Earnings Call Transcript - OGI Q4 2021

Operator, Operator

Good morning and welcome to OrganiGram Holdings Inc.’s Fourth Quarter Earnings Conference Call for the Fiscal Year 2021. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session with analysts. As a reminder, this conference call is being recorded and a transcript will be available on OrganiGram’s website. Listeners should be aware that today's call will include estimates and other forward-looking information. Please review the cautionary language in today's press release on various factors, assumptions and risks that could cause the company's actual results to differ. Furthermore, during this call, reference will be made to certain non-IFRS financial measures, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS and our approach in calculating these measures may differ from that of other issuers and so these measures may not be directly comparable. Please see today’s earnings report for more information about these measures. I would now like to introduce Ms. Beena Goldenberg, Chief Executive Officer of OrganiGram Holdings Inc. Please go ahead Ms. Goldenberg.

Beena Goldenberg, CEO

Thank you, operator. Thank you for joining us today. With me is Derrick West, our Chief Financial Officer. For today's call, he will discuss the financial results for the three and 12 months ended August 31, 2021 and I will provide a general business update. We will then open this call for questions. To begin, I'd like to say how pleased I am to be part of the OrganiGram team and host this call with investors. With OrganiGram's reputation for high quality products, our strong brand portfolio, and our proven ability to innovate in ways that meet consumer needs, I believe we are positioned for success. What's more, we have the strategic partner, the team, and the resources in place to ensure we will execute on our growth strategy. Our fourth quarter 2021 results demonstrate progress against all of our strategic objectives. We achieved double-digit growth in recreational revenue. We introduced innovative products that were quickly embraced by consumers. We continue to improve our adjusted gross margins. We enhanced operations through adding key team members and advanced our product development collaboration with BAT. Also, and importantly, according to Hifyre data, we grew our recreational cannabis market share to 7% in Q4 from 5.4% in Q3, positioning OrganiGram as the number four LP in Canada, and the momentum continues. Our latest data shows a market share of 7.9% at the end of October. Starting with our brands, in the quarter, we continued the revitalization of our portfolio, with the introduction of 16 new SKUs into the recreational market, bringing the total to over 100 new SKUs in fiscal 2021. In addition, we recently introduced two new brands; SHRED’ems gummies in Q4, and our CBD-forward wellness brand, Monjour subsequent to quarter end. We have been refreshing our portfolio based on our ongoing consumer research to ensure it is aligned with current and expected evolutions and consumer preferences. The launch of SHRED’s and Big Bag o' Buds is a great example of our strategy to tackle the migration to large format, low price, and high THC offerings. While our Big Bag o' Buds offers 28 grams of high quality flower at a consumer-friendly price, SHRED is a potent value segment product that has built leading brand equity through its unique and bold flavor profiles. It has captured the imagination of the cannabis consumer, with sales growing 67% from Q3. SHRED has remained the number one search brand on the OCS website for 11 of the past 12 months. When it comes to addressing the evolving needs of the premium cannabis consumer, we continue to invest in our Edison brand. In fiscal 2021, we introduced seven new high potency strains that were well received by consumers. Moving forward through our in-house genetic breeding program, backed by our R&D investments in our advanced cultivation facility, we plan to bring new cultivars to market with unique terpene profiles and high THC content that consumers are looking for. We also devoted significant marketing budget to Edison to elevate new product introductions and solidify its brand position. And we're seeing the results of our marketing efforts. According to Brightfield's survey of 3,350 panelists over the August to September period, Edison experienced a 4% growth in brand awareness and achieved a significant increase in its numbers of social mentions and positive consumer sentiment scores. In fact, over 80% of consumers indicated they would likely recommend Edison to a friend. We will continue to invest in building our flagship brands with consumers, both in marketing and product development, to ensure this momentum continues over time. While we are committed to improving our mix in favor of premium products, we do recognize the importance of the value segment and its pivotal role in converting illicit market users to the legal market. That's why we continued to focus on offering brands such as SHRED and Big Bag o' Buds to consumers seeking a high quality legal product at a fair price. That said, we are committed to ensuring we can do so profitably. While Big Bag o' Buds has always had reasonable margins for the segment, we were able to leverage the strong consumer demand and loyalty on SHRED to take price, which improves the margin