OrganiGram Holdings Inc

TSX:OGI

Earnings Call Transcript 2021-Q4

[Operator]

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

[Beena G. Goldenberg, Chief Executive Officer]

Thank you, operator, and good morning. Thank you for joining us today. With me is Derrick West, our Chief Financial Officer. For today's call, we will discuss the financial results for the 3 and 12 months ended August 31, 2021, and I will provide a general business update. We will then open the call for questions. To begin, I'd like to say how pleased I am to be part of the OrganiGram team and host this call with investors. With OrganiGram's reputation for high-quality products, our strong brand portfolio and our proven ability to innovate in ways that meet consumer needs, I believe we are positioned for success. What's more, we have the strategic partner, the team and the resources in place to ensure we will execute on our growth strategy. Our fourth quarter 2021 results demonstrate progress against all of our strategic objectives. We achieved double-digit growth in recreational revenue. We introduced innovative products that were quickly embraced by consumers. We continued to improve our adjusted gross margin. We enhanced operations through adding key team members and advanced our product development collaboration with BAT. Also, and importantly, according to Hifyre data, we grew a recreational cannabis market share to 7% in Q4 from 5.4% in Q3, positioning OrganiGram as the #4 LP in Canada. And the momentum continues. Our latest data shows the market share of 7.9% at the end of October.Starting with our brands. In the quarter, we continued the revitalization of our portfolio with the introduction of 16 new SKUs into the recreational market, bringing the total to over 100 new SKUs in fiscal 2021. In addition, we recently introduced 2 new brands, SHRED’ems gummies in Q4, and our CBD forward wellness brand, Monjour, subsequent to quarter end. We have been refreshing our portfolio based on our ongoing consumer research to ensure it is aligned with current and expected evolutions in consumer preferences. The launch of SHRED and Big Bag O’ Buds is a great example of our strategy to tackle the migration to large format, low price and high THC offerings. While Big Bag O’ Buds offers 28 grams of high-quality flower at a consumer-friendly price, SHRED is a potent value segment product that has built leading brand equity to its unique and bold flavor profile. It has captured the imagination of the cannabis consumer with sales growing 67% from Q3. SHRED has remained the #1 search brand on the OCS website for 11 of the past 12 months. When it comes to addressing the evolving needs of the premium cannabis consumer, we continue to invest in our Edison brand. In fiscal 2021, we introduced 7 new high-potency strains that were well received by consumers. Moving forward, through our in-house genetic breathing program, backed by our R&D investments in our advanced cultivation facility, we plan to bring new cultivars to market with unique terpene profiles and the high THC content that consumers are looking for. We also devoted significantly marketing budget to Edison to elevate new product introductions and solidify its brand position, and we are seeing the results of our marketing efforts. According to Brightfield survey of 3,350 panelists over the August to September period, Edison experienced a 4% growth in brand awareness and achieved a significant increase in its numbers of social mentions and positive consumer sentiment scores. In fact, over 80% of consumers indicated they would likely recommend Edison to a friend. We will continue to invest in building our flagship brand with consumers, both in marketing and product development, to ensure this momentum continues over time. While we are committed to improving our mix in favor of premium products, we do recognize the importance of the value segment and its pivotal role in converting illicit market users to the legal market. That's why we continue to focus on offering brands such as SHRED and Big Bag O’ Buds to consumers seeking a high-quality, legal product at a fair price. That said, we are committed to ensuring we can do so profitably. While Big Bag O’ Buds has always had reasonable margins for the segment, we were able to leverage the strong consumer demand and loyalty on SHRED to take price, which improves the margin on this popular brand. On the premium side, we expect that, in time, consumers will become more discerning and will start making choices based on genetics, bud structure, flavor and aroma profile as well as other quality attributes. Our product development strategy anticipates this evolution, and we will be ready as this shift in consumer behavior happens.Moving on from flower, in the fourth quarter, we launched SHRED’ems gummies to leverage the success and brand recognition of