Organigram Holdings, Inc. (OGI) Q1 2022 Earnings Call Transcript

Organigram Holdings, Inc. (NASDAQ: OGI) Q1 2022 earnings call dated Jan. 11, 2022

Corporate Participants:

Beena Goldenberg — Chief Executive Officer

Derrick West — Chief Financial Officer

Analysts:

Rupesh Parikh — Oppenheimer & Company — Analyst

Tamy Chen — BMO Capital Markets — Analyst

Aaron Grey — A.G.P. — Analyst

Ty Collin — Eight Capital — Analyst

Andrew Partheniou — Stifel — Analyst

Rahul Sarugaser — Raymond James — Analyst

Adam Buckham — Scotiabank — Analyst

Douglas Miehm — RBC Capital Markets — Analyst

Andrew Bond — Jefferies — Analyst

Frederico Gomes — ATB Capital Markets — Analyst

Presentation:

Operator

Good morning, and welcome to OrganiGram Holding, Inc.’s First Quarter Earnings Conference Call for the Fiscal Year 2022. [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 Beena Goldenberg, Chief Executive Officer of OrganiGram Holdings, Inc. Please go ahead, Ms. Goldenberg.

Beena Goldenberg — Chief Executive Officer

Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today’s call, we’ll discuss the financial results for the three months ended November 30, 2021, and I will provide a general business update. We will then open the call for questions.

The first quarter of fiscal 2022 showed continued momentum from the progress we achieved in the last quarter of 2021. We achieved record net revenue in the quarter, the highest in the history of the company. We solidified our number four market share position among Canadian LPs in the recreational market in Canada, becoming one of the few larger Canadian LPs registering market share growth.

Subsequent to quarter end, we completed an accretive acquisition of Laurentian, that expands our product and brand portfolio and bolsters our geographic presence in Quebec, and we made further progress on our goal to achieve profitable adjusted EBITDA, which should be accelerated with the purchase of Laurentian.

Now, net revenue in Q1 was CAD30.4 million, a 57% increase over Q1 in fiscal 2021. This record level of net revenue speaks to our success at innovating to best address consumer needs and introducing compelling brands that resonate with consumers. We continue to hold the number four market share position among Canadian LPs in the quarter at 7.5%. A year ago, before our product revitalization program, our market share was 4.4%. The HiFyre data provides detail on how our products are being received in the market.

SHRED continues to be the most popular flower brand with Tropic Thunder and Funk Master SKUs holding the number one and two positions respectively for November, and Tropic Thunder and Gnarberry as a top two SKUs in December, based on sales and volume. SHRED also remained the number one search brand on the OCS website for 13 of the past 14 months. These sustained positive results, while the price of SHRED was increased in Alberta and Ontario, demonstrates its exceptional consumer demand. SHRED’ems gummies were introduced in August 2021 and are quickly gaining distribution and traction in the market. In November, they were ranked number three in terms of both sales and volume of units sold.

Edison JOLTS, our unique high potency THC lozenge maintained its best-selling position within the ingestible extracts category. Our momentum continued after quarter end. December data from HiFyre highlights that Organigram achieved 7.6% market share, up 10 basis points from November, holding the number one position in the imported flower category, number three position in gummies and moving up to the number four position in pre-rolls. We’re very pleased with these results, and you should also note that this market share does not reflect the contribution from the sales of Laurentian products that will get us closer to an 8% market share.

In November, we launched Monjour, a wellness brand providing large format CBD-infused soft chews in Berry Medley and Citrus Medley flavors. Both flavors are available in vegan-friendly and sugar-free formats for maximum consumer choice. In the short-time since its launch last month, Monjour has already shown strong momentum in the market. We are very pleased with the start and look forward to this new brand achieving the same success as our recent brand introduction.

We continue to focus on the needs of premium cannabis consumers through our flagship Edison brand. As stated last quarter, Brightfield data has shown growth in Edison’s brand awareness and a significant increase in its number of social mentions and positive consumer sentiment scores. Seven new high potency strains were introduced in fiscal 2021, and fiscal 2022 started off with the launch of several new products, including the Edison Blue Velvet vape and yet another first-to-market product, the Edison Pinners combo pack, the first pre-roll 10-pack in the market to offer consumers two unique genetics within one pack. Consumer demand has been strong on these innovations and we’re excited to continue to offer new relevant products to the market throughout the rest of the year.

Now let’s look at our operations. In Q1, our yield per plant was 129 grams compared to 86 grams in Q1 of fiscal 2021. As we have brought our new grow rooms and improved operational efficiencies, our cost per gram has been reduced by half, while increasing THC levels. At the Moncton cultivation center, upgrades to the facility are currently underway. This includes increase in capacity through our 4C expansion, a second harvesting area, adding environmental enhancement and performing upgrades to the irrigation system. These will further enhance yields and flower quality.

