Earnings Call Transcript - OGI Q4 2022

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 Fourth Quarter and Full Year Fiscal 2022 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. Craig MacPhail, you may begin your conference.

Craig MacPhail, Speaker

Thank you and good morning everyone. Before we start, I would like to remind everyone 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, reference we made to certain non-IFRS measures during this call, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under 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, making certain statements relating to market share data, the Company relies on reputable third-party providers. Unless otherwise indicated, all references to market data are sourced from High Fire data as of August 31, 2022, pulled on October 18, 2022. I would now like to introduce Beena Goldenberg, Chief Executive Officer of OrganiGram Holdings Inc.

Beena Goldenberg, CEO

Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today's call, we will discuss the financial results for the three months and year ended August 31, 2022, and I will provide a general business update. We will then open the call for questions. Now, I joined OrganiGram in September of 2021 and at the time I said, what attracted me to the Company was its high-quality products, strong brand portfolio and proven ability to innovate to meet consumer needs. This was bolstered by a strong sales team to get products into distribution and efficient operations that would enable us to compete in the large value segment. I'm happy to report that, in fiscal 2022, those strengths proved to be significant and resulted in success on several fronts. In fiscal '22, we generated net revenue of $146 million and an 84% increase over fiscal '21. In Q4, our net revenue was $45.5 million, an 83% increase over Q4 '21, and our sixth consecutive quarter of record revenue growth. We also became adjusted EBITDA positive in Q2 of this year and have delivered three consecutive quarters of positive earnings. Our share of the adult recreational market grew to 8.2% in Q4 fiscal 2022 from 7% in Q4 '21. For the month of October 2022, we held the number two position in terms of market share. According to High Fire, OrganiGram was the only top five LP to grow market share in our fiscal 2022. At the end of our fiscal year, we held the number one position in the flower category, which represents the largest portion of the adult recreational market. Also, according to Provincial Boards Data, since January, we held the number one position in Ontario in ship sales with a Q4 market share of 8.8% and in the Maritimes with a 14% share in Q4. In Quebec, we moved into the number three position in September, as shown by data from Weedcrawler. We have built SHRED into a recognized brand across multiple categories: milled flower, gummies, and vapes. It is one of the biggest brands in the country with over $150 million in retail sales. SHRED also has a solid net promoter score of 77%, according to Brightfield based on field surveys from August 4th to September 27th. We continue to hold the number three position in the gummies category. This includes SHRED'ems and Monjour, CBD-infused gummies, and are the number two in terms of volume sold. In Q4, we had a 24.3% volume market share, which means that close to one out of every four gummies sold in Canada was an OrganiGram product. In fiscal 2022, we introduced over 60 new SKUs to the market to refresh and optimize our product offering. These new SKUs represented about 30% of our sales in the year, which speaks to our ability to not only innovate but to create products that engage consumers. In Ontario, we have the highest average sales per SKU, which is more than double the average of the top 10 LPs, showing the efficiency of our lineup. A great example of innovation is our ingestible extract, Edison JOLTS. We introduced JOLT in August 2021 using proprietary IP, and it quickly took the second position in the capsules category. There are now three flavors in the JOLTS lineup, and it holds a 26% market share. In fiscal 2022, we also launched our Monjour wellness-focused brand. It was the first large format, a multi-flavor offering in the space and quickly gained share. It is now the number one selling pure CBD gummy with a 37% share. We continue to innovate with Monjour by adding new flavors and other minor cannabinoids into our formulations. We have also been successful at innovating in the value segment. Big Bag O' Buds was introduced in May '21 in the 28-gram format. It was unique in offering quality, high-potency strains not typically available in the value segment, such as Ultra Sour and GMO cookies. It was quickly embraced by consumers and received positive reviews on social media. Now, we did not have a presence serving the value segment in smaller pack sizes, which accounts for over $300 million in retail sales. So to address this, subsequent to quarter end, we introduced a new brand, Holy Mountain. Currently, we are in the market with the strains R*NTZ and MAC-1 in 3.5-gram formats as well as pressed hash. I'd also like to talk about our success with acquisitions. Compared to