OrganiGram Holdings (OGI) Q1 2021 Earnings Call Transcript

OrganiGram Holdings (OGI -1.03%)
Q1 2021 Earnings Call
Jan 12, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Casey, and I will be your operator today. At this time, I would like to welcome everyone to OrganiGram Holdings Inc.'s first-quarter fiscal 2021 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. We ask that you please limit yourself to one question and one follow-up question. You may requeue if you have any further questions. As a reminder, this conference call is being recorded and a replay will be available on our -- OrganiGram's website.

At this time, I would like to introduce Amy Schwalm, vice president, investor relations. Please go ahead.

Amy Schwalm -- Vice President, Investor Relations

Thank you, Casey. 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 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 are not directly comparable. Please see today's earnings report for more information about them. I will now hand the call over to Greg.

Greg Engel -- Chief Executive Officer

Thanks, Amy. Good morning and thank you for joining us today. This morning we reported our fiscal quarter -- our first-quarter fiscal 2021 results for the period end of November 30, 2020. We're pleased with meaningful growth in our adult rec's sales sequentially from last quarter.

Strong evidence that our new products as part of our portfolio revitalization are resonating well with consumers. We're excited about the recent launch of another three strains under our Edison brand and we have more to come in the next few quarters as we continue to reinvigorate this brand. Encouragingly, Edison was recognized as one of the most-searched brands on Ontario Cannabis Store website for the month of November. We've started to ramp up cultivation and staffing such that we can meet overall increased demand in the industry and for many of our new products and we have the assets and financial strength to support our plants.

In contrast to many of our peers, we generated positive cash flow from operations in Q1. The second quarter of the last three quarters with positive cash flow from ops.  Since the second half of fiscal 2020, we've been extremely active in introducing new products and improving many of our existing ones. Since July, we've launched 53 new SKUs with up to 14 more in the pipeline expected to launch before the end of February. We continue to see dried flower and pre-rolls as the two largest categories in the Canadian rec market and based on U.S.

little state data, we believe they will continue to dominate the foreseeable future even as alternative product points gain traction. We've successfully launched the number of value segment dried flower offerings in the first half of fiscal 2020, particularly in larger format sizes in response to increased demand in that category. I'll talk more about our success there in a moment. We're also very focused on our higher-margin Edison flower portfolio by introducing new unique strains and higher potency THC products where we think there's a good opportunity for us to differentiate.

Subsequent to quarter end, we launched three new Indica strains: Black Cherry Punch, and Ice Cream Cake or ICC both with THC ranges of 20% to 26%, and Slurricane with 17% plus THC. We expect to launch at least three more high THC strains under the Edison brand over the next few quarters as a result of our continuous investment in new genetics. We run trial cultivation cycles to ultimately identify the winners. The ones we decide to move forward with because we expect them to attract the strongest consumer response.

We continue to leverage our indoor facility and our unique three-tiered cultivation rooms. Every Edison's great benefits from being grown in one of these data-backed, strains-specific grow rooms with bespoke moat -- microclimates designed to offer a distinct flavor and aroma profile and to ensure consistent quality. Variables such as humidity, temperature, and light are customized to optimize the growth ca -- cannabinoid and terpene profile of each strain. Opportunities to scale up new genetics require a patient and deliberate process where cultivation protocols are trialed for each cultivar and adjusted through multiple grow rooms before full roll-out to multiple rooms in our facility.

We've launched a number of new genetics over the past 18 months including our high THC Edison Limelight or Ultra Sour which is now the company's best selling strain. Our newest cultivars were developed from genetics that are originally sourced from a premium cannabis nursery. The nursery's processes and technology help ensure a robust, healthy, high-quality plant. Our focus on both genetics and the environment in which they're grown results in a unique phenotype expression.

This means even plants grown from the same genetics can be markedly different in terms of physical properties, potency, terpenes, and aromas based on their growing conditions. We believe this product development process is a differentiator for us. Revisiting our re -- more recent launches in the value dried cat -- flower category, we believe our value products are differentiated and do not have to compete on price alone. Particularly since the onset of the COVID-19 pandemic, value in large format sizes have become an increasing focus of consumers.

In the spring of 2020, we responded with the interaction of buds which is indoor-grown, whole dried flower, and strain-specific. The company's value segment strategy also includes dried flower offerings that were launched in larger format sizes of seven gram and 15 gram under the Trailblazer brand in July 2020. The Trailblazer value brand continues to offer increasingly higher THC levels versus what was offered when originally lodged near the start of adult rec -- adult-use cannabis -- cannabis legalization and at a competitive price point. At the beginning of Q1, we expanded our value portfolio with the launch of SHRED, a high-quality, high-potency dried flower that is pre-shredded for consumer convenience.

SHRED offers three pre-milled varieties, all with THC levels of 18% or more, and combine specific strains to provide unique flavor profiles for each of the three product offerings. It is made from whole flower, does not contain any shake or trim, and is milled to the same specifications or existing pre-roll products. SHRED is currently OrganiGram's most affordable option on a per gram basis. Sales of SHRED contributed significantly to our growth in rec revenue in Q1 and was the No.

1 most-searched brand on the Ontario Cannabis Store website for both November and December. The product has exceeded our expectations and continues to sell out, one of the reasons we are ramping cultivate -- ramping up cultivation and staffing which I will talk about more shortly. At the end of the quarter, we also launched limited edition seasonal offerings including Trailblazer Kushmas Stix, an affordable 0.5-gram pre-roll which continues to do well in retail stores. In addition to new Rec 1.0 products, we've launched a number of innovative Rec 2.0 offerings in vape, edible, and beverage categories.

Just after quarter end, we launched Trailblazer Spark, Flicker and Glow 510-thread Torch vape cartridges in a new 1 gram format. This extended our lineup to a suite of trial-size 0.5 gram and full-size 1 gram cartridges for the 510 vaporizer. Trailblazer Torch offers consumers 510 cartridges high-quality CO2 extract in three unique terpene-infused flavors. Our vape portfolio also includes products for the mainstream and the premium segments.