In terms of automation, the second pre-roll machine was commissioned last quarter and investment in high-speed pouch lines for Big Bag o’ Buds and SHRED is underway. Our product development collaboration with BAT advanced in the quarter, with the completion of the Quality Assurance and Control Laboratory. Construction has also begun on the BioLab, which will conduct advanced plant science research, and on the GPP Food and Edibles Facility. Both of these are expected to be completed in February of 2022. This is an important milestone.

The research conducted as part of our PDC will contribute to ongoing development activities, which could result in new products in the future, support market share growth and our reputation as a consumer-centric innovator. Initial development is focused on CBD and other cannabinoid edibles, drinks, vape and ingestible products with focus on products that improve delivery, efficacy, convenience, and create new usage occasions.

Our commitment to innovation is also reflected in our increased investment in Hyasynth Biologicals. Hyasynth is a leader in cannabinoid science that is using biosynthesis to produce THC, CBD and rare cannabinoids without the use of cannabis plants. This greatly reduces the cost and production time of the compound with a smaller environmental footprint. In December, we increased our total investment in Hyasynth to CAD10 million. This provides us with approximately 49% interest in the company and two board seats. Once Hyasynth commences commercial production, we have the option to purchase cannabinoids at a discount to the wholesale market price for a period of 10 years. Producing any major or rare cannabinoids quickly and at scale opens up multiple possibilities for medical, wellness and recreational product, as one of only three large LPs investing in biosynthesis, OrganiGram is well positioned to take advantage of these opportunities.

Finally, I’d like to highlight the acquisition of Laurentian we made in December. Laurentian is a Quebec-based LP of artisanal craft cannabis sold under the Laurentian brand and Quebec’s top selling hash sold under the Tremblant Cannabis brand. Laurentian’s current annual capacity is about 600 kilograms of flower and 1 million hash units. We intend to invest CAD7 million in growth capex behind Laurentian’s expansion program, which will increase capacity to about 3,000 kilograms of flower and 2 million units of hash by the second half of 2022.

We are excited to further expand the distribution of Laurentian’s brands outside of Quebec, leveraging the strength of our national sales force. The acquisition cost was CAD36 million consisting of CAD10 million in cash and CAD20 million in shares as well as potential earn out consideration. This is a significant acquisition and that strengthens our premium portfolio with high margin products and increases our presence in Quebec. It is also accretive as Laurentian has been averaging since it entered the Ontario market in November, an annual net revenue run rate of CAD17 million with CAD6 million in EBITDA.

Now, I will turn it over to Derrick to present the financial overview. Derrick?

Derrick West — Chief Financial Officer

Thanks, Beena. Turning to our earnings results for Q1 fiscal 2022. Gross revenue grew 75% from Q1 2021 to CAD44.3 million and net revenue grew 57% from the same period in fiscal 2021 to CAD30.4 million. These revenue increases were primarily due to higher recreational net revenue which grew 9% from Q4 fiscal 2021 and 49% from the same period in 2021, and the resumption of shipments to Israel under our agreement with Canndoc.

While gross revenues grew 75%, cost of sales increased only 21% year-over-year to CAD28 million. There was no charge for unabsorbed fixed overhead for unused grow rooms in Q1 fiscal 2022 compared to CAD2.7 million in Q1 of the prior year. We harvested approximately 11.6000 kilograms of flower during Q1 fiscal 2022 compared to about 3,900 kilograms in Q1 of the prior year, an increase of 197%. This increase was directly related to increase yield per plant, along with the increased cultivation planting during Q4 fiscal ’21 and Q1 of fiscal ’22 to meet the growing demand for our products.

Largely due to lower cultivation and post-harvest costs, lower changes in fair value of biological assets and inventory provisions, the gross margin in Q1 improved to CAD610,000 from negative CAD16.7 million in Q1 2021. On an adjusted basis, gross margin was CAD5.5 million, compared to CAD1.9 million in Q1 2021. We expect that the price increase to SHRED, the addition of higher margin premium products to our offering and lower production costs will further improve margins.

SG&A, excluding non-cash share-based compensation increased to CAD12.6 million in Q1 2022 from CAD10.5 million in the prior year’s comparison quarter largely due to higher employee costs due to increased headcount, general wage increases, increased professional fees due to technology fees and the auditor fees from the new requirement to have an integrated audit and higher trade investment in marketing spend initiatives tend to support the launch of our new gummy and other derivative products. Also due to improved revenue and margin, the negative adjusted EBITDA was reduced from CAD5.7 million in Q1 of 2021 to CAD1.9 million in the current quarter. We also reduced our net loss year-over-year from CAD34.3 million to CAD1.3 million.