on this popular brand. On the premium side, we expect that in time, consumers will become more discerning and will start making choices based on genetics, bud structure, flavor and aroma profile, as well as other quality attributes. Our product development strategy anticipates this evolution and we will be ready as the shift in consumer behavior happens. Moving on from flower, in the fourth quarter we launched SHRED’ems gummies to leverage the success and brand recognition of SHRED. SHRED’ems are available in indica, sativa, and hybrid versions with exciting flavors like Sour Cherry Punch, Sour Megamelon, and Wild Berry Blaze. Since their launch in August, SHRED’ems quickly gained momentum capturing 5.8% national market share in the gummy category as of last week. This is the first product launch from our recently acquired Edibles & Infusions Corporation, and demonstrates the synergies achieved from combining EIC's confectionery expertise with the strength of our SHRED brand and our team focus on consumer insights. The efficiencies that are in place at EIC also allow SHRED’ems to be one of the most competitively priced gummies on the market. Launched in August, Edison Jolts was another first to market offering in the quarter that demonstrated our R&D capabilities, our creativity, and our commitment to consumer-driven innovation. Jolts are Canada's first flavored, high potency THC lozenges. They are available in a package of 10 mint-flavored lozenges, with 10 milligrams per lozenge for a total of 100 milligrams per package. For the eight-week period ending November 6, Jolts reached the number one position within the ingestible extracts category. And finally, last week, we announced a major addition to our cannabis derivatives lineup with the introduction of CBD-infused soft chews under our new wellness brand, Monjour. They are offered in Berry Medley and Citrus Medley flavors, as well as in both vegan-friendly and sugar-free formats. Monjour offers 20 milligrams per piece and is attractively priced for 30 pieces per pack. Monjour is also produced at our EIC facility in Winnipeg. Again, EIC's highly efficient production technology means we can produce high quality, low-cost edible products at scale. In fiscal 22, we expect to add even more edible products to our lineup in both THC and CBD formulations. Moving on to our growing facility in Moncton, in the past quarter, we launched several initiatives to increase the average THC content per plant, as well as the average yield. These initiatives are aligned with consumers demand for high THC, and are expected to continue the improvements in our margin. In Q4, our yield per plant was 127 grams, compared to 117 grams in Q3, and 101 grams in Q4 of fiscal 2020. We harvested about 12,000 kilograms of dried product in Q4 compared to about 8,400 in Q3 of fiscal 2021. The increased harvest helped to meet the growing demand for our products and for the growing store build-out in Ontario. However, we are reaching capacity at our Moncton campus. The higher consumer demand for our products has meant that we are not able to take advantage of all the sales opportunities presented to us. In order to better capture these opportunities, we have decided to complete the Phase 4C expansion of our growing facility at Moncton, which will significantly increase our capacity and ability to meet and monetize further demand. This is a rare situation in the Canadian cannabis industry. While other Canadian LPs are closing facilities, we are expanding. And this speaks to both the prudent initial build-out of our growing infrastructure and our compelling product offering. Our current annual capacity at this facility is approximately 40,000 kilograms. When the Phase 4C expansion is complete, the facility will have an annual capacity of approximately 70,000 kilograms of flower. We are also making design improvements and environmental enhancements to the facility to improve yields and flower quality. In the fourth quarter, we significantly advanced the build-out of our Center of Excellence or CoE in Moncton that we are building as part of our product development collaboration with BAT. As has been discussed in prior quarters, the CoE will develop the next generation of breakthrough cannabis products, IP, and technologies. Both OrganiGram and BAT are contributing scientists, researchers, and product developers. Currently, we have reached the first 100-Day milestone in the project with staffing, construction, and project planning underway. In the next eight to 10 weeks, we expect to have the remaining core construction projects completed, with the biolab to be completed in Q2 of fiscal 2022. Research collaboration has begun with the initial focus on CBD cannabis, vapor, and oral products. This is an exciting opportunity. This strategy should enable us to grow our market presence in Canada. What's more, having access to new IP from the collaboration and the ability to sublicense the technology opens up significant opportunities in the U.S. and other markets. Finally, before Derrick provides the financial overview, I'd like to comment on our international sales to Israel. We recently resumed shipments to Canndoc, and we expect to make further shipments in fiscal 2022. This is a high-margin revenue source for us and one that provides our leading cultivars to markets outside of Canada. Over to you, Derrick.

