extremely busy, particularly as the industry began growing at an accelerated pace. Coupling this with the fact that we had a leaner workforce, which not only reduced cultivation levels but also processing and packaging capacity, these factors contributed to certain launch delays and missed purchase order fulfillments in late Q4 and to some degree in Q1 too. In some ways, the number of our products were victims of their own success. With better-than-expected initial sales, we had stock-outs; Shred being one example. We are evaluating our processes and supply chain, including the benefit of gradually scaling up staffing to improve order fulfillment rates and realize more sales opportunities. We are progressing well through our portfolio revitalization, with up to 18 new SKUs expected in Q2 fiscal 2021, and remain committed to offering innovative products. We conduct proprietary consumer research to help us identify the attributes that cannabis consumers want most, and we're very encouraged by the initial reactions we're getting and early signs of success for many of our new products. I will take a moment to recap some of the more notable ones. Across recreational 1.0 and 2.0, dry flower remains the largest category in the Canadian adult-use recreational market, and we believe it will continue to dominate based on what we've seen in more mature markets in the U.S. There has been significant growth in the dried flower large format value segment, and competition has intensified. With the onset of the pandemic, value products in large format were increasingly the focus of consumers as many of them either were forced to or preferred to order online or take advantage of curbside pickup or delivery. Our first value offering in a large format originally entitled Trailer Park Buds, which is now simply known as Buds, launched in fiscal Q3, and we believe it doesn't just compete on price alone. It offers a product that is indoor grown, whole dried flower, and strain-specific. Our value segment strategy also includes dry flower offerings that were launched in larger format sizes of 7 grams and 15 grams under the Trailblazer brand. In mid-September, we expanded our value portfolio with the launch of Shred. This product continues to perform well for us, and we are seeing retail stores sell out where it is carried. It really resonates with consumers, and it is high quality, high potency dried flower that is pre-shredded for convenience at OrganiGram's most affordable price currently offered on a per gram basis, and it is made from whole flower. High potency THC continues to be a key attribute for consumers as well as cultivar diversity. In early August, we launched three new THC strains under the Edison Cannabis Company brand: The General, or under its street name, Grapefruit GG4, Chemdog, and a limited-time offering Samurai Spy, or its cultivar named Ninja Fruit. Going forward, we will consider using street generic names for many dry flower products to the extent we believe they will resonate even better with consumers. We are making investments in new genetics and improved cultivation processes to increase THC potency, and we'll introduce new strains into the highly important dried flower and pre-rolls category. In addition to recreational 1.0, we plan to expand our recreational 2.0 offerings, which we think will become a larger relative category, more in line with mature U.S. legal markets. At the end of July, we launched Trailblazer Snax, our cannabis-infused chocolate bar in mint and mocha flavors. With 10 milligrams of THC in every bar, each of the five sections of the bar are filled separately, which allows for a higher accuracy as an infusion and microdosing. Trailblazer Snax is our value segment chocolate offering and our second product type in the chocolate category after launching Edison Bytes in four SKUs earlier this year. In time for the holidays, we also announced the launch of a fifth Edison Bytes chocolate in the seasonal Gingerbread flavor for a limited time. These only came to market recently, but initial sales have been amongst the top sellers in their subcategories. In addition to the Gingerbread Bytes, we've also offered another limited-time seasonal product, Trailblazer Kushmas Stix, an affordable 0.5-gram pre-roll in a festive green box that is a perfect basket add-on or stocking stuffer just in time for the holiday season. Turning to our vape portfolio, we offer products for the value, mainstream, and premium segments of the market already with the Trailblazer Torch cartridges, Edison Plus Feather Disposable Pens, and PAX Era cartridges. Before the end of fiscal Q2, we expect to launch Trailblazer 510 Torch vape cartridges in a 1-gram format. This will extend our lineup to a suite of trial size at 0.5 gram and full-size 1 gram cartridges for the 510 vaporizer. Lastly, branding out our recreational 2.0 portfolio is our Edison RE:MIX dissolvable powder. This product just landed in some provincial retail stores, so we don't have an initial sales read yet. Our recent data in Colorado, for example, show cannabinoid-infused powders have quickly risen in popularity, comprising 55% of the state's beverage market. In fact, 46% of cannabis consumers reported enjoying cannabinoid-infused beverages multiple times a day, according to Headset data. In Canada, estimates suggest that the cannabis adult-use beverage market is a $467 million opportunity as it is expected to increase by 15-fold its current market size over the next 5 years as per the Brightfield Group. We also conducted a survey recently, which indicated a large majority of consumers would prefer to add cannabis to their drink rather than consume a pre-mixed cannabinoid-infused beverage. With traditional edibles, beverages and ingestible oil-based extracts, the body spends significant time breaking down fat-soluble cannabinoid particles before they can be absorbed and before effects are felt. Our R&D team developed a proprietary nanoemulsification technology that generates nano droplets, which are very small and uniform for Edison RE:MIX. We believe RE:MIX provides enhanced bioavailability, both improved speed of absorption and improved total absorption compared to traditional edibles and beverages, potentially allowing for a more reliable and controlled experience. The nano motion technology is also anticipated to have increased stability to temperature variations, mechanical disturbance, salinity, pH, and sweeteners. The powder formulation also offers the discretion, portability, and shelf life expected of a dried powder formulation. Before I pass the call over to Derrick, I do want to highlight a couple of recent achievements that occurred subsequent to quarter end. First, as announced in October, we invested an additional $2.5 million in Hyasynth Biologicals Inc., a cannabinoid biosynthesis company. Additional investment was tied to a successful completion of a milestone linked to the first commercial sale of CBDa. CBDa is a natural precursor to the naturally occurring form of CBD, which is converted to CBD in processing. The product was manufactured through the enzymatic conversion of a protein produced from genetically modified yeast, which is the process of biosynthesis. The additional investment brings our total investment in the biotech company to $7.5 million, representing a potential ownership interest of up to 46.5% on a fully diluted basis. We believe the biosynthesis process has some definite advantage over traditional cultivation, particularly as it relates to the feasible production of minor and rare cannabinoids and as an alternative path to producing pure major cannabinoids. So we are very excited to watch this space evolve and Hyasynth's progress in it. Also post-quarter end, we raised approximately $69 million in gross proceeds from an underwritten public offering, including the exercise of the over-allotment option. We opportunistically took advantage of a financing with strong institutional support that became available. We believe that de-leveraging our balance sheet puts us in a more agile position as the sector continues to see both growth, as well as capital markets volatility. This raise substantially strengthened our balance sheet, which Derrick will describe further. So I'll pass the call over to him now and then come back to wrap before we take your questions.