SHRED. SHRED’ems are available in Indica, Sativa and Hybrid versions with exciting flavors like Sour Cherry Punch, Sour Megamelon and Wild Berry Blaze.Since their launch in August, SHRED’ems quickly gained momentum, capturing 5.8% national market share in the gummy category as of last week. This is the first product launch from our recently acquired Edibles & Infusions Corporation, and demonstrates the synergies achieved from combining EIC's confectionery expertise with the strength of our SHRED brand and our keen focus on consumer insights. The efficiencies that are in place at EIC also allow SHRED’ems to be one of the most competitively priced gummies on the market. Launched in August, Edison JOLTS was another first-to-market offering in the quarter that demonstrated our R&D capabilities, our creativity and our commitment to consumer-driven innovation. JOLTS are Canada's first flavored high potency THC lozenges. They are available on a package of 10 mg flavor lozenges, with 10 milligrams per lozenge, for a total of 100 milligrams per package. For the 8-week period ending November 6, JOLTS reached the #1 position within the ingestible extracts category. And finally, last week, we announced a major addition to our cannabis derivatives lineup with the introduction of the CBD infused soft shoes under our new wellness brand, Monjour. They are offered in Berry Medley and Citrus Medley flavors as well as in both vegan-friendly and sugar-free formats. Monjour offers 20 milligrams per piece and is attractively priced with 30 pieces per pack. Monjour is also produced at our EIC facility in Winnipeg. Again, EIC's highly efficient production technology means we can produce high-quality, low-cost edible products at scale. In fiscal '22, we expect to add even more edible products to our lineup in both THC and CBD formulations. Moving on to our growing facility in Moncton. In the past quarter, we launched several initiatives to increase the average THC content per plant as well as the average yield. These initiatives are aligned with consumers' demand for high THC and are expected to continue the improvement in our margin. In Q4, our yield per plant was 127 grams compared to 117 grams in Q3 and 101 grams in Q4 of fiscal 2020. We harvested about 12,000 kilograms of dry product in Q4 compared to about 8,400 in Q3 of fiscal 2021. The increased harvest helped to meet the growing demand for our products and for the growing store build-out in Ontario. However, we are reaching capacity at our Moncton campus. The higher consumer demand for our products has meant that we are not able to take advantage of all the sales opportunities presented to us. In order to better capture these opportunities, we have decided to complete the Phase 4C expansion of our growing facility at Moncton, which will significantly increase our capacity and ability to meet and monetize further demand. This is a rare situation in the Canadian cannabis industry. While other Canadian LPs are closing facilities, we are expanding. I think this speaks to both the prudent initial build-out of our growing infrastructure and our compelling product offering. Our current annual capacity at the facility is approximately 40,000 kilograms. When the Phase 4C expansion is complete, the facility will have an annual capacity of approximately 70,000 kilograms of flower. We are also making design improvements and environmental enhancements to the facility to improve yields and flower quality. In the fourth quarter, we significantly advanced the build-out of our Centre of Excellence, or CoE, in Moncton, that we are building as part of our product development collaboration with BAT. As has been discussed in prior quarters, the CoE will develop the next generation of breakthrough cannabis products, IP and technology. Both OrganiGram and BAT are contributing scientists, researchers and product developers. Currently, we have reached the first 100-day milestone in the project with staffing, construction and project planning underway. In the next 8 to 10 weeks, we expect to have the remaining core construction projects completed, with the bio lab to be completed in Q2 of fiscal 2022. Research collaboration has begun with the initial focus on CBD cannabis, vapor and oral products. This is an exciting opportunity. This strategy should enable us to grow our market presence in Canada. What's more, having access to new IP from the collaboration and the ability to sublicense the technology opens up significant opportunities in the U.S. and other markets. Finally, before Derrick provides the financial overview, I'd like to comment on our international sales to Israel. We recently resumed shipments to Canndoc, and we expect to make further shipments in fiscal 2022. This is a high-margin revenue source for us and one that provides our leading cultivars to markets outside of Canada. Over to you, Derrick.

