OrganiGram Holdings Inc

TSX:OGI

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Lisa, and I'll be your conference operator. At this time, I would like to welcome everyone to the OrganiGram Holdings Inc.'s Third 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 would like to introduce Amy Schwalm, Vice President, Investor Relations. Ms. Schwalm, please go ahead.

[Amy Schwalm, Vice President of Investor Relations]

Thank you, Lisa. Joining me today are OrganiGram's Chief Executive Officer, Greg Engel; Chief Financial Officer, Derrick West; and our Chief Strategy Officer, Paolo de Luca. Before we begin, I would like to remind you that today's call will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's press release regarding various factors, assumptions and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS 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 these measures. I will now hand the call over to Greg.

[Gregory Engel, CEO & Director]

Thanks, Amy. Good morning, and thank you for joining us today. This morning, we reported results for our third quarter, which ended May 31, 2020. I'll provide some overall remarks on the quarter and discuss some recent product launches, and then Derrick will take you through our financials in more detail. All 3 of us will be available to answer questions following our prepared remarks. Our Q3 fiscal 2020 results reflected some challenges that we've had and that the industry has faced, as well as those that were exacerbated by COVID-19. Some of these headwinds are temporary, but we have taken several key actions as an organization, which we believe will lead to improved results moving forward. As we've continued to see progress in the efforts to contain COVID-19 in Atlantic Canada, it's important to keep in mind that New Brunswick, where our facility is located, took early and decisive action in the battle against COVID. Since the start of our Q3 aligned closely with the actions taken in the province as well as the actions taken by our organization to protect the health and safety of our employees and their families, our ability to launch new products according to our original plan and to supply existing product lines was hindered. For example, we needed to pause pre-roll production, a product line, which comprised 14% of our revenue in our Q2 2020. Recall that for most of Q3, the company was working with a substantially reduced workforce. As a result of the global pandemic, we announced in early April that about 45% of our workforce were temporarily laid off in an effort to protect the health and safety of our employees and allow for physical distancing within the facility. While we began recalling some of the temporarily laid off employees in mid-May, ultimately, we laid off approximately 25% of our workforce in order to better align with prevailing market conditions. Not unlike many of our peers, we had overbuilt and were overproducing for the current market demand, which resulted in the asset impairment and some of the inventory write-offs we faced this quarter. However, we have a strong track record in proven history of managing our cost compared to our peers. Notwithstanding the write-offs, and even the noncash to the quarter, we were able to generate positive operating cash flow in Q3. We were able to do this even before we rightsized our labor force and despite softer revenue in the third quarter. Now we are moving forward with a leaner workforce and only modest capital investments remaining to complete the plans for our facility. And to drive the top line, we have a very focused strategy. One that prioritizes competing successfully in the dry flower market in Canada, which is the largest product segment in cannabis, and a strategy that ensures a continued focus on Rec 2.0 products as that market evolves. We are in the middle of a revitalization of our product portfolio and have launched a number of new products with more to come in the near term, which we believe have the ability to compete with the market leaders in their respective categories. We estimate 18 additional SKUs will be launched in the next 6 to 8 weeks alone. Now I'll provide a little more context on revenues and gross margins for this past quarter. As we disclosed in our press release earlier this month, net revenue declined sequentially from Q2, largely due to significantly less wholesale revenue as orders slowed. To date in Q4, we have already seen reorders for wholesale revenue and recorded wholesale revenue. In Q4 fiscal 2020, we also expect to start shipping to Canndoc, subject to the receipt of an export license. Canndoc is one of Israel's largest medical cannabis producers. Under terms of the agreement with them, we will provide a guaranteed 3,000 kilos by December 31, 2021, for processing and distribution into the Israeli medical market. We may provide an additional 3,000 kilos during the same time period at their option. Q3 adult recreational revenue was up slightly from Q2. Excluding provisions, Q3 Rec revenue increased 14% from Q2 2020. We've conducted consumer research and leveraged the detailed analysis of consumer purchasing behavior in an effort to better align our products with evolving consumer preferences. Although, we launched a number of new products in Q3 fiscal 2020. As previously noted, some product introductions were delayed from the original expectations due to the impact of COVID-19 on commissioning equipment and/or due to our reduced workforce. We have noted the significant growth in the dry flower value segment of the adult use recreational market, including the larger SKU format offerings. Competition continues to intensify, and new entries have caused substantial market share shifts within the segment as well as an overall shift from the mainstream to value segments within the dry flower category. Value-priced products in larger forms and sizes became increasingly popular during the pandemic as consumers look to pantry load in the early stage and later became more comfortable with ordering online. We expect this trend to continue during the pandemic. Unfortunately, our increased offerings in the value segment and in the largest Q-formats were later to launch than we had expected. This was primarily attributable to a reduced workforce and delays on packaging equipment and some new packaging materials due to the COVID-19 disruptions impacting the global supply chain in late winter to early spring. Notwithstanding these comments, we have and continue to roll out value and large SKU offerings. During the last week of April, we launched Trailer Park buds, our first value-priced product in a large-format size of 28 grams. We believe we are offering a differentiated product, which doesn't just compete solely on price. Trailer Park buds is a strain specific dried whole flower and is indoor grow, unlike much of the greenhouse competition. It's being very well received since its launch and sold out in many of the early entry provinces. After discussion with Health Canada following the launch, we decided to make changes to the brand and the logo. There was about a month of supply disruption, while we changed the interim branding from Trailer Park buds to simply Buds. In Q3, we had listings in Alberta and 5 other small provinces and launched in Ontario last week, where you will see the interim Buds brand until we have the new permanent brand name in market. Bud should be available on the OCS website in Ontario retail stores later this week. For Quebec, our value line in large-format offering is expected to be under the Trailblazer brand and anticipated to launch in Q1 of fiscal 2021. The Trailblazer brand was our only value-priced offering until now. In the 1-gram, 3.5-gram and pre-roll formats. We recently launched Trailblazer dry flower in larger formats, sizes of 7 grams and 15 grams. The brand offers higher THC potency from when we originally launched Trailblazer just after rec. legalization at competitive price points. Subsequent to quarter end, we also began rolling out further line extensions on our Edison brand streams. Specifically, in June of 2020, we extended our most popular strains, such as Edison Limelight and Edison Blue Velvet to offer new size formats and 3 pack pre-rolls. Lastly, we anticipate launching new core strains with higher potent THC in Q4 2020. These new strains will be sold under the Edison brand and will infuse novelty the brand. Turning to the Rec 2.0 market, Canada. During our fiscal Q3, we launched our premium bay product, Edison + Pax ERA cartridges, the last of our vape products to launch and rounding out our vape portfolio, which addresses the value, mainstream and premium segments of the market. We're excited about the upcoming launch of our high-quality value chocolate bar under the Trailblazer brand. This will be our second product offering in chocolate category after the introduction of our premium Edison Bites earlier this year. We believe that Trailblazer chocolate bar is superior quality to the current leading value brand and will be available at a competitive price point. The bar will be available in 2 flavors: First mocha chocolate and soon thereafter, mint chocolate and both expected to launch in Q4 fiscal 2020. We now expect to launch our powdered beverage product in Q1 fiscal 2021 after facing delays in part due to COVID. As we have said, there has been a lot of interest from provincial category buyers in this product. We acknowledge the beverage category still relatively small but has been fast growing. This dissolvable powder can be added to a beverage of the consumer's choice and is anticipated to provide an initial absorption of cannabinoids within as few as 10 to 15 minutes. In summary, we have a lot of new entries in -- to both the Dry Flower market and the Rec 2.0 market in Canada. We look forward to them gaining traction over the coming months. A consumer walking into a retail store or visiting an online website in [ August ] this year should see an improved and expanded product offering to OrganiGram compared to earlier in calendar 2020. I'll now turn the call over to Derrick to go through more details on our financials.