Edison + Feather ready-to-go distiller pens and Edison + PAX Era distilled cartridges. We're focused on increasing THC concentration -- concentrations in many of our vape products to meet consumer demand. So stay tuned for changes to come in this category. Our chocolate portfolio includes Trailblazer Snax: a value-priced, cannabis-infused chocolate bar available in both mint and mocha flavors.

And we expect to launch a new flavor this quarter. Our state-of-the-art chocolate equipment allows for each of the five sections of the bar to be filled separately, allowing for higher accuracy of infusion. We also offer Edison Bytes truffles available in both milk and dark chocolate formulations as well as a gingerbread flavor for a limited time. At the end of the quarter, we launched Edison RE:MIX dissolvable cannabis powder.

This product's distribution has expanded listings to eight provinces and we expect to secure listings for the remaining two provinces in the near future. We believe the beverage segment could have greater potential than we've seen in the U.S. -- than what we have seen today -- in the U.S. today.

As I mentioned on our last earnings call but worth repeating, estimates suggest that recreational cannabis beverage market represents a $467 million opportunity in Canada, and results of a recent OrganiGram survey indicate a significant majority of current consumers, 74% would prefer to add cannabis to their beverages versus consuming a premixed one. This is also supported by sales data in Colorado where cannabinoid-infused powders have rapidly risen to the top of the beverage category in popularity, representing 55% of the state's beverage market sales. This is from Headset data in Colorado market insights from July 2020, the last year. We believe Edison RE:MIX offers a unique experience for consumers made possible by our R&D department.

They developed a proprietary nanomotion technology that generates nanodroplets which are very small and uniform. This pro -- provide improved absorption compared to traditional solid edibles and beverages, potentially allowing for a more reliable and controlled experience. The nanomotion technology is also anticipated to have increased ability to temperature variations, mechanical disturbance, salinity, pH, and sweeteners, and the dry powder formulation offers discretion, portability, and a potentially extended shelf life compared to a liquid. It's available in three formats: two sachets with 5 milligrams of THC each, two sachets with 5 to 5 milligrams of THC to CBD, and five sachets with 10 milligrams of CBD each.

As we've said, we're encouraged by the consumer response to date for many of our new products. However, we understand the frustration consumers have when they can't get what they want because of inventory stockings. We've already begun to ramp up staffing with plans to hire 100 staff mostly in cultivation with up to another 30 staff and packaging by early in our third quarter. We know we have missed out on significant sales opportunities and remain focused on improving supply chain processes and order fulfillment rates.

For example, internally, we've identified a list of course queues for which we aim to ensure never go out of stock in an effort to drive maximum distribution and continue to build brand equity. Increased production and staffing should result in efficiencies from greater economies of scale. Benefits to revenue margins are not expected to be recognized in Q2 as we take this quarter to hire staff. Further, we do -- we do know that the industry demand may be dampened and negatively impacted Q2 sales due to lockdowns related to COVID-19.

For example, since November 23rd, cannabis retail stores in the densely populated regions of Toronto and Peel in the province of Ontario have been close to physical retail traffic. And since December 26th, the remainder of stores in Ontario being closed to in-store purchases. The stores have still been able to offer click and collect in limited delivery services. In the near future, we expect to resume shipments to Canndoc in Israel.

We're seeking good agricultural practice certification by the Co -- Control Union Medical Cannabis Standard to comply with Israel's updated standards for imported cannabis. We're making good progress and subject to successful completion of a required inspection likely to be conducted remotely. We anticipate being certified as early as our third quarter. Shipments will also depend on the availability of the desired product mix as we work on ramping up staffing and production to accommodate demand.

In addition to our revenue upside beyond fiscal Q2, we've identified a number of opportunities which have the potential to greatly enhance gross margins. We expect to get economies of scale and efficiencies as we scale cultivation and packaging including the decline in charges for earnings or fixed overhead costs. The recent launches of higher-margin Edison strains with more launches on the horizon have the potential to positively impact gross margins over time. These products gain traction in the market and comprise more of our total revenue.

A greater proportion of our portfolio is being dedicated to higher volume SKUs such as multiple pre-rolls and one grand vape cartridges which attract higher margins. We continue to invest in automation to drive cost efficiencies and reduce dependence on manual labor. For example, a new pre-roll machine expected to be fully commissioned and operational by the end of fiscal Q2 2021. And as a result of the packaging task force project, a number of cost reduction opportunities have been identified with the potential to benefit margins starting in Q4 2021.

I'll now pass the call over to Derrick to go through our financial position and re -- results in more detail before I wrap up.

Derrick West -- Chief Financial Officer

Thanks, Greg. Starting with our financial position. We ended the quarter with $134 million of cash and short-term investments. On December 1st, we used $55 million to pay down our term loan to $60 million which left us with a pro forma cash and short-term investment balance of $79 million.

The repayment on our term loan was agreed as part of the amendment and restatement of our credit facility completed during the quarter. As we discussed last quarter, we raised $69 million in gross proceeds in Q1 from an underwritten public offering with strong institutional support. As Greg mentioned, this past quarter represented the second quarter of the last three which generated positive cash flow from operations. In Q1, net cash provided by operations at $0.3 million, compared to net cash used by operations at $26.9 million in the prior-year period.

The improvement was largely due to the prior period's increase in working capital assets as we scaled operations ahead of Rec 2.0 legalization. Turning to our results for Q1. Canadian adult-use rec net revenue grew 30% to $16.8 million from 12.9 million in the prior-year quarter, and gross rec revenue grew 42% to $22.5 million from $15.5 -- $15.9 million in Q1 2020. The year-over-year increase was mainly driven by the legalization of Rec 2.0 products.

Despite overall revenue being down sequentially due to the temporary pause in sales to Canndoc, gross and net adult-use rec revenue grew 14% and 11% respectively from Q4 2020. Q1 total net revenue of $19.3 million declined from $25.2 million in the prior-year quarter, largely due to significantly lower wholesale revenue and a lower average selling price in Q1 2021. The higher wholesale revenue in the prior-year period reflected opportunistic sales to a single licensed producer and was not necessarily expected to recur each quarter at those levels or at all. Total gross revenue of $25.3 million compared to $28.4 million in Q1 2020, largely due to similar factors impacting net revenue and reflected the increase in excise taxes as a percentage of gross revenue in Q1 2021.