[Derrick W. West, Chief Financial Officer]

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

[Beena G. Goldenberg, Chief Executive Officer]

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

[Operator]

[Operator Instructions] Your first question is from the line of Frederico Gomes.

[Frederico Yokota Choucair Gomes, VP & Analyst]

Congrats on the quarter. So the first question is just on market share. You guys are obviously gaining share really rapidly in Canada, now #4 LP here. So that's positive. But I was just wondering how do you plan to keep those market share gains. Or just how sustainable do you believe they are just considering the fragmentation of the market, the heavy competition on price, and we've seen some other LPs gaining market share and then losing some of that. So what are your thoughts there?

[Beena G. Goldenberg, Chief Executive Officer]

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

[Frederico Yokota Choucair Gomes, VP & Analyst]

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

[Beena G. Goldenberg, Chief Executive Officer]

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

[Operator]

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

[Rahul Sarugaser]

So congratulations on driving terrific a top line quarter-over-quarter growth as well as market share. My question, however, is really on margins. We saw the gross margin profile relatively flat between last quarter and this quarter. Given the capacity expansion that you talked about, Beena, as well as the changes in the unabsorbed fixed overhead that you talked about, Derrick, can you give us a little bit more color in terms of how you expect margins to improve over the next few quarters?

[Beena G. Goldenberg, Chief Executive Officer]

Thank you, Rahul. Let me start, then I'll pass to Derrick to add to my comments. So first of all, as you can imagine, as we increase production, we get economies of scale in our facility. We saw that benefit as the numbers improved between Q3 and Q4 of 2021. And we expect to continue to see that [ opportunistically ] as we build out more capacity within our [indiscernible]. We have [indiscernible] some environmental enhancements that are driving [indiscernible] deals, and we expect that to continue to drive improved gross margin as well as driving higher THC, and we all know that we can get higher average selling price as we sell higher THC products. As I talked about in my opening [ remarks, ] we did have the ability to take the price increase on SHRED. And that is a unique thing to happen in this market where most of the prices are coming down. But we have such high consumer demand that we're able to [indiscernible] recognizing our lower -- inability to fulfill all of the sales opportunities. We were able to take a price increase, which again will help our margin. And finally, as we look towards [indiscernible], there's an opportunity to improve our margins through improving our provincial mix. Right now, we're heavily sold in the [ Ontario ] market that happens to be the most compressed-margined market. And as we expand into further provinces, we expect to see [indiscernible] improvements in our margins. So those are a couple of comments. But Derrick, I'll let you [indiscernible]

[Derrick W. West, Chief Financial Officer]

Yes. I'd just add, I guess, in addition, we are reviewing our sourcing with suppliers and considering more strategic sourcing, there is opportunity for further automation with regards to our blends that SHRED pre-milled flower along with we'll have in Q1 the automation of our second pre-roll machine and have labor savings with that. So we do see some near-term improvements with our margin. As well, as we were leaving Q4 near capacity. But during Q4, in the early parts, we were not at capacity, and there is a heavy fixed cost component to our operations. And as we achieve these economies of scales from operating in Q1 at the current capacity and then with the build-out, we do think that we can drive down fairly significantly our cost of cultivation that will allow us to have sustained quarter-over-quarter improvements to our costs, and therefore, to our adjusted gross margin. And just by example, going from Q3 to Q4, our adjusted gross margin went from negative 4% to plus 12%. So in 1 quarter, just from some of the initiatives we've already implemented, we improved our adjusted gross margin by 16%.

[Rahul Sarugaser]

Great. And then just pivoting towards the British American Tobacco partnership, specifically, given the investment that you have in Hisense and the recognition that this was potentially a key motivator for that partnership, we're starting to see biosynthesis or fermentation-derived products start to hit market by a few of your competitors. Can you maybe give us an update in terms of that partnership, how you see products rolling out and maybe potentially a broader update on the British American Tobacco partnership?