[Derrick W. West, Chief Financial Officer]

Thanks, Greg. I will go a little deeper into our quarterly results and discuss our financial position. Third quarter net revenue was $18 million compared to $24.8 million in Q3 2019. Primarily due to lower flower sales volumes and a lower average net selling price as well as a net provision for sales returns and price adjustments of $3 million. Sequentially, Q3 net revenue decreased from Q2, largely due to less wholesale revenue, as Greg mentioned. Q3 adult-use recreational net revenue of $15.3 million was up slightly from Q2 net revenue of $15 million. Excluding provisions, Q3 net revenue increased 14% sequentially to $18.3 million from $16 million in Q2. Q3 2020 cost of sales was $44.4 million compared to $12.5 million in the same prior year quarter, primarily due to noncash inventory provisions and COVID-19 related charges. We wrote off $19.3 million in excess of unsalable inventory of which $11.9 million consists of a provision related to excess trim and concentrate. While we haven't destroyed the inventory provided for, we have determined that this inventory could not be sold within a reasonable amount of time. Another $2.87 million related to inventory write-downs to an estimate of net realizable value on account of declining market prices. Lastly, $7.9 million of charges related to a reduced workforce due to COVID-19. This amount was comprised of $5 million for plant culling due to an insufficient workforce to manage plants in various stages of their growth cycle, $2 million in unabsorbed fixed overhead as a result of lower production volumes and $0.9 million, mostly for lump sum payments to temporarily laid off workers to bridge them until they could receive their serve benefit. Gross margin before fair value changes to biological assets and inventories sold was negative $26.4 million compared to a positive $12.3 million in Q3 2019. This was due to lower net revenue and higher cost of sales, as I just described.In Q4 2020, we do expect an improvement to gross margin before fair value changes to biological assets and inventory sold as we anticipate there will be fewer inventory provisions than as compared to Q3 2020. As indicated in prior quarters, we do expect some production inefficiencies to persist and impact gross margins in the near term, while we continue to launch new Rec 2.0 products and optimize production. Our portfolio revamp is only partially complete, and we expect to gain efficiencies when the product launch schedule normalizes. A negative noncash adjustment to cost of sales for unabsorbed fixed overhead costs is also anticipated to persist since we intend to cultivate less than the target capacity of our facility for the foreseeable future. In Q3, we decided to indefinitely defer the completion of 4C as originally designed. Phase IV C has been partially completed, but without any foreseeable near-term use for the space, we recognized an impairment charge of $37.7 million in the third quarter. As we previewed in our July 3 press release, Q3 2020's SG&A expenses of $10.3 million decreased approximately 26% sequentially from the $14 million in Q2 2020. Our Q2 included marketing and other costs related to the initial launch of our Rec 2.0 products. SG&A in Q3 2020 increased from $9.1 million in the prior year's quarter as we continue to scale operations for ongoing Rec 2.0 launches as well as due to some charges related to COVID-19. Unique to this past quarter, we recognized government subsidy income of $3.2 million, which related to the Canada emergency waste subsidy paid to eligible employers whose business have been impacted by COVID-19. For Q3 2020, we are reporting a negative adjusted EBITDA of $24.7 million compared to Q3 2019 adjusted EBITDA of $7.7 million. The current period's negative gross margin before fair value changes was primarily due to the aforementioned inventory provisions and adjustments in the cumulative amount of $22 million. For Q3 2020, we are reporting a net loss of $89.9 million compared to a net loss of $10.2 million in Q3 2019. This was primarily due to the negative gross margin combined with the noncash impairment charge for property, plant and equipment. As Greg mentioned, we generated positive cash flow from operating activities of $8.5 million in Q3 2020. This was accomplished through the monetization of receivables and inventories and a deliberate decision to calibrate our investment in cultivation and inventories to a level that better matches our near and medium-term needs. We ended the quarter with $44.8 million in cash and short-term investments and have continued to strengthen our balance sheet subsequent to quarter end. Also worth noting, we only had $4 million of remaining CapEx at the quarter end needed to complete our existing plans for Phase IV and V of our Moncton campus facility. During Q3, we successfully amended our credit facility agreement as such that we could access of $30 million in available capacity on our term loan. We raised money under our At The Market or ATM equity program announced in April of 2020. In Q3, under the ATM program, we issued about 14 million common shares for gross proceeds of $31.1 million at a weighted average price of $2.21 per common share. The net proceeds were $29.8 million after agents, commissions and other fees. Subsequent to quarter end, the ATM was completed with a final raise of $17.9 million in gross proceeds on the issuance of about 7 million common shares. We also drew down the remaining $30 million available under the credit facility's term loan. As at July 17, 2020, including the $8 million GIC that is a restricted investment, the company had approximately $78 million in cash and short-term investments. We feel very good about the strength of our balance sheet, which is critical in this volatile industry and during the uncertain times of this global pandemic. That concludes my formal remarks, so I'll turn the call back over to Greg for closing comments.