Overall, we are pleased with our improving financials and the continued momentum we are seeing. In addition, starting in December of 2021, we began to recognize revenue from the Laurentian acquisition. Based on this, we have now advanced our view in achieving positive adjusted EBITDA by Q3 of fiscal 2022.

In terms of our statement of cash flows, net cash used in operating activities was CAD9.3 million during Q1 of fiscal 2022, compared to cash generated of CAD294,000 in Q1 of the prior year. The change was primarily due to the current period’s investment in working capital asset as we supported the growth of the business. Net cash used by financing activities was CAD270,000 during Q1 of fiscal 2022, primarily driven by reduction of debt and lease liability. Net cash generated from investing activities was CAD54 million during Q1 of fiscal ’22, an increase of CAD38 million from the prior year’s comparison quarter. During the current period, there was CAD60 million from short-term investment proceeds, CAD1 million from restricted funds, net of the CAD7 million incurred for capital expenditures.

In terms of our balance sheet, on November 30, 2021, we had CAD168 million of unrestricted cash and short-term investments compared to CAD184 million at the end of fiscal 2021. The decrease during the period is primarily due to the company’s investment in both its working capital asset and capital expenditures for facility improvement.

This concludes my comment. Thank you. I would like to turn the call back to Beena.

Beena Goldenberg — Chief Executive Officer

Thanks, Derrick. To close, we are very pleased with the record results in the past quarter. We continued to generate significant momentum that I believe positions us for a successful fiscal 2022. Investors can continue to expect strong revenue and volume growth, more new and exciting product introductions, increased brand penetration and further improvements in our adjusted gross margin.

Thank you for joining us today. I look forward to updating you on our progress. And now, Operator, you may open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Rupesh Parikh of Oppenheimer & Company.

Rupesh Parikh — Oppenheimer & Company — Analyst

Good morning, thanks for taking my question. So I guess the first area I wanted to go to just market share, so significant increase in market share year-over-year. What would you guys attribute the key efforts that drove that market share increase?

Beena Goldenberg — Chief Executive Officer

Sure. Thank you for the question. So we saw significant growth in the interest in our SHRED brand, it’s really been quite an increase demand from consumers, really related to not only the conveniences, but the high flavor profile of the offering that’s attracted consumers and we’ve seen really strong growth behind that brand. In addition, we have started — we launched into the gummies category after our acquisition of EIC back last April. We launched into the category in August and saw significant traction behind our SHRED’ems brands. We came in with a cost — competitive cost into the marketplace and built to the number three position in the market by November, so pretty quickly. So we continue to focus on building our derivatives offerings.

And in addition, as I mentioned earlier, we launched our Pinners, our Edison Pinners, which is a pre-roll offering 10-pack that has two different strains and unique [Phonetic] offering to the marketplace. So we’re just listening to our consumers, understanding what they’re looking for and launching products that meet their demand and this has helped us gain our market share.

Rupesh Parikh — Oppenheimer & Company — Analyst

Great, that’s helpful color. Maybe just one follow-up question. So on the Laurentian Organic’s acquisition, so it’s pretty impressive, they already have CAD6 million EBITDA run rate and sales base of CAD17 million. What’s unique about the business that already generates that strong EBITDA on a fairly low revenue base?

Beena Goldenberg — Chief Executive Officer

Right, so I mean, their focus in Laurentian is predominantly on selling hash products and their — the number one selling hash in the Quebec marketplace. So it’s a premium product offering with good margins on it. And that has been really — drove great consumer appreciation for its taste and flavor and feel of the product. So they’ve been able to maintain really strong margins on that offering. They complement that with some craft flower. We know craft flower is good margin product. So their focus has been on the Quebec market. We’ll continue to expand those offerings as we build out capacity to take advantage of those higher margin offerings to our overall portfolio.

Rupesh Parikh — Oppenheimer & Company — Analyst

Great, thank you.

Operator

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

Tamy Chen — BMO Capital Markets — Analyst

Hi, good morning. Thanks for the question. First, I wanted to ask a bit more about the cost structure and margins. So can you help us understand, once you are up and running on the expanded capacity, I recall somewhere around the 70,000 kilograms a year, what sort of minimum sales level would you need at that level of capacity to maintain positive margins and EBITDA? I ask because while you’re gaining share now, which is a positive, the market does change a lot and who is gaining share could fluctuate from time to time. So I wanted to understand the flexibility or operating leverage or deleverage nature of your cost structure?

