OrganiGram Holdings Inc

TSX:OGI

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. 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 Inc.'s First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and a replay will be available on Organigram's website. At this time, I'd like to introduce Amy Schwalm, Vice President, Investor Relations. Ms. Schwalm?

[Amy Schwalm, Vice President of Investor Relations]

Thank you, operator. Joining me today are Chief Executive Officer, Greg Engel; and Chief Financial Officer, Paolo De Luca. Before we begin, I would like to remind you that today's call will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in our Q1 MD&A and financials regarding various factors, assumptions and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS financial measures. These measures do not have any standardized meaning under IFRS, and our approach in calculating these measures may differ from that of other issuers and so may not be directly comparable. Please see today's earnings report for more information about them. I will now hand the call over to Greg.

[Gregory Engel, CEO & Director]

Thanks, Amy. Good afternoon, and thank you for joining us today. This afternoon, we reported results for our first quarter of fiscal 2020, which ended November 30, 2019. I'll provide some overall comments on the quarter, our progress on Rec 2.0 products as well as some views on the industry. And then Paolo will go over the quarterly results in more detail before we open up the call to your questions. We are pleased with our results in the first quarter of our fiscal 2020 year. As we expected and guided with our last quarterly results, Q1 saw a marked improvement from Q4 across a number of key metrics we track to assess our performance. Net revenue grew. Our cost of cultivation per gram declined. Gross margin substantially increased. And we returned to positive adjusted EBITDA. Net revenue included wholesale revenue as well as exports to Australia. Despite pricing pressures seen by other Canadian licensed producers with lower quality product, our average selling price to the provinces fared well. It was largely consistent with our -- with prior quarters at over $5 per gram when you back out wholesale revenue. This is a testament to our indoor facility where we have ability to better control consistency and quality when compared to greenhouses and outdoor grow operations. We expect to see gradual pricing pressure in the market, but are in the enviable position of having one of the lowest costs of cultivation as well as consistent indoor quality product, which better positions us against pricing headwinds. In fact, our Q1 all-in cost of cultivation decreased from Q4 to $0.87 per gram. The cash component of that came in at $0.61 per gram. Overall, we executed well in the first quarter, balancing our existing Rec 1.0 business and ensuring the readiness for Rec 2.0., and this was reflected in our operating and financial results. We also made progress on a number of other key fronts. As of now, Phase 4A and B -- and 4B of our Moncton facility expansion are licensed for a total target production capacity of 89,000 kilos per year, which consists of both dried flower and sweet leaf. We received licensing approval for the remaining 16 rooms in Phase 4B in mid-December, which represents approximately 13,000 kilos per year in additional target cultivation capacity. We've decided to fill these rooms at a slower pace to better match more gradual growth in consumer demand. As announced with our Q4 earnings results, we have also decided to delay completion of our final Phase 4C for a number of reasons. We believe consumer demand in Canada continues to be suppressed by the lack of retail stores, particularly in the most populous provinces of Ontario and Québec. We can more effectively manage cash allocation and put some of the capital to better use elsewhere. And the decision to delay completion as originally designed allows us to preserve flexibility to use portions of the 4C space for other strategic purposes. We will continue to monitor market conditions and believe we can finish 4C in a relatively short time frame should consumer demand warrant. Our Phase 5 refurbishment within our existing facility is progressing largely on schedule. We are transforming 56,000 square feet into a multifunctional space. Designed to our EU GMP certification standards, Phase 5 plans include inedibles and derivatives facility as well as increased extraction capacity using both CO2 and hydrocarbons as well as additional areas for formulation, including short path distillation for edibles and vape pen formulations. This past December, we also received licensing approval for the operations area in our Phase 5 refurbishment, which houses our chocolate production line as well as the entire perimeter of that facility. Our chocolate production line has been installed, commissioned, and in the last few weeks, we completed successful bench trials and some homogeneity testing to ensure the amount of cannabinoid content is consistent in each product. The chocolate line is a state-of-the-art production line with very high capacity and high throughput, such that we are exploring co-manufacturing and white label opportunities. In the meantime, we expect to introduce premium quality cannabis-infused chocolate products into the Canadian market before the end of March. We've worked hard at differentiating our chocolate products, sourcing the highest quality inputs, and we plan to offer a variety of SKUs. Our team benefits from deep chocolate expertise and experience at one of the largest chocolatiers as well as research and development done with Canada's Smartest Kitchen. We've already seen great interest from all the provinces planning to sell edibles. And as I've said before, we've received very positive feedback on our chocolates in taste tests, right up there with the top selling chocolates in the Canadian market today. Moving on to our first 2.0 product that is now in market, our Trailblazer Torch 510-thread vape cartridges, which began shipping to provinces on the first day allowed by the regulations, December 17 of last year. The cartridges are designed to accommodate a standard 510-thread battery. And we currently have 3 core offerings: Spark, Flicker and Glow, inspired by our dried flower and pre-roll products under the existing Trailblazer brand. Trailblazer cartridges are currently available for sale in the following provinces: Ontario, Manitoba, Saskatchewan, New Brunswick and Nova Scotia. It is still early days, but we're all -- we are seeing some excellent sales traction already and have even received reorders for the cartridges from at least one province. The release is the first of 3 stage releases from our comprehensive vape pen portfolio. Organigram has forged partnerships with leading trusted vaporizer hardware companies that have been selected for their commitments to consumer experience and proven track records for producing quality products. Next, we expect to launch Edison + Feather ready-to-go distillate pens before the end of this month. Feather is a well-known cannabis vape pen company currently selling products in Colorado, and we have secured exclusivity with them in Canada. We now plan to launch Edison + PAX Era distillate cartridges in Q2 calendar 2020, following some further work targeting the optimal customer experience. Just like our efforts and strategy for Rec 1.0, we are focused on building further brand equity by striving to ensure consistent product availability while still offering a variety of SKUs such that we appeal to all segments of the market. So to sum up our Rec 2.0 rollout plans, we are in market with 3 SKUs of our Trailblazer vape cartridges, and we're pleased with the response to date. We expect to make our first shipment of our 3 SKUs of our Feather Edison pens as early as next week. And our PAX Edison cartridge, we expect to have out in calendar Q2. Our chocolate Edison truffle bites are expected to be in market soon as well followed by Trailblazer bars and Edison bars. And rounding out our portfolio of 2.0 products is our dissolvable powder product. Our R&D team has developed a proprietary nano-emulsification technology that is anticipated to provide an initial absorption of cannabinoids within 10 to 15 minutes. The technology is also anticipated to be stable to temperature variations, mechanical disturbance, salinity, pH and sweeteners. The unflavored dissolvable powder formulation is expected to offer consumers a measured dose of cannabinoids, which they can add to a beverage of their choice, while also offering the discretion, portability and shelf life expected of a dried powder formulation. Phase 5 plans include housing the production equipment for this product for a relatively small capital investment, especially compared to a liquid beverage line. The product has generated high levels of excitement from our provincial partners, and we expect to launch in Q2 calendar 2020. In short, we are encouraged by our progress on 2.0 and the further growth opportunity from this market. Not only do we have an exciting product lineup for 2.0, we are also introducing new core strains, including Limelight and El Dorado, which have shown good success as previous limited time offers. I'll take this opportunity to make some overarching comments on the industry. There are certainly positive developments on this front with new retail stores continuing to open across Canada. We know recreational cannabis sales per capita are highly correlated to both the number of stores available to serve a population base as well as the proximity of stores to customers. In this regard, we see positive progress on the horizon in particular as it relates to Canada's largest market, Ontario, which alone represents approximately 40% of the Canadian population. Last month, Ontario announced it is taking steps to move to an open market for retail cannabis stores beginning in January 2020. Store authorizations from this open allocation process are expected to be issued beginning in April 2020 at an initial rate of 20 per month. By then, Ontario should already have about 70 stores opened from the previous lottery process. By way of comparison, Ontario currently only has 27 stores open, and many industry analysts believe that Ontario can comfortably support over 500 stores. This open market approach will not only ensure more stores are available, but market forces will help migrate stores to those operators that are ready to open and in areas that make the most sense from a business perspective. Québec has also announced plans to double stores and plans to be at 50 soon from the current 33, adding roughly 2 stores a week until they get to 50. And B.C. has quickly expanded after a slow start to currently have 134 stores. Alberta has been a great example of our successful retail network with some 375 stores opened to date and further growth expected. For example, it was reported that Albertans spend 3x more on cannabis products and accessories in the legal market than those in Ontario in the first 11 months of legalization. This can largely be attributed to its robust retail network. The expansion of retail stores represents a significant growth opportunity for the industry and Organigram. It is estimated that Canadians currently spend only about 15% of what those in the U.S. legal state spend per year on legal cannabis, which illustrates the potential of Canada's legal market. This variation in spending is likely not due to Canadians consuming less, but instead related to the different levels of legal spending on cannabis. Additionally, there was a recent article, which highlighted the decrease in beer consumption since adult rec use -- rec legalization in Canada, as more Canadians choose to substitute cannabis for alcohol. This same trend has played out in U.S. legal states and could even be more of a potential opportunity in Canada, with alcohol prices notably higher than in the U.S. Furthermore, our products in Canada are well positioned to compete for the consumer dollar in light of the stringent conditions in the Cannabis Act around product safety, additives and mandatory testings. The growth opportunity, however, may not be there for all the Canadian producers. Financial distress will be a continuing theme in 2020, as some LPs struggle to secure sources of capital. We believe we are well capitalized and have a strong liquidity position. As I mentioned, we returned to positive adjusted EBITDA in the first quarter and continue to be focused on cost control and prudent spending. Unlike some of our peers, our financial results are evidence that we have forged a clear path to profitability. I'll let Paolo expand more now on our financial position before he takes you through the quarterly results in more detail. And I'll turn things over to Paolo.