Derrick West, CFO

Thank you, Greg. I will start with our financial position. As Greg just mentioned, we recently closed an underwritten public offering of approximately 37.4 million units, including exercising the over-allotment option at a price of $1.85 per unit. We expect to use the net proceeds for working capital and other general corporate purposes, with the majority of it being used to pay down our term loan balance. The latter was agreed as part of an amendment and restatement of our credit facility, which we just completed on Friday and it's now available on SEDAR. On December 1st, tomorrow, we will use the proceeds from the offering to repay $55 million on our term loan to reduce the balance to $60 million from its current $115 million. After this term loan repayment is completed on December 1st, and excluding the $8 million restricted investment on a pro forma basis, we would have $80 million in cash and short-term investments and $60 million in long-term debt. Turning to our results for Q4. Gross revenue increased 32% to $25.4 million from $19.2 million in the same prior year period. Net revenue grew 25% to $20.4 million from $16.3 million in the same prior year. As Greg mentioned, higher flower sales, international sales, and recreational 2.0 revenue were among the largest contributors to this increase. We also recorded a lower sales provision for returns and price adjustments of $2.2 million than as compared to $3.7 million in Q4, as compared to Q4 2019 comparison period. Q4 2020 cost of sales was $29 million, which increased from $15.5 million in the same prior year quarter, primarily due to higher sales volumes at a non-cash inventory provision of $11.1 million for excess and unsalable inventory. Of the $11.1 million, $8.3 million related to excess trim and concentrate, and $2.8 million consisted of adjustments to net realizable value. As we indicated with last quarter results, we expect a negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs to persist as we plan to produce below full capacity for the foreseeable future. In Q4, these negative non-cash adjustments amounted to $3.5 million. Q4 2020's adjusted gross margin increased to $16.2 million from $1.5 million in Q4 2019 on higher sales and a lower sales provision for returns and pricing adjustments. The IFRS gross margin for Q4 2020 was negative $28.8 million compared to a negative gross margin of $11.1 million in the prior year period. The variance was largely related to higher non-cash provision and negative fair value changes to bio assets and inventories during Q4 2020. We continue to expect some production inefficiencies to persist, which will impact gross margins while we launch new products and optimize production. Our portfolio revamp is ongoing, and we expect to gain efficiencies when the product launch schedule normalizes. Q4 2020 SG&A of $10.8 million decreased 22% from Q4 2019's amount of $13.9 million and the current quarter's SG&A as a percentage of net revenue is 53% compared to 85% for Q4 2019. The Q4 2020 SG&A reflected our reduced spending during the ongoing COVID-19 pandemic and it was largely in line with the current year's Q3 SG&A of $10.3 million. As a percent of net revenues, the Q4 SG&A of 53% was a decline from Q3's 57% of net revenues. As in the past, management continues to closely monitor discretionary and below the gross margin expenditures. Q4 2020's adjusted EBITDA was a negative $2.7 million. This improved versus the negative adjusted EBITDA of $7.2 million for Q4 2019. This improvement was largely due to the current reporting period's improved adjusted gross margin. We recorded a net loss of $38.6 million or $0.199 per share on a diluted basis during Q4 2020, as compared to a net loss of $22.5 million or $0.144 per share in the same prior year period, primarily due to greater negative gross margin in Q4 2020. Q4 2020's net cash used in operating activities of $10.1 million was a decrease from the $15.7 million used during Q4 2019. This reduced cash outflow was largely due to the prior period's increased working capital assets as we had scaled operations ahead of recreational 2.0 legalization. That concludes my formal remarks. I will now turn the call back over to Greg.