Derrick West — Chief Financial Officer

Hi, Tamy, it’s Derrick here. We are revising the outlook in terms of the total capacity to — from 70,000 to 75,000 based on the improved yields that we have been getting consistently over the last three, four months, and we are operating at capacity now based on the rooms available and we just by increasing over the last few quarters we have significantly reduced our cost structure to the point that we’ve gone from negative adjusted gross margins to positive adjusted gross margin. There is — as you know, there is a fixed cost element to the facility that’s beyond the variable cost on the labor, and as such, we do plan based on the demand on our products that at this point it far exceeds or exceeds our current capacity, but we’re only going to be planting in the rooms as this demand continues to outstrip our current capacity. And based on the success of our products and our plans for innovation on launching new products, we do feel that as we complete the construction and add the rooms to take us from this 55,000 capacity we have today to the 75,000, that we will be able to be operating at or near capacity. So we’re not viewing this from a perspective whereby there is a significant downside to doing the expansion just given where the demand is today based on the capacity that we have today moving from this 55,000 annualized run rate to 75,000. But of course, as with all cannabis companies, if there is an element whereby you’re not operating at capacity with the competition in the marketplace, there is a cost or fixed cost element that will be [Indecipherable] charging to cost of sales should you be not be operating our capacity, but we feel that there is so much more that we can provide on cost reduction just based on moving from 55,000 to 75,000 and as such, we think will be sufficient buffer should there be sufficient slowing in demand in our products, which again we do not expect.

Beena Goldenberg — Chief Executive Officer

Right, let me just add one more comment on top of what Derrick just said. Tamy, right now our very popular SHRED brand is really only available in two marketplaces, in two provinces, in Ontario and Alberta. We have some small volume that is in Quebec. But we haven’t been able to expand the distribution to other markets due to the lack of supply. We do believe there is a lot more opportunity for us to expand that brand and take advantage of what we believe is a great product offering out in the marketplace. So we’re not — we, while I recognize your comment that consumers have been swapping between brands, we’ve seen some pretty sustained demand on our SHRED brand and continued great performance and we’re looking forward to having that extra capacity to be able to expand our distribution.

Tamy Chen — BMO Capital Markets — Analyst

Got it. Thanks for the comment there. That’s actually good segue to my follow-up question. So Beena that’s very interesting on SHRED, because I was going to ask how much more upside in consumer demand you see in the SHRED brand because it’s gotten so much success over the last year. So to clarify, SHRED is really only in Alberta and Ontario and not really in the other provinces. So I see the upside there. How about in the provinces, Ontario and Alberta that SHRED has already in. Do you continue to anticipate or see that there is still even more demand upside on SHRED? Thank you.

Beena Goldenberg — Chief Executive Officer

Yes. So we absolutely see opportunities in those markets, and I should correct. We do have a little bit of business also on SHRED in Quebec in a 15-gram format versus the 7-gram format we have in Ontario and Alberta. But we do see upside because currently we’re on allocation. We can’t supply the demand that’s currently out there. This is why the increase in our production capacity and our improved yields is helping us, will continue to be able to fulfill orders as they come in. But in just having our joint business planning meetings with the OCS, they’re basically telling us there is big demand from the retailers and we can’t supply that demand at this point. We’re really looking forward to our expanded capacity so we could fulfill that demand. And I think it all comes back to the fact that we are offering a product that is competitively priced to the illicit market and so we’re bringing product — people in from the illicit market into the legal market through this brand, introducing them to high quality offerings. And so I do think there is lots of upside as more people move over from the illicit market to the legal market as well.

Tamy Chen — BMO Capital Markets — Analyst

Great, thank you.

Operator

Your next question comes from the line of Aaron Grey of A.G.P.

Aaron Grey — A.G.P. — Analyst

Hi, good morning, and thank you for the questions. So first question for me, I just wanted to touch on Israel. We had sales begin again this quarter. So just on the go forward, two questions in this. First of all, could you comment maybe on the margin profile that you guys are receiving for some of the products to Israel? And then how do we think about sales going forward that they could — should continue in 2022? Just want to know relative to revenue you received in the first quarter, whether or not should continue to be lumpy to invest kind of a good base to build off of? Thank you.

Beena Goldenberg — Chief Executive Officer

Right. So thank you for the question. At this point, we had strong — we resumed shipments to Israel in Q1 of fiscal 2022. We have a great partnership with Canndoc, and they’re very interested in ongoing — receiving ongoing product from what they — selling in their market is premium indoor grown cannabis from Canada, they see it as a big draw to get a premium price for that product. And with our shipments that we made in Q1 of fiscal ’22, they were very pleased with the performance of our strains. I believe we shipped them MAC1 that sold out in their stores within 24 hours. So they’re very pleased. They’re looking for more product. We expect to be on a cadence of shipment once a quarter to Canndoc, obviously that does depend on, no changes to the regulatory environment. But at this point, we have a strong partnership with Canndoc and we do expect to see ongoing shipments throughout the balance of our fiscal year.