Derrick West, CFO

Thanks. I will start with our strong financial position. In terms of liquidity, we ended fiscal 2021 with $184 million in unrestricted cash and short-term investments, compared to $75 million at the end of fiscal 2020. This $109 million increase was primarily due to the $65 million unit offering done during November of 2021. The $221 million private placement was part of the strategic investment from BAT, net of the allocation of $31 million to restricted funds for the CoE, along with $115 million used towards debt repayment. Our strong cash position and debt of $300,000 ensures we are well-resourced to execute on our growth strategy. As Beena mentioned, earlier this year we made the decision to complete the Phase 4C expansion at our Moncton campus. The budget amount for Phase 4C is estimated to be $38 million and began in fiscal Q4 2021, with completion targeted during fiscal 2022. We have sufficient resources to support these expenditures and the corresponding growth through our working capital assets, while still maintaining sufficient liquidity and financial flexibility. In addition, on August 31, we filed a Preliminary Base Shelf Prospectus, which allows us to move quickly to access even more financial flexibility if necessary to pursue attractive growth opportunities should they arise. To date, we have not offered any securities under this base shelf prospectus. Net cash used in operating activities was $7.7 million during Q4 fiscal 2021, which was flat compared to the same prior year period. For the fiscal 2021 year, cash used was $28.6 million, down from $45.1 million in fiscal 2020, mainly as a result of improved inventory management. Net cash provided by financing activities was $55,000 during Q4 fiscal 2021, down from $46 million for the same prior year period, which had been driven by draws from the credit facility. For the fiscal 2021 year, cash provided by financing activities was $174 million, up from $160 million in fiscal '20, with the current year's net amount driven by the net proceeds from the equity investments net of debt repayments. Turning to our earnings results for Q4 fiscal 2021. Gross revenue grew 24% from Q3, 2021 and 43% from the same period in fiscal 2020 to $36.2 million, and net revenue grew 22% from both Q3 2021 and from the same period in fiscal '20 respectively to $24.9 million. These increases to revenue were primarily due to higher recreational net revenue, which grew 36% from Q3, and 52% from the same period in 2020, due to an increase in sales from the flower categories. Cost of sales decreased 11% year-over-year to $26 million, primarily due to the current period's lower cost of cultivation, and due to the nearly $11 million in inventory write-offs and provisions recorded in Q4 of last year. As expected, the charge will hedge and absorb fixed overhead and included in cost of sales continues to decline again sequentially. It is anticipated that we will no longer have unabsorbed fixed overhead and we expect this to help our margin going forward. We harvested approximately 12,000 kilos of flower during Q4 fiscal 2021 compared to approximately 8,800 kilos of flower in Q4 of fiscal '20, an increase of 38%. This increase was directly related to increased cultivation, planting, staffing during Q3 and Q4 of fiscal 2021, which was done to meet the growing demand for many of our new products as part of the product portfolio revitalization, as well as the increase in industry demand. Largely due to higher net revenue and lower cost of sales, gross margin in Q4 improved to negative $1 million from negative $8.6 million in Q4 of 2020. On an adjusted basis, gross margin was $3 million compared to negative $700,000 in Q3 of 2021. We expected the price increase to SHRED, as well as lower production costs, will further improve margins. SG&A excluding non-cash share-based compensation increased to $13.6 million in Q4 2021 from $10.8 million in Q4 2020, largely due to the establishment of the OrganiGram BAT Center of Excellence, increased out of licensing fees with the continued rollout of stores in Ontario, combined with marketing initiatives behind Edison and the launch of our new gummy products, as well as higher audit and related professional fees in connection with the company's regulatory requirement to obtain an integrated audit opinion for the first time for fiscal 2021 financial statements. Also, as a result of improved revenues and margins, adjusted EBITDA was negative $4.8 million in Q4 2021 compared to negative $9.2 million in Q3 2021, the most recent quarter. We also reduced our net loss year-over-year from $39 million to $26 million. Overall, we are pleased with our improving financials and the momentum we are assuming. Based on this, we currently believe that we will achieve positive adjusted EBITDA Q4 of fiscal 2022. This concludes my comments. Thank you. I would like to turn the call back to Beena.

Beena Goldenberg, CEO

Thanks, Derrick. As you've heard today, we have generated significant momentum in Q4 fiscal 2021 against all of our strategic objectives, which include achieving strong sequential revenue and volume growth, in addition to doubling market share, innovating to bring new and exciting products to market and improving our ability to match our supply with increased demand for our product portfolio. We also expect to see further improvements in our adjusted gross margin, as we continue to realize economies of scale from cultivation and as our price increase from SHRED comes into effect. We are excited for what fiscal 2022 holds for OrganiGram. Looking ahead, we expect to continue our strong growth momentum as we maintain our focus on increased points of distribution, growing market share, exceeding consumer needs by bringing more insights-driven and innovative products to market and improving our ability to fulfill growing demand. I look forward to updating you on our progress. And now operator, you may open the call for questions.

Operator, Operator

Thank you, ma'am. Your first question is from the line of Frederico Gomes. Your line is now open.

Frederico Gomes, Analyst

Hi good morning guys. Congrats on the quarter. Thanks for taking my questions. So the first question is just on the market share. You guys are obviously gaining share really rapidly in Canada now, number four LP here, so that's positive. But no, I am just wondering how do you plan to keep those market share gains or just how sustainable do you believe they are, just considering the fragmentation of the market, heavy competition of price and we've seen some other LPs gaining market share and then losing some of that, so what are your thoughts there?