Greg Engel, CEO

Thanks, Derrick. And I just want to clarify one comment Derrick had made. So the adjusted gross margin was $6.2 million, so just want to clarify that. So looking ahead, we remain positive on the prospects for the industry and OrganiGram. The annualized run rate of the Canadian adult-use recreational market was estimated to be a record $3.1 billion based on the most recent data available from Stats Canada for September 2020. This is an increase of approximately 109% from September 2019. There are a number of factors creating tailwinds to industry growth. A large factor is the much-anticipated increase in the number of retail stores in Canada. Since July, the store count in the provinces grew by 33% driven by Ontario's cannabis retail stores growing at 140%. Ontario is now on pace to add up to 40 stores per month and sits close to 250 stores right now. So you can see that there is material growth still expected. The legalization of recreational 2.0 is another big tailwind. Product forms in these categories are still being rolled out with new SKUs bringing enthusiasm to the legal market. Consumers are very much still in the exploratory stage and willing to experiment as a broader selection and new product forms such as our RE:MIX powder are made available. Outside of Canada, we continue to serve in international markets, including Israel and Australia, via export permits and look to expand sales channels internationally over time. I don't think I could end my remarks without acknowledging the recent significant political changes in the U.S. and the ballot initiatives for both medical and adult recreational cannabis use. These suggest the potential move to federally legalize THC may have stronger momentum, yet the outcome and timing remain difficult to predict. As we continue to monitor and develop a potential U.S. THC strategy, we look to evaluate CBD entry opportunities in the U.S., which we've been doing for quite some time. Our view is that it is better to measure twice and cut once and to continue to be selective on our opportunities we actively consider. We are focused on disciplined capital allocation. Fiscal 2020 was nothing short of an eventful year for us and the industry. We entered the vapes and edibles market with a broad and innovative suite of products and continue to launch new products. We signed our largest international deal to date with Canndoc in Israel. We invested additional funds into our biotech partner Hyasynth, as they made notable progress in cannabinoid biosynthesis work. Significant expansion CapEx related to our facility is behind us. We strengthened our balance sheet recently for greater financial flexibility and the ability to act on potential opportunities, always with a view to enhancing shareholder value. Our strong culture of cost management and prudent discretionary spending helped us report positive adjusted EBITDA for the second year in a row against the backdrop of accelerated industry growth as retail stores expand in Canada's largest recreational market. In closing, we're excited about our products, our partnerships, and the year ahead. We're working tirelessly at enhancing our agility and execution to capture more market share and top-line growth. And as always, we're working to pursue profitable growth in an effort to generate attractive return on investment for shareholders. That ends my prepared remarks. Operator, if you could go ahead and open up the line for questions.

Operator, Operator

Your first question comes from Aaron Grey from Alliance Global. Your line is open.

Aaron Grey, Analyst

Hi, good morning and thanks for the questions. So first one for me, specifically on the vape segment. It looks like quarter-over-quarter revenues did come down a little bit. So, I just wanted to know if you could kind of talk about the trends you're seeing there. Obviously, it's been a pretty competitive category. So just any further color in terms of the drivers which may be impacting you guys and some pricing pressure on the competition there, and more on kind of how you see that evolving for you guys? Thanks.

Greg Engel, CEO

Thank you for the question. We certainly have a comprehensive vape portfolio that includes premium, mainstream, and value offerings. We have noticed an increase in competition in the market, which has required us to make some pricing adjustments. As we've observed with dry flower, consumers are sometimes inclined to try new products. However, we are very optimistic about our 510 cartridges, which continue to perform exceptionally well. We're also looking forward to launching our 1 gram cartridges in the next quarter, as we believe they will significantly impact the market, given the success we've had with 1 gram products in U.S. states.

Aaron Grey, Analyst

Okay. Great. Thanks for that color. And then just the second one from me before I pass it on. You spoke about the increase in brick-and-mortar that we’re beginning to see in Canada up 30% since July. So, I would just like to get some commentary in terms of how you think that comes into your plan to more fully utilize your cultivation space, especially as we start to see 40 stores per month in Ontario, like you just mentioned. And then just like any color we might be able to get in terms of the first quarter now that we are pretty well through it, in terms of how that might've come through the top line in terms of seeing the benefit of the increased brick-and-mortar there. Thank you.