the rest of the industry, we have taken a very prudent approach to acquiring companies. We look for those that will complement our product line and have the potential to be accretive to shareholder value. First was the edibles and infusions corporation based in Winnipeg, which we acquired in April '21; it was pre-revenue and pre-sales license, but had a manufacturing facility purpose-built for cannabis-infused products with highly efficient state-of-the-art equipment. This provided us with a significant opportunity to disrupt the cannabis edible market in Canada. We launched three gummy SKUs in Q4 of 2021 and grew that to 14 SKUs by the end of 2022. The three original SKUs continued to grow in sales from Q1 to Q4 by 19%, while we brought new ones to market, indicating that the new SKUs attracted new consumers and further built our market position. We have invested in additional automation at Winnipeg including high-speed pouch packing lines and automated excise stamping. In September of '21, we shipped 39,000 gummies. In October of '22, we shipped 3 million and have the capacity to increase further. In December, we purchased Laurentian Organics, a licensed producer of craft cannabis and hash, which also gave us an important presence in Quebec. It was a successful operation with accretive revenue and EBITDA. We have committed $13 million to expand the facility to increase its annual capacity to 2,400 kilograms of flower and over 2 million packaged units of hash. Construction is expected to be complete by the end of this calendar year. Our new Holy Mountain pressed hash is produced at this facility. We added Laurentian Tremblant hash to our national distribution, and it was available in 10 provinces in five months post close. It has maintained its number one position in the Quebec market and is now the number two hash SKU in Canada. Also, a very important contemplated synergy, our new foothold in Quebec enabled significant growth of core organic SKUs in the province. In fiscal 2022, we achieved a 50% increase in revenue per SKU, and as of September 2022, we increased the number of SKUs in market from 21 to 35. I'm also pleased with our production success of fiscal 2022. In Q4, we brought all the cultivation rooms in our 4C expansion at our Moncton Cultivation Center online. We have 115 grow rooms available to us for the flowering period, which provides an annual growing capacity of 85,000 kilograms. We have also completed environmental enhancements at the facility with LED lighting in every room. This has resulted in an 11% increase in yield per plant, decreased power consumption per room, and a 21% reduction in the cost of cultivation. We have also introduced fractional watering. It will be available in all rooms by the end of this calendar year and has already shown to create further improvements. The results of these efforts have been lower production costs, higher yields, and higher potency. In Q4 of fiscal '22, we had a record harvest of 16,000 kilograms, 33% higher than Q4 of fiscal '21, and yield per plant was 141 grams compared to 127 grams a year earlier. In fiscal 2022, the Center of Excellence formed as part of our product development collaboration with BAT completed all key spaces including the R&D lab and the state-of-the-art biolab for advanced plant science research. As part of the development, the COE has undertaken initial stage development and safety studies on first generation edibles and novel beverages as part of its work. The COE has created and set numerous delivery systems and created over 60 unique formulations to develop differentiated products in the future. Another key strategic advantage for us is the dedicated cultivation R&D space. This new space has accelerated rapid assessment and screening by delivering 20 to 30 unique cultivars every two months while freeing up rooms for commercial growth. The plant science team continues to move the garden towards unique, high terpenes and high THC in-house grown cultivars, while also leveraging the newly commissioned biolab for ongoing plant science innovation. Their focus is on quality, potency and disease resistance to enrich the future flower pipeline. In fiscal 2022, OrganiGram established a significant position as an international supplier of cannabis. We shipped a total of $15.4 million of flowers to Canndoc in Israel, and Medcan and Cannatrek in Australia. This compares to the 351,000 of international sales in fiscal 2021. To date, this fiscal year, we have shipped approximately $6 million of dry flower internationally. With our expanded capacity at Moncton, we expect to increase our revenue from international sales. On November 17, we entered into a new agreement with Canndoc in Israel. This new agreement over a three year supply term allows for the shipment of 10,000 kilograms of dry flower with an option for Canndoc to order an additional 10,000 kilograms. This agreement speaks to the consistently high quality of our flower and our strong relationship with Canndoc and allows us to collaborate in the future on other emerging medical cannabis markets in other jurisdictions. I will now turn it over to Derrick to present the financial overview.