Q1 2021 cost of sales of $23.2 million increased from Q1 2020 cost of sales of $15.8 million. Higher cost of sales this past quarter was largely due to higher production costs, a greater inventory provision, and a charge related to unabsorbed fixed overhead as a result of lower production volumes in Q1 2021. Adjusted gross margin decreased to $1.9 million from $10.2 million in the prior year's quarter, primarily due to lower net revenue and value segment offerings comprising a larger proportion of total revenue in Q1 2021. Negative IFRS gross margin of $16.7 million declined from positive gross margin of $11.2 million in Q1 2020, largely due to net noncash negative fair value changes to buyer assets and inventory sold in Q1 2021 versus positive changes in Q1 2020.

SG&A of $11.1 million increased from the prior year's amount of $9.4 million as a result of higher insurance costs and general wage increases. Q1 2021 negative adjusted EBITDA of $6.8 million declined from a positive adjusted EBITDA of $5.7 million in Q1 2020, mostly due to lower adjusted gross margin this past quarter. The net loss of $34.3 million or $0.17 per share on a diluted basis in Q1 2021, compared to a net loss of $0.9 million or $0.01 per share in the prior-year quarter, primarily due to greater negative gross margin in Q1 2021. That concludes my remarks.

So, I'll pass the call back to Greg.

Gregory Engel -- Chief Executive Officer

Thanks, Derrick. The industry continues to make progress with the latest run rate estimated at $3.2 billion for the rec market based on Stats Canada data for October 2020. A large driver of the growth is coming from the increase in the number of retail stores, mostly in the province of Ontario. Since July, the store count in the provinces grew by approximately 47% to 1,414 stores as of last week, driven by Ontario's cannabis retail stores more than tripling to 330 stores.

And in early December, Ontario announced it was doubling the number of store authorizations again to 80 per month. Outside of Canada, we continue to serve international markets, including Israel and Australia via export permits and look to expand international sales channels. Finally, I'd like to make a few comments about the United States because recent developments are significant for cannabis. As everyone's likely aware, the U.S.

election results, and particularly the Georgia runoff elections that tipped Senate control to the Democrats, is positive for pro-cannabis initiatives. While we believe the timing of full legalization is unclear and will likely still take considerable time to happen, it is clear the political landscape has changed. We've patiently followed the market, and in particular exploring paths to enter the CBD market. To date, we have not found opportunities that meet our risk-reward criteria, but we continue to monitor closely.

Many of the R&D initiatives and new products that we work on, we believe, will ultimately be commercialized in U.S. CBD markets and ultimately THC markets when federally legal. For example, our Edison RE:MIX is an innovative product that we believe would translate well in the U.S. In preparation for U.S.

activities, Christy Zhou, our vice president of legal and regulatory affairs, is now an active member of the board of directors of the American Trade Association for Cannabis and Hemp. This is a trade organization registered in Washington DC, founded to promote the expansion, protection, and preservation of businesses engaged in legal trade of industrial, medical, and recreational cannabis and hemp-based products. The organization is ushering in the next phase of marketplace expansion by providing a bridge from the cannabis industry to mainstream name brand businesses who will be partners in advancing the industry and ending prohibition. And we are pleased to welcome Marni Wieshofer to the comp -- company's board of directors.

Ms. Wieshofer is based in California and represents our first U.S.-domiciled board member. We believe she will be a tremendous asset, given her deep U.S. and international M&A and finance experience, combined with her board experience.

Notably, she was recognized by Variety Magazine in the 2028 -- 2018 Dealmakers Impact Report. Her former roles include chief financial officer and executive VP of corporate development at Lions Gate Entertainment, a multi-billion dollar global entertainment company. She oversaw M&A including acquisitions and integration of Trimark Pictures, Artisan Entertainment, and Redbus Film Distribution U.K. We look forward to Ms.

Wieshofer's contributions and insight as we continue to chart an ambitious path for the company, nationally and internationally. In closing, we are -- we are well through the revitalize -- revitalization of our product for pro portfolio and are starting to see a come through in top-line growth. This will only be aided by the additional resources we are now bringing on. We remain focused on cost management and have identified meaningful upside potential for gross margins to drive profitability and sustained attractive returns on investment for shareholders.

So, that concludes my prepared remarks. Operator, if you could go ahead and open up the line for questions.

Questions & Answers:

Operator

Great, thank you. [Operator instructions] And your first question here comes from the line of David Kideckel from ATB Capital Markets. Please go ahead, your line is now open.

David Kideckel -- ATB Capital Markets -- Analyst

Oh, hi. Good morning. Congrats on the quarter and thanks for taking my question. So, just looking at your gross margin profile here.

Greg, I'm wondering if you can comment, just over the next several quarters -- and -- and knowing that, you know, that you won't be providing a formal guidance here. Just with respect to product mix, whether it's value or your premium segment, 2.0 versus 1.0 products, how should we think about the overall splits in revenue, just so we can get a better grip here on gross margin?

Gregory Engel -- Chief Executive Officer

Yeah, no. Thanks, David. It's a great question. So -- I mean certainly, as we indicated, dried flower makes up the greatest proportion of our revenue.

And -- and over the last couple of quarters, the value segment has been a higher proportion over those two quarters than we'd seen in the past. You know, as I alluded to earlier, you know, one of our keys is our genetics program and introducing new cultivars. So, we did introduce three new cultivars in late December: Black Cherry Punch, ICC, and Slurricane, as I mentioned. And we have plans to introduce additional new products under Edison coming forward.