[Paolo De Luca, Chief Financial Officer]

Thanks, Greg. Upfront, I want to address our financial capacity, as it is certainly a key topic for all licensed producers in the industry right now. We have always been very careful about ensuring we have sufficient capital and capital sources available and take great pride in keeping our spending in check. We believe we have sufficient capital to execute on our operational expansion plans. As at quarter end, our remaining spend on Phase 5 was $20 million of the estimated budget of about $65 million. Our remaining estimate to spend on Phase 4 was about $16 million, of which $13 million relates to finishing Phase 4C as originally designed. As Greg mentioned and as we had previously disclosed, we have strategically delayed completion of this final Phase 4C, but even if and when we decide to spend the remaining CapEx, we will have the financial resources available. As at quarter end, we reported about $34 million in cash and short-term investments and still have $30 million in available capacity on our term loan, which remains undrawn today. In addition, we also have a revolver of up to $25 million available to be drawn against specified receivables. Lastly, included in our credit facility is an uncommitted option to increase the term loan and/or revolving debt by an additional $35 million to a total of $175 million, subject to agreement by the lenders and satisfaction of certain legal and business conditions. As announced with our Q4 results, we made amendments to our credit facility to further improve balance sheet flexibility. We extended the final draw deadline on the term loan from November 30, 2019, to March 31, 2020, to avoid drawing committed portion of the term loan prematurely and postponements of the principal term loan repayments to May 31, 2020. The financial covenants were realigned to be more consistent with industry norms, which will provide us with a greater flexibility around the timing and amount of drawdowns. Covenants will revert to the original structure on August 31, 2020. During Q1, we filed a base shelf prospectus for an amount up to $175 million, which gives us the flexibility to issue common shares, preferred shares, debt securities, subscription receipts, awards or units. The purpose of this filing is to shorten the time line to raise funds, if needed, and to maintain maximum flexibility. Subsequent to quarter end, we established an at-the-market, or ATM for short, equity program to create further financial flexibility in this volatile market. Under the program, we can issue up to 55 million of common shares from treasury -- $55 million of common shares from treasury. Subject to securities laws and stock exchange request, the volume and timing of distributions under the ATM program is determined at our sole discretion. To date, we have issued approximately 7.3 million common shares for net proceeds of about $22.4 million. This leaves an additional $32.1 million available that could be raised under the program. Given our cash and short-term investments of $34 million, our $30 million of untapped committed credit facility, up to $25 million available under the revolver and a potential uncommitted $35 million under the credit facility, plus the $22 million raised under the ATM, we believe we have created the necessary capital and liquidity cushion to write out any volatility in the capital markets. As always, we remain committed to disciplined capital allocation as well as a strong cost management culture throughout the organization, which we believe we've demonstrated consistently. Please look at our SG&A and compare it to our peers if you need but one example. Moving to our quarterly results. Net revenue more than doubled from the prior year quarter to $25.2 million. Of this amount, about $12.9 million of net revenue was sold to the adult-use recreational market, $2.7 million to the medical market and $9.5 million to the wholesale and international markets, with the negligible balance of sales generated from other sources. Net revenues for Q1 were offset by a provision for product returns and price adjustments of $1.1 million, net of excise, largely related to THC oil that has been -- that has seen less than anticipated demand in the adult-use recreational market. Estimated Q1 cash and all-in costs of cultivation were $0.61 and $0.87 per gram of dried flower harvested, respectively, which decreased from $0.66 and $0.94 per gram in Q4 2019, as our yield per plant increased from 148 grams in Q4 to 152 grams in Q1 2020, and we kept our costs in check. Q1 cost of sales remained relatively stable with Q4 2019 cost of $15.8 million, but on much higher revenues. Q1 2020 cost of sales benefited from lower inventory write-offs than in the previous quarter and lower postharvest costs on wholesale and international shipments. Q1 gross margin before fair value changes to biological assets and inventory was $9.3 million or 37% of net revenue. As Greg mentioned, we focus on gross margin before fair value changes to biological assets and inventories as one of the key measures to assess underlying performance and generally find this is what the investment community tends to track. Q1 IFRS gross margin was $11.2 million, largely due to fair value changes in biological assets and inventory sold. Q1 SG&A of $9.4 million decreased 32% from $13.9 million in Q4 2019. As expected, SG&A declined as a percentage of net revenues to 37% from Q4 2019, as we had previously indicated, Q4 2018 was an anomaly. Notably, this percentage compares to our efficiency ratio of Q1 in 2018. As Greg discussed, we returned to positive adjusted EBITDA in Q1, generating $4.9 million or 19% of net revenue. Our Q1 net loss of $0.9 million was largely due to our operating expenses nearly offsetting our gross margin as we continue to invest in the development of business and launch of Rec 2.0, which should significantly expand the market potential going forward. I will now turn the call back to Greg for closing remarks.