Derrick West, CFO

Thanks, Beena. As Beena mentioned, we achieved record revenue in both the fourth quarter and the full year fiscal 2022. Gross revenue grew 81% from Q4 2021 to $66 million and revenue grew 83% from the same period to $46 million. On an annual basis, gross revenue grew by 86% to $209 million from $110 million in fiscal '21. Net revenue grew by 84% to $146 million from $79 million in the previous year. These revenue increases were primarily due to higher recreational net revenue, which grew 64% from Q4 of fiscal '21 and 78% over the prior fiscal year. The cost of sales in Q4 fiscal '21 was $37 million compared to $26 million in Q4 fiscal 2021, an increase of 42%. Annually, cost of sales were $119 million, a 15% increase over $104 million in fiscal '21. The low increase of cost of sales relative to the large increase of revenues was due to the lower cost of production that was primarily achieved through improved efficiency from automation. We harvested approximately 16,000 kilos of flower during Q4 of '22 compared to about 12,000 kilos in Q4 of fiscal 2021, an increase of 33%. Annually for fiscal 2022, we harvested 51,000 kilograms, a 76% increase over the 29,000 kilos in fiscal '21. The annual capacity at the Moncton growing facility has increased to 85,000 kilos. This positions us well to meet our growing Canadian and international sales demand. On an adjusted basis, gross margin was $10.4 million or 23% of revenue over the $3 million or 12% for Q4 fiscal 2021. On an annual basis, adjusted gross margin was $33.4 million or 23% of revenue as compared to 3.6 million or 5% for the prior fiscal year. The significant improvement in adjusted gross margins was primarily due to the higher overall sales volumes combined with the lower cost of production. SG&A excluding non-cash share-based compensation increased to $15.7 million in Q4 2022 from $12.4 million in Q4 '21. Annually, SG&A was $60 million compared to $46 million for the prior fiscal year. The increased amounts over the period are largely due to the increased employee headcount related to the acquisitions of the Winnipeg and Lac-Supérieur facilities, increased professional fees, ERP implementation costs, and non-cash amortization of the intangible assets acquired from the two acquisitions. While there was an increase in SG&A as a percentage of net revenue, it decreased from 56% to 39%. In the quarter, we achieved a positive adjusted EBITDA of $3.2 million compared to a negative $4.8 million in Q4 '21. Annually, adjusted EBITDA was $3.5 million compared to a negative $27.6 million for the prior fiscal year. The primary drivers of the significant improvement to profitability were the higher volume of products sold, lower production costs, which increased margins. Q4 '22 was our third consecutive quarter of positive adjusted EBITDA, and based on our outlook for revenue, including international sales and improved efficiencies primarily achieved through scale, we expect this trend to continue. The net loss was $6 million in Q4 fiscal 2022, compared to a net loss of $26 million in Q4 fiscal '21. For the fiscal year, the net loss was $14 million compared to $131 million for the prior fiscal year. The decrease in net loss was primarily due to the increased revenues, improved cost structure, along with reductions to inventory provisions. From a statement of cash flow perspective, beginning with operating activities, there was net cash used of $36 million during the year, and this was mainly driven by the increase to our working capital assets, which grew as a result of higher sales and production levels. From an investing perspective, OrganiGram dispersed $49 million in capital expenditures across factory facilities, $8.4 million in cash consideration towards the acquisition of Laurentian Organic, and a $2.5 million investment into Hyasynth Biologicals. From a financing perspective, the Company had lease obligation payments of approximately $1 million and raised $6.4 million from the issuance of common shares, which was primarily through BAT exercising its top-off rate. In terms of our balance sheet, on August 31, 2022, we had $125 million in cash and short-term investments compared to $215 million at the end of the prior year. During the year, the Company undertook a significant expansion at its Moncton facility, which resulted in an expected decrease to our cash position. As we completed our expansions at Laurentian and automation and enhancement investments at the Winnipeg and Moncton facilities, the Company expects to spend approximately $29 million for fiscal 2023. The Company's $125 million in cash and short-term investments includes $26 million unrestricted cash for the center of excellence, thereby leaving $99 million of unrestricted cash. With the Company now generating positive adjusted EBITDA, we believe that we'll generate positive cash flow from operating activities during fiscal 2023 and positive free cash flows in calendar 2023. We believe our capital position is healthy and that there is sufficient liquidity available to support the growth of the business over the near to medium-term. This concludes my comments. I would like to turn the call back to Beena.

Beena Goldenberg, CEO

Thank you. We are pleased with fiscal 2022, which reflects all our efforts in building a leading Canadian consumer packaged goods company focused on cannabis. With the progress we've made, the market penetration we've achieved, our highly efficient production and our innovation platform, we are positioned to deliver long-term shareholder value. I want to express my gratitude to our board for their valued support and guidance as well as to our employees for their dedication and ingenuity. We look forward to further success in 2023. Thank you for joining us today. And operator, you may open the call for questions.

Operator, Operator

Your first question comes from a line of Tamy Chen from BMO Capital Markets. Your line is open.