So, those new higher THC, new genetics in the Edison banner are of higher margin because they have a higher average selling price. So, that's been a big shift for us. You know, it's important to note as well, you know, while in a couple of quarters -- previously, we had reduced pre-roll production due to COVID, we were able to start ramping pre-roll production up, but those do also have a lower margin than Edison, for example. One big advantage for us, as I mentioned earlier, as well going forward is that you know, we have new automation equipment, we expect to be fully commissioned and operational by the end of this quarter, early Q3, which again will reduce the cost of goods on pre-rolls and allow us to not only be efficient in the pre-roll production.

But as our plan evolves, you know, what we're looking to do is continue to increase, you know, SKU size and efficiency and margin by going to higher volume. I talked earlier about, you know, on our Trailblazer vape carts going to a 1 gram. On the pre-rolls, we're going to multi-packs as well, which we've seen very good consumer response from. And you know, I think when you look at our overall picture, one of the things that's impacted us certainly is, you know, part of the -- the good news on the genetics program is that, you know, we've really been able to sort through and come up with these new products, but it does have an impact in the near term as you're working on a number of different new genetics and getting through that genetic mix until you optimize the conditions takes time.

So you know, we're confident that we're going to be able to continue to prove that on a go-forward basis. You know I think, one of the other things that's really impacted us, you know as we said, we're -- we're in the process of staffing up because we were producing less than the market demand for our products, which is good news in terms of on a go-forward basis. So you know, increasing that will reduce, you know, this isn't gross margins, specifically, but will reduce some of the unabsorbed overhead and effect adjusted EBITDA and really optimize and -- and continue to improve efficiencies. And that's one of the keys for us as an organization.

We've proven in the past that we can run very efficiently. And now with kind of scaling back up, we, you know, we believe that will be the case going forward. And the -- and the last thing I'd say, David, is just that, you know, we also have a packaging task force that's been working over the last two quarters to look at other opportunities for cost reductions. And I think one of the key area --  you know, we've identified a number of key areas, you know, is to bring by Q4, some of those initiatives into place to really have an impact on efficiencies in packings.

So you know, just I guess in summary, I would say that, ultimately, we believe that our -- our investments, as I said, in -- in these new strains and new genetics to really meet the consumer demand are going to pay off, but it takes time to get there.

David Kideckel -- ATB Capital Markets -- Analyst

OK, thanks. Those are really great colors. My follow-up question has to do with kind of -- in the month of December and given these unusual times of COVID, but have you noticed any seasonality effects, and in particular, have any particular products within your 2.0 product portfolio, whether that's chocolates, vapes, or beverages. Have any of those products kind of stuck out to you just from a consumer overall revenue perspective during the month of December and even in two weeks of holidays? Thanks.

Gregory Engel -- Chief Executive Officer

Yeah, no. It's a good question, David. Certainly, it's too early to tell on our RE:MIX beverage product because we've just launched that and -- and we don't have distribution in every province as of yet. You know, we did look to some seasonal offerings.

And I think that was one of our approaches right, with our Kushmas Stix pre-roll 0.5 gram specific for the Christmas season, as well as gingerbread Edison Bytes, a milk chocolate truffle that was gingerbread flavored. And so, the response to both of those was very good. The only thing I would say, we have seen an impact during COVID and through the whole period of COVID on areas like disposable vape pens. The revenue in that area has not been as high as expected, and we understand that.

Those are driven in some cases more by, you know, tourism and travelers and areas like that. And those are also things that people take to share at events and stuff. So those have been kind of carriers, but we didn't necessarily see a seasonal. But, you know again, typically like anything -- you know, people may have been diverting kind of some of their disposable income to other areas.

But you know overall, you know, I think part of our way of taking advantage of some seasonality was to offer a couple unique seasonal offerings, which both were very well received in the market.

David Kideckel -- ATB Capital Markets -- Analyst

OK, got it. Congrats on the quarter.

Operator

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

Andrew Partheniou -- Stifel GMP -- Analyst

Hi, thanks for taking my question. Maybe if we can continue the conversation on -- on gross margin. You know, I think you mentioned the, you know, restaffing activities only benefit gross margin in Q3. But unabsorbed costs could be reduced in -- in Q2.

Just wondering if restaffing activities are the main source of the unabsorbed costs and lower production utilization? Could you provide a little bit more detail and reconcile these two items?

Gregory Engel -- Chief Executive Officer

Yeah, maybe I'll turn that over to Derrick to answer that question.

Derrick West -- Chief Financial Officer

Sure, thanks, Greg. Yeah. During the quarter, we had unabsorbed overhead fixed costs, essentially depreciation insurance and taxes of $2.7 million. And that was as a consequence of operating at the capacity level we have, which was approximately 40% during Q1.

As we add to our planning and cultivation and then add the staff, we would be utilizing more of the rooms. And as a consequence, as it relates to our overall margin, a lower dollar amount of these unobserved overheads would impact Q2 as well as Q3. They would be staggered in terms of the direct benefits, but there would be some benefits in terms of the overall direct charge to the cost of sales during the second quarter. But to Greg's point, on an overall basis, the costs and production of -- of brands that go into your inventory really normally impact the subsequent quarters' margins and cost of sales.

And that was why he is providing perhaps a comment that the true benefit of operating at a higher level and getting a lower cost per unit starts to impact Q3 and later quarters.

Andrew Partheniou -- Stifel GMP -- Analyst

OK, thanks for that additional color. And kind of on the same line, when you -- we noticed that, you know, and you talked in the past that, you know, you're planning on lowering yields to increase quality. So, when you combine the lower yields, but also the higher-margin new Edison strains, and obviously, taking into context that you won't be providing any kind of formal guidance, around what levels do you think we can see gross margin stabilizing? Do you have any internal goals in this metric? And maybe as part of that, can you also remind us where your production levels were before restaffing activities and what kind of increase we can expect once you're fully staffed?

Gregory Engel -- Chief Executive Officer

Yeah. So maybe I'll start off and answer that, Andrew. I think, again, when we commented before that our -- we knew we would be decreasing yields on a per gram basis -- and part of that, also keep in mind, you know, because of COVID and the amount of inventory we had of extractable product and concentrates, we also stopped harvesting trim, right, in Q2 of 2020, which made up 30% of the, you know, product or material from the plant. So, that had an impact on our overall yields, to begin with.