[Gregory Engel, CEO & Director]

Thanks, Derrick. There's no question it's been a challenging time for the Canadian cannabis industry and the pandemic certainly exacerbated some of our own challenges in Q3. Again, some of these headwinds should only be temporary in nature. For example, we did miss out on some opportunities to capture revenue in Q3, as I've discussed. But we believe our new products have the potential to put our revenue growth back on track. We expect it to take some time as the new product launches are fairly recent and some are still to come. We encourage interested observers to regularly visit the online websites or stores to see our progress in rolling out new products and extensions. We anticipate it will take until Q1 fiscal '21 before there is the potential for OrganiGram to reflect any meaningful incremental sales from the adult-use recreational market. We are excited about these significant rate of vitalization to our product portfolio, and we believe we've made necessary changes to rightsize the company as we continue to relentlessly focus on building a business that generates attractive return on investment for our shareholders. That ends my prepared remarks. Operator, if you could go ahead and open up the line for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Aaron Grey from Alliance Global Partners.

[Aaron Thomas Grey, MD & Head of Consumer Research]

First one for me is around gross margin. Thanks for the color that you offered there. Just wanted to dig a little bit deeper in terms of how to think about the gross margin in the near term? I know you said there was still going to be some inefficiencies kind of going forward near-term, and then you kind of gain more over time as it normalizes? So just how best to think about gross margin profile? Because there was a lot of kind of one-off puts and takes during this quarter.

[Gregory Engel, CEO & Director]

Sure, Aaron. It's a good question. I'll take that and then if Derrick has any color he can add. So I mean, certainly, as you outline to me, we don't give guidance necessarily on gross margin, but we do expect an improvement from Q3 due to fewer inventory provisions. For Q4, net revenue, I think, as I mentioned, it's going to take time for new products to really gain some traction as many of these launches are recent. And we did have supply disruptions during the quarter related to rebranding buds for about a month. Any potential meaningful incremental revenue will not occur until Q1 more than likely, as I outlined earlier, and we will see continued pressure on ASP due to value offerings and increase competition in the space. We do expect, though, for increased pre-roll sales with a return to production of that line because, again, in Q3, we have temporary halted production, and we have recorded wholesale revenue in Q4 to date, but don't expect it to be of the same magnitude that we've had in Q2. And as noted, we expect to start shipping to Canndoc. So certainly, in Q4, on the cost of sales, we do expect some negative charges for unabsorbed fixed overhead costs to persist as we continue to produce below our target capacity. And there will be a higher cost of cultivation as we're no longer harvesting trim. So that higher cost of inventory flowing through into Q4. We do expect some production efficiencies to persist as we continue to launch new products, and we've given guidance on this before as there's always a learning curve to optimize the production process. Although, again, as we've outlined previously, the larger format SKUs will lead to better cost efficiencies when it comes to packaging of things like 28-gram and 3-pack pre rolls. So...

[Derrick W. West, Chief Financial Officer]

Yes. I would add to what Greg said. And again, it's not in a position where we're going to provide forward guidance. But when you look at Q3, there are approximately $22 million in adjustments to inventory values from an obsolescence or net realizable value that would be considered non-normal and unique in this quarter due to a combination of events. And in addition to the $22 million there was $7.9 million in direct costs related to the COVID-19, which was made up of the plant culling and other associated costs. So cumulatively, those 2 numbers are over $29 million, and we adjust that against the margin that's otherwise reported. You can get a better indication of the quarters -- of the Q3 quarters margin.

[Aaron Thomas Grey, MD & Head of Consumer Research]

Okay. That's really helpful. And then just 1 follow-up for me would be mostly around your vape line. It looks like it had a little bit of an uptick there. Great color that you gave on edible side. But just as we look at vape, which has certainly been the biggest category for 2.0 products in the Canadian market. Any color you can offer in terms of the competitive landscape you're seeing there, how your offerings are offering in terms of sell-through and reorder rates?

[Derrick W. West, Chief Financial Officer]

Yes. No, certainly, I can give some general commentary in that, again, as we had expected and we timed and staggered our launches accordingly. So our value line with our Trailblazer line is the first one -- the 510 cartridges that came to market. And then we launched with follow-on with our Edison feather disposable and then more recently, our Edison + PAX premium line. And we did that because of the size of the category. So the larger categories, the 510, the disposables would be next and then that premium kind of ultra premium line would be following. So good response to date. I think the only comment I would make overall is that without a fulsome offering for the PAX platform and more recently, some of the other companies that were making PAX have come to market. So now there's a more broader offering in the store. So I think that was hindering PAX in general, a little bit, only having initially one company, and then we were one of the first 3 to have product in market. And we're seeing PAX now really kind of key up their efforts on digital marketing and now that reps can visit stores again and doing that, and that should help the PAX kind of grow and evolve. So overall, we're happy with where we are. I think we're still continuing to see that this is a market that is growing and evolving. And consumers -- one thing that's interesting is consumers have come to the legal market because of the value SKUs. They're looking at the high-quality hardware that's being provided in the legal marketplace and potentially choosing those options. We're hearing that anecdotally from many of the retailers that people are coming in for the large volume value flower product. Now they're looking at the vape pens that are available because the quality of the hardware in the legal market.

[Operator]

Our next question comes from the line of Andrew Partheniou from Stifel GMP.