Beena Goldenberg, CEO

Thank you Frederico for your question. Look, we believe we have a very strong position with our SHRED brands. We see heightened consumer interests through the search on the OCS website for the brand. We see strong consumer pull in demand to the extent that at this point, we can't supply the demand that that brand is generating with consumers. And we think it's a unique offering. Because it has, it's not simply a milled flower, we're providing bold sort of flavor profiles that are resonating with our consumers. At this point, we believe there's opportunity to extend our momentum and our market share, because we see that there are opportunities to extend-trim to other regions across the country. we currently sell most of our products in Ontario and Alberta with a little bit of SHRED being sold in Quebec. The demand is out there. We have plans to continue to build out our capacity so we could fulfill that demand. So that's on our SHRED business. We believe there's further opportunities. And with respect to Edison, which is our premium brand, we need to continue to bring news to that brand and keep making sure it resonates with the cannabis enthusiast, and we will do that with continuing to bring new flower, unique strains out to the marketplace, and bringing some other products such as vape that we have with live resin, other products that will continue to advance that brand as a more premium brand within our portfolio. So we're confident that we have the plans in place to continue the momentum and that we have the consumers interested in our brands and will be coming back for more.

Frederico Gomes, Analyst

Okay, thank you Beena. That's helpful. And then just on international markets, you mentioned your shipment to Israel, but are you looking at any other markets out there in Europe, in addition to Israel, and to that point would you consider an acquisition to enter some of those markets? We've seen some LPs they're making acquisitions in Germany, Netherlands, so any color there would be helpful? Thank you.

Beena Goldenberg, CEO

Yes, sure. So in terms of renewing or resuming our shipments with Israel, we have a great partner in Canndoc and have an opportunity to continue to supply that market. We currently supply the Australian market and are working with our partner Cannatrek in Australia to continue to build out our portfolio there. So those are markets that we're currently in. Certainly, the news on Germany that's been coming out makes it a market that we will continue to explore. But in terms of interest in acquisitions in other European markets, at this point, we'll continue to evaluate the opportunities. We'll continue to look at how regulations change, because sometimes the news happens way faster than the actual changes happen in the regulations. So we'll monitor it and continue to evaluate opportunities in the international market.

Frederico Gomes, Analyst

Thank you. I'll hop back into queue, thanks.

Beena Goldenberg, CEO

Thank you.

Operator, Operator

Your next question is from the line of Rahul Sarugaser from Raymond James. Your line is now open. Rahul, your line is now open.

Rahul Sarugaser, Analyst

Good morning, Beena and Derrick. Sorry I was talking to myself on mute, I apologize for that. Thanks so much for taking my question. So, congratulations on driving terrific top line, quarter-over-quarter growth, as well as more market share. My question, however, is really on margins; we saw the gross margin profile relatively flat between last quarter and this quarter. Given the capacity expansion that you talked about, Beena, as well as the changes in the unabsorbed fixed overhead that you talked about, Derrick, can you give us a little bit more color in terms of how you expect margins to improve over the next few quarters?

Beena Goldenberg, CEO

Thank you, Rahul. I'll begin and then Derrick will follow. As we have increased production, we are experiencing economies of scale in our facility. We noticed this benefit as the numbers improved from Q3 to Q4 of 2021, and we anticipate continuing to see this as we expand our capacity. We have implemented enhancements that are driving these deals, and we expect that to lead to improved gross margins as well as increased THC levels, which typically results in higher average selling prices for our THC products. As I mentioned earlier, we were able to raise the price on SHRED, which is significant in a market where most prices are declining. Due to high consumer demand and our competitors' challenges in meeting sales opportunities, we could implement a price increase that further benefits our margin. Looking ahead, there is an opportunity to enhance our margins by improving our provincial mix. Currently, we are focused on markets with more compressed margins, but as we expand our offerings across additional provinces, we expect to see improvements in our margins. Those are some of my comments. Now, I'll hand it over to Derrick.

Derrick West, CFO

Yes, just I guess in addition, we are reviewing our sourcing with suppliers and considering more strategic sourcing. There is opportunity for further automation with regards to our blinds that are showing pre-milled flower along with we'll have in Q1, the automation of our second pre-roll machine and have labor savings with that. So we do see some near-term improvements with our margin. As well, we were leaving Q4 near capacity, but during Q4 in the early parts, we were not at capacity and there is a heavy fixed cost component to our operations. And as we achieve these economies of scale from operating in Q1 at their current capacity and then with the filled out, we do think that we can drive down fairly significantly our cost of cultivation that will allow us to have sustained quarter-over-quarter improvements to our costing and therefore to our adjusted gross margin. And just by example, and going from Q3 to Q4, our adjusted gross margin went from negative 4% to plus 12%. So in one quarter, just from some of the initiatives we've already implemented, we improved our adjusted gross margin by 16%.

Rahul Sarugaser, Analyst

Great, thanks, thanks so much for that color. And then just pivoting towards the British American Tobacco partnership, specifically, given the investment that you haven't hired since, and the recognition that this was potentially a key motivator for that partnership, we're starting to see biosynthesis or fermentation derived products start to hit market by a few of your competitors. Maybe give us an update in terms of that partnership, how you see products rolling out, and maybe potentially a broader update on the British American Tobacco partnership?