Greg Engel, CEO

Yes, I believe so. First, regarding the expansion of the cultivation space, we are looking to increase our production. We have space that is currently underutilized, and as market demand continues to grow, we are actively planning to scale our operations back up. This may involve hiring additional staff for both cultivation and downstream processing. One of the challenges we faced in Q4 was managing resources between packaging and other areas. You are correct that we have the capacity, and now is the right time to start utilizing it. In terms of Q1, I want to emphasize that we are still working on revitalizing our portfolio, and we have new products set to launch. As I mentioned, we’ve experienced some stock-outs and missed sales opportunities recently. However, we are eager to introduce these new products, not only in Q1 but also into Q2. At this point, I can't provide any guidance on Q1.

Aaron Grey, Analyst

Great. Thanks. I will jump back in the queue.

David Kideckel, Analyst

Hi, good morning. Thanks for taking my question and congrats on the quarter. I just wanted to go into your international component of revenue for a second and tie that back to flower as well in Canada. So, in reading through some of your financial statements, we're looking at revenues in Israel, think just north of $3 million. So, the remainder would be mostly 1.0 products in Canada, and mostly flower, we think as you've indicated in your prepared remarks and press release. So, I'm just wondering moving forward, how important and significant internationally is Israel, in particular, going to be for you? I get that you have the exclusive supply agreement with Canndoc. That said, Israel is relatively, as you know, a small market, lots of competition, et cetera. So just trying to understand how important we should be thinking about Israel moving forward as an overall line item from a revenue perspective. Thanks.

Greg Engel, CEO

Thank you for your question, David. Regarding Israel, I want to clarify that we are the exclusive supplier of indoor flower, which is our product line for that market. There have been recent changes in Israel's medical cannabis systems, and we are working to ensure we can continue supplying them, and we have identified a suitable path for this. We have had great success with our products there, with one strain already sold out. We view Israel as a growing market. Although competition is strong, we have also formed a partnership with Canndoc, which could help us process products for future sales in European markets due to their certification. This agreement allows us to focus on the Israeli market while also exploring potential access to Europe through Canndoc. From this perspective, there are two angles to consider. Additionally, in response to your earlier question, flower remains a crucial part of our market, which is why we've invested in new genetics. We are dedicated to introducing new genetics and offerings, including higher THC products and a wider variety, as consumers increasingly resemble a craft beer market, looking to try different and innovative products consistently. We will continue to invest in this area.

David Kideckel, Analyst

Thank you for that information, it was very helpful. For my second question, I would like to revisit Hyasynth. If I understood you correctly, Greg, you mentioned that CBDa is one of the precursor cannabinoids. Does this indicate that you will begin using that cannabinoid first in some of your 2.0 products, or will it be CBD along with another cannabinoid? My overall question regarding biosynthesis is which 2.0 products do you believe are most suitable right from the start for cannabinoids derived through biosynthesis? Thank you.

Greg Engel, CEO

Yes, it's a great question, David. I'm really excited. It's important to note that Hyasynth was the first successful commercial production and sale of any cannabinoid produced through biosynthesis, and they had a potential buyer interested in CBDa, which was the product they produced. Currently, their focus with Hyasynth includes 23 cannabinoids in their portfolio, 19 of which are minor cannabinoids, each uniquely positioned. I've mentioned before that we see two paths for biosynthesis. One is producing a pure major cannabinoid for potential use in our products or possible partnerships with Hyasynth in other industries. More importantly, we see opportunities with minor cannabinoids. For example, THCV has similar effects to THC but does not necessarily induce appetite in the same way, according to anecdotal reports. There are many opportunities for these minor cannabinoids in the adult recreational market.

David Kideckel, Analyst

Okay. Thanks for that and congrats on the quarter. I'll hop back in the queue.

Andrew Partheniou, Analyst

Thanks for taking my questions. Could we discuss the new SKUs that you have rolled out and the upcoming ones? Can you share any metrics on their performance? I know you've mentioned that some sold very well and experienced stock-outs, but I'm looking for more details. How should we view this going forward? Should we expect that this started with relatively lower volumes and will continue to ramp up, or was this a significant shift for you?

Greg Engel, CEO

Yes, thank you for the question, Andrew. I think we should view it similarly to how we approached new SKUs in the past. We launched three specific dried flower SKUs and are monitoring market response closely. We are preparing for increased production based on their performance. When we have a strong response, like we did with our limelight strain, we significantly ramp up production. This has certainly been the case here as well. One challenge with introducing new flower products is the timeline required to get listings in various provinces, which can affect market feedback. Our plan is to continue introducing new SKUs and to increase production on those that perform well while reducing cultivation on those that do not. Alongside the three recent strain launches, we have more strains scheduled for launch in Q2 and Q3. It's crucial to maintain supply of our core products, such as limelight, which remains our best-selling flower product. Additionally, there are opportunities for some new strains, especially those that are unique or have high THC levels, to successfully establish themselves in the market.