Tamy Chen, Analyst

First, I just wanted to ask in terms of your thinking on the flower portfolio. It does seem like, especially with Holy Mountain, and Beena, you talk a bit about the rationale of launching this, but things like your portfolio continues to be more in value. So, I'm just wondering, as you go forward, is that where you want to stay for the most part, things are working there, or would you consider trying to up price the consumer with some more mainstream or premium type products in the future to improve your margin?

Beena Goldenberg, CEO

I think the answer is we're comfortable participating in the value segment because it's the largest segment in the market, and it's important to be able to compete there profitably. But we do have our Edison brand, which is now going through a revitalization to really establish a stronger position in a more premium space. And through the acquisition of Laurentian, we also have craft opportunities to continue to push the craft flower set. So, we'll have products in all the different consumer segments, flower products, but we have brands that fulfill the value segment because that's where a lot of the volume is.

Tamy Chen, Analyst

And a follow-up for me is. So this quarter in your fiscal year ended in August and some of your competitors that had September talked about how the disruptions in Ontario from the cyber attack as well as from labor strikes, I believe in both BC and Quebec, gave them a bit of a noisy period had some disruptions on the sales side. So I was wondering if, to the extent you can comment, did you see something similar post quarter?

Beena Goldenberg, CEO

Sure, no problem. So listen, despite the challenges in the market during the month of August, so both the cyber attack and the BC strike. We were able to deliver a record net revenue in our fourth quarter. In terms of the OCS, we were proactive with our sales team. They were able to work directly with retailers to let them know which SKUs were available at the OCS warehouse. So, they were able to get around the allowed or work within the allowed limits. So that we kept up our position on our sales through that period until things got back to normal. Now I will say, we did see some minor impact in September, as we had such strong sell-through in September that we have had to run down to some minimum volume levels at our distribution centers on our high-velocity SKUs, and we had a bit of a delay in replenishment of those. So there was a slight impact. But overall, we are very pleased with the results of our quarter, and we feel very good that everything is resolved, and we are having a solid Q1 as well.

Operator, Operator

Your next question comes from the line of Ty Collin from Eight Capital. Your line is open.

Ty Collin, Analyst

Hi. Thanks for taking my question and congrats on the quarter. Just wanted to start off. I'm wondering if you could share your views on the structure that Canopy Growth is using to roll up its U.S. assets and whether that's a pathway you are considering for OGI to establish a presence in the U.S.?

Beena Goldenberg, CEO

So, Ty, thank you for your question. And listen, every single cannabis company is looking at what Canopy has done in the marketplace. I think it's important to start with that, we have been laser focused first and foremost on making sure we have a sustainable and profitable position in Canada, and taking advantage of some international opportunities through exports. Now we have looked at the U.S. and in particular in the past, we have looked at CBD. But we haven't found a transaction that makes sense to us. So, on the THC side, we will continue to develop a market entry strategy. We will pay close attention to the proposed legislative changes and the acceptance of the certain transactions from some of our competitors. So I guess the answer to your question is, we will enter only when we have determined the risk-reward dynamic makes sense for the Company and all stakeholders. But we are watching it and we are going to see what works.

Ty Collin, Analyst

Okay, great. Thanks for that. And then maybe one directed more towards Derrick. I'm wondering if you could unpack the gross margin rate a little bit for us. It looks like that came in lighter-than-expected, particularly given the significant step up in international revenues this quarter. I'm just wondering how much of an influence maybe pricing and mix were, for example. Just appreciate any color you can provide there.

Derrick West, CFO

Sure. In Q4, we experienced a notable increase in international sales compared to Q3. However, this increase was actually less than what we saw in flower sales in the recreational market, which helped us achieve the highest overall recreational sales for the Company in that quarter. The sales mix still leaned more towards wet flower and value brands. Overall, our gross margin reached $10.4 million, the highest quarterly figure we've had in the past three years, across the last 12 quarters. Additionally, we benefited from a larger harvest and a lower cost of production in Q4. However, those harvests were completed at the end of Q4 and were not included in our cost of sales for the quarter, so they are likely to affect our Q1 margins. Overall, the margin remained fairly stable from quarter to quarter, even with the boost in international sales, primarily because the increased sales for the quarter were mainly driven by the additional flower sales in the recreational market.