[Andrew Partheniou, Analyst]

I was hoping we could, I guess, center my questions around your production and inventory. Right now you have about $100 million in inventories and biological assets. And I'm just wondering, if you can give a breakdown of how much of that is your old strains versus the new strains that you've already launched like Limelight and those that you have yet to launch. And also, you mentioned that you guys are going to launch 18 new SKUs very shortly. How much of those 18 SKUs are new strains? Just trying to get a sense of the magnitude of the new strains coming online. And if you guys are going to be capacity constrained at all to meet demand with those new strains going forward.

[Gregory Engel, CEO & Director]

Andrew, maybe I'll start off and answer the question relative to the second part and then turn it back to Derrick to comment on the kind of overall mix of our inventory. So we have 3 new strains coming to market in the near term. So these have been strains we've been working on for a while. So those trains in addition to, as I mentioned during the call, kind of additional offerings of both Limelight and Blue Velvet, kind of expanding, and those have been top sellers for us expanding our strain offering. In terms of the SKU mix, there's a combination of new products, and there are other value products coming to market as well as these Core Edison strains. So it's across each of our kind of offerings as we look to bring new products out and the Trailblazer of ours, I said 2 of those coming in the not-too-distant future. Derrick, I don't know if you want to add any additional color on the relative inventory levels overall across what we have available. We may not be able to provide full details on that, but maybe Derrick, I'll turn it to you.

[Derrick W. West, Chief Financial Officer]

Yes. I don't have all the exact break down by the different strains, I would say it is a mix. Any of the inventory values that would have related to -- strains related to products that have either been delisted and/or became more stale dated, we have provided full allowances for. And so they have been reduced out of our inventory values. And so it would consist mainly of relatively current production levels, which, again, would have a mix between the new streams and some of the old.

[Andrew Partheniou, Analyst]

Sorry, I was on mute there. Thanks for that additional color. And maybe as my follow-up, to talk a little bit about your Phase V. You guys don't have that much left for that. And it could give you maybe some greater ability to create new types of products, maybe in the concentrates area, if I'm not mistaken. Wondering when that could come online and if you guys need that Phase V in order to create products like hash for example?

[Gregory Engel, CEO & Director]

Yes. It's a good question, Andrew. The -- so Phase V, as you noted, we've only got a couple of million dollars left, and that really is just final equipment going in. So I mean we've already prepaid and already have on-site expanded extraction for both hydrocarbon and CO2. And I think as you alluded to, I think hydrocarbon extraction is the one area to allow us to bring many of these new products, right? I mean, not hash in particular, but some of the other types of products where you're looking to take flash frozen material and produce potentially live resin and things like that. So we were looking to, kind of, build out capacity to have those future offerings and hydrocarbon extraction is necessary for that. So one of the challenges during COVID has really been -- and Atlantic Canada is within a bubble and is allowing kind of movement between the 4 provinces, but to get final commissioning of equipment, and I'll give you an example for our Trailblazer launch, I mean, we work with the Danish company [ Austed ]. We had to do virtual commissioning of the kind of changeover to produce trailblazer chocolate bars. And it was much more challenging because we weren't in a position to bring over kind of the people from the OEM. With the hydrocarbon extraction, we've got internal experience and expertise, but ideally, we'd love to be able to bring people into the facility. So it just -- it drags out. So I don't want to give a direction. I need to say here's when it will be up and running because it does take longer having to do things through, kind of, video conferencing with the OEM and just making sure. But I mean, certainly, that is our plan of the investment in expanded extraction methodology, especially with hydrocarbon to bring out some of these new products in the future.

[Andrew Partheniou, Analyst]

Okay. And any color on the hash?

[Gregory Engel, CEO & Director]

It's currently not in our plan at this point.

[Operator]

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

[Tamy Chen, Analyst]

Had a first housekeeping one. Just wondering, Derrek, if you're able to provide at all figures for net selling price in the overall medical market as well as -- then that selling price for flower in the Rec market? And also, if you have any pricing for your 2.0 product as well?

[Derrick W. West, Chief Financial Officer]

I don't have that. Paolo, do you happen to have that average selling price on the medical versus -- I mean there has been a decrease over the last quarter as it relates to the average selling price of the flower, but the breakdown between the 2, I don't have it in front of me, but I can circle that back to you after.

[Tamy Chen, Analyst]

Okay. Sure. So first question is wanted to just ask specifically about the store rollout in Ontario? I know you talked about that in terms of the product launches. Because of that, it will take a bit more time to see meaningful incremental revenues. But from a store rollout perspective, that was 1 thing that I think you mentioned as a key bottleneck in rolling out more revenues for the industry as a whole. And now we are seeing Ontario increased stores. I think there's just over 100 now in the province. So I'm just wondering from your vantage point, I mean, is this something that is starting to have an incremental benefit for revenue trajectory?

[Gregory Engel, CEO & Director]

Yes, Tamy, it's a great question. We are seeing, for the industry as a whole. I mean, Ontario for the last few months, as you know, and you see the reporting. I mean, it surpassed Alberta in terms of revenue. I mean that's a combination of online and stores. And as new stores come online and additional consumers have access to purchase in-store and with the restrictions lift related to store visits on COVID, we certainly expect that to continue to kind of drive an increased market potential in the province of Ontario. We've seen kind of mixed communication in the media at different times about what AGCL (sic) [ AGLC ] is going to do and not going to do. I did see yesterday another notification that they're going to limit store and report that they're going to limit the store opens to 5 per week, but certainly, that still keeps them on 20 per month, which puts us on a good run rate to be well over 200 before the end of the year. Yes. So we definitely are seeing an increase across the board with new stores coming online.

[Tamy Chen, Analyst]

Okay. And my second question is, with this whole shift towards value, so I guess it's a bit of a 2-part question as my follow-up is. One, is this your view of where this industry is going in that it's going to be predominantly essentially a battle in the value segment. Or do you see there is opportunity to create brands outside of the hard value segment and how? And the second part of that question is, if we do continue to shift both flower and as well as some of the 2.0 categories into much more value from your cost perspective, I mean, is it flexible enough to participate in even additional pricing competition? Or is there a certain level where, from a cost structure perspective for you, it would become incredibly uneconomical?