Andrew Partheniou, Analyst

Thanks for that additional color. And maybe going on a similar topic is just on your Phase 5 expansion. Wondering if you could give any updates on that and kind of what needs to happen in order to get some of your hydrocarbon extraction up and running and products on the shelves?

Greg Engel, CEO

Yes, the area is fully licensed, and our expanded CO2 extraction is operational. We are still working through the commissioning process for the hydrocarbon extraction, so I can’t provide a specific timeline. However, our team is diligently working to bring those products to market. The timeline is dependent on commissioning, which has faced some challenges over the past nine months due to COVID. In the past, we have successfully commissioned new equipment, like RE:MIX and launched new offerings in chocolate. This process sometimes takes longer than initially expected because we are dealing with challenges related to COVID and travel, and trying to manage things remotely.

Andrew Partheniou, Analyst

Thanks for that additional color. I'll get back in the queue.

Adam Buckham, Analyst

Good morning. I appreciate the opportunity to ask my questions. I wanted to begin by discussing the relationship between production output and demand. There seems to be some commentary regarding missed opportunities related to point of sale in the queue and whether there are plans to increase staffing to address these challenges. When considering the bottleneck, is it primarily on the packaging side, or did the decrease in output during fiscal Q3 play a role in this? Furthermore, concerning the current output of about 44,000 kgs per year, do you believe this aligns with near-term demand, or is there a need to boost output even more?

Greg Engel, CEO

Yes, that's a great question, Adam. I would say it's a combination of both cultivation and the levels of cultivation. It's important to keep in mind that when planning cultivation, you are looking at a timeline of 20 to 18 weeks before the product is available. Some of the recent missed purchase orders were due to misalignment regarding the strains and the availability of products, as the market is continually changing. Consumer feedback is crucial for us to ensure we are offering the right products. The bottleneck has resulted from both cultivation issues and staffing shortages on the packaging and processing side. One positive outcome related to COVID-19 is that we have become more efficient, managing to accomplish more with fewer people. We have significantly improved our processes because we needed to operate in a leaner and safer environment for our employees. Therefore, gradually ramping back up is important, while recognizing that there will always be some excess production. One advantage we have is sufficient working capital to navigate through the quarter, but it's important to note that the inventory may not always match the highest demand strains. Balancing this remains a challenge. When we mention ramping back up, we mean gradually looking to bring some of the facility operations back online.

Adam Buckham, Analyst

Okay. That's great color. And secondly, I just wanted to touch on the commentary on Israel. Are you able to give any color on expected timing of the remediation plans? And were you able to get some shipments out in fiscal Q1, or did that change your regulation pushes out into fiscal Q2?

Greg Engel, CEO

I can confirm that we did not have a shipment in the first quarter to Israel. Although I cannot provide a specific timing target, we are confident, along with Canndoc and the Israeli government, that we have a viable path and solution moving forward. We expect and hope to achieve this within the second quarter. However, it depends on the Israeli government and coordination with inspectors to proceed remotely, which will take some time. We hope to navigate through these challenges.

Graeme Kreindler, Analyst

Hi. Good morning, and thank you for taking my questions. Maybe as a follow-up to what was just being discussed there with respect to the international market and taking the previous comments with respect to some of the staffing levels and other efficiencies that you're looking to increase throughout fiscal 2021. To me, that sounds like it looks like Q2 might be the real inflection point that we should be looking at in terms of the new SKUs launching, whether it's the 40 that had been launched the other 18 you’re looking to launch in Q1. And then a potential restart of international shipments starting in Q2. Is my thinking correct there? I'd appreciate some further commentary with respect to the cadence of potential revenue growth. Thank you very much.

Greg Engel, CEO

Yes, Graeme, thank you for your question. To clarify, the 40 SKU launches since July are for Q4 and Q1, and we will have an additional 18 in Q2. We are anticipating further growth, particularly with the Trailblazer 1 gram vape cart expected in Q2. We remain optimistic about the near-term growth. While we typically do not provide revenue guidance, we are noticing the positive impact of new SKU launches. Our product RE:MIX is currently in a few provinces, and we expect to expand into more provinces that are open to it in Q2. Full distribution isn't available yet due to lead times. In summary, we believe we are on the right track, consistently introducing new products. It simply depends on market acceptance and ensuring those products reach the market promptly, which our team has handled well despite the challenges.

Graeme Kreindler, Analyst

Okay, understood. I appreciate the color there. Then just as a follow-up with respect to the gross margin, there was $11 million of inventory that was written off or impaired this quarter, impacting that gross margin. I was just wondering if you could provide some more details on what sorts of products were included within that $11 million charge. And at this point, does the company feel comfortable in terms of where its inventory position is sitting in terms of how things are costed within there that it's through the bulk of these charges? Thank you.