[Gregory Engel, CEO & Director]

Thanks, Paolo. I spoke about the upside potential coming from new products and new stores in 2020. At Organigram, we believe we are very well positioned to take advantage of this growth opportunity. We have a track record of strong operational execution, owed to our deep cultivation expertise and our indoor facility designed and operated to deliver quality product at one of the lowest costs of cultivation among LPs. Not only do we generate near industry-leading yields, we have also seen cannabinoid content in our flower and sweet leaf reach all-time highs to date, which in what we view is the optimal balance. We also have a team with deep expertise in consumer packaged goods and a relentless focus on offering innovative quality products, both of which we believe are required for success in the 2.0 marketplace. Based on our best estimates, we continue to maintain a healthy market share year-to-date in the adult-use rec market, in part attributable to building brand equity as we strive to offer consistent availability of a variety of SKUs appealing to a number of consumer segments. Financial improvements and cost management are deeply embedded in our company culture and remain focused on delivering profitable growth to generate attractive returns for our shareholders. In closing, I'd like to thank the team for delivering strong results in Q1 and for all they have done to pave the way for a successful 2020. With that, this concludes my formal remarks. Operator, if you could please go ahead and open up the line for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Rupesh Parikh from Oppenheimer.

[Erica A Eiler, Equity Research Associate]

This is actually Erica Eiler on for Rupesh. So yes, I wanted to start off talking about Rec 2.0 here. Recognizing it is early, could you maybe talk about what you're seeing by category in the market? What product categories this early in the game are performing better than others? And what are you seeing -- where are you seeing the strongest consumer demand or consumer uptake thus far? And then just also curious how your vape products are performing in these early days versus other offerings out there in the market?

[Gregory Engel, CEO & Director]

Sure. No, that's a great question, Erica. So a couple of key points I would make. One is when we look at certainly the landscape in Canada, there's still a limited number of offerings available under 2.0 products, primarily vape products as well as edibles. And so the category -- currently, we only have our vape products in the market. And -- but as I alluded to earlier, we've seen good response, good online consumer reviews of the product. And as noted, we've already had at least one province reorder very quickly. So positive response to date. So good response to vapes overall. And for edibles, with our chocolates, we've already seen -- even though we've not shipped product yet, one of the key large provinces has already tripled the order that they had wanted to place based on the consumer demand that they're seeing in the marketplace. We know, in Ontario, for example, that by the weekend -- this past weekend that edibles were virtually sold out across all of their stores. So very strong demand both on vapes and edibles, and that's the predominant 2.0 products that are available in the market. But we -- certainly, we have not launched our edibles yet, but in anticipation of that launch, we've had very good response in terms of preorders. I think certainly, so when we look at what that cycle looks like, again, as I mentioned, it's going to be critical to add new stores in Ontario to take advantage of that market opportunity. And that's going to be one of the key aspects for market growth going forward.

[Erica A Eiler, Equity Research Associate]

Okay. No, that's very helpful. And then just switching gears to the competitive environment. I mean there's clearly a lot of distress out there in the market, with many big players obviously becoming increasingly cash strapped. Do you expect the environment to become more competitive in the near term as competitors may be forced to sell products at lower prices to generate needed cash or out of desperation? And maybe you could just talk about kind of how you see some of these dynamics playing out in the near term.

[Gregory Engel, CEO & Director]

Yes, we have seen that to some degree to date, where at least one competitor has really taken significant price drop on their dried flower products to attempt to get a better market position as well as garner some return on their products. I think one of the challenges for any company in that position, and it's one of the things that I think differentiates us, is when you're -- we have very low cash cost of cultivation, and having that ability to produce at a low cost puts us in [ unenviable ] position. But we're also producing a quality product, and our average selling price is very strong. The second point I would make is when we look to the 2.0 products, the success of those products is primarily driven by your ability to [ produce ] consumer packaged good, right? So other than vaporizer -- vape pen, all the edible products and any other products is going to be how efficient are you as a producer, because certainly, the cost of producing a chocolate bar, for example, is much higher than the cannabinoid input that goes into it. So that's been our focus. We're very much -- and I've spoken about this quite a bit, we see this as a CPG market. We operate as a CPG company. And we want to make sure that we're doing things efficiently so that we can continue to retain as much margin as possible. And that's going to separate companies, and we're seeing that in the market. I mean certainly, there's been some mixed reviews on some of the products that are out there, and our focus is very much on quality. Maybe Paolo could comment a little bit on the overall financial landscape, if you wanted to?