[Gregory Engel, CEO & Director]

No, it's a great question. So I mean, I think as I said earlier, that part of the shift in value has been exacerbated by COVID. We had more people buying mail order, when you're going to purchase mail order you're typically buying more volume. Or even when you're -- like we've seen in people buying groceries, they do less frequent trips, they're more likely to go when they do go to a store, buying more product one. So kind of that value growth has, I think, been increased because of COVID in part. But it's certainly -- our understanding from everything we're hearing is it's expanding the base of consumers and it's drawing consumers from the current illicit marketplace. And I think value is here to stay. There's no question. But we do continue to see a demand for high-quality products in every category, right? There's a mix of kind of consumers as you would see whether or not it's in craft beers versus value beer and mainstream or it's different lines at different levels. I mean, this is a market while value has grown. I think there is still an opportunity to build brands and kind of build brand resonance. I mean, we -- again, we talked earlier about Limelight and Blue Velvet, 2 of our leading strains. Those products when they go up and are available for sale, they move pretty quickly in general. And so there is a demand there for products in the higher end. I think when you talk about cost structure, I think we've always been a company that's focused on operational efficiency. We're continuing to do that. I think one of the things that COVID has allowed us to do is because of reductions in staff with our 45% temporary layoffs, we were forced into a position where we had to do more with less and really focus on automation and focus on areas we could get higher throughput with fewer people. It has led to some efficiencies that are sustainable in certain areas where the methodology of the way we do certain things does require less labor, fewer people. We are also looking at -- continuing to look at how do we improve our packaging efficiency. And while we have no plans for significant CapEx, I think there's some add-on equipment of [ $100,000 here or $200, 000 ] there that could have a positive impact on just improving our current packaging, and we're evaluating that as a company right now. So I think you've got to always be continue to focus on, are there ways to continue to improve costs as an organization. But back to your first part of your question, I think there is still very strong demand. And we've seen -- at the high end of it, you still continue to see kind of more boutique kind of craft grow, like whether it's cannabis farms or [ broken co ] sustain a very, very high price, right? So there are consumers across each category, no question.

[Operator]

Our next question comes from the line of Adam Buckham from Scotiabank.

[Adam Buckham, Associate Director of Cannabis Equity Research]

So you just touched on it, but I wanted to maybe get some color on your higher THC SKUs within the flower segment. It seems as though high-THC product is seeing strong demand in the market with the OCS highlighting the products north of 20%. THC were some of the highest velocity SKUs. On the back of that, can you maybe provide some comments on the velocity of your SKUs within your current portfolios, how they may be trending? And what percent of volumes or sales they make up?

[Gregory Engel, CEO & Director]

Yes. Maybe I'll turn it over to Derrick, but I would just give caution that we don't necessarily give a breakdown by product type or give feedback. Because as you know, there is market data available from provinces so we get sell-in data but not from every product. We get selling data for everybody, but we only get kind of market data from 5 provinces in terms of sell-through. So we don't have that necessarily, and we haven't given color on it in the past. But I mean, I would agree with your comment that we have seen in Limelight, one of the reasons it's, for example, been a strong seller for us is, in most cases, it's averaging between 20% and 27% THC, right? So it's been in high demand because of that. So Derrick, I don't know if you want to add any more commentary.

[Derrick W. West, Chief Financial Officer]

Yes. I would echo Greg's comments, and we don't provide that type of detailed disclosure. But clearly, the market has pivoted more towards higher THC and larger formats, and we're aware of that. And so higher THC products will move faster. But in terms of a granular disclosure on these levels, that's just not something we provide.

[Gregory Engel, CEO & Director]

Yes. And maybe I would just add -- sorry, just add some color to, like, I mean, the reason -- when I was saying earlier, we're kind of optimistic on a go-forward basis as we looked at new products and kind of expanded strain offerings, I mean we do look at the portfolio that we have and kind of how do we supplement it and bring these new strains. This goes back to Tammy's question as well, where it is important to bring those higher THC products into market and certainly expanding the offering and availability of those. So this has not been done in isolation. It's been done both through looking at market data, but also through doing market research with consumers to understand what the trend of the marketplace is. So anyway, sorry to interrupt, but...

[Adam Buckham, Associate Director of Cannabis Equity Research]

Yes. No, I was just going to maybe ask it a different way. And in terms of your production capabilities to meet that demand in that higher THC segment. Like are you able to quantify on a quarterly basis given your restructuring, like how much you guys think you can produce, that's above that?

[Gregory Engel, CEO & Director]

The only -- I guess the only guidance I could give is that we have shifted in the current production cycle right now. Roughly 35% to 40% of our production is of, kind of, these new strains because as they come to market, and we expect them to do well, we definitely put a big focus on them, but I can't give anything beyond directionally on that.

[Adam Buckham, Associate Director of Cannabis Equity Research]

Okay. No, that's great. So I just wanted to touch on 2.0 secondly, particularly within the vape segment. It seems as though the breadth of the category, particularly within the 510 segment has expanded rapidly over the last couple of months. I'm just wondering how the team views the evolution of that category. Do you think it's going to be so much without a flower with the value segment eventually being the large driver of volumes? Or do you think products are able to differentiate based on their internal qualities?

[Gregory Engel, CEO & Director]

I think there's a combination of differentiation. I mean, we get data from the U.S., and we work closely the Green Solution in Colorado and understand kind of what's happening in that market very intimately. I mean, part of what we're seeing right now, some of the pricing approaches that some companies have taken on their 5/10 cartridges is in part a dating issue is our understanding when we speak to the provinces, they've got limited amount of time left on those cartridges. So they're trying to move them out quickly. So it's been -- from that side, it's been a bit more aggressive with few companies taking that approach. But I think we will see an evolution. This is the California market. For example, like today, the predominant product is distillate. If we look into 2021 and beyond, we will start to see more whole resin kind of live resin type products in the future, which are more of a premium end. And I think there's always a place for distillate products, and they continue to do well in U.S. states where we've had years of experience. But I think the market will evolve and that ultra-premium platform will be also additive in the future.