Operator, Operator

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

Aaron Grey, Analyst

The first question for me is on international, nice to see the $6 million of sales you guys had in the quarter. It sounds like 6 million a year-to-date as well. So I want to talk about your expectations there, more long term, specifically on the Israel market. I know you guys signed the agreement with InterCure earlier this month, $20,000, 10,000 now with an option on another 10,000. Sounds like 3000 already delivered. Just given some of your peers kind of backing away from that market, we'd love to get your longer-term view there. Do you think it's more just the indoor quality that's why you're not seeing some of the pricing pressure that some of your competitors have called out? And just how you're seeing that overall marketplace because I know there's been different views regarding some of your competitors for this Israel market? Thank you.

Beena Goldenberg, CEO

Thank you for the question. We have a strong partnership with Canndoc. The product available in the market is co-branded, highlighting both OrganiGram and the fact that it features indoor-grown Canadian flowers. We are recognized for our indoor cultivation, and we lack competition in that segment. The quality of our flowers is well accepted by consumers, and we continue to see opportunities in the Israeli market. Regarding international prospects, you may have noticed the new agreement we signed with Canndoc. As previously mentioned, our demand has been exceeding our supply. Now that we have completed our 4C expansion and increased our flower production, we can explore additional opportunities outside of our current customers to export our high-quality indoor-grown flowers. We are very optimistic about international sales moving forward and are looking at new customers and markets as well.

Aaron Grey, Analyst

Okay, great. Thanks for that. And just given, factory wouldn't have international versus Canada, as you look to allocate the extra capacity, is it fair to say that you might prioritize some new customers internationally versus what you might have domestically particularly as you're targeting? Sounds like a little bit more of the value segment in the near term on the Canadian side? Thanks.

Beena Goldenberg, CEO

No. I think the answer is the reverse. As I said earlier, we really want to make sure we have a sustainable, profitable leadership position in the Canadian marketplace. And so, over the course of last year, we prioritized our domestic market and continue to supply not only the value flower, but we supplied our Edison brand that has close to a 2% market share. So, we continue to have a brand playing in the premium segment. We are building capacity at our Laurentian facility and Lac-Supérieur to really participate in the craft flowers. So, it will have a complete portfolio of products for the Canadian market, and we'll explore excess opportunities with international markets because we have great quality flower, and now we have the capacity to do it. So, I think the priority will still be to make sure we're strong at home and then build from there on opportunities internationally.

Operator, Operator

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

Andrew Partheniou, Analyst

Maybe first, just to expand on the previous question on gross margin, correct me if I'm wrong, but if I understand, the better international sales, higher margin international sales were kind of offset by more rec value flower sales. Just thinking going forward here, understanding that expansion is going to benefit with operating leverage and the word production cost going forward. Just kind of want to understand what the uplift potential to gross margin is? As mentioned this quarter, it seems value kind of offset international, but is that something that we're going to see less of starting in Q1 of fiscal '23? And again, what kind of pickup on gross margin could we see from the expansion here, assuming that a lot of your future demand is going to be value-focused?

Derrick West, CFO

Seventy-five percent of our revenues come from flower categories. There is a difference in margins between international and domestic sales due to the high excise tax affecting all licensed producers. We are selling a substantial amount of our products under our value brand, and we are currently profitable in that segment in Canada, even without achieving full scale. We completed fiscal 2022 with an annual capacity of 85,000 kilos, up from 45,000 at the start of the year, but we only finished construction at the beginning of the fourth quarter and started planting in a staggered manner. While we experienced some cost efficiencies and automation benefits, we haven't yet realized the full benefit of lower production costs in our income statement. However, we did report a 23% year-over-year decrease in our cultivation costs, which will eventually reduce our flower costs. This reduction will begin to positively impact our margins across all flower categories in fiscal 2023, although we did not see much of that benefit reflected in our fiscal 2022 income statement. I cannot provide specific guidance on the exact margins expected from this, but our primary offerings remain in the flower categories, and the substantial decrease in cultivation costs as we exit fiscal 2022 should support this trend.

Andrew Partheniou, Analyst

Could you please confirm if the positive cash flow guidance applies to the entire fiscal year '23 and the entire calendar year '23, or does it refer to achieving positive cash flow in any specific quarter? Additionally, I would like to understand the expected progress, especially considering the increase in working capital this quarter. Should we anticipate a significant change, or will it be a more gradual process to reach positive cash flow? Managing expectations here would be appreciated. Thank you.