Beena Goldenberg, CEO

Okay, perfect. Let me start with Hyasynth. We believe there is a long-term opportunity to develop from this partnership. We conducted a strategic review of the investment over the summer and are very pleased with the progress made and the intellectual property developed. We look forward to furthering our relationship with Hyasynth, as we see potential in the biosynthesis of rare cannabinoids and will keep you updated on that investment. Regarding the BAT partnership, it is integral to our daily operations, and we have strong relationships with our investors. The Center of Excellence is progressing well, and we have hired scientists, product developers, and researchers from both BAT and OrganiGram to collaborate. The construction of the Center of Excellence is nearly complete, with expectations for finalization by Q2 of fiscal 2020. This will include not only laboratories but also the BIOS facilities for our collaborative projects, focusing on oral, vapor, and CBD products. There is significant potential to expand our intellectual property and technology for both companies, as we explore opportunities in other global markets.

Rahul Sarugaser, Analyst

Great, thanks again for taking our questions and congratulations again on the quarter.

Beena Goldenberg, CEO

Thank you.

Operator, Operator

Your next question is from the line of Rupesh Parikh from Oppenheimer. Your line is now open.

Rupesh Parikh, Analyst

Great, thanks for taking my question. So I guess just going back to that target for positive EBITDA margins later in your fiscal year, is there any way to frame just what type of gross margin you expect to get to, to be able to achieve that target? And I guess a second question is just, I guess as you look at the capacity right now that you have, I guess what type of revenue, I wanted to say like to totally ramp, like what type of revenue do you think that you can get up to with your existing facilities?

Beena Goldenberg, CEO

Derrick, why don't I pass that one over to you?

Derrick West, CFO

Okay, as it relates to the merge and that we would need to get positive, adjusted EBITDA, I mean that's not really the type of guidance we would normally provide. I know we are providing the positive guidance just based upon where we are today and the trends and the products that we have and the cost analysis that's been done and our control over our SG&A cost, we are confident that we can get to the Q4 adjusted EBITDA positive and that will happen over time to gain that funding as well from the economies of scale from operating at the higher output more towards the 70,000. In terms of what type of revenue that results in? I mean you are not going to, of course, sell everything that you produce when you add 70,000 kilos a year in capacity, because of our packaging and processing losses, but what the ultimate top line revenue and sales number extrapolates to is really dependent strongly on the mix of the flower that's being offered and whether it's in mainstream and/or value and when there's a pre-roll. So there can be large fluctuations with that. I think that you can look at some of the data points on the net average selling price in our disclosures and come up with a range for it, but it's not the type of extrapolated guidance that we would be comfortable to go on record with at this time. But we are providing the guidance that we will be at least at 70,000 kilos of flower by the end of the year after completing the construction. So that is the guidance we can provide.

Rupesh Parikh, Analyst

Okay, great. Maybe just one follow-up question. So clearly, your liquidity position seems to be better than peers. Where does M&A fit into the strategy going forward at this point for the company?

Beena Goldenberg, CEO

Thank you for the question. We will continue to explore opportunities that align with our business strategy. Currently, there is much discussion about potential in the U.S., and we will assess the situation regarding regulations to determine if and how we might enter that market. Our evaluation of opportunities includes observing what our competitors are doing. Additionally, we see potential beyond the U.S., particularly in Europe and Canada, as we strengthen our presence in the Canadian market. At this time, our focus is on establishing a solid foundation, revitalizing our product portfolio, and increasing market share. We will consider acquisitions that help fill gaps in our portfolio in specific regions when they make sense.

Rupesh Parikh, Analyst

Great, thank you for all the color.

Operator, Operator

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

Aaron Grey, Analyst

Hi, good morning. Thanks for the questions and congrats on the market share gains and improvement on the gross margin. So I just wanted to double back my question in terms of some of the gross margin commentary, specifically as it relates to what you said, Derrick, in terms of targeting EBITDA profitability in 4Q 2022. Can you just maybe give some targets you have within that to help get that breakeven mark maybe in terms of metrics for gross margin or top line just to help us kind of model out how we might get to that? Thanks.

Derrick West, CFO

I understand the interest in running the models. There are many variables at play, such as the timing of flower harvests, market dynamics, and brand impact, which can lead to a wide range of selling prices based on product format and brand. I look at this through the lens of the average of averages, especially as we aim to reach higher capacity by year-end following construction completion. It is reasonable to expect that we could achieve breakeven or positive EBITDA. However, I will leave the detailed modeling to the analysts. We believe we can significantly lower our cultivation costs while increasing our production from 47 kilos of flower to 70,000. Additionally, with the yield improvements from our innovative efforts, there are further opportunities. Nonetheless, there are too many variables for me to provide exact figures. We are confident, given our facility's cost structure, overhead expenses, and the ability to sell our product currently being harvested and in the near future, that we will be EBITDA positive for Q4.