We knew to optimize THC, we would have to kind of work to optimize yields, and it wasn't necessarily improving TFC, as I said. It was that investment in genetics. You don't have the ideal conditions. You know that impacts the drop.

And it takes a number of different rooms and cycles to really get to the point. We are seeing yields improving over the last quarter, certainly, along with THC levels. So, we've been able to continue to see progress in both areas, as you can see by the product launches that we've recently had, you know, in that 23% To 27% THC range. And you know, yields are -- are starting to go back up.

I don't want to give a kind of necessarily a specific target relative to, you know,  where we need to be on a yield per THC basis because, you know, every strain is different and you have to treat them accordingly. And there is room depending on the strain to have, you know, some differential pricing as well for the product based on the demand. You know, one comment I would make before answering the second part of your question also is that we returned -- we started using street names, you know, in the marketplace and it's -- it's actually had a very positive impact in terms of response. People know the strains.

We've seen the legal market attract a lot of people from the illicit market. And that's been very, very helpful for them to identify the products, and certainly something that's been a positive move. I think Derrick just now indicated that you know, in answer to the second part of your question, that when we look at our facility utilization, prior to staffing up, we had about a 40% utilization rate of the facility. So you know, by adding this 100 cultivation and 30 packaging people, again, this will be staggered in overtime, we expect to continue to progress on that.

It's not only just a Q2 initiative as we see opportunities not only domestically, but internationally growing, you know, an opportunity to continue to expand and increase cultivation levels going forward.

Andrew Partheniou -- Stifel GMP -- Analyst

Thanks for that additional color and I'll get back in the queue.

Operator

Your next question comes from the line of Aaron Grey with Alliance Global Partners. Please go ahead. Your line is now open.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi, good morning, and thank you for the question. You know, first of all, for me, it's kind of -- I want to go back to the commentary made kind of around the US and kind of how you're looking at it because, obviously, been a lot of focus on that, given the election results. So, you've seen some of your peers kind of get into the U.S. market via CBD, MSOs, or other CPG businesses.

So just curious, as you kind of talk about not liking some of the risk-rewards you're seeing right now, could you kind of give some more color in terms of what you believe might be the best way to play it today, given there's still uncertainty in terms of whether there will be federal laws passed and how those federal laws will look. And if you're now kind of thinking about play the wait and see game to see how it evolves? Or if you might be a little bit more aggressive in terms of making a potential move into the US?

Gregory Engel -- Chief Executive Officer

Yeah, no. It's a -- it's a great question and I thanks for the question, Aaron, as I alluded to, one of our focuses has been always our focus and investment in R&D in developing new and differentiated products, you know, because, again, ultimately, we believe, in order for the legal market to displace the illicit market, whether or not that's in Canada, in the U.S. or in other jurisdictions, offering differentiated products that change the whole cannabis consumer experience is going to be important. So, that's why products like our RE:MIX dried powder beverage that we've developed and invested, we believe there are opportunities potentially to, you know, license that to other markets and to look at, you know, how do you take those platforms and bring them into the markets.

You know as I said earlier, we have spent a lot of time over the last two years really looking at the CBD market and as a potential entry point into the U.S. And I think, you know, ultimately, to be frank, we just haven't found the right partner on how to do that. You know, I think, for us, as we look at -- we -- we continue to focus on the U.S. as an opportunity.

You know, there isn't a clear path as, you know, as Canadian company that traded on -- dual-listed on the NASDAQ and the TSX with the regulations that exist there currently to enter the US in the THC market certainly. You know, we've seen some companies take some option approaches relative to -- our approach is really about developing branded products, developing innovation and technology that we feel will lend itself to the market. And that may be something, you know, we either look to license our or we look to do ourselves in the future as the regulations allow.

Aaron Grey -- Alliance Global Partners -- Analyst

All right, great. Thanks a lot for that color. And then, the second one would be specifically kind of around the province of Ontario. And obviously, you know, everyone's looking for a lot more stores to come online, you know, in 2021 and we've started to see toward the end of 2020.

So, just curious, from your perspective, in terms of like, as incremental stores come online, you know, how are you seeing in terms of like saturation within specific geographies, right? So, I know there are some cities -- in Toronto where there's a lot of retail stores in one specific area. So, do you feel like that might start to impact maybe the incremental, you know, dollar sale we're going to be seeing, you know, per new store that you're seeing in Ontario? And how do you feel like that might impact kind of the overall competitive landscape for you guys going forward? Thanks.

Gregory Engel -- Chief Executive Officer

No, yeah. It's a great question, Aaron. I think, you know, you're banging on in terms of, you know, not every new store is the same in terms of the ability to generate additional revenue. I think, you know, what you're seeing -- for example, you referenced in Toronto, there are a couple of key areas in Toronto along Queen Street, along Yonge Street are two of the major arteries where there is an abundance of stores going in, and so that does lead to some level of saturation.

So, it will grow the overall market, but at the same time, the revenue per store will, you know, not be at the same level because of that saturation point. I think when you look outside of the core of Toronto, there are certainly lots of opportunities, and we are seeing new stores happen in areas that have limited stores or no stores today. And I think that's been one of the keys. You know, and I think that's where the growth opportunity certainly exists is to kind of -- people that have had to rely upon online-only sales, getting access to a store or multiple stores now is one of the key facets.

So, it's a bit of a combination of both, but certainly, you know, and I look at Alberta as an example where, you know, with the number of stores, Alberta has the highest number of stores per capita right now, is that they probably did reach a saturation point kind of last year, and we've seen where, you know, a small number of stores have closed or there has been a little bit of consolidation happened on optimizations. So, Ontario is a long way away from that happening because there's still tremendous room for growth. And in terms of, you know, where we see the growth happening, but again, certainly along a couple of quarters, there is some saturation happening. The other area I would comment on is, you know, there are still a couple of municipalities, especially in and around Toronto, that don't allow cannabis stores.