Aaron Grey — A.G.P. — Analyst

Okay, great. Thank you. And then just quick follow-up. Could you just comment if any color on the margin profile you’re seeing for Israel? relative [Speech Overlap]

Beena Goldenberg — Chief Executive Officer

Sure, sorry. You did ask that. Okay. Yes. So certainly, we have good margins on the product that we sell to Israel, and that’s obviously because when you sell export markets, you don’t have the excise tax impact that you have when you sell within the recreational market and so it’s strong margin for us and it helps drive our overall net revenue. I don’t know, Derrick, if you want to provide any more color.

Derrick West — Chief Financial Officer

I guess we don’t normally get into the margin by product categories specifically. But we do have healthy margins on the B2B business as a consequence of the excise tax, that’s how is noted as well. Just to put the packaging that you’re doing and sending on the export is — it’s a more simplified process in terms of both labor and the packaging element, and so it does allow for margins that are enhanced than as compared to the flower margins in the Canadian rec market.

Aaron Grey — A.G.P. — Analyst

Well, that’s helpful, qualitative color, I appreciate that. Second question from me then, just in terms of high-level view on the market and pricing, right? So some peers have talked about potential continued pricing pressure and using price as a lever to kind of regain market share. I just want to get your overall view in terms of what the recent price increases in SHRED? How you’re going to look at pricing and kind of maintain price gaps kind of as we go through 2022, especially relative to potential changes in market share as was mentioned earlier, we’ve seen different fluctuations over time with different brands. Thank you.

Beena Goldenberg — Chief Executive Officer

Right. So I think there — we’ve seen the price compression that’s happened in the flower category, but from my perspective we’ve basically seen it sort of level off. We got to a place in flower where supply and demand are getting more aligned in the marketplace. The price compression we’re seeing now is coming in other segments. You see quite significant compression coming in the vapes category. We have a good competitive cost structure for our gummies so we’re not concerned in that category in terms of price compression. We know that we have to be competitive in the value segment to prices offered in the illicit market to maintain that momentum. So I think we obviously have to watch the pricing. We certainly have seen the compression in the flower category over the last year, but it’s, I think really a good indication of the strength of our SHRED brand that we’re able to take pricing in this category and continue to maintain the momentum on the brand. So we — I do believe that we’ve kind of leveled on flower. There might be some compression on the high-end in the craft flower segment. But on the value segment, I think we’ve sort of leveled off. I could be proven wrong, but that’s certainly our — what we see as we were able to get that price increase on SHRED.

Aaron Grey — A.G.P. — Analyst

Okay, great. Thanks so much for the color. Then I’ll jump back into the queue.

Operator

Your next question comes from the line of Ty Collin of Eight Capital.

Ty Collin — Eight Capital — Analyst

Hi, thanks for taking my question. Just looking for some additional color on the Q2 outlook. I think the language in the press release guided towards higher year-over-year sales in Q2, but not necessarily sequential growth. So just wondering if Q2 is looking flat or down? What are you seeing in terms of adult use? Some of the puts and takes there would be great. Thanks.

Beena Goldenberg — Chief Executive Officer

Perfect. Thanks for the question. So we are going into the quarter, obviously we have December behind us. We’ve had some good momentum and we do have the incremental revenue coming from Laurentian, but the careful consideration on quarter-over-quarter, which could very well be growth quarter-over-quarter, but we do want to recognize the fact that there is seasonality to this business. The second quarter, our second quarter is usually our lowest quarter of the year because you have sort of the shutdown over Christmas, you have the shorter February month as well as the provincial boards that year-end are in March. So we’re just being cautious recognizing that while we certainly are striving for revenue quarter-over-quarter, we are very clearly going to be significantly higher than the same quarter prior year.

The other thing I do want to recognize, look, we — nobody likes to talk about this, but COVID’s back out there. There are some restrictions in some of the retail stores in terms of capacity limits and in Quebec, who’s allowed into the stores. There is the impact of labor shortages as people are infected with COVID. So we’re just being cautious on our statements for this quarter, but we certainly have momentum coming in and we certainly have the incremental revenue coming from Laurentian that should help us deliver a great solid quarter in Q2.

Ty Collin — Eight Capital — Analyst

Great, appreciate the color there. And just as my follow-up. You mentioned earlier in the call that the company still can’t keep up with demand for SHRED, for example. Is there any way to quantify how much sales are left on the table this quarter? And when do you expect that the supply/demand picture will start to balance out given the capacity expansion in Moncton? Thank you.

Beena Goldenberg — Chief Executive Officer

Right. So good question. I mean, we certainly believe that we will be out of our supply challenges once 4C expansion is up and running. So as Derrick mentioned earlier, we’re focusing on 75,000 kilos of product out of the facility and that should be able to address the needs and demand of SHRED and enable us to look at expanding the distribution to other markets on top of feeding the markets we’re currently in, where we’re on allocation.