[Operator]

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

[John Zamparo, Associate]

The minimum EBITDA covenants in the amendment to the credit facility seemed to suggest that fiscal Q1 and even Q2 were more challenging than fiscal Q4. Is there any particular reason for that other than maybe seasonality of consumption? Or is it that new product launch costs are expected to fall into Q1 rather than Q -- or maybe Q1 and Q2 rather than Q4? Just any commentary there would be helpful.

[Gregory Engel, CEO & Director]

Yes, I'll let Derrick answer.

[Derrick W. West, Chief Financial Officer]

Yes. I wouldn't read too much into the exact covenant by quarter. We're in discussions with the lender. We discussed a robust review of various scenarios, and it ended up settling on a certain amount per quarter, but there is, based upon production timing and product launches and even overhead expenses. A bit of fluctuation. And so I just wouldn't read too much into the quarter-over-quarter change to the covenant, and it was just what ended up after the discussions with the lender.

[Gregory Engel, CEO & Director]

It may be important to add too, John, that in our credit facility EBITDA, it does allow for more add backs into the calculation on things like noncash areas like inventory provisions or certain returns provision. So it's not a straight up calculation. It does have more flexibility from that perspective.

[John Zamparo, Associate]

Okay. That's helpful. And then on the Trailer Park buds, do you have a way you can communicate some elements of this brand with consumers given the truncated name. There was a comment in the press release about competing not just on price and emphasizing indoor grown. How do you plan to market this brand given your recent discussions with Health Canada? And how do you communicate the overall brand to consumers?

[Gregory Engel, CEO & Director]

Yes. As noted, I mean, we work closely with Health Canada kind of on amending the brand to buds, and we continue to see whether or not it's under the Trailer Park buds name more buds alone, strong demand for the product. I think what consumers are seeing and hearing is that it is an indoor grown product that is strain specific. And I mean, now that in Ontario, in particular, and even in Alberta, where a number of stores were closed and Canopy, for example, at some of their store closed. I think one of the key things is our reps and our sales team spending time with the bud tenders of the staff in the store to make sure they understand that differentiation. Because ultimately, they do help guide consumers in that decision making. And so certainly, the feedback we're getting on it, the posts on areas like reddit have been extremely positive about that differentiation. So whatever brand we end up choosing kind of in the future, it's going to be the same product is going to be a single strain indoor grown. And I think that's resonating well with people. We're not promoting the brand itself or promoting the content of the product at the end of the day soon.

[Operator]

Our next question comes from the line of Rupesh Parikh from Oppenheimer.

[Rupesh Dhinoj Parikh, MD & Senior Analyst]

I guess to start off with an industry question. So as you look at the coronavirus pandemic and the retail footprint, are we back to normal? Or what are you guys, I guess, seeing on the ground around right now in terms of stores reopening, et cetera?

[Gregory Engel, CEO & Director]

Yes. As far as we -- I mean, we're back to normal really across the country. I mean, there were still a small number of stores in Alberta that were -- and we've seen some Alberta stores close permanently. I mean, maybe they were they were in areas that were -- that was too high -- too many stores for the area and things like that. So we've seen a small number of stores close their doors. I mean, the area I live in Toronto, there's 5 stores within walking distance for me that are going to open within the next few weeks. So I mean, definitely, there's a lot happening. But yes, so in general, the stores are open. I think like any environment, they're still limiting the number of people at any one time. But I think Canadians have done a very good job, and whether it's a grocery or liquor or drugstores. I mean people are patient, they'll wait in line and even with limited staff in the store, there -- one of the things with cannabis stores, that's always been the case, right, limited number of people in the store, kind of having bud tenders working with them. So people are used to that when they go into store. So it's a positive thing.

[Rupesh Dhinoj Parikh, MD & Senior Analyst]

Okay. Okay. That's helpful. And then as you look at your, I guess, your evolving product mix, what portion of your mix today is value? And how do you see that trending over time?

[Gregory Engel, CEO & Director]

I don't have a specific breakdown, Rupesh, in terms of like what portion is value. But I think we've always wanted to play. We always have played in value, mainstream and premium and look to play in each category. I think where we are under index today is on value. We are late, as I mentioned, in launching buds. And although, we do have Trailblazer out there. We're amending that and bringing new products under both banners, and they'll be rebranding under buds as well. So we're not -- we don't have the same mix of value today that we expect to have going forward and that we see in the market. But even in categories like chocolates, I mean our Trailblazer bar will -- snacks will be -- will compete in that value line. And as I mentioned earlier, we see it as a very good quality chocolate at a very competitive price that has a very strong potential in the marketplace relative to what's available today. So the market is shifting in part to value. But I think at the end of the day, we want to play in every category and be diversified.

[Operator]

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

[Matt Bottomley, Analyst]

I just wanted to go back to one of the earlier questions. I'm trying to normalize some of the noise that was in this quarter with a lot of the noncash charges and other provisions. I'm just wondering, Greg, if you can comment on one of the silver linings here is, in the quarter, you were cash flow positive from operations. And I guess what I would like a little more color on is, how much of that is -- I know you touched on this, but timing differences of some of these positive working capital adjustments, given that for the 9-month period, obviously, it's still not a profitable enterprise. Just from operations alone, so how much of this can we expect going forward without trying to tease guidance out of you. But just given the fact that you're expecting more of a flat contribution from your recreational penetration over sales rather in the near-term period. Is this something that's sustainable going forward? Or are there other timing differences in your working capital or other factors that we need to consider?

[Gregory Engel, CEO & Director]

Maybe I'll let Derrick answer that question.

[Derrick W. West, Chief Financial Officer]

Sure. I would say that we're not providing guidance, there's too many moving parts and uncertainty. However, we have rightsized the business. We have, as noted before, laid out 25% of the workforce. And we do have a strong track record of managing costs. Generally speaking, we get a thorough review of the inventory, as mentioned in the quarter, whereby we did take these allowances. We have near-term visibility and have matched production to sales demand at this time. And so given that, our expectation would be that we would not see significant movements in working capital in one way or another. But I'm still -- could not get granular and provide anything more than that in terms of future guidance.