[Beena G. Goldenberg, Chief Executive Officer]

Okay. Perfect. So let me start with Hisense. As you said, we [indiscernible]. This is something that we believe there's a long-term opportunity to build out from this partnership. We actually did a strategic review of the investment back in the summer and found they were very happy with the progress being made, very happy with the IP that has been developed, and we continue to look forward at opportunity to further [indiscernible] our relationship with Hisense. Because we do believe down the road, there's an opportunity around biosynthesis of some of those rare cannabinoids. And we look forward to updating you further on that relationship [indiscernible] to invest and build [indiscernible] As for the BAT partnership, [indiscernible] that is prominent every day in what we do. We have great relationships with our [indiscernible] investor. We have the Centre of Excellence, as I mentioned earlier, that is well on its way in being built. We've hired scientists and product developers and retailers both from BAT as well as from OrganiGram that are working together. We have the build-out of the Centre of Excellence almost complete. As we said, we expect all the construction to be completed by Q2 of fiscal 2022. That includes not only the [ R&D ] labs, but also the bio [indiscernible]. And this is the [indiscernible] having some facilities to work with our collaboration projects to continue to build out [indiscernible] that we're looking around [indiscernible] oral and vapor products and CBD products. So lots of opportunity here to continue to build out the IP and the technologies that we think have [indiscernible] opportunities for both our companies, but we would have that [indiscernible] to take it to other markets around the world.

[Operator]

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

[Rupesh Dhinoj Parikh, MD & Senior Analyst]

So I guess just going back to that target for positive EBITDA margins later in your fiscal year, is there any way to frame, I guess, what type of gross margin you expect to get to, to be able to achieve that target? And then I guess a second question is just, I guess, as you look at the capacity right now that you have, I guess, what type of revenue -- once the facilities are fully ramped, like what type of revenue do you think you can get up to with your existing facilities?

[Beena G. Goldenberg, Chief Executive Officer]

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

[Derrick W. West, Chief Financial Officer]

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

[Rupesh Dhinoj Parikh, MD & Senior Analyst]

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

[Beena G. Goldenberg, Chief Executive Officer]

So thank you for the question. Look, we're continuing to look at opportunities as they make sense in our business. Right now, there's a lot of talk about what is the opportunity in the U.S.? [ Options ] keep moving forward, and we'll [ discuss them ] as we evaluate those regulations when or if it's right for us to move into the U.S. market and how we do it. So we'll continue to look at opportunities. We [indiscernible] organic brand, not because other competitors are there. And look, we're watching what our other competitors are doing. So it's something that we'll continue to evaluate. And I'd say, beyond the U.S., there are opportunities in Europe that we could look at. But there are certainly opportunities in Canada as well as we strengthen our position in the Canadian marketplace. So right now, we're focused on getting our foundation right, getting our business -- our product portfolio revitalized, growing our market share. And as we see acquisitions that fill in our portfolio, so gaps in whether it's in segments, gaps in certain regions, we'll look to fill those gaps with accretive acquisitions that make [ sense for us. ]

[Operator]

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

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

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

[Derrick W. West, Chief Financial Officer]

Yes. I understand the desire to run the models off about. There's just so many variables that can come into play, whether it's your -- the -- when the flower comes off in terms of what market wins and what brand there is a large range in selling price depending on the product format and the brand that can lead to a range. And so I tend to look at it in terms of the average of averages, but based upon getting to the higher level in capacity, which we only get to at the end of the year. And after the construction is complete, that is -- it's very reasonable that we would expect to be EBITDA at a breakeven or positive. And -- but to get granular in terms of what that exact math is, I'll let everyone of the analysts do the modeling on that. But we do believe that we can significantly reduce our cost of cultivation as we produce at a higher level going from 47 kilos of flower to 70,000. And those, of course, with improved yields from the innovation work that we're doing, there's extra opportunity there. But that would go on top of that. But there's just too many variables at play to -- for me to put it on 1 or 2. But we are confident that based on the cost structure of the facility and overhead expenses and the fact that we have the capacity to sell the product that's coming, everything is being harvested and into the foreseeable future that we're confident that we will be able to be EBITDA positive for Q4.