In terms of how much demand or sales are we leaving on the table, that’s a hard one to answer. We certainly know that in our conversations with the OCS, they certainly see it a very large number. Their retailers are looking for product and its something we can’t supply. So every quarter we started to see improved yields, we started to build some extra supply this past quarter, and that should help us fulfill more orders over the next quarter. As you know, there is sort of that delay between when you plant a new harvest, but we should continue to see improvements over the next couple of quarters, but I see the big unlock coming in once 4C expansion is complete and we will have production out of those grow rooms by the end of our fiscal year.

Ty Collin — Eight Capital — Analyst

Thanks, and congrats on the quarter.

Beena Goldenberg — Chief Executive Officer

Thank you.

Operator

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

Andrew Partheniou — Stifel — Analyst

Good morning. Thanks for taking my question. Maybe just starting with some of your products, continuing on SHRED. Is it possible to quantify the price increases that you’ve made in Q1? How much more do you expect to increase it by in Q2? And as you bring SHRED into new markets, are you thinking about having a standardized national price on SHRED? Or could there be even further upside on price?

Beena Goldenberg — Chief Executive Officer

So, thank you, Andrew. So here — with regard to SHRED, we know that currently we are selling in the most price compressed market, which is in Ontario, the biggest bulk of our volume, and that’s just based on their margin model. And so we do believe that as we roll out to other markets, there is margin upside as we have some markets that have better for prices and we could get better margins on our SHRED. In terms of the price increase, while we were able to get the pricing through in Alberta a little bit earlier in the quarter, we were only able to get the Ontario pricing through by the end of October. So we do think that there is good upside in the next quarter as we see the full impact of the price increase in Ontario.

Andrew Partheniou — Stifel — Analyst

Is it possible to quantify the price increases?

Beena Goldenberg — Chief Executive Officer

Derrick, do you want to take that?

Derrick West — Chief Financial Officer

Yeah, I’m not sure if it’s a quantification, I mean we were — we partially benefited in the quarter, as noted, just on the timing and, but from here it would be in the 5% range effective in terms of the impact to the top line sales just based on a transitional implementation on the timing during our Q1 reporting period.

Andrew Partheniou — Stifel — Analyst

Thanks for that color. And maybe transitioning to your R&D expenses that — you had that nice outlook of accelerated profitability, could you clarify, I believe that’s excluding R&D expenses. And when thinking about R&D expenses, I believe the last time we spoke about it, you were talking about maybe CAD30 million over three years. Has that outlook changed at all? Could you maybe talk about cadence and any other color you can provide on the level of R&D expenses to take into account your profitability outlook?

Derrick West — Chief Financial Officer

Yeah, I would say that our R&D expenses to-date has been modest just in terms of the timing of the spending programs that are within the Centre of Excellence. The employees have been hired that are doing the work from — in terms of the Centre of Excellence, and we of course have our own innovation and R&D team over and above the Centre of Excellence. But I would indicate that the total program spend is as the same as was originally budgeted and are recently forecasted and that it was — it’s more or less that the timing once some of the spend on the programs has been pushed out a few months, but the aggregate of the spend would be similar. So it can get a bit lumpy, but we would see that it would start to increase from the run rate you would have seen in Q4 and Q1 of this year in terms of the total R&D spend for the company.

Andrew Partheniou — Stifel — Analyst

Thanks. I’ll get back in the queue.

Operator

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

Rahul Sarugaser — Raymond James — Analyst

Good morning, Beena, Derrick, Paolo. Thanks so much for taking our questions. I know you’ve talked a bit about gross margins already, but I just wanted to drill down a little bit about — into the interplay between capacity and gross margins. We saw historically that the company was extraordinarily efficient in the early days that legalization when operating at capacity. And Derrick I think you referred to being close to capacity, if not fully at capacity right now. How should we be thinking about the sort of upper end or the rate limiting step in terms of capacity and gross margins now? And then how do we see that with the expansion? And do you potentially see sort of a dip in margins as you transition to that expansion?

Derrick West — Chief Financial Officer

Yeah, firstly I would not see any dip to our margins as we proceed to the expansion of the costs that are getting added up, the operational costs that are getting added are not at the same dollar-for-dollar pro rata as the extra capacity it’s going to generate. Just by example, when we say we’re at 55,000 annualized capacity, say that’s for the month of January. But for our Q1 reporting period, it was approximately 45,000. So just in terms of volume output today and where we can get to, we would be going from 45,000 from Q1 effectively to 75,000, an increase of 30,000, which is significant and our cost structure, where there is that fixed cost component sort of tying back to a reply I gave on Tamy Chen’s question earlier is that most of the costs from here are going to be variable in nature and as a consequence our cost of production per unit is going to go down as you increase — every room that we increase, and we’ve already seen that as we’ve increased the number of rooms available in Q1 than as compared to Q4 and Q4 over Q3. We’ve had the significant increases to our adjusted gross margin, again going from a negative to a positive 18%. So we do think that there is now a mathematical reason that this should not continue as we get to full capacity of 75,000.