So if you recall, when legalization happened, the Ontario government allowed each municipality to opt-in or opt-out. I think, certainly, smart retailers should be looking to, you know, put stores on the border of the kind of those municipalities and I think that's kind of one of the opportunities that exist right now, especially kind of north of Toronto. There's a -- there's a big opportunity where some border stores along Steeles Avenue, for example, would have a huge impact on revenue.

Aaron Grey -- Alliance Global Partners -- Analyst

All right, great. Thanks for the color and I'll pass it along.

Operator

Your next question comes from the line of Graeme Kindler with Eight Capital. Please go ahead. Your line is now open.

Graeme Kindler -- Eight Capital -- Analyst

Hi, good morning, and thank you for taking my question. I wanted to ask a follow up with respect to the -- the adjusted gross margin. And I appreciate the comments made in prepared remarks and the discussion earlier about the -- the unabsorbed fixed overhead. I wanted to dig a little deeper.

Greg, you mentioned on the call that you're going to be bringing in a pre-roll machine in the middle of the year and the packaging task force is expected to complete their work by the end of the year. Can you give any indication of what those initiatives will do discreetly for the gross margin? Maybe there's some internal modeling you've done there and compare that to what the baseline is right now? That would be helpful. Thank you.

Gregory Engel -- Chief Executive Officer

Yeah, Graeme, I don't want to give guidance necessarily specifically about the impact. I mean, I will give a comment on the pre-roll equipment. That equipment's been on site now. We've been working with it and we have seen, during test runs, it producing 40 to 50 pre-rolls per minute and reducing the labor required with pre-roll production from 22 people down to 3.

So, you know, that's an example of, you know, just directionally what we've seen now. It's not fully optimized. We're still, you know, on playing around with the blends in terms of the appropriate blended mix of you know, material for it, but we expect that to have a significant impact in the near term. And then, part of our shift for Q4, as I said, is really looking at some of the shift in some of our packaging types and designs and trying to be more consistent in terms of utilizing a couple of pouches, for example, for multiple different product lines, which allows us not only efficiency in packaging, but also allows us in terms of, you know, packaging inventory and always availability.

One of the things I commented on in the prepared remarks was, you know, we left revenue on the table in the quarter. We certainly you know, we did not have sufficient product and/or capacity and staffing to meet the demand for our product, which is why we're staffing up. I don't want to give specific direction in terms of what we expect on savings. We have done modeling, but until we get to the point where -- one of the challenges always with automation and equipment is until you get it commissioned and up and running, you don't know what impact it's going to actually have.

Graeme Kindler -- Eight Capital -- Analyst

OK, understood, and I appreciate the anecdote there. That's helpful. Then perhaps then in terms of the order of the magnitude and what your expectations are between increasing your staffing levels, which are going to give you higher throughput there and then, you know, the -- the -- the pre-roll initiative, the packaging initiatives, can you give any sense directionally in terms of what you're expecting will have the most outsized impact in terms of increasing the gross margin there?

Gregory Engel -- Chief Executive Officer

You know, again, directionally, I would say, it's definitely a combination of both. You know I think -- the -- I think increasing staffing and increasing output and throughput is going to have the most significant impact because, again, producing a more sellable product, especially as we've now optimized conditions around some of these new high THC genetics will, you know, create significant opportunities for us and, you know, the -- the -- the initiatives on the packaging are more of a longer-term impact and we'll have an improvement in margin. But at the end of the day, you know, increasing revenue on a high THC product which has a higher margin is going to have more impact.

Graeme Kindler -- Eight Capital -- Analyst

That's very helpful. Thank you very much, Greg. 

Operator

Your next question comes from the line of Adam Buckham with Scotiabank. Please go ahead. Your line is now open.Adam BuckhamGood morning and thanks for taking my question. First, in terms of the capacity, is it possible to speak to the potential size of missed revenue opportunities in fiscal Q1 as a result of production constraints? Maybe in terms of missed purchase orders or something along those lines?

Gregory Engel -- Chief Executive Officer

Yeah, Adam. I mean, you know, internally, we do know -- some of these purchase orders, we were able to fulfill in Q2, so they weren't necessarily completely missed. But we did have between $5 million and $6 million of POs we were not able to fulfill in the quarter.

Adam Buckham -- Scotiabank -- Analyst

OK, that's -- that's a great color. Thanks. Secondly, in the prepared remarks, the team indicated that there could be some cooling off in the market, given the retailer shifts in Ontario. To date, have you seen any impacts in your buying patterns from the OCS? And then just a bit of a follow up to that, the OCS has recently had some comments that they're potentially rationalizing SKU counts? Obviously, OGI has already gone through this with much of its portfolio, but with this potentially coming, do you think it could eventually be a bit of a tailwind for the products there that are left remaining on the OCS?

Gregory Engel -- Chief Executive Officer

Yeah, I know. It's a good question. So, to answer your first question, I think certainly we have not seen a shift in order patterns, but certainly, we've been notified by OCS, you know again, as they are continuing to kind of monitor daily, weekly the impact of now going to click and collect and local delivery only will have on retail sales that they could change. So, an existing PO, for example, that's due to be shipped three weeks out could be reduced.

So, we have not seen that happen yet. But they've given us an indication that that could happen. To your point, we've been probably one of the most active companies and working closely with OCS in terms of revamping our portfolio, switching our products. So, certainly, that's been a big focus for us.

And we really see with every province and, you know, certainly with the two largest provinces, for us and for the market, Alberta, and Ontario, we've been active in doing that. So, I think it does -- their strategy, they're going to 100 core listing products. They expect those products to always be 100% available. And so, there are tailwind opportunities for those products, for core listed products to generate revenue because, again, the commitment from every company will be to, you know, make sure those products are always in stock.

And there's a tremendous opportunity. So, retailers know that they will always be able to, you know, access those products and carry them at the retail store. But any listing requirement in the province of Ontario now will require a 98.5% inventory level. And so, you know, it's critical for companies to consistently meet that level or you run -- as you would see in any normal retail environment, you run the risk of being delisted.

So you know, companies that have in-demand products and are able to consistently supply the market, you know, are in a great position in terms of revenue against those products.