Aaron Grey, Analyst

No, that's helpful commentary. Thank you for that. And then second question from me, you guys have done really well in terms of market share as of recent. So just, a lot of your peers talked about more shifts to more consumers shopping in brick-and-mortar, if you can kind of regain some share gains during that time. So I just wanted to hear about you guys and your strategy as consumers potentially go to more shopping at brick-and-mortar versus online, how you're looking to maintain the market share trends that you guys have, particularly maybe if there's maybe less of a focus on price or you guys also talked about the value proposition you have within that price range. But maybe your kind of commentary now look in terms of potential shifts in consumer purchase habits as they go to more brick-and-mortar shopping and higher positioning? Thank you.

Beena Goldenberg, CEO

Yes, I would like to remind everyone that one of OrganiGram's unique advantages is our dedicated sales force. Unlike many competitors who rely on third-party sales, we are focused on this area every day, with our team visiting retail stores and engaging with bud tenders. This gives us a competitive edge, and we plan to expand our presence in stores. We were able to quickly distribute our SHRED'ems gummies within 12 weeks of launch, achieving mass distribution across the country, excluding Quebec. As people return to stores, we believe this will benefit us, especially for our Edison brand where bud tender recommendations are crucial. We will conduct more in-store activations, which were limited last year due to COVID restrictions. This engagement will help us maintain visibility and drive momentum. Additionally, we have bud tender education programs, including a dedicated program called Plant Lab, which focuses on quality knowledge for bud tenders and consumers. We will also enhance our consumer communication strategies. This category presents challenges since we cannot market like traditional CPG companies. However, we can reach consumers in-store and online, and last year, in-store marketing faced restrictions due to COVID. We are eager to increase in-store efforts and improve our online programs, targeting consumers for both our Edison brand and other new products like gummies and jolts, which we believe can significantly enhance our product offerings.

Aaron Grey, Analyst

All right, Beena, thank you very much for that color and commentary and I’ll jump back into the queue.

Operator, Operator

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

Tamy Chen, Analyst

Thanks, good morning. Sorry to hound on the gross margin again. But I just want to make sure I understand. The going from the negative 4% gross margin last quarter to 12%, so quite a significant recovery, so was that more due to changes in your product mix or was that largely because you're producing more and so you have those economies of scale? Was it more due to the latter?

Derrick West, CFO

I would say that the 16% improvement was largely due to cost reductions we achieved at the facility during Q3 and early Q4, which helped enhance the margin. This occurred before we operated at full capacity of 40,000 kilos, which is why we gained confidence in the improving cost structure and margin. We continually aim to sell our products in brands and formats that allow for higher prices, which will also contribute to margin improvement. However, the significant enhancement we witnessed over the last quarter primarily stemmed from bettering the cost structure.

Tamy Chen, Analyst

So it was improvement to the cost structure, so this was even prior to getting to more production economies of scale?

Derrick West, CFO

Correct, which was one of the drivers along with the sales demand for our products that gave us the ability to give the guidance on the adjusted EBITDA for the end of the year.

Tamy Chen, Analyst

It sounds like now that you're producing more, and as you continue to increase production through fiscal 2022, that’s where the potential for greater margin improvement will come from. My next question is regarding your Big Bag o' Buds and SHRED. I know you recently raised the price on SHRED. Are both of these product lines currently generating positive gross margins, or is SHRED still just at breakeven after the price increase? Could you share some insight into the margins you have on those two products? Thank you.

Derrick West, CFO

Yes. Currently, all our flower product categories and brands are achieving positive product margins. While I cannot go into specific details about individual products or formats, I want to highlight that due to the lower production costs we have managed to achieve over the past few quarters, our product categories are indeed generating positive profit margins.

Tamy Chen, Analyst

Okay, thank you.

Operator, Operator

Your next question is from the line of Adam Buckham from Scotia Bank. Your line is now open.

Adam Buckham, Analyst

Good morning. Thank you for taking my questions. Following up on Tamy's question, Derrick, could you provide more details on the flower segment, specifically the mix between volume and premium this quarter and how it compares to the last two quarters?

Derrick West, CFO

Yes. I would say that SHRED has been very popular and has become a strong organic brand, with demand exceeding our production capacity at times, resulting in some potential lost sales. Over the last couple of quarters, the percentage of SHRED in our total value formats and value brands has increased. However, with our current and future investment in innovation, we are focused on making more products available in mainstream to premium brands. Additionally, I would refer to comments made by Beena regarding M&A opportunities we have considered to complete our portfolio. We typically do not break out volume by brand, but it is clear that the success of SHRED has contributed to a larger percentage of total sales for the facility, which has helped cover our overhead costs and allowed us to achieve improved margins.