Greg Engel, CEO

Yes, it's a great question, Graeme. Maybe I'll turn it over to Derrick to answer that question.

Derrick West, CFO

Yes, thank you, Greg. For the fourth quarter, there was $11.1 million in overall provisions related to inventory, including adjustments for net realizable value. Of that amount, $8.3 million was primarily associated with extract materials, specifically concentrates and trim. Historically, the company had accumulated a certain amount in these categories, but we have stopped harvesting the trim, and prior adjustments and the carrying value of the trim significantly contributed to this. Looking at the balance sheet, our inventory and bio assets have now decreased by 37% compared to last year and by 28% compared to Q3 2020. This reduction has lowered our exposure to future valuation adjustments that could adversely affect our gross margins. In the meantime, it’s unreasonable to expect that there will not be some ongoing non-cash adjustments for excess aged inventory and net realizable value adjustments due to price compression in the market and ongoing changes in consumer preferences. That said, we believe that over the past few quarters, we have conducted a thorough review of these issues, and with the provisions now established, we are confident in the carrying values reflected on the balance sheet at this time.

Graeme Kreindler, Analyst

Okay. Understood. Appreciate the color. Thank you very much.

Rupesh Parikh, Analyst

Good morning. Thanks for taking my question. I also wanted to follow up on gross margins. The near-term, is it fair to think about the 30% level as maybe a base to build off of? And then longer term, just thinking about how you guys are thinking about the longer-term scaling of gross margins from here?

Greg Engel, CEO

Yes. Maybe Rupesh thanks for the call or the question. I'll maybe let Derrick answer that one as well.

Derrick West, CFO

Yes. For fiscal year '20, our adjusted gross margin was 33%. But as you correctly note, the Q4 period that we've just filed had an adjusted gross margin of 30%. This has had the impact of significant price reductions in the market that have occurred over the current fiscal year, and also includes a certain level of production inefficiencies. But to some extent we do believe that it should somewhat persist as we continue to launch 2.0 products and continue on the learning curve to optimize production. But the Q4 30% margin does reflect where it was with regards to the pricing in the market and our production levels. And so at this time it's a fair indicator.

Rupesh Parikh, Analyst

Okay, great. Any commentary just longer-term scaling gross margins from here as you look forward?

Derrick West, CFO

Yes, I would say that we've stayed away from providing any guidance between long-term target for gross margins, just as a consequence of it's too dynamic of an industry with increasing competition, uncertainty, especially related to the duration and impact of the pandemic. And again, we do believe we do have the potential to optimize our production and efficiencies as we work through the learning curve, particularly related to 2.0 products and improving the packaging costs that Greg was talking about earlier. And as we moved to larger format offerings on the 20 gram with repack pre-rolls. But it's difficult, it's a very ever-changing dynamic market. And so that's the most we could provide for guidance at this point.

John Zamparo, Analyst

Hey, thanks. Good morning. I just want to stick with that same topic of gross margin over the next few quarters and then maybe we can simplify it a bit. But particularly as it relates to new SKUs and Shred in particular, those seem like that's quite popular. I'm trying to get a sense of the impact of those, and maybe the way we can frame this is if there's no further pricing compression in the market, is it fair to say that the cost optimization efforts you put in so far and the higher volumes you're expecting and the new SKUs you're launching that in a similar environment in terms of pricing that you'd see margin growth.

Greg Engel, CEO

Again, maybe Derrick answer that question.

Derrick West, CFO

Yes. Well, I guess as the question is framed, sure, if there's no changes in the pricing in the market as we increase our volumes. Just inherently when you increase your volumes, you do absorb the fixed overhead amounts and have less of the unabsorbed fixed overhead from not operating at capacity along with improving the efficiency at the facility. So under that parameter, yes margins would move up under that scenario.

John Zamparo, Analyst

Okay. Thanks. And then my follow-up is on Ontario. Greg, you mentioned your optimism about this province just because of the store growth, which I think is fair. Can you talk about your performance in Ontario relative to other provinces, whether it was in Q4 or in Q1 and even without giving specific numbers. Just trying to get a sense of if you think you're adequately participating in the industry growth in the province. Thanks.

Greg Engel, CEO

Yes, that's a great question. Ontario is likely the most competitive market in the country, with more SKUs listed here than in any other province. Due to the size of the market, we've experienced significant stock-outs. This can be viewed positively in terms of product availability and demand, but it has affected our market share and revenue given the market's growth. We anticipated that the market would expand, but the pace of growth has exceeded our expectations. The planning cycle for some product types can be challenging, but the overall market growth remains strong and should continue, even with COVID-related restrictions in Toronto and surrounding areas. We're seeing steady growth on the construction and licensing fronts, although we've been impacted in Ontario more than other provinces by stock-outs. For instance, Shred was one of the highest demand products shortly after its launch, and as we worked to supply it to other provinces, we faced higher than expected demand. We're experiencing strong growth, but there have been challenges in resupplying the market quickly. We're making adjustments to ensure we can continue to provide adequate supply, which is essential.