[Paolo De Luca, Chief Financial Officer]

Yes, sure. So thanks, Greg. So just to add to that, I think what's important to recognize here is we certainly pay attention to the competitive landscape and the financial picture of some of the other companies. If you look at some of the overheads, some of the spending patterns that a lot of our peers have, it's unclear how they can ever turn to profitability if they get into this kind of race to the bottom on pricing. So I think that would certainly be a short-term approach if that's their only lever to pull. And I think what would make a lot more sense for the entire industry is for everybody to adopt a bit more of a prudent approach to spending so that the business model is reflective of: a, the fact that it's going to take a while for the black market to be displaced. But from our perspective, we think we have a business that is rightsized from a spending perspective. I think we're one of the first, if not the first, to show EBITDA positive in the past and certain we'll return to that this quarter. And I would certainly hope that the industry just operates in a reasonable manner and they just become a bit more disciplined in their spending, because a price war doesn't really -- doesn't leave anybody as a winner and I just don't think it's sustainable for the long run. So...

[Operator]

Your next question comes from the line of John Zamparo from CIBC.

[John Zamparo, Associate]

I wanted to get some thoughts on the balance sheet and in particular the use of the ATM. Just want to get a sense of why you'd rather use this as a vehicle for capitalization rather than the available debt, particularly at these valuation levels. And just to confirm, the $25 million revolver, is that entirely at the company's option, or do you need to get approval from your bankers for that?

[Gregory Engel, CEO & Director]

No, it's not our option, but it's dependent on the level of receivables that we have with the provinces. We haven't chosen to utilize that yet, because we still have obviously room on our term loan. The at-the-money -- market offering is, as you can see, we raised some money. We haven't raised a ton of money. But part of it is just us even just testing the market to see how it works. And we were certainly cognizant of -- there was a lot of -- essentially a lot of downward pressure on the entire sector in the fall. So we wanted to raise a little bit of money in advance of our earnings, just because I think there seems to be a perception out there that we certainly don't share that we have potentially more capital needs, I think, with the fact that our Moncton Campus construction is in its final stages. We certainly are comfortable where we're at. And the term loan, certainly, we intend to draw most of it, if not all of the remaining $30 million at some point. We've done an extension on that. So that gives us flexibility. So our goal really here is to have as many levers as possible to pull, if and when needed. But right now, we're doing this cautiously and drawing funds on a kind of a reasonable basis, but not drawing unnecessary debt that will obviously cost us interest as well.

[John Zamparo, Associate]

Okay, that's useful. Maybe we can move to wholesale revenues, and apologies if I missed it in the call. But we had a pretty significant composition of your revenues from wholesale. How sustainable are these? Have you seen them in Q2 to date? And just what should we expect over the coming quarters in the wholesale market?

[Gregory Engel, CEO & Director]

Yes. I think we are -- John, we -- certainly, as a quality producer and producing at a reasonable cost, I mean, there has been demand. We know that a number of companies have based a significant part of their future on wholesale purchasing. And I think we've heard comments from those companies publicly in the past or at least one of them that they were discouraged with the quality of the product that was available there. And so that's why we have had a couple of companies turn to us as a potential source. So we look to diversify our revenue base. And I think we also see this as an opportunity to -- we're very focused on 2.0. And certainly, even in the prep in the retail marketplace, not that we're not supporting dried flower, dried flower is always going to be a very strong part of our market. And based on the product we have, I mean, we talked about launching a couple of new strains. And Limelight, the one strain that we're moving towards really national distribution on in the provinces where we have sold it, it's sold extremely well. So part of the decision to move forward with it was, I would say, in part driven by inbound interest based on the quality of our product and also for us to look to diversify our base. I mean, one of the challenges we faced in the past, as you know, was some of the inventory management that was happening with -- there was a lot of lumpiness and having the ability to kind of diversify your demand rate is more consistent for us in our facility. So it's been a positive for us. So we do see continued demand. Certainly, our expectation in the future is certain players, it is part of their business case, so it's how they're built out, but I'm not sure what that demand will be. But I mean, certainly in Q2, we do have demand at this point. I can't comment any further on what that demand is, but certainly, it's been successful for us and it helped -- as I said, it helps us diversify our revenue stream.

[John Zamparo, Associate]

Yes. Okay, understood. And then last one from me. And commentary you can give on market share by region and how it's trended over the past quarter, the past year and in particular Alberta, where we do see a more fulsome store build out?

[Paolo De Luca, Chief Financial Officer]

Yes. It's Paolo here. Listen, our market share is growing in most provinces. We just entered Québec a few months ago. Alberta has been a very strong province for us historically and it remains so to date. We only really get detailed market information from 3 provinces: Ontario, Nova Scotia and PEI, but we kind of did ad hoc information or kind of anecdotal information on some of the other provinces. But we're very happy with our national position, certainly. And I think with the addition of our new strains, which have shown very high receptiveness by consumers, and Greg alluded to them earlier, Limelight, which is a high THC strain, which is sold out in our kind of limited offers that we've had in Nova Scotia and Alberta historically. And we're just entering with that strain in Alberta now and Québec shortly and Ontario hopefully next month. So I think you'll see a little bit of bouncing around once new entrants come into the market. But I think what's important is to look at strains and brands that have consistent market share over a sustained period of time. So we're very happy, and we look forward obviously to the addition of stores in Ontario, where we've had a very good market position historically.

[Gregory Engel, CEO & Director]

Yes. The only comment I would add, John -- I mean certainly, in Atlantic Canada, where we had such a dominant position, we've certainly had declined market share as new entries and new products have come to market. There was a period of time in the early days, as you know, in the rec launch, where we were the only product available in one of the provinces at a minimum.But still have a very strong market position, a leading market position, but certainly not at the same level we were for the first 6 months of rec launch. But again, expect to get back to that point or in a strong -- continue to have a strong position with our new product entries going forward.

[Operator]

Your next question comes from the line of Graeme Kreindler from Eight Capital.

[Graeme Kreindler, Principal]

I wanted to start off with the composition of revenue. Looking to the filings here, looks like there was a $1 million sales provision recognized this quarter. So I just wanted to go through the particulars in terms of what types of products those were related to? How much of that provision subsequent to the quarter has been cleaned up? And what does the outlook look like for any additional provisions moving forward, I guess, with any of the products that have been identified in the past as being part of the returns there?