[Matt Bottomley, Analyst]

Okay. Appreciate that. And just a follow-up on one of the sort of levers here for increased revenue in the Israel exports. Can you give any color on the 6,000 kilogram commitment for orders here? What the actual time period is to that? I believe it's more than a year. And if there is certain quantities within that, that we can expect and given the licensing and everything else that come today that we can expect in the near term? And without giving pricing information, if you're unable to, can you give a magnitude with respect to what you think maybe the margin profile is on those exports versus what you're doing in Canada?

[Gregory Engel, CEO & Director]

It's a good question, Matt. So I think we -- and in the press release on this, we did outline that 3,000 kilos was really kind of a committed number and then the additional 3,000 to bring the total to 6,000 by the end of 2021 is the target timeline. So that being said, as I mentioned earlier, pending receipt of an export certificate from Health Canada, we expect to be in a position to ship a pretty significant portion of that initial 3,000. So I can't necessarily give any guidance on kind of pricing relative to. But again, I mean, the strong part relative to selling bulk wholesale product at the end of the day is there's no packaging. There's very limited labor associated with it. So again, I think it's a great deal for us. We're looking forward to working with Canndoc. They've proven themselves to be a leader. And they're also looking at, in not only the Israeli market, but how do they continue to expand into other parts of Europe and possibly that could be used for some of the product going forward?

[Matt Bottomley, Analyst]

Perfect. And is it fair to assume that those 3,000 kilograms if fully sold and shipped over? Would that be accretive to the existing margin profile? Or can you comment on that?

[Gregory Engel, CEO & Director]

Again, I wouldn't necessarily give. We don't disclose pricing on the agreements. I think once -- I mean, certainly, you can always -- when we've done wholesale sales or other sales, you can back out pricing, but that's proprietary to the agreement, unfortunately.

[Operator]

Our next question comes from the line of Pablo Zuanic from Cantor Fitzgerald.

[Pablo Ernesto Zuanic, Research Analyst]

Just a housekeeping question first. So you talked about 14% growth in the Rec business in the third quarter, and you're guiding for flat for the August quarter. So I'm just trying to understand, based on my numbers, that would mean that in the third quarter, you were pretty much in line with the market. You maintain share, if you can correct me on that if I'm wrong. And then what are you looking at in the August quarter? Is it that you're losing share more so than in the third quarter? Or is there that you're predicting a slowdown in demand, just a more color if we can start with that.

[Gregory Engel, CEO & Director]

Yes, Pablo, we just wanted to be cautious in terms of -- I mean, we historically do not give guidance, right, in terms of as an organization. And I think one of the things we are signaling that we have launched and are continuing to launch a number of new products, but as we're already more than halfway through the current quarter, we did not want to set unrealistic expectations from people that those new launches would have a really huge impact on revenue in the quarter. We expect them to have a significant impact in Q1 as uptake kind of optimistic based on consumer feedback so far from the products we've launched, but we just wanted to be -- again, we don't give guidance we wanted to be cautious so that people did not expect all of these new products to have a huge impact in the current quarter.

[Pablo Ernesto Zuanic, Research Analyst]

Right. But from a market perspective, when we look at the March bump in retail sales and then April stable, how are you characterizing sales in June, July compared with, say, the May quarter for the industry? And if you can give the nuance there in terms of any variance between the actual retail sales and how the boards are ordering and shipments from [indiscernible] to [ stores ] I'm talking more broader market level, if you can give color there.

[Gregory Engel, CEO & Director]

Yes. Again, I -- again, we don't give guidance necessarily. I will say we are seeing increasing demand in Ontario, in particular. And certainly, when you look month-over-month since January, in particular, I mean, there's been really strong growth in Ontario and as these new stores come online. But again, I can't comment specifically on different markets what kind of positioned in the market. So we don't have guidance.

[Pablo Ernesto Zuanic, Research Analyst]

And just to follow-up. I mean if we -- for us, looking from outside, right? We obviously, some companies are gaining share. Some are losing share. Obviously, there are many factors. But if you have to put your finger on one of them, what will it be. Just having the right product availability? I mean, from outside, it seems that sometimes it's [ at scale ]. Some people cannot get in the door. They have to sell wholesale bulk or sell finished product to others to rebrand. It's about the relationships with the Board. If you can just talk about that in general, having the right price segments. I mean, what are the key factors? Because some are gaining and some are losing. And it seems that right now you have lagged recently, but just if you can expand on that in terms of what is the key issue?

[Gregory Engel, CEO & Director]

Yes. I mean, I will say there's no question part of why we have lagged recently to some degree, not in every province and certainly not in all categories. But I mean, is -- we didn't have a fulsome offer, and we didn't have enough of the value category, and we're looking -- we've addressed it, and we're looking to further address that. So I think that's part is having the right mix. I think we've always shown an ability to get product to market. We were impacted by COVID. I think one of the things -- I mentioned this early in the call, the province of New Brunswick where our facility is, was more aggressive than most parts of the country. BC and Alberta and New Brunswick all declared a state of emergency early, but the schools were already closing in New Brunswick. So kids were at home and people couldn't come to work. So we were already -- even before we announced our temporary layoffs, we were being impacted. And so the quarter lined up, unfortunately for us perfectly with COVID. So that's kind of where the overall is.

[Pablo Ernesto Zuanic, Research Analyst]

And if I can squeeze one last one here. When we hear about potential mergers within other [ LLPs ], I mean how would you characterize your scale? I mean, do you have a scale disadvantage or even in your size, you can still operate well. That's not an issue. How do you think about that, especially if the industry begins to consolidate?

[Gregory Engel, CEO & Director]

Yes. It's one of our key assets, and Derrick alluded to it earlier. I mean, we've always been one of the most efficient operators in this space, right, between how we produce, how we package, how we process. So it's been one of our core focuses. And I think one of the challenges sometimes with consolidation is you're consolidating multiple facilities, right? So having one single facility for us, I mean, not to say there aren't values in consolidation. But for us, we've always been able to be very efficient from a scale perspective. And we're not producing -- we've reduced part of our production at current, and we have an ability to scale that up if necessary. So I would just answer it that way.

[Operator]

And our next question comes from the line of David Kideckel from ATB Capital Markets.