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

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

[Beena G. Goldenberg, Chief Executive Officer]

Yes, sure. No problem. So I would like to just remind everybody that one of the unique differences for OrganiGram is that we have our own dedicated sales force. And while many of our competitors use third party, we're focused day in, day out in this space, and our team is out in retail stores, meeting with budtenders. And so we think that, that's a competitive advantage for us. We'll continue to build out our presence in the stores. We were able to get our SHRED’ems gummies significantly into distribution within 12 weeks of launch. We were out in mass distribution across the country, except Quebec, but we were able to get that product out quickly. And that is -- so as you talk about what happens as people start going back into stores, the reality is, I think that's going to be a benefit for us. We know that it will help our Edison brand, where budtender recommendations are important. We'll do some more in-store activations, which we weren't able to do last year during COVID. And so getting the name out, getting that contact, it will help us maintain our presence and continue to drive our momentum. Look, we have budtender education programs. We kicked off a program called Plant Lab last year. And it's a dedicated program for budtenders' learning about the quality of our products and available to consumers. And on top of that, we'll continue to improve our consumer communication strategies. Look, this is -- it's a difficult category because you can't market like traditional CPG companies can to consumers. But there are 2 places we could reach our consumers. And that's in-store and it's online. And the in-store was hampered last year with all the retail restrictions during COVID. So we're excited about the opportunity to ramp that back up and continue to improve our online programs to really reach the consumers, both for our Edison brand and for our other new products like our gummies and our JOLTS that we think have the great potential to continue to drive further improvements in our product mix.

[Operator]

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

[Tamy Chen, Analyst]

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

[Derrick W. West, Chief Financial Officer]

I would say that was more -- yes, I would say that the improvement of the 16% was more to do with cost improvements that we achieved at the facility over Q3 and early Q4 that did allow for the improved margin, and that was prior to operating at full capacity at the 40,000 kilos and that was why we were gaining confidence as to the improving cost structure and the improvement to the margin. We're always looking to sell our products in the brands and formats that allow for the higher selling price and that will, of course, be a big improvement to the margin as well. But we have seen the improvement over the last quarter significantly come from improvements in the cost structure.

[Tamy Chen, Analyst]

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

[Derrick W. West, Chief Financial Officer]

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

[Tamy Chen, Analyst]

Interesting. Okay. So it sounds like the -- now that you're producing more, and as you continue to produce more through fiscal 2022, there's -- that's where that upside to more margin improvement will come from. Okay. And my next question is, can you give us a sense, like your Big Bag O’ Buds and your SHRED, I know you just took that price increase on SHRED. Like those 2 product lines, like are they in the positive margin -- gross margin territory at this point now? Or is like SHRED, after the price increase, still kind of like just at breakeven? Like can you just give us a sense of the margin you get off of those 2 products.

[Derrick W. West, Chief Financial Officer]

Yes. At this time, all or flower product categories are -- and brands have a positive margin -- product margin, but to get into the details of one over the other and format sizes and provincial jurisdiction is not something that we would normally get into, but I would indicate that our -- because of the lower cost of production already achieved over the last couple of quarters that all our flower categories are -- have positive product margins.

[Operator]

Your next question is from the line of Adam Buckham from Scotiabank.

[Adam Buckham, Associate Director of Cannabis Equity Research]

So maybe just following up to Tamy's question there. Derrick, are you able to provide some more color on -- particularly in the flower segment, what the mix between value and premium was for you guys this quarter. And where that compares to maybe the last 2 quarters?

[Derrick W. West, Chief Financial Officer]

Yes. I would say that SHRED has been very popular, and that's been a great for OrganiGram in the sense that we've been able to have demand that exceeded our production capacity at the time and then, perhaps, less sales on the table in that situation. So it was over the last couple of quarters with the success of blends with the SHRED has increased the percent of the total with regards to value -- the value formats and value brands. However, with our current spend and future spend on innovation, and we know that is a focus of ours to have more product available in mainstream to premium brands. And as well, I would refer to some of the comments made by Beena in terms of M&A opportunities that would always be considered to complete the portfolio. But we don't historically give volume breakout by brands. But no question, the success of blends through SHRED has created a bigger percent of the total in terms of sales of the facility, but that's helped cover our overhead costs and it has allowed for us to show these improved margins.

[Adam Buckham, Associate Director of Cannabis Equity Research]

Okay. Great. That's good color. So just my second question. So obviously, if you look over the last 4 or 5 months, many of your peers have kind of tried to jump into premiumizing their overall portfolio. So if you look at your market share gains for the summer, it sounds like a lot of them have come through the SHRED brand and the associated products through that. So if you look more specifically at Edison, are you able to provide some color on how market share has trended in the premium category for you guys? Like with the launch of the new strains, are you starting to see greater uptick? Some color there would certainly be helpful.