[Paolo De Luca, Chief Financial Officer]

Yes, Graeme, it's Paolo here. So it's mostly THC oil and we had a provision for it in Q4 and we had a bit more this quarter. One of the things that I can tell you, just to answer you quick, the last part of your question, we don't see any kind of icebergs on the horizon in terms of provisions or returns. There's always going to be dribs and drabs here and there. But one of the things that we've done that maybe we weren't doing 6 months ago is much more proactively looking at inventory levels at each of the provinces. And we're -- in particular, Ontario, which, I think, if you have conversations with other LPs have -- historically had some issues with inventory management. So right now, we're being proactive about how much inventory we keep at each of the provinces. And we're making sure that we derisk kind of any large volumes that could bite us in the future. So I don't see that as an issue right now at all. And -- but keep in mind, we're just launching Rec 2.0 now so there's a whole new learning curve with some of those products. But right now in terms of dried flower and pre-rolls, I don't see anything really on the horizon.

[Gregory Engel, CEO & Director]

Yes. And maybe I'd just add, Graeme, a comment on that is we've seen a big shift in order patterns, as Paolo was always alluding to, and particularly in Ontario and Alberta, which are the biggest provinces, like they're not holding as much inventory as they were historically. And so it is much more demand-based and other provinces have gone to a more similar model, right? So you really are -- and even the approach, I mean, I know there was a number of stories about this over the last little while since OCS launched with the Rec 2.0 products. They've had to reorder a significant number of products, because they started out with very lower inventory. So it's a very different approach than historical, which means as an organization: a, we have to be flexible; but b, it also doesn't give you -- you don't have inventory that's going to go in and not move. And that was part of the issue, right? We had certainly significant large orders for Ontario, in particular, that did have an impact on exposure. And we're not the only company that went through having to take provisions or write-downs. But as Paolo said, we don't see anything else in the inventory levels at this point that provide any significant exposure.

[Graeme Kreindler, Principal]

Okay. I appreciate the color. And then on a separate note, looking at the gross margin, obviously a very nice improvement in this quarter compared to the previous quarter. I was wondering if you could provide some color on how quickly you think that the gross margin might bounce back towards the historical levels of 50% plus? And with the launch of these derivative products, are you expecting any sort of shorter-term margin headwinds as you get your supply chain down for those products?

[Paolo De Luca, Chief Financial Officer]

Yes, it's Paolo here. So I would say that, look -- I mean, making a prediction on anything in this industry is just -- is always challenging and our margin obviously is a function of 2 things, our selling price and obviously our cost of production. On the selling price, we're obviously in a competitive market. So we think that our brands have good stickiness in terms of pricing that we have out there now, and we have obviously a sense of what prices we can get on our Rec 2.0 products. I do think it's a fair point on the costing for Rec 2.0. There is a learning curve like there is in any other product launch. So do I think that the margins out of the gate are going to be as good as they will be a year from now? Probably not or at least in terms of costing. But certainly, we target margins of kind of in -- at that 50% range, and that's something that we've hit in the past. And given our culture in terms of cost management, our history of keeping costs under control and just being prudent operators, we don't spend a lot of unnecessary money, I think we're best positioned or one of the better positioned LPs to hit those targets.

[Gregory Engel, CEO & Director]

Yes, I think [ I'd just add ], Graeme, I mentioned this earlier with Erica's call. And that was, when you look at -- again, having that deep expertise in CPG with a manufacturing mindset as many of these 2.0 products, especially edibles and our dissolvable powder, when we bring that to market, it really does come down to how efficient are you producing the food product or the beverage product, right? The cannabinoid cost is marginal. And I think that's where we have that expertise. We've invested in the automation and the equipment that will allow us to produce that at a very good -- at a low cost, right? But I mean, as Paolo said, there will be some -- there's some R&D process as you go through when you optimize a line and get it going at first. And so -- but certainly, I would say the flip side of that was on vapes, right? I mean, there was really no -- we did some initial very small formulation batches, and then we went right into production batches successfully. So chocolate, we've had to do a bit more testing, but we're already at the point where we're into production batches. So...

[Graeme Kreindler, Principal]

Okay. And then a final follow-up on that, I guess, as it relates to Phase 5, I saw there's disclosure of the remaining budget that needs to be spent at Phase 5. But I'm not sure if I missed it, are you putting an exact timing of when you're expecting the facility to be fully commissioned for all the various products? Or how you're expecting the remaining, I believe it's $20 million, to be spent over the next couple of quarters here?

[Gregory Engel, CEO & Director]

So certainly always dependent upon Health Canada from a licensing perspective, the perimeter Phase 5 is completely licensed and a portion of it is where our chocolate line is, where some of the driver and some of the packaging is currently licensed. We did make a submission at the end of last year for that expansion space. For the remaining -- 100% of the remaining areas within Phase 5. So that is ongoing investment. And I think certainly, our expectation is currently within this quarter and into the early in the next quarter, everything will be completed. Again, we are dependent upon Health Canada for licensing, but we've got a very strong historical track record with Health Canada on the licensing process. So -- and again, it's always helpful that the perimeter is approved.

[Operator]

Your next question comes from the line of Doug Miehm from RBC Capital Markets.

[Douglas Miehm, Analyst]

Greg, when you think about the 89,000 kilograms that you're at right now in terms of production capability, are you going to be running the operation at those sorts of levels, let's say, starting maybe by calendar Q2 of 2020? Just curious about that.

[Gregory Engel, CEO & Director]

Yes. I think we've already guided even in this -- kind of here that we -- even when Phase 4B was licensed, we started -- we're filling 4B, but historically, what we would do is start to fill the first room on this first day; and then within 2 days, we're filling another room or 3 days. So we delayed that slightly, so to your point, Doug, so we did not move on the typical acceleration schedule for filling that we have done historically. We will get there eventually. And we have a couple of rooms that we kind of have moved in and out of the storage space periodically as well. So we have the capacity to grow that much, but we're not necessarily always growing that much. But I think -- so to your point, by the summer, are we going to be on that run rate? Yes, reasonably, yes. But we're not there right now in terms of what's actually going to be fully available for sale.

[Douglas Miehm, Analyst]

Okay. But it's your intention to get to that level by the summer so that if you had excess supply, you'd have to be selling that into the marketplace on the wholesale basis?