Adam Buckham -- Scotiabank -- Analyst

Great, thanks for the color.

Operator

Your next question comes from the line of John Zamparo from CIBC. Please go ahead. Your line is now open.

John Zamparo -- CIBC Capital Markets -- Analyst

Hi, thanks, good morning. I wanted to get a sense of how you feel about the balance sheet at the moment. And, of course, you did the recent equity raise, but there's still some debt on the balance sheet and industry valuations are pretty robust at the moment. And now, there's the prospect potentially of entering the U.S., at some stage, at least.

I just would like to get your thoughts on capitalization levels at this time.

Gregory Engel -- Chief Executive Officer

Yeah, look. I mean, we're -- we're very comfortable with our balance sheet, as you said. At the end of the quarter, after using $55 million of proceeds to pay down a portion of the -- of the debt facility, you know, we still have $60 million remaining in debt. But we did have $79 million in cash and short-term investments, plus $8 million of restricted cash.

And I mean again, one thing that I would highlight is, you know, we had the second of the last three quarters positive cash flow from operations. So, as a company perspective, I think we're in a strong position on a go-forward basis relative to our own cash position and also kind of how we're operating and our operating consistency.

John Zamparo -- CIBC Capital Markets -- Analyst

OK, thanks. And then my follow up is on -- is on the gross margin. When you think about getting back to the previous level, kind of that 35% to 40% number, do you need to get to the same level of net cannabis revenue, probably about $25 million plus in terms of sales, or -- or is your cost structure different now that it wouldn't quite need to be so high? Or is it potentially higher because now you're offering a lot more value products? Just would like to get a sense of what you'd need to hit on the top line to hit that previous gross margin level? Thanks.

Gregory Engel -- Chief Executive Officer

Yeah, it's -- it's a good question. I think, you know, there is a mix there. So, certainly, on one hand, you know, we have become much more efficient as an operator. You know, I hate to say there was a benefit from COVID.

But one of the things that with reduced staffing it forced us to do was look at how we operate, how we do things, and -- and we've been able to get much more efficient in a lot of things we do. And then kind of going forward, as I said, you know, some of the initiatives we've taken on, automation, or even kind of systems and how we operate. So, do we need to be there? I think yes. You know, there's no question that our mix is, you know, so I didn't mean to say, do we need to be there, yes, at the same level of net -- net revenue.

I think it's a mix, right? Because we are selling, you know, more value, large volume SKUs, so your average price per gram there but certainly is lower, but your labor costs would go into that, and packaging costs are significantly lower as well. But you know again, our goal is to -- as I spoke to earlier, is to really continue to drive more revenue on the high margin products. And that's why this investment in the genetics program and what we've been doing over the last 12 to 18 months is -- it's really starting to pay off now because that is going to be critically important. You know, we have seen -- there's no question, we've seen price compression in many categories.

And it's not just, you know, value dried flower categories. It's also been in the, you know, in the vapes category as well. So again, I don't want to give a specific forecast, as we don't give guidance on what level we need to hit, but I guess your comment would be accurate in terms it's a mix between the two. You know, on one hand, we're selling more of the high -- high volume, lower price value products, which do have a lower margin.

One of our lowest margin products historically has been pre-roll. So, we're looking to improve that dramatically with automation.

John Zamparo -- CIBC Capital Markets -- Analyst

OK, that's a great color. Thank you very much.

Operator

Your next question comes from the line of Vivien Azer with Cowen and Company. Please go ahead. Your line is now open.

Vivien Azer -- Cowen and Company -- Analyst

Hi, good morning. I just wanted to follow up on Aaron's question about the U.S. market and your posturing there around CBD. There hasn't been a lot of evidence around brand equity transferability between CBD and THC.

And frankly, the category development in CBD has been quite lackluster, and there continues to be regulatory uncertainty around the FDA. So, can you just expand on why that's the appropriate pathway to enter the U.S?. I understand, obviously, the regulatory constraints around THC. But why are you going to pursue a CBD strategy? Thanks.

Gregory Engel -- Chief Executive Officer

No, it's a great question, Vivien. Ultimately, what you had outlined is why we have not entered the U.S. and we have not seen really an impact. I mean, is there transferability between CBD and -- and THC products? Not necessarily.

I think there are only a few areas where that's the case. I think for part of us, our -- our strategy there was, you know, as we've evaluated entering the market is, you know, simply to get a toehold in the U.S. and look to be a US operator and kind of look to hire people potentially or acquire a company that, you know, you could leverage across to the THC market. But I agree with you 100% that to date we haven't seen that transfer.

And ultimately, that's why we haven't made the decision. You know again, our -- our focus has been, you know, as I outlined earlier in response to Aaron's questions, you know, I think there are technologies and innovations, like our dried powder that can be applied in both markets. And one strategy may be to say, do we look for, you know, someone to license those two, or do we look to launch those ourselves? I think there is still a level of uncertainty on -- on CBD, you know, in the U.S. with the FDA.

I think there is still going to be guidance out where they are going to look at certain forms of ingestion. For example, oral ingestion products having to undergo some toxicology work potentially. So, the rules still aren't clear on CBD. And there's a number of reasons we have not yet entered the market.

But certainly, we've looked at it as an opportunity to tip into the U.S. possibly.

Vivien Azer -- Cowen and Company -- Analyst

Understood, thanks for that color.

Operator

Your next question comes from the line of Rahul -- Rahul Sarugaser from Raymond James. Please go ahead. Your line is now open.

Rahul Sarugaser -- Raymond James -- Analyst

OK, thank you. Morning, Greg, Derrick, and Amy. Thanks for including my question from the queue. So, my first question is about market share.

And -- and all your comments earlier are well taken. I guess maybe more -- since speaking more at the macroscopic level, we've seen a decline in market share over several quarters. At least in this last quarter, we've seen that -- that being attenuated somewhat, so you are stemming that. Given your earlier comments about increasing appreciation and demand for OrganiGram's products, do you anticipate that you kind of bottoming out and market shares should start to -- that should start to increase over time?