Rahul Sarugaser — Raymond James — Analyst

Great, that’s very helpful. And then just switching gears a little bit. We saw Organigram continue to support its investment in Hyasynth and we understand that Hyasynth is starting to meet some important milestones, particularly in terms of the production of — the fermentation production of CBDA. Could you maybe give us a sense for when we might start to see the incorporation of Hyasynth’s produced molecules into Organigram’s products and hitting shelves, particularly given that we see a couple of peers, at least one of your major competitors hit shelves with fermentation derived cannabinoids?

Beena Goldenberg — Chief Executive Officer

Right, so thank you for that question. So at this point, we’re very pleased with the IP that’s come from Hyasynth and it’s why we furthered our investment. We are looking at having contract manufacturer organization sort of agreements in place to help on the scale by around Q3 of 2022, that’s calendar year 2022, and expect production sort of material revenue coming out of their facility or that agreement by the end of calendar 2023. So it’s still a little ways away before we have scaled rare cannabinoids out of that production. But we’re very excited about what we’ve seen in terms of their technology and IP. We think we have a simplified approach that is easier to scale up in some of our competitors and we believe that while we’re talking about revenue only coming out by significant material revenue coming out by the end of calendar 2023, we do believe that the opportunities in terms of the use of these products, we’ll take that time between now and then to work on some of the innovation and work with BAT in our product development collaboration to see where the greatest opportunities are in bringing in these products. So we’ll use that time to do the right research, to do the right consumer work and make sure that we’re ready to go once that product is scaled.

Rahul Sarugaser — Raymond James — Analyst

Great, that’s very helpful. Thanks again for taking our questions.

Operator

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

Adam Buckham — Scotiabank — Analyst

Good morning. Thanks for taking my questions and congrats on the quarter. Beena, you provided some great color on the demand for SHRED. I want the focus more on the sort of flower revitalization project that’s been undertaken over the past year and a half. Are you able to provide some high level detail on the contribution for sort of premium flower to overall sales versus let’s say last quarter or versus last spring? And really I’m just trying to get an idea about demand that you’re seeing for those sort of new products that you’ve launched.

Beena Goldenberg — Chief Executive Officer

Right, so a couple of points on that question. So we have seen from a flower standpoint, we’ve seen the growth obviously in our SHRED demand, but also in our Big Bag o’ Buds, so that’s our 20-gram format, unique strains, and again, we have limited distribution as we have worked through our capacity challenges, but we’re seeing some growth in that format as well. Our Edison brand, we’ve seen, it’s been sustained market share on an Edison brand. We expect to see some growth on our Edison flower in the back half of this year as we start introducing some of our newer genetics behind that brand, higher THC, higher terpene offerings on Edison, which is consistent with the consumer demand for more premium brand. So that is coming.

In the interim, we continue to focus on building out our portfolio behind Edison with our vapes. We have some live resin, vapes under packs that will be coming out to market. We have our Edison JOLTS, which I talked about briefly in the script, that really was a great intro into sort of high potency lozenge category and we’re seeing additional SKUs coming out in that space because of the demand. So we’ll margin up outside of flower through some of our derivatives. We launched our Monjour offering, which is CBD-infused soft chews. And again, a larger format CBD offering, there’s not very many in the marketplace. Good margin for us, a great offering for consumers, an opportunity to build that distribution. So I think there is going to be margin improvement as we continue to build out our portfolio.

And then as I said earlier, I think with Edison, it’s just a matter of some of the new products gaining some traction. And we did see that with our Edison Pinners, which where our pre-rolls this past quarter. So I hope that answers that question.

Adam Buckham — Scotiabank — Analyst

Yeah, no, it certainly does. Thanks for the color. So, second, I just wanted to kind of touch on Israel again. And I’m just wondering if your partner, Canndoc, has shared any sort of commentary on what they expect for competitive dynamics in the market. It seems basically right now that Israeli

[Indecipherable] sort of anything Canadians put on the table, but of course there are many LPs looking to get into that market given the attractive demand and margins, right? So is there anything you can share on that front in terms of what you expect on a forward basis? I know you said sort of sequential one order every quarter, but anything on that front would be helpful?

Beena Goldenberg — Chief Executive Officer

Right, so I think what became clear in our discussions with Canndoc is, what they’re looking –what is really gaining the best premium prices in the Israeli market is Canadian indoor grown flowers. So what I think provides us with a unique opportunity is that we’re one of the largest indoor grown facility supplying that marketplace. They said that as soon as they put product out there with our brand and identify it as Canadian indoor grown, it just flies off the shelf. So it’s –we’ve seen as premium quality product in that marketplace. So, well, I think there will be some competition from Israeli grown cannabis. Certainly think that we feel pretty strongly about our performance in the market and Canndoc has — is very pleased with the products, and they were — certainly told us how quickly that some of our new strains that we introduced sold out in their marketplace. So I’m feeling good about that relationship and continuing to build from there.