Adam Buckham, Analyst

Okay, great. That's good color. Thanks Derrick. So just my second question, so obviously, if you look over the last four or five months, many of your peers have kind of tried to jump into premiumizing their overall portfolio. So if you look at your market share gains for the summer, it sounds like a lot of them have come through the SHRED brand and the associated products through that. So if you look more specifically at Edison, are you able to provide some color on how market share has trended in the premium category for you guys? Like with the launch of the new streams are you starting to see greater uptick? Some color there would certainly be helpful.

Beena Goldenberg, CEO

Thank you for your question, Adam. Our primary focus with Edison, as I mentioned earlier, is to enhance our connection with consumers. We are dedicated to increasing brand awareness and customer loyalty for Edison. During COVID, our ability to engage directly with consumers and receive recommendations from store budtenders was restricted. However, we see an opportunity in the coming year to improve our messaging and strengthen our bond with Edison consumers. We also have plans to introduce new products that will bring fresh news to Edison, including new strains and vape products, to expand our portfolio beyond just flower and appeal to mainstream consumers, rather than focusing solely on price. Edison represents more than just high THC; we're looking to incorporate terpenes into our labels and increase visibility for our strains. These elements should attract the interest of cannabis enthusiasts over time. While building Edison may take time, we believe we have a solid foundation to continue developing and strengthening the brand. Meanwhile, we plan to leverage SHRED to attract consumers from the illicit market with a more competitive price point and higher THC products, which presents an easier message. We don't allocate a significant portion of our marketing budget to SHRED, as its market positioning tends to work effectively on its own; instead, our investment is focused on the Edison brand.

Adam Buckham, Analyst

Okay, that’s great color. Thanks and congrats on the quarter.

Beena Goldenberg, CEO

Thank you.

Operator, Operator

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

Douglas Miehm, Analyst

Good morning. I guess as part of this gross margin question, I am curious if you could comment on, if you're getting close to capacity today at 40,000, and as you move to the 70,000, can you tell us what's going to be required to get there in terms of are there any new approvals required as you bring on capacity? Is there a chance that margins could decline over the next few quarters before we get to Q4?

Derrick West, CFO

I don't see any impact on the margins from the extra capacity due to the fixed costs associated with operating the facility, including labor and overhead costs. As we increase our capacity by adding new rows, those costs will be spread over a larger output. Therefore, I don't anticipate any disruption to the monthly or quarterly cost structure that would affect the margins as we scale from 40,000 to 70,000 kilos of flower by the end of the year. While there may be some minor changes during transitions and as we make environmental improvements to the facility, overall, I don't expect margins to be affected. Additionally, there are other factors beyond the quality of the flower affecting our sales, particularly with our new derivative products like Edison Jolts and SHRED'ems gummies, which are capturing more market share and contributing to revenue growth. This will further support OrganiGram's overall margins moving forward.

Douglas Miehm, Analyst

Okay. Perfect. And then maybe you could comment on one of the things that you've obviously been very good at is your ability to identify changes within the consumer, how they're thinking. And Beena, maybe you could describe some of the new consumer research that you're seeing right now and how that's changed over the last, let's say, six or 12 months, and how you intend to take advantage of that? That’s it from me. Thanks.

Beena Goldenberg, CEO

Thank you for the question. Regarding the direction of consumer preferences moving forward, we anticipate that consumers will shift their focus from merely seeking the highest THC at the lowest price to placing more importance on aromas, flavors, and unique genetic traits. There is a growing 'foodie' mentality among cannabis enthusiasts who are interested in exploring new and distinctive cultivars. We believe this shift will take place, and we are ready to support it through our in-house breeding programs under the Edison brand. Additionally, the wellness segment is expected to continue its upward trend. We recently launched our Monjour product, which provides CBD as part of a daily regimen, and we foresee an increasing demand for wellness-focused offerings that cater to consumers interested in the benefits of CBD and balanced CBD-THC products rather than just seeking a high. Consumers are likely to gravitate toward edibles over oils, as the oil segment has seen a decline with the rising popularity of edibles that allow for discreet consumption and specific dosage over time. We are particularly enthusiastic about our Edibles & Infusions Corporation, as that acquisition has enabled us to quickly enter the gummies market. Last quarter, we mentioned our cannabis innovation panel, which consists of 2,500 consumers whose insights help us identify trends. This panel informs our decisions on flavors for our gummies and guides our plans for pre-rolls and chocolates, allowing us to continuously refine our product portfolio based on consumer research.

Douglas Miehm, Analyst

Great, thank you.

Operator, Operator

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

Andrew Partheniou, Analyst

Hi, good morning. Thank you for taking my questions and congrats on the profitability and improvement in this quarter. Maybe just talking about your rec performance, you mentioned that you took price increases on SHRED. Wondering what that did to the average net selling price in the quarter and if you continue to take price increases on SHRED, where that can go in tandem with your premium offerings?