John Zamparo, Analyst

Okay. That's helpful. Thank you very much.

Matt Bottomley, Analyst

Yes. Thank you very much. Good morning everyone. Just wanted to expand a bit further on John's prior question there. It was sort of framed around Ontario. But when you look at the overall market growth, certainly at the retail level, and you've mentioned this in your outlook, you use the one month of September, it looks like it's about a $3 billion market. Do you have any color on dynamics of how much LPs as a whole are sort of losing their market share to the provincial buyers, pricing at the retail level are coming down at the same degree. I imagine more of the economics might be going to the provinces and some of the wholly-owned retailers, if there's a dynamic there to explore. And then if you can give any color on the product SKUs and format that you're focused on, maybe the edibles side and the beverage side of the powder beverage side. I know it's very nascent right now, but where you think you rank in the overall Canadian landscape as those obviously have longer-term growth profiles and what we're seeing in dry powder?

Greg Engel, CEO

Thank you for the question, Matt. Looking at the market over the past six to twelve months, we’ve seen that when pricing reductions occur, they are typically shared with the provinces. This means that the impact is not solely on the company, but there is a collaborative effort involved. Several strategies are executed jointly with provinces to either move products or respond to competition. The landscape is evolving, and we continue to hear discussions about potential changes in the systems. For instance, New Brunswick is considering moving to a private tender model, and Alberta is contemplating shifts in their approaches, which requires flexibility from us. A positive development has been the consolidation in the retail sector. We have solid partnerships with companies that are consolidating, and these relationships have national reach, which benefits us. Regarding the second part of your question about our expanded offerings, getting our vape portfolio out and launching a one-gram option is crucial in the near term. A competitor recently launched a similar product, so we aim to release ours within this quarter, although COVID and equipment supply issues can delay this. With RE:MIX, we are focused on achieving national distribution and increasing production levels. Looking ahead to 2021, it is essential for us to have the capability to produce live resin, whole plant extract, and vape pens, which we know perform well in markets like California. That’s why we’ve invested in hydrocarbon extraction equipment. While I can't provide a specific timeline for launching these products, staying ahead of market trends is vital. We conduct extensive market research alongside reviewing U.S. state data. In the near term, we are eager to expand our offerings. We have introduced a couple of seasonal products—Kushmas Stix and Gingerbread Bytes—in collaboration with several provinces, and the response to these items has been promising thus far.

Matt Bottomley, Analyst

Great. Appreciate that. And then just a quick follow-up. Maybe overall, just the sort of management risk assessment or maybe high-level view on as this market continues to expand. So that $3.1 billion number, I think it's very encouraging, but when you look at the LP landscape overall, and it's not really dominated by profitability at this point, where do you see the opportunity to really lock in whether it's margin or things that are more specific to organic gram strategy and core competency plan? We see a lot of price monetization in dry flower. Is this a risk that the vape pen category, given the high competition, could see a similar dynamic in the next year here? And as the market gets closer and closer to, I think that overall headline number in terms of market size might be close to 10 billion, and we'll see where that falls. Where do you assess the risk of subsequent product categories potentially being commoditized at the overall macro that the industry continues to grow pretty healthily?

Greg Engel, CEO

Yes, that's a great question. We've already noticed pricing changes in the vape market. Initially, there was limited competition, but as more products entered the market, we observed shifts in pricing. We've communicated some of these pricing reductions with our provincial partners and private retailers. What's crucial for companies like OrganiGram is improving efficiency. With the pricing pressure in flower and the shift to larger volume SKUs, packaging costs have decreased significantly. The same applies to our 2.0 products; as production increases, it becomes more efficient. While we face some price pressures, our focus has consistently been on delivering quality differentiator products. Take our Trailblazer Snax chocolate bar, for instance. It stands out in the value category as one of the best-tasting and uniquely crafted chocolates available. Each five-piece bar weighs 42 grams, with each piece independently filled, giving consumers better dosing flexibility instead of a single large bar with uneven cannabinoid distribution. It's vital to concentrate on new product development beyond just new flower offerings to meet the demands of consumers seeking innovation and differentiate our products like RE:MIX and the quality of our chocolate.

Rahul Sarugaser, Analyst

Hey, Greg and Derrick and Amy. This is Mike in for Rahul today. There's a couple of questions from me. So I know we've talked a lot about production and how we can enhance efficiencies going forward. I'm wondering if, and I’m looking at your yield per plant features year-over-year, and they seem to have gone down from about 150 grams per plant to around 100 at the end of this year. Is this a problem that you can resolve with staffing and how important do you see the sort of yield per plant issue as it flows into the rest of your business?