[Gregory Engel, CEO & Director]

Well, so -- and also, this is why -- and we alluded to this, right? Our Phase 5 facility is designed and built completely to EU GMP standards. And so we are working through that process. Getting the EU GMP is always dependent upon the regulator -- the authority in the jurisdiction you're working with. But certainly, starting from scratch, designing the facility to that may provide an opportunity for us to expand more in the international markets. I mean we have been selling to Australia for a number of years. We're seeing growth in that marketplace. But certainly, we're looking at are there other opportunities outside of Canada. So -- and one other comment, Doug, and we've talked about this before, is we've gone through a significant shift in terms of our product mix. So we know -- it was one of the key aspects of our early success and having significant products in the market, we were able to get feedback on which strains were successful and which strains was high demand and high throughput. So we have shifted our production pretty significantly towards those as well as designating a certain portion to limited time offers, right? So we are taking with a portion of our facility and of a craft brew approach, where we'll be cycling different genetics through to bring something new, because there is a certain part of the market segment that's always looking for, hey, what's new, and they're kind of more like a craft brew approach. So...

[Douglas Miehm, Analyst]

Yes. Great. And then, Paolo, just a quick housekeeping item. As we look out to the next couple of quarters, number one, how will data be presented, given the Rec 2.0 products, I imagine you're not going to be talking about grams in that case? And then maybe you could just also speak to -- it looks like a decrease in the carrying value per gram for flower and trim, relative to August. And I was just wondering what's -- what happened there as well.

[Paolo De Luca, Chief Financial Officer]

Yes, Doug, on the first question, I'm actually probably going to wait and see just what -- how the industry peers report, because they'll be reporting before Organigram, given they have -- many of the peers have December 31 either year-ends or quarters. But I don't anticipate reporting vapes and edibles in dried flower equivalent. So I have a bit of time to figure out exactly how we intend to report that. But I don't think, especially for edibles, that it's the appropriate measure to show kind of margin analysis, just because the vast majority of the cost of an edible was not the cannabinoid, but rather the input ingredients and the packaging. On your second question, yes, that's good that you caught that. I think it's just where we are as an industry, there certainly is an abundance of trim and sweet leaf available in the marketplace. And from our perspective, we just think it's appropriate to carry that at a lower value, given that the market dynamics have changed. And there's certainly, from everything that we're reading between the StEP's annual reports and other industry analysts, that that is not the in-demand products like maybe high-quality dried flower would be. So that's why we've decided to take that as a measure of conservatism.

[Operator]

Your next question comes from the line of Neal Gilmer from Haywood Securities.

[Neal Gilmer, Research Analyst of Special Situations]

Paolo, maybe just to follow up on some of your comments in your prepared remarks on the operating expenses, obviously, did come down from the prior quarter, which you had said is an anomaly? Any sort of color you can provide us on sort of how you expect that to trend going forward, obviously, as your revenue grows? I get that it'll decline as a percentage of revenue. But are you expecting more -- much growth on an absolute dollar basis as you proceed through fiscal '20?

[Paolo De Luca, Chief Financial Officer]

Yes. Look, from our perspective, we're going to obviously pull any discretionary spending in check, where there's an opportunity to do so and in particular where we're in an environment where the growth isn't as accelerated as it maybe was a year ago. So from Q4 to Q1, we were very careful about our spend. It will probably go up a little bit in Q2, just because we're -- we launched the marketing campaign that started in December, but again, well in line with where we would be comfortable having that expenditure. So there will be growth in expenses and we'll toggle it up and down depending on how we view the forecast on sales and how we view the market developing. I can't give you specific guidance, but I can promise you that it is always top of mind for us. And we will match our expenditure to make sure that it's consistent with where our sales are trending and that it's commensurate with the growth opportunities that may or may not exist.

[Neal Gilmer, Research Analyst of Special Situations]

And then just a clarification question from when you ran through the CapEx numbers, $20 million on Phase 5 remaining to be spent. And then on the 4C, did I hear correctly, it was $16 million, but $13 million of that is what was earmarked for what you plan to do at some point so that you've got a net CapEx right now or expected of $23 million?

[Paolo De Luca, Chief Financial Officer]

No, sorry, it was, of the $16 million, $3 million related -- was just like the final piece on 4D and $13 million for 4C. I would say, of the 4C, about half of it, we are kind of committed to spend or at least have deposits on equipment and materials to spend; and the other half, we can defer. But again...

[Neal Gilmer, Research Analyst of Special Situations]

Okay. So in and around $30 million?

[Paolo De Luca, Chief Financial Officer]

Yes, $30 million. And we're very comfortable with our cash position in terms of all that, because we obviously have the $34 million, plus the undrawn term loan, plus the ATM. And so from our -- and we just don't spend a lot of money. So it's not like we're -- we'll have some unexpected spends come through. So we're comfortable from our position, and we want to always be in that position where we have sufficient capital resources.

[Operator]

Your next question comes from the line of Rahul Sarugaser from Raymond James.

[Rahul Sarugaser]

Congratulations on the strong quarter. So I just wanted to dig a little deeper on the $9.5 million sold into the wholesale market. So I wanted to ask, so what volume of biomass is sold in this channel? What was the average price? And given the higher quality nature of Organigram's products, how does your wholesale pricing compare to the spot prices you're seeing out there?

[Paolo De Luca, Chief Financial Officer]

Yes, our volume in that market was approximately 2.6 million grams. And so the ASP would have been in the high $3 range. And sorry, what was the second part of your question?

[Rahul Sarugaser]

No, just the margin. But again, understanding that, again, you're not packaging it, you're not putting labor against it, you're selling in bulk.

[Paolo De Luca, Chief Financial Officer]

Yes. So from our perspective, obviously, the -- there's much less labor involved in wholesale and obviously less packaging, because we're just shipping in large bags. So from a margin perspective, it's pretty neutral. From our perspective, though, for the quarter, it was more a decision to make sure that we diversify our revenue base and also we have plenty of product coming off the harvest schedule. So it was an opportunity to develop those markets. And we look forward to bringing on some of the wholesale buyers in this quarter.

[Rahul Sarugaser]

Great. That's really helpful. And then just as a quick follow-up, I wanted to ask for an update on the development of your biosynthesis activities with Hyasynth. And in particular, how you see this as a potential input for your chocolate line, both private and white label?