Gregory Engel -- Chief Executive Officer

Yeah, you know, it's a great question. I  think we're, you know, as I mentioned, we had unfulfilled POs in the quarter, there's no question. And I think one of the challenges we've had truly is you know we've had an inconsistent supply of many of our products. So, even our Trailblazer Snax, when it was launched in the chocolate category, it was not always available.

And -- and part of the, you know, part of the challenge we face is that in certain jurisdictions in terms of how much product they carry at launch, and then if it sells out quickly, our SHRED is very similar to that, right? So, SHRED was an overwhelming success. You know, they said it was the most searched -- No. 1 most-searched brand in November, December in -- on the OCS website. And so, we had no -- no idea that was going to be the case.

So, you know, again, it's -- it's difficult to just look at our share because there's kind of the lost opportunity there where, you know, we've not been able to fulfill the market demand. And I think, certainly, you know, we believe with increased production, we are in a great position to be able to continue to increase share on products like that or some of our core new offerings on Edison because every time we ship SHRED in, it sells out very quickly right now. And as I said, the search metrics that we've seen on -- on OCS would be an indication of the demand. So, you know, what you see in terms of share doesn't represent the demand necessarily.

We've got to do a better job in kind of meeting the inventory levels to fulfill that demand.

Rahul Sarugaser -- Raymond James -- Analyst

OK, thanks. And just a quick follow up and testing a little bit. So, you are one of two companies that have taken a pretty material debt in biosynthesis and we're seeing the states really starting to evolve. And -- and given that -- that is in Hyasynth and its specific, somewhat unique strategy focusing on -- on the major cannabinoids relative to its universe of peers which are very focused on the minor cannabinoids, do you see this as kind of your ace in the hole, particularly when it comes to entering the U.S.

market and, as you referred to, specifically around the beverage powders?

Gregory Engel -- Chief Executive Officer

So, again, you know, I'd agree in part with what you said. Like initially, certainly, Hyasynth's approach has been, you know, they were the first commercial company that we're well aware of -- first biosynthesis company to have a commercial sale of, you know, of a cannabinoid with CBDA produced through biosynthesis. So -- but I mean, they are focused on minor cannabinoids as well. They've got a fulsome portfolio of 23 cannabinoids, 19 minor, and 4 major cannabinoids.

Again, I think one of the keys of early focus on major cannabinoids is that the process for producing them is somewhat more straightforward and not as complicated. But in parallel, they are also working on minor cannabinoids, and I think that's going to be critical for the future. And I wouldn't necessarily agree with your comment that like every other company are all focusing on minor, we've seen other companies, you know, talking about plans to commercialize CBD in the near term and that's been their focus. But I think Hyasynth's focus, they've got a, you know, our investment strategy with them is then, you know, and we believe they have a strong IP portfolio and that they are working, you know, on dual paths, both with major cannabinoids, but potentially for minor cannabinoids in the future, and I think that's one of the key aspects where we believe, you know, in the future, minor cannabinoids are going to benefit greater -- greatly from biosynthetic production because, you know, ultimately, you cannot produce the majority of minor cannabinoids from a plant at any significant level and the cost would be cost-prohibitive.

So, the benefits of -- of biosynthetic production, as you know, are much higher with minor cannabinoids than major cannabinoids.

Rahul Sarugaser -- Raymond James -- Analyst

[Inaudible] Thank you very much.

Operator

Your next question comes from the line of Pablo Zuanic. Please go ahead. Your line is now open.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Good morning. Two -- two quick questions. One, you know, when you see Aphria and Tilray merge, you know, how do you think about that? You know, you have about 3%, 4% share based on my numbers. As the industry starts to merge, is that a problem for a company like -- like yourselves? Or how does that manifest itself at the ground level? Or it doesn't make a difference? It's not something that's keeping you awake at night?And the second question, in the case of Israel with Canndoc, there's been two or three other companies that have also shipped to Israel since Canndoc is, like you said, cherry-picking and they buy something from some companies and other things from other companies.

Just talk about the dialogue in terms of what are they buying from you and what is it that stands out compared to what other people are -- are exporting to Israel?

Gregory Engel -- Chief Executive Officer

Yeah, no, Pablo. It's great, but you know, your first question, in terms of the overall marketplace, I think, you know, we have seen, you know, bigger doesn't necessarily mean better. I mean, some of our larger peers have shuttered multiple facilities. So, you know, a potential merger of the Aphria and Tilray coming together, you know, it may be more about international markets from certainly what I've seen written or kind of looking at other markets than it is about the Canadian market per se.

Certainly, at least that's many analysts', you know, perspective on it. I think for us, the key has to be -- continue to drive for -- with, you know, new and innovative products, differentiate the products that there is market demand for, and, you know, that's going to be one of the critical parts. To answer your question on Israel, you know, certainly, for us, with -- with Canndoc, you know, we're an indoor producer and certainly, there's a differentiation between, you know, their other supplier at this point, you know, in terms of the marketplace and -- and certainly, the initial response to the product we did sell in on our first shipment was extremely positive and, you know, we're working hard to -- with Canndoc to be able to continue to supply them in Q3, and again, that will be depending on getting the CUMCS certification as well as, you know, having the right product mix for them at the time. But you know, certainly, for them, one of the big advantages that they saw on us is being an indoor producer, so --

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Got it, thank you. 

Operator

And there are no further questions at this time. [Operator signoff]

Duration: 62 minutes

Call participants:

Amy Schwalm -- Vice President, Investor Relations

Greg Engel -- Chief Executive Officer

Derrick West -- Chief Financial Officer

Gregory Engel -- Chief Executive Officer

David Kideckel -- ATB Capital Markets -- Analyst

Andrew Partheniou -- Stifel GMP -- Analyst

Aaron Grey -- Alliance Global Partners -- Analyst

Graeme Kindler -- Eight Capital -- Analyst

Adam Buckham -- Scotiabank -- Analyst

John Zamparo -- CIBC Capital Markets -- Analyst

Vivien Azer -- Cowen and Company -- Analyst

Rahul Sarugaser -- Raymond James -- Analyst

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

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