[David M. Kideckel]

So the inventory write-downs you announced, in particular, with concentrates in the TRIM, are quite significant there. And I'm just wondering with additional inventory or outdoor cultivation coming online in Canada in the fall, I think this -- in October, approximately how likely do you think it is, not only for you, OrganiGram, but for others across the board to really see additional write-downs? Because I think a lot of analysts thought, there's might have been one to maybe a couple to a few quarters of write downs, but I think we're seeing this consistently across the board. And I'm just wondering from your perspective, Greg, is this something we should expect moving forward into the fall?

[Gregory Engel, CEO & Director]

Well, it's a great question, David. I think where we have made, as we've outlined on the call and in our MD&A I mean, we've made decisions to scale that production, so we don't get caught in that situation, right, in the future. And I think where, and as Derrick mentioned in an answer to an earlier call, we have made inventory provisions against product that we don't believe we have a market for. I can't necessarily comment on other companies per se, but I think that has always been one of the challenges in the space has been, do you have the right product for sale in the marketplace? And I mean, part of our shift in some of those write-downs was driven by a shift in marketplace to newer product, higher -- a higher THC SKUs and kind of our more focused core strains. So I think I don't expect necessarily that if -- you asked about outdoor production, for example, I mean, we've seen -- my understanding, for example, is the bulk of the ultra production that was produced last year is just predominantly gone for attraction, right? And that's what the toll extractors have been using, it's driven down the toll price for it. But we -- that's why we've gone through such an extensive review of our strain mix and doing market research and looking to understand the consumer so that we are positioned for the right products for the right consumer.

[Operator]

And our final question today -- we'll have time for 2 more questions. Our next question will come from Graeme Kreindler from Eight Capital.

[Graeme Kreindler, Principal]

Just one question. I wanted to follow-up regarding putting together some of the pieces from the forward looking commentary, which I appreciate and the minimum EBITDA on the revised credit agreement here. So for fiscal Q4, looking at no real incremental growth there, Greg, you mentioned until fiscal Q1. And still expecting some drag on gross margins as you introduce some new products there. And thinking about the fixed cost side of things, it did decline sequentially, and there might be some further savings because of the labor force there. Now I know you mentioned that the calculation is a bit different from the credit agreement versus how it would show up on the financial statements. But what I'm wondering is, based on everything that was laid out there and not expecting a lot of growth, is it possible that reaching that positive EBITDA might be at risk in the fiscal Q4 here, depending on how the next month goes? I appreciate some color on that.

[Gregory Engel, CEO & Director]

Yes. Again, maybe I'll turn it over to Derrick, but I mean, we do have, as I outline, I mean we've got new products that have launched. We've got new products that are launching kind of in the currently and in the next month, and I think we're optimistic, but it just takes time for them to have a dramatic impact, right? But I'll give you an example that when we did our first sell into our first province of Trailer Park buds. It was a $1.2 million order. So it was a major province, it was a big order. So it's dependent. So I don't want to give guidance directionally. But Derrick, if you want to add some color to Graham's question.

[Derrick W. West, Chief Financial Officer]

Yes. I would indicate that, as we've stated, we're not going to provide specific forward-looking guidance. But what I will say is that we aim to be in compliance with any covenants related to our debt. And we do understand some of the near-term challenges, and we believe that's been factored in at the time we did the negotiation. And so again, we plan to be in compliance with the covenants, but it's based on a future event, and follow up comment at this time.

[Operator]

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

[Rahul Sarugaser]

So really add sort of one macro question. Greg, in your comments, you noted that the market has really quickly shifted towards the value and devalue segments. And you also noted that OrganiGram has been a little bit slow and adjusting to be shifting consumer preferences. So I'm sure that we agree the market will continue to be quite dynamic. And you may have already answered this in pieces, but to summarize, my question is, what strategic management and operational changes are you undertaking to make OrganiGram more nimble in the future? And then hence, give shareholders confidence in your outlook for 2021 onward?

[Gregory Engel, CEO & Director]

Yes. It's a great question, Rahul. I think as outlined earlier, I mean, we were slow in part, predominantly because of COVID and some of the things that were impacted by COVID, not only in staffing and kind of equipment and materials. So that, unfortunately, did have an impact on us, getting kind of our plans out to marketplace. And I think so we were planning, and we started that planning process last year. But I think we have gone, and this was part of the move of having Paola move into the Chief Strategy Officer, right, as having someone dedicated to strategy, having someone dedicated to product development and working with our marketing and sales team and operations team to look at product trends and what -- not only -- we've always been a company that has wanted to be out in front on certain products. An example when we on pre-rolls when the Rec market opened, we were really the dominant player there because we saw the opportunity. I think as we look to future products, we have to continue to do that. So I think from a consumer perspective, our focus is looking to bring -- continue to bring differentiated products. As I said, for example, we're bringing a value chocolate bar in the marketplace, but it's a very high-quality chocolate, right? So we believe that while it's going to be priced in the battle category, it's going to differentiate itself and taking an approach like that. And we are looking at future products, right? As I said, having harder carbon extraction puts us in a position to, in the future, bring differentiated products beyond simply distillate vape pens into the marketplace. And I think companies have to be thinking that way for the future.

[Rahul Sarugaser]

Great. That's really helpful. And then, of course, you know me, I will ask for an update on the partnership with Hyasynth. So how are those plan towards manufacturing and formulation of cannabinoids by Hyasynth, particularly given the real shift towards kind of 2.0?

[Gregory Engel, CEO & Director]

Yes. I mean, you'd have to ask Kevin and the team at Hyasynth. I do know, certainly, they were -- because of their facility in the space, they were temporarily shut down completely for a number of months. They have returned to partial activity in the facility. So that has had an impact on them. But I think, and again, as I mentioned before, I think one of the key things is the shift in the future towards minor cannabinoids as we see the price of isolate and distillates community be driven down. I think the real tremendous market opportunity is on minor cannabinoids and through biosynthesis.

[Operator]

And our final question today will come from the line of Doug Miehm from RBC Capital Markets. Okay. There are no further questions at this time. Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.