[Gregory Engel, CEO & Director]

Yes. So we will -- certainly, we're seeing a lot of focus from Hyasynth right now in terms of optimization before going into commercial production as well as development of -- continued development of minor cannabinoids. They certainly disclosed publicly and we have to be cognizant of that, that they've been certainly successful to date in synthesizing both THCV and CBDV and they are working on a number of other minor cannabinoids. And I think the combination of producing major cannabinoids at large scale as well as producing unique minor cannabinoids is the future of biosynthesis. It's challenging to give a time line, because it is in part dependent upon the optimization process, but good progress certainly, especially on optimization and then on minor cannabinoids as well. So again, I mean I know you know the CEO at Hyasynth well. So feel free to reach out to him for further color. But as -- we're an investor in the company. So I guess, that's the most disclosure we could provide at this point.

[Operator]

Your next question comes from the line of Greg McLeish from MRCC.

[Greg McLeish, Director & Analyst of Special Situations]

Just a quick question. How does the deferral in Alberta change your outlook for your cannabis 2.0 products, particularly -- well, it's on the vape side. So how does that change your outlook for this year?

[Gregory Engel, CEO & Director]

Yes. So what's interesting is, certainly that was a last minute change. I mean, there were -- certainly was unexpected. We knew early about Québec. And then [ Newfoundland ] kind of, I guess, came out of -- [ with certain norm ] notice as well. What I would say is that when we look at U.S. states, for example, like Massachusetts, that put a hold on vaping products, and once they go through a fulsome review, they're in a position to say, okay, let's release it. Massachusetts, [ did ] do that. I think there's a coordination going on here, both provincially and federally to understand. As we know, the vaping health-related illness cases out of the U.S. that CDC has reported that they are linked to vitamin E acetate and they're linked to illicit vapes and counterfeit e-cigarette vapes. And the same is true in Canada. There's been 15 cases reported to date, illicit fake products or counterfeit tobacco products. And I think Health Canada is -- there are prohibited substances, vitamin E acetate, propylene glycol, polyethylene glycol. Out of an abundance of caution, Health Canada has also -- they haven't prohibited MCT, but they have given direction to companies that they would not want to see MCT.So I think part of the kind of review process that provinces are going through is just understanding in more detail what the risks are associated with. So we're optimistic that at least 1 of the -- or 2 of the provinces will make a decision to move forward at some point later in the year. And again, it does allow us, because we see chocolates as such a big part to also look to say, can we pivot to that market now with [ our base ] to provide more edible products, right? Because we have seen very good response to the edibles in the marketplace.

[Greg McLeish, Director & Analyst of Special Situations]

Great. And just a question on the edibles. I was actually out in a couple of stores last week. So I looked at it. And for the edibles, I was paying anywhere from $0.90 per milligram to $1.46 per milligram. So it was an $8 to $12.95 edible. That compares to about upwards of $0.10 per milligram in the black market. How fast do you think we're going to see price compression come down on the edibles to make it more competitive with that -- with the illicit market?

[Gregory Engel, CEO & Director]

I think one of the things -- we've heard this now, even though in different parts of the country, where edible has been out since before Christmas, we've heard it in Ontario as well is one of the things that I think we've always known was that a lot of what's stated on an edible in the illicit market may not be factual, right? So people may think they're buying something, it has this -- because we've heard commentary now that people -- I know David Cosh-George (sic) [ David George-Cosh ] for example, on BNN today was talking about some of the responses and the surveying work that they've been looking at to see what people's response is to the edible. So it's been a positive response. The effect that they're looking for, they've received. And I think that's always the disconnect in an uncontrolled market with the illicit space, they can make a lot of claims, but does it actually factually have that product. And I think that's one of the key aspects is understanding that. I think for people with -- that are concerned about contaminants, concerned about quality of the product that they're receiving, I think that's going to be important. And I know a lot of times, we see the media focus on pricing as a differentiator. But as an industry, we need to continue to separate ourselves in terms of quality and testing and rigorous controls. And that's not only on edibles, but I think on vapes as well, right? Consumers can be confident that they know that all the vapes from the regulated market do not contain any of these prohibited substances.

[Greg McLeish, Director & Analyst of Special Situations]

Yes. I agree with you on the vapes, because my -- the vape I bought was $0.26 per milligram versus $0.075 for the black market ones. So -- and just a housekeeping note, how much -- what amount of depreciation was in your cost of goods sold?

[Paolo De Luca, Chief Financial Officer]

It's -- typically, it's about the noncash, the depreciation and the share-based comp is about 1/4 or 25%. I don't have the breakdown within that.

[Greg McLeish, Director & Analyst of Special Situations]

So is it around -- because here, the depreciation number for the quarter was $3.7 million, you said it was $240,000 in the G&A. So was the balance all in cost of goods? Or is there some spread out in different areas?

[Paolo De Luca, Chief Financial Officer]

Yes. If it doesn't [ book ] straight to the SG&A, it's going into our inventory, which then flows through the cost of goods sold.

[Gregory Engel, CEO & Director]

Right.

[Greg McLeish, Director & Analyst of Special Situations]

Okay. So that means that your gross margin without it is up in the high 50s?

[Paolo De Luca, Chief Financial Officer]

It's -- we had -- the cash gross margin would certainly be higher than what's reported, yes, because we have noninterest expenses, absolutely.

[Operator]

Your next question comes from the line of David Kideckel from Altacorp Capital.

[Frederico Yokota Choucair Gomes, Associate of Institutional Equity Research]

This is actually Frederico filling in for Dave. Congratulations on the results. So it's more of a big picture question. Given current industry conditions, what's your view on -- do you expect to see possible increased consolidation activity in the Canadian market in 2020? Do you think that, that may be a key theme going forward?

[Gregory Engel, CEO & Director]

I think -- we get asked this question a lot. So I think there's kind of 2 aspects to look at it, right, is one is there are a lot of companies that are struggling today. We've seen 2 companies fit with Wayland and AgMedica file for bankruptcy and solvency protection. They will not be the last company to do so. I think the capital markets are very tight. I think whenever we look at opportunities to acquire companies, you have to -- our focus is very much in terms of do they have technology that differentiates them, what is their costs, what's the rationale for doing an acquisition. So I think with consolidation, it's really dependent upon what is available and what the assets are, right? I think ideally, you want to look, as you would in any industry, at accretive acquisitions. And if it's not accretive, is there technology or efficiency aspects that come along with it? That's my perspective in terms of how we've approached them. There's well over 200 licenses right now. Many of those companies are not going to survive, but it certainly doesn't mean that they'll be acquired or rolled up into other companies.

[Operator]

And your next question comes from the line of Matt Bottomley from Canaccord.