[Beena G. Goldenberg, Chief Executive Officer]

Okay. Adam, thanks for that question. So our focus on Edison, and as I mentioned in my comments earlier, is really going to be around building that consumer connections. We're investing in marketing [indiscernible] to continue to build on that brand awareness and the loyalty factors attached to Edison. Certainly, the -- during COVID, the ability to talk to consumers in-store and to get budtender recommendations was limited. We see, over the next year, the opportunity to strengthen the messaging and that connection with our consumers on Edison. We also have the plans in place to introduce some new products that bring some new news to Edison. So not only new strains, but also [indiscernible] product under Edison just to continue to build out that portfolio beyond just flower on a more mainstream consumer as opposed to it all being about price.I think Edison is more than just high THC. We're talking about adding terpenes to our labels. We're adding about -- we're talking about adding more visibility to our strains. And these are things that I think, over time, the cannabis enthusiasts will be interested in. So it's a slower build on Edison, but I think we have a really good platform of which to build and continue to build that brand. While we leverage, as I said earlier, leverage SHRED to get those new -- those consumers from the illicit market coming over with a lower price offering, higher THC offerings, that one is an easier message. We don't put a lot of our marketing funds towards SHRED. I think the positioning in the market works on its own, but our investment is being made into our Edison brand.

[Operator]

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

[Douglas Miehm, Analyst]

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

[Beena G. Goldenberg, Chief Executive Officer]

Yes.

[Derrick W. West, Chief Financial Officer]

Yes. I mean, obviously, I don't really see where the margins -- in terms of being impacted for the extra capacity, just there is this fixed cost component in terms of running the facility, whether we're talking about labor or other overhead-type costs. And as we add new rows and add new capacity and we are spreading those costs over. And so I'm not really seeing where margins are going to be interfered with. I mean, obviously, there is a little bit with loom changeovers and things as we make these various environmental and other enhancements and design enhances to the facility. But on an overall basis and moving from 40,000 to 70,000 by the end of the year in terms of kilos of flower, I do not really see that we would have a disruption to the monthly or quarterly cost structure that would host the margin. But beyond the cost of the flower, there are other factors beyond the quality of flower where it's being sold as well with our derivative products. We recently launched in Q4 with -- Edison JOLTS along with the SHRED’ems gummies and the derivative products. And they're capturing a larger part of the market share and becoming a larger part of our revenue. And so that will also assist the overall margins for OrganiGram as we look forward.

[Douglas Miehm, Analyst]

Okay. Perfect. And then maybe you could comment on one of the things that you've obviously been very good at is your ability to identify changes within the consumer, how they're thinking. And Beena, maybe you could describe some of the new consumer research that you're seeing right now and how that's changed over the last, let's say, 6 or 12 months, and how you intend to take advantage of that?

[Beena G. Goldenberg, Chief Executive Officer]

Sure. Thank you for the question. So in terms of where we see the consumer going over the course of the next little while, we do see the evolution where consumers will start to look at not only the highest THC for the lowest price, but we'll start to really care about aromas and flavors and we'll also look at the genetics and making sure that there's something unique and interesting about it. So there's a certain kind of foody approach to the cannabis enthusiasts that they want new and unique, different cultivars. So we think that will happen, and we'll be ready with our in-house breeding programs to continue to provide that under our Edison brand. We also see that the wellness segment will continue to be a trend. We just launched our Monjour, our -- providing CBD in a sort of daily regimen. We believe that more wellness will continue to build over time. And we have to have offerings to consumers that, perhaps, aren't looking for the high but are looking for the wellness benefits of both CBD and balanced CBD-THC offerings. I think these are things -- the consumer will continue to look at edibles instead of oils. Over time, I think the oils segment has declined as edibles have become a nice way to get discrete but specific milligram intake over time, sort of dosing. And we're really excited about our Edibles & Infusions Corporation because that acquisition has helped us get into that gummies category very quickly. So we have said that we have -- last quarter, we talked about our Cannabis Innovations Panel. We have 2,500 consumers that we speak to, to get better insight into trends. We use that panel to understand flavors to launch in our gummies. We use that to look at what we want to do on pre-rolls or on chocolates. So we have opportunity to continue to dip into that consumer research and continue to adjust our portfolio accordingly.