Greg Engel, CEO

Yes, I'll start by addressing that. There are two main points to consider. First, we stopped keeping trim by-products a few quarters ago because we had enough extract inventory and extractable material. This has resulted in approximately a 30% decrease in yield per plant. Secondly, we have been focusing on increasing THC through experimentation with various techniques, styles, and strains. Certain strains yield more per plant while others yield less, so it's about finding the right balance between THC and yield. Regarding staffing, any increases will be modest, with just a small number of people returning to the facility. However, I wouldn’t say that this will significantly affect yield or plant care; it's primarily about the genetics of the strains we choose to cultivate. I hope that answers your question.

Rahul Sarugaser, Analyst

Yes. That's really helpful. And just a thing on the topic of staffing, I mean, in New Brunswick recently that you've seen some enhanced COVID-related restrictions like the Atlantic bubble recently. Are you seeing sort of the recent uptick in cases in New Brunswick specifically affecting your operations or your capacity to re-staff even modestly?

Greg Engel, CEO

No, it's a great question. We have worked closely with the government, and last week we had a spot inspection where public health and the RCMP visited our sites across the province to ensure safety protocols are in place for our employees. They were satisfied with everything they observed. While we have noticed an increase in cases in the province, we have been focused since the early days of COVID on maintaining a safe workplace. Our employees appreciate this commitment, and it has been central to our operations. So far, this situation has not affected our facility or operations. The greater impact of COVID has been related to equipment maintenance and challenges in bringing in third-party contractors for work.

Rahul Sarugaser, Analyst

Got you. That's terrific. If I could just ask one more question, could we focus closely on biosynthesis and Hyasynth, especially regarding your recent investment and their announcement about recent changes in this space? How do you view a partnership with Hyasynth as a potential entry point into the United States, considering that bio manufacturing through contract research or contract manufacturers can take place virtually anywhere?

Greg Engel, CEO

Yes, it's interesting. I'm not sure if you've spoken to Kevin, but the first production and sale was completed in the U.S. They are working with a contract site there and have transferred their yeast strains and enzymes for optimization. The main difference with biosynthesis versus cannabis plant production is that it doesn't have to be tied to a specific country. There are many opportunities for Hyasynth to operate in jurisdictions where it's legal and to transfer pure cannabinoids, especially to places with fewer control mechanisms currently or in the future due to regulatory changes. This is a significant aspect of their strategy right now.

Douglas Miehm, Analyst

Yes. Good morning. Just a couple of quick questions. Number one, Greg, you're really close to the industry, and I'm just wondering what your thoughts are on M&A right now and what you see unfolding in Canada but also North and South of the border with respect to the Canadian market.

Greg Engel, CEO

Yes. I mean, we are what we have seen some consolidation now in the retail space, and I think that we expect that to consider potentially. Doug. But I think when we look at this space, and I've said this publicly before, I mean, we are continuously approached by banks and or companies directly where companies are looking to be acquired or have a strategic investment into them. And I think one of the challenges is always when you evaluate those companies is looking at what's their differentiator, what's their innovation, what's their kind of brand. I mean, if you have all three of those and or a couple of those that can be quite unique, then certainly something to evaluate. So I think that's the challenge to be frank in the spaces. There are many companies that don't really have that differentiation. So I think it's one of the things we focus on when we assess people is what is the differentiation? How do you supplement? I mean, certainly there's public synergies that could happen in any MA activity. But I think the more important things along with that are how did the two companies combined and what are their synergies in terms of the market opportunity. So North and South of the border, I think that's still very much dependent upon what happens in the U.S. and I think if the Republicans control the Senate with these two upcoming runoff elections in Georgia, that sets one tone. If the Democrats were able to garner both those seats that might send another direction. So, we'll see what happens.

Douglas Miehm, Analyst

Okay. I didn't want to continue discussing the U.S. market. You mentioned you are exploring how it might develop and how you plan to respond. Can you share what the company is considering? We've seen other companies entering the market, and I'm curious about your perspective, especially given your relationship with the company in Colorado.

Greg Engel, CEO

Yes, we are closely monitoring the U.S. market, and one of our key team members is involved with an industry board there. Keeping abreast of developments is a significant part of our focus, particularly on the government relations side. As a Canadian company, we are exploring potential CBD opportunities, which could provide a legal entry into the market. We are also following developments related to THC. Additionally, we are committed to creating innovative products, as evidenced by our RE:MIX technology, which has generated interest from various companies on both the CBD and THC sides. However, we have not finalized any agreements yet. If we were to proceed, we would only partner with a CBD company at this time due to the legal concerns surrounding THC revenue. We are actively seeking CBD opportunities, but we have not yet found the right fit.

Operator, Operator

Thank you, everyone. This will bring us to the end of our Q&A session today. I would like to thank everyone for joining our conference call today. This will conclude our conference call. You may now disconnect.