Derrick West, CFO

Yes. The guidance that's being given is not for the whole fiscal year. It is that we will achieve that income during the fiscal year in one of our quarters. So starting with the operating cash flow, we finished the year with fairly large increased sales. We do expect sales to continue to grow. We have significantly increased the production level in Moncton. And if we plan in those rooms, that will increase our investment in our biological assets and our inventories. So, as we continue to have success in the marketplace with our products and getting to a higher level of scale, there will be negative cash pressures on the operating activities for the first half of the year. However, we do expect that once we are fully operating our capacity at all facilities that, that will level off, and we are confident that we will have a positive operating cash flow prior to the end of fiscal 2023. And with regards to free cash flow, our main CapEx spend program, while significant in fiscal '22, we are doing further enhancements in automation in Winnipeg and Moncton and as well with completing the expansion at Laurentian. We expect to have that completed in fiscal 2023. And from there, we have no identified large capital projects. It would be more sustaining capital and as a consequence, as we get into the first part of fiscal '24, we would expect that positive operating cash flow with nominal CapEx will lead us to positive free cash flow, which is why we indicated in the guidance by the end of calendar '23, which covers our first quarter of next year, of fiscal '24.

Operator, Operator

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

Matt Bottomley, Analyst

Good morning everyone. Congrats on a strong finish to the fiscal year. Just wanted to kind of maybe more of a state of the union on what we are seeing in what's a saturated landscape in just terms of the number of participants in this sector, particularly on the cultivation production? So appreciate all the commentary on how you are positioned and you are pretty much sort of top three in everywhere where you are playing. But are you seeing any shakeouts right now, a lot of the commentary we have had from LPs as of late has there is a bit of what may be a bottoming in market share declines that we have seen pretty much across the board and you guys have been making good progress? So are you seeing that as well or maybe there is less competition for wholesales with the provincial boards? Or is this just more specifically where you are choosing to allocate time and effort in terms of the SKUs that you're looking at that's resulting in these gains?

Beena Goldenberg, CEO

That's an interesting question. Over the past year, we have noticed that some cultivation facilities unable to compete on quality or price have closed, which has reduced marketplace capacity. However, other players remain and are striving to succeed. As a result, we will continue to see some price competitiveness. We are confident in our cost structure, allowing us to compete effectively in the value segment. We have products in other segments, but particularly in today's high inflation market, we expect significant growth in the value segment and are comfortable participating in it. While some competitors focus solely on the premium segment, it is not large enough for us. We will achieve economies of scale, and although there is a focus on our margin percentage, the actual dollars matter; that's what we bring to the bank. Our gross margin dollars continue to grow. I believe the market will experience further consolidation, with some companies entering CCAA and facilities shutting down. The next 12 months will be interesting for the market. We are confident in our improved position and projected gross margins, as Derrick mentioned. We will continue competing in segments where consumers find good value, meaning right quality at a fair price. I feel comfortable with our position. Regarding market share, we are growing in the gummies category and have introduced SHRED-X vapes to a segment we hadn't tapped into with our SHRED brand, seeing nice growth there. We also have opportunities to expand the Tremblant hash portfolio thanks to the brand's strength. We see potential in other segments as well. As Derrick noted, we are primarily a flower company currently, benefiting from great assets and quality. However, we are still building our portfolio, and the two acquisitions we completed last year have helped us expand into higher margin products.

Matt Bottomley, Analyst

Got it. Thanks. I think I might have dropped maybe not. But if I'm still on the line, just one more follow-up for me. I know you touched on this a little bit, but I just want to make sure I understand the cadence of what's in your guidance as well. So given calling for a significant increase in adjusted EBITDA over the last fiscal year. I'm just wondering if you think that the sort of run rate that you're at now, or at least the 3.2 million that you did in this quarter, are you expecting to continually see gains sequentially or do you think there'll be some volatility in terms of being breakeven and sort of up and above that sort of breakeven level?

Derrick West, CFO

Yes, with regards to the EBITDA, we do expect significant improvement in fiscal '23 compared to fiscal '22. And but I do know that for the first three quarters of fiscal '22, we were nominally positive and most of the current fiscal '22 EBITDA do was generated in Q4. We do see EBITDA sequentially improving over next year. There can be some swings. It can depend on mix. But again, generally speaking, with the lower cost of production that we will have for next year and with our sales being at the level that they are, we think that we can maintain and continue to increase that. Ultimately, we will see that it would increase over the year. But we can't guarantee one quarter over another at this time. So we're not giving guidance specifically by quarter, but we would certainly see the year fiscal '23 being higher than fiscal '22 in a significant way as a consequence of overall sales being higher and cost of production being much lower than it was for fiscal '22.