Beena Goldenberg, CEO

Thank you, Andrew. Let's discuss the increase on SHRED. We are currently struggling to meet the demand for this brand, and in response, increasing prices is a natural choice. We implemented a price increase in Alberta in August, and Ontario's increase took effect at the end of October. We expect to see the benefits of this price increase reflected in our results next quarter as we continue to grow the brand. This should help improve the margin for SHRED, and there are additional opportunities to expand the brand into other markets as our supply allows. Ontario represents the most price-sensitive market, so expanding into other regions will also enhance our average selling price. Regarding Edison, we believe that our Edison brand is well-positioned in the mainstream market in terms of pricing. We need to keep generating interest and excitement around this brand, and that's part of our strategy as we enter fiscal year 2022. We plan to engage with consumers and bud tenders while introducing innovation. This presents a great opportunity to shift our product mix towards premium offerings. Additionally, we're excited about launching new gummies, including Monjour and SHRED'ems, which will help us achieve higher average selling prices as we move beyond the flower segment. We see many promising opportunities as we evaluate our product portfolio moving forward.

Andrew Partheniou, Analyst

Thanks for that and maybe just continuing on that. You talk about the continuing revitalization of the Edison brand. Maybe just providing a little bit more color on the mechanics behind that. Do you need to win any SKU listings for that? I'm not sure that you're required to do that in the past, you may have just switched them out with your existing legacy strains, just some color on the path forward given the provincial markets, or the provincial buyers are being a little bit more stringent with SKU listings here?

Beena Goldenberg, CEO

Yes, sure. Look, part of our interest is to have the best-selling products in the marketplace at all times, right? And so I think we're working with the Provincial Boards to make sure we have our best offerings in their portfolio. So we will work with them and look at if we have any slower removers and switching them out to add new SKUs. There is a need for new in this category to continue to refresh the portfolio. And so, that is an ongoing process that we currently do with our Provincial Boards. And so we're not worried about trying to get too many more incremental SKUs. We're looking at optimizing our offerings in each board to make sure we have the best-selling SKUs in the marketplace. Certainly, when we bring in something that's unique like our Edison Jolts, we find a way to get in incremental listings across the board, but there is a need for ongoing rationalization and optimization of your portfolio. And so, as we bring new cultivars in, we retire some and continue to refresh our portfolio.

Andrew Partheniou, Analyst

Thanks for that. I’ll get back in the queue.

Beena Goldenberg, CEO

Thank you.

Operator, Operator

Your next question is from the line of Graeme Kreindler from Eight Capital. Your line is now open.

Graeme Kreindler, Analyst

Hi, good morning and thank you for taking my question. With respect to the expansion of capacity at Phase 4C, the company is still incurring charges for unabsorbed fixed overhead and the cost of sales. So I wanted to know what those charges are related to given the fact that it's currently expanding capacity? And what types of levels of output are needed to be achieved to fully absorb that overhead? Thank you very much.

Derrick West, CFO

Yes, thanks. I can address that question. The unabsorbed overhead, which was more pronounced in the earlier quarters, stemmed from underutilization of the depreciation on our chocolate machines and the unused grow rooms, primarily in the earlier quarters. The impact on Q4 was much smaller. Looking ahead, we do not anticipate any unabsorbed overhead due to the reduction of rooms as they become available for growing. This was more of a historical issue, and as those costs are recognized as cost of sales, we're fully utilizing all the rooms. We are naturally absorbing the remaining costs through our margins, which will positively affect the gross margin. The costs mainly include depreciation, property tax, and insurance for the unused rooms at that time. However, as we expand capacity at the end of Q4, the charge for Q4 was minimal, and we do not expect it to recur even with the expansion. As new rooms become operational, we will only depreciate them while they are in use, and they will be put into use immediately. I hope this clarifies your inquiry.

Graeme Kreindler, Analyst

Okay, understood. Thank you for that. Then with respect to incremental capacity coming online with Phase 4C, can you comment on the company's position in downstream packaging and processing? What the spare capacity looks like to handle the increase in production there as that had been a bottleneck in the past? Thank you.

Beena Goldenberg, CEO

Thank you for the question. We are continuing to invest in automating our production and downstream processing. Last year, we had one automated pre-roll line, and we added a second one in August or September of this year. We are also exploring more automation in our packaging and blending. As we expand our capacity, we are focusing on downstream processing to ensure we can not only grow the flower but also fulfill consumer demand. This is all part of our plans and the efficiencies we aim to achieve in this fiscal year.

Graeme Kreindler, Analyst

Okay, thank you very much for that.

Beena Goldenberg, CEO

Thank you. And thank you, everybody, for joining this call today. Thank you, Operator. And I look forward to updating you on the progress moving forward. Have a good day.

Operator, Operator

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.