[Operator]

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

[Andrew Partheniou, Analyst]

Congrats on the profitability improvement in this quarter. Maybe just talking about your rec performance. You mentioned that you took price increases on SHRED. Wondering what that did to the average net selling price in the quarter. And if you continue to take price increases on SHRED, where that can go in tandem with your premium offerings?

[Beena G. Goldenberg, Chief Executive Officer]

Thank you, Andrew. And so let's just talk first about the increase on SHRED. So here's a brand that we are having -- we're struggling to supply the demand. And when that happens, taking prices is a natural response. We have had our Alberta price increase in market in August -- as of August and the Ontario increase took effect at the end of October. So the benefit of the price increase we'll see in our next quarter's results as we continue to grow those brands. But I think that should help the margin on that brand. And there are other opportunities as we have supply to take the brand to other markets. Ontario is the most price-compressed market. So just expanding that brand in other regions will also help on our average selling price for that brand.When you -- you asked about Edison, we feel strongly that our Edison brand maintains a good position in the marketplace for a mainstream brand in terms of pricing. And we just need to continue to provide news and excitement behind that brand. And that's our strategy as we move into fiscal year 2022, talk to consumers, talk to budtenders, add innovation. It's a great opportunity to continue to build our mix towards premium. And then, as I mentioned earlier, the gummies that we're launching, so our derivatives, both Monjour and our SHRED’ems add an interesting mix, obviously, higher ASPs as we move out of the flower segment. So we're excited about the opportunities as we look at our product portfolio moving forward.

[Andrew Partheniou, Analyst]

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

[Beena G. Goldenberg, Chief Executive Officer]

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

[Operator]

[Operator Instructions] You next question is from the line of Graeme Kreindler from Eighth Capital.

[Graeme Kreindler, Principal]

With respect to the expansion of capacity at Phase 4C, the company is still incurring charges for unabsorbed fixed overhead and the cost of sales. So I wanted to know what those charges are related to given the fact that it's currently expanding capacity? And what types of level of output are needed to be achieved to fully absorb that overhead?

[Derrick W. West, Chief Financial Officer]

Yes. Thanks. I can take that question. The unabsorbed overhead, which was more significant in the earlier quarters was as a consequence of the underutilized portion of the depreciation on our chocolate business -- or our chocolate machines. And secondly to the unused glow rooms that -- and that was mostly occurring in the earlier quarters. We had a much smaller amount impact our Q4 financials. But looking forward, we do not expect to have any unabsorbed overhead amounts as a consequence of reusing the rooms as they're available for growing, et cetera. So that was -- is more of a historical context and as that cost comes out of our cost of sales, and we're using all the rooms, we're absorbing the rest of the cost naturally through our margins. And so that will have an overall positive impact to the gross margin. And those costs mainly relate to the depreciation, property tax and insurance on the unused rooms or unused rooms at the time. But again, as we got to capacity at the end of Q4, it was more of a nominal charge for Q4. It's not expected to reoccur even with the expansion because as new rooms come on, we'll only be depreciating them as they're put into use and will be immediately put into use. And so, hopefully, that provides a clear view [indiscernible].

[Graeme Kreindler, Principal]

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

[Beena G. Goldenberg, Chief Executive Officer]

So thank you for that question. We continue to invest in automating our production -- our downstream processing. We had one automated pre-roll line last year. We brought on a second automated pre-roll line just in August or September of this year. We're looking at more automation in our packaging and in our blending. And this is -- so as we build out our capacity, we're also looking at downstream processing to make sure that we're able to not only grow the flower, but get it out the door and meet our consumer demand. So that's all part of plans and efficiencies that we hope to gain in this fiscal year. Thank you. And thank you, everybody, for joining this call today. Thank you, operator. And I look forward to updating you on the progress moving forward. Have a good day.

[Operator]

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