Operator, Operator

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

Michael Freeman, Analyst

Congratulations on a terrific quarter, and a really impressive year. So my first question is on capacity. You indicate you've completed the build-out of the 4C expansion in Moncton. You're continuing to expand cultivation capacity in the Laurentian facility, but with international agreements looking like they're on a trajectory of growth, there seems to be continued unmet demand in Canada. Do you see even with these capacity expansion projects you've been undertaking reaching, running out of capacity to meet demand both domestically and internationally? And if so, what routes might you take to address that?

Beena Goldenberg, CEO

I think to start with, we continue to look at ways to enhance our yields further. So even with the completion of our expansion build-out in Moncton, the LED lights only roll through all of our facility by the end of this past quarter. And so the full impact of that benefit isn't yet in our numbers. As I mentioned and as I was talking, fractional watering will only be completed through the end of the calendar year. So that benefit is still to come and we work with our plant science group, the work that they're doing on cultivars, breeding, cross-breeding and selection. We're finding cultivars that have higher yields and higher potencies and will continue to update our garden with those products. So, there is upside even to the 85,000 kilograms that we're talking about right now as we work through the fiscal year at our Moncton facility. With that being said, and as you also mentioned, we have the capacity at the ranching facility. There is always the opportunity to go out into the market and buy incremental flower as required to fulfill our sales needs. We don't anticipate needing it for fiscal year '23 based on sales, but if opportunities come up, we can certainly look at that; there is excess capacity in the marketplace. And again that will be buying product that meets the specifications that we need to have to meet our consumers' demand and the quality of products they're looking for from us.

Michael Freeman, Analyst

And if I didn't just drop, I have another question. Thank you for that answer. Talking about the categories in which you play OrganiGram has been in dominant and very strong in edibles. The number two and three most important areas, largest categories apart from these or largest categories in the nation are pre-rolls and vapes; after that, in which, by my calculations, OrganiGram stands number 9 and number 12 position respectively among LPs? How is OrganiGram thinking about these categories? I recognize there's an increased attention put towards vapes? Recently, we saw some positive movement there. How can OrganiGram cultivate a right to win in each of each of those categories, if these are aims?

Beena Goldenberg, CEO

So, I think a couple of answers here. Look, it's always important to look at all the different categories and where there's new opportunities for growth. Certainly, pre-roll is one that we have been and we have held higher market positions than where we are. And at the end of the day, no different than our flower demand in fiscal 2022, we had demand that outstripped our supply. And so we were at fully pushing on our pre-roll opportunities. Now that our flower is coming in, we have more opportunities to expand our pre-roll offering and we will continue to do so. So we have a strong pre-roll offering under our SHRED brand, called Jar of Joints. And we have a really good product offering under our Edison brand. Our Pinners are dual. We have dual flavored, dual strain offerings under Edison. So we have good competing offerings. We just haven't been pushing pre-rolls to the extent, as a result of our available capacity and that will change going into fiscal year '23 as we have more flower available. In terms of vapes, as you said, we were not really a player in the vape market. We introduced vapes under our SHRED-X brand, again leveraging our brand strength and saw very strong off-take at the beginning. Now we have to find, make sure that we are offering a product that meets both what consumers are looking for at the right price. And it's a very crowded space in vapes right now and the market is very highly competitive. So while we have something to offer that's unique and different, we are in there and we do believe that offering flavors that match our very successful flower flavors for our SHRED milled flower that we had something unique to offer in the marketplace. But we will continue to explore how we could provide a differentiated offering in those segments. That's part of the work we do both in our R&D group as well as through the center of excellence with BAT to look for how to have differentiated offerings. So, we could come in and really disrupt the market. And that's what we are working on behind the scenes, while we continue to push on the segments that we have good penetration.

Michael Freeman, Analyst

Okay. That's really helpful. And if you would indulge just one more, since you mentioned the COE with BAT. I wonder if you could remind us the fate of those products that you develop in tandem with BAT; you mentioned 60 formulations developed and a bunch of delivery systems worked on this year. Where might we see these products and under what company might these be commercialized?