[Matt Bottomley, Analyst]

Just wanted to follow up a little bit on your responses to some of Doug's questions about potentially how cannabis 2.0 is going to be shown in the MD&As across the industry and what your plans are for that. So hearing that it's still early stages for that, is there any other color you can give us with respect to maybe the proportion of the retail price that LPs or yourself specifically is getting? We see typically for dried bud, it's anywhere between 50% or 60%, whether you're looking at net or gross. Is that a fair way of looking at it when it comes to a vape pen or in edible in terms of that ratio? Or is it all over the map depending on availability of product right now?

[Paolo De Luca, Chief Financial Officer]

Yes. I'm not sure that to be -- it's Paolo here. I'm not sure -- if your question is the markup the same on these products at the level or the margin that we...

[Matt Bottomley, Analyst]

Yes. I guess, we can see that the high end of vape pen goes for $125. So is an LP getting $60 of that on the wholesale if we use the same proportion for dried bud, or is it completely different in edible?

[Paolo De Luca, Chief Financial Officer]

It's -- from what I understand -- and I don't have a definitive answer on this. My understanding is the markup model is similar. And we've certainly gone through a competitive bid process similar to what we did a year ago with flower, and there's some back and forth with the provinces. But my understanding is that they're looking to get pretty much the same markup on their end. And from our perspective, we're trying to obviously make sure that we have sufficient margin that we can live with as producers.

[Gregory Engel, CEO & Director]

Yes. I'd add to that, we've worked in concert with all the provinces and jurisdictions on cannabis 2.0 products with the exception of Québec at this point, I mean, although we certainly see a tremendous opportunity for our dissolvable powder for beverages there. And I think what we've been cognizant of is, as Greg McLeish asked earlier, what ultimately is your price to the market. We certainly want to make sure that we -- it's a partnership approach so that when you're looking at pricing, you're looking at margin, is it going to come at a reasonable price. But there is some slight variations, a couple of provinces have taken a little bit of a different approach by category. We have seen, for example, already some differences on taxation, right? We know B.C. has taken an additional tax on vapes as part of their e-cigarette tax. But I think in general, the market margin approach should be very -- is very similar based on our pricing going in. But yes, there may be exceptions to that. And I think one's certainly -- there's also going to be that period of time, we saw this on gel caps, for example, right? The gel caps company -- we didn't have gel caps. But companies who had gel caps out in the market, at the end of the day, they were priced too high. And they were -- in conjunction with the companies, they pulled back pricing, right? So was there a consumer pushback on it? And there was. So -- but at this point, pricing has not -- not going to be an issue, I think, except for the -- you mentioned kind of some of the vape products that are well over the $100 mark, that might be out of reach for a lot of people, but it depends on what the product is. So...

[Matt Bottomley, Analyst]

Got it. And then maybe just one quick follow-up. Looking into the next quarter or 2, obviously, there's this dynamic process going on right now where it seems like the -- and this may not impact Organigram as much, but it seems like there's a huge influx of inventory coming in for dried bud at these wholesalers that might stifle growth of provinces rebuying or buying more dried buds. And then you have cannabis 2.0 that's sort of coming online at the same time. So given the fact that you had significant wholesales this quarter that you could tell me if you can, in terms of the magnitude that, that might repeat. I imagine it could be lower. So is that going to be offset by what's happening in cannabis 2.0? Or can you just maybe tighten up some of those dynamics with respect to what's happening right now in those levels?

[Gregory Engel, CEO & Director]

Yes. So I think I'd answer that in 2 ways, Matt. One is that we've had companies approaching us about purchasing wholesale product, right? Because they have had challenges, they've purchased product from other companies. This is new to us as a business model, and we have chosen in the past not to do so because of the quality of our product, right? So this has been very much driven by consistency, quality, opportunities. So I -- certainly, we already know in Q2 that we continue to have wholesale sales. Will that continue at the same level? I think it's really dependent upon the other product, because there is -- as we all know, there are big differences in terms of product quality. The second point to cannabis 2.0 is we are striving -- we've given as much guidance as we can to when we are going to launch different products with the Feather product as well as our chocolates and our future sales of PAX. But I mean, always you're -- it's a timing issue. But certainly, the demand is there and when you get a product out. So we -- that's why we are not giving guidance for Q2 at this point, because it can have a significant fluctuation based on an order date. We've had that happen in the past, right, where a significant order went out -- in one quarter, went out 2 days before the end of the quarter landed, was counted in the quarter. In another instance, we shipped to Québec a couple of days after the quarter, right? So those can have big variations on the revenue on a quarterly basis. And I think you have to look at trends and look at kind of what those things are going forward.

[Matt Bottomley, Analyst]

Perfect. And sorry, just within that answer, are you able to comment on if the provinces are decelerating the purchases of the dried flower, given where inventory levels are at the provinces?

[Gregory Engel, CEO & Director]

So I would say they were -- I think, in general, overall, they're not -- they haven't decelerated, but they haven't -- they're not holding as much inventory, right? So there's still a demand for flower. What's interesting with 2.0 is it's brought a lot of new consumers into the store as well as people from the black market now looking. So -- but we have seen their general inventory levels decline, but their order frequency increasing.

[Operator]

And we only have time for one more question. Your final question comes from the line of Justin Keywood from Stifel, GMP.

[Justin Keywood, Director of Equity Research]

Just with the Ontario market opening up with many more stores, I'm wondering how does the sales and marketing strategy evolve here. Will you be making more investments to maintain or gain market share? Or is there any new initiatives to implement?

[Gregory Engel, CEO & Director]

So Justin, thanks for the question. So I think when we had anticipated certainly in advance of the rec launch -- we have a national sales team across the country. We also have a training group that focuses on training bud tenders and staff. So it's a combination of sales and training. And we have been fully staffed up for Ontario since day 1, because they kept [ being signaled ], they were going to expand, going to expand. So we already have the footprint. And our focus very much continues to be enhancing the retail experience, working with the retailers to make sure that they understand our products. We do, do some marketing in-store depending on the province. In Ontario, that is allowable. So you do see some, but it's limited in terms of the spend. It's really more about the sales team and the trainer spending time as well as providing tools, right? We were very early. We're the first company to have a terpene guide out that's routinely used across all the stores, things like that. So as the store footprint grows, yes, at a certain point, we will have to expand the sales force. But we certainly have a pretty good footprint today versus the next 6 months in terms of the number of stores.

[Operator]

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.