Beena Goldenberg, CEO

Let me start by reminding everyone that we can commercialize all the products and intellectual property that comes from the COE, including through sub-licensing arrangements. This means we don't need to have a physical presence in some international markets to monetize our developed products or intellectual property. We have the authority to do this. We intend to utilize these formulas not only internationally but also within the Canadian market, where we have strong products with unique offerings. We are conducting scientific work behind the scenes focused on enhancing onset and bioavailability. If we create products that truly set us apart, they will be introduced under our SHRED'ems, Monjour, SHRED-X, or any relevant portfolio. This strategy aims to further strengthen our brands with unique products and provide us with a competitive edge over others who are not conducting similar research.

Operator, Operator

Your next question comes from the line of Frederico Gomes from ATB. Your line is open.

Frederico Gomes, Analyst

Congrats on the quarter. Thanks for taking my questions. My first question is on your guidance for CapEx in next fiscal years. So if I got that right, you're planning to spend about $29 million. So it seems like you're continuing to materially invest in your automation and your cultivation, your capabilities, so that stands out compared to what many of your competitors are doing right now in the marketplace. So could you provide a bit more color on the return you expect from that investment capital and why does it make sense from a capital allocation standpoint to continue to invest at that pace in the current market conditions? Thank you.

Derrick West, CFO

Yes. Maybe start the answer on that one. I would say that, a substantial portion of that capital that we're allocating for fiscal '23 relates to the planned spend at the Laurentian facility and Lac-Supérieur. We acquired a company that had the capacity for hash of 1 million units a year, and we're looking to double that capacity to 2 million and take the, and quadruple the craft flower capacity there, along with provide certain automation equipment that will make it more profitable. So a large portion of that spend relates there. And in Moncton and Winnipeg, we're continuing to look at automation that will drive margins. Everything that we're investing in based upon our outlook on margins has a very quick payback and is very attractive. But we have not identified anything significant with our current three facilities that we now have going beyond fiscal '24. This would be just the planned expenditure at Lac-Supérieur and funnel touches to completely automate the Moncton facility and as well in Winnipeg. I don't know Beena, if you wanted to provide any color there.

Beena Goldenberg, CEO

Yes. I just want to say that, listen, we recognize that we have an opportunity to continue to invest, to drive significant efficiencies in our operations where some of our competitors who don't have the cash balances that we have have had to stop that kind of investment, which again provides us with an opportunity of a competitive advantage as we continue to see our cost program go down through this investment of automation and other enhancements. So, this is again, a long-term play. We're here for the long term, and we believe these are the right investments now to make us on continued ongoing improvement in our profitability and really be a leader in the space.

Frederico Gomes, Analyst

Okay. Thanks for that. And then in terms of pricing in Canada and your average selling prices. So I know that in the past, Beena, you have mentioned that you saw some stabilization here in Canada in terms of pricing, but at the same time in terms of net average selling prices that you report, we continue to view decline there. So could you talk about that dynamic, what you're seeing in the market right now, and how you expect that to evolve going into 2023? Thank you.

Beena Goldenberg, CEO

Thank you for the question. Our average selling price per gram did decline this quarter, which is primarily due to our product mix, with an increase in SHRED flower sales compared to Edison flower. This change accounts for the lower average selling price. It's important to note that we did not implement any price cuts in the market during Q4; this was solely a result of mix effects. There is a noticeable trend toward valuing offerings in the current high-inflation market. Consumers are not likely to reduce their cannabis consumption but are seeking the best value options. Consequently, we need to recognize this shift, and there will be a move toward larger formats, such as 1-ounce or 28-gram packages, leading to pricing pressures as companies compete for this consumer segment. We believe our cost structure allows us to compete effectively in this area with our 28-gram offerings. Additionally, as mentioned, we introduced the Holy Mountain line to provide value in smaller formats, which will be priced slightly higher than the larger flower formats, benefiting our pricing strategy. We also have a robust revitalization plan for the Edison brand, which we consider important. The rollout was postponed this past year due to exceeding flower supply with demand, but we anticipate improvements moving forward. While the average selling price is significant, it largely depends on our brand mix. Additionally, since our derivatives tend to have higher prices, increasing sales of our Tremblant hash will enhance our overall margins. Looking at the market from a broader perspective, we expect further challenges, especially concerning large-format flowers, due to existing excess capacity in Canada. Despite this, we are confident in our current position.

Operator, Operator

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

Beena Goldenberg, CEO

Perfect. Thank you, operator. And to everybody who congratulated us on the quarter, thank you for that. We did have a great quarter and a great year. So thanks for joining the call today. And I do look forward to providing an update on our fiscal '23 progress in the New Year. Thank you.

Operator, Operator

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