Adam Buckham — Scotiabank — Analyst

Great. Thanks for the color, and congrats in the quarter again.

Beena Goldenberg — Chief Executive Officer

Thank you.

Operator

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

Douglas Miehm — RBC Capital Markets — Analyst

Good morning. A couple of questions. First question just has to do with the illicit market, and maybe what you could do is walk us through where you see the pricing in that market, particularly in larger provinces? And the price differential between your SHRED, Big Bag o’ Buds product and the type of differential that you need to maintain in terms of pricing, like how far in price can you take before you’re not able to take share from the illicit market? Just want to start with that.

Beena Goldenberg — Chief Executive Officer

Right, okay. So thank you for that question. I think we’ve actually crossed that market in terms of pricing with the illicit market. If you look at price per gram, we’ve seen overall in the market where the price per gram in the legal market in some of the value offerings has actually fallen below the price per gram on the illicit market. Now, it’s hard to say whether that’s a level playing field. You have differences in, obviously, strains and THC, but I feel like the increase in our demand on SHRED has sort of indicated that we’re there. We’re getting that crossover from the illicit market into legal market and we’re right price there that I don’t — that we continue to see and I believe it’s come across that right now. The legal market is now 53% of sales versus 47% of the illicit market. I mean, there is still a long way to go to get more of that illicit market over. But in terms of price per gram on flower, I think we’ve kind of crossed over and I think that gave us the opportunity to take a little bit of pricing on SHRED. Obviously, the market dynamics are a little bit different depending on the province you’re in. But generally speaking, that, I think we’ve already hit that mark.

Douglas Miehm — RBC Capital Markets — Analyst

Okay, that’s fair. The second question I wanted to ask was about, we see that you’re selling into Israel, but there are going to be a couple of other markets that open up in Europe in the next little while, perhaps in the next 12 to 24 months. What do you — what’s your thinking or the company’s thinking for international expansion outside of Canada and what you’re doing in Israel?

Beena Goldenberg — Chief Executive Officer

Right, so first of all, we also have a partnership with Cannatrek out in Australia. We had shipped them a while ago when we have reengaged with them and are looking to expand our export shipments to Australia as well. So that in addition to Israel, our current businesses that will certainly look at fulfilling in this fiscal year. In terms of other markets, certainly we’re all watching Germany and trying to understand legalization there and other available markets in Europe. What we’re doing in the short term, we’re evaluating how to get some EU GMP or GMP status in our Moncton facility, how to build out some capacity to be able to take advantage of that market as well. The facilities are designed to get to EU GMP. That’s our derivatives facility in Winnipeg, as well as our Moncton facility. We don’t have the certification yet, but it’s something that we’ll look at over the course of the next 12 months, as we consider those export markets in Europe that become another opportunity for us.

Douglas Miehm — RBC Capital Markets — Analyst

Okay, thanks very much.

Beena Goldenberg — Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Andrew Bond of Jefferies.

Andrew Bond — Jefferies — Analyst

Good morning. Andrew Bond on the line for Owen Bennett. Thank you for taking our questions. I understand it’s late in the call, so I’ll keep it to one. Just around U.S. strategy for federal legalization. Understanding the timing remains uncertain, we’ve seen several different approaches and transaction types from other LPs like optionality agreements and structured agreements with MSOs as well as CPG oriented brand place. Obviously, Organigram has shown great traction based on market share data. So just curious what specifically you’re thinking about as you develop an approach to the eventual U.S. THC market? Thank you.

Beena Goldenberg — Chief Executive Officer

Great. Well, thank you. So we’re — we’ve been looking at the U.S. market and obviously it’s something that, that we — apologize for a second, sorry about that. So we have looked at the U.S. market and I don’t believe necessarily that the options that some of our competitors have done is the right approach. We know how significantly this market has changed over the course of two years and I’m not sure if you put in an option now, you know what you’re going to be getting in two years’ time given the rapidly changing market dynamics.

We, as a company will continue to look at the market and track regulation changes to make sure that we understand when the opportunities really develop in the U.S. for us. We’ll explore CBD offerings in the U.S. and other adjacencies. So those are things that we’ll look at. But we’re going to do it when it’s the right move for us. The short-term goal in the last six months has been to build out the foundation in our Canadian marketplace. We added EIC, which got us into gummies market very quickly.

We’ve just added Laurentian, which bolsters our presence in Quebec and gets us both into craft flower and into concentrates in a bigger way with the Tremblant hash. So I think that was our priority. As we continue to look and as we’ve built out our base in Canada, we’ll start to look and I’m not sure if the U.S. is the first market that we’ll look outside of the U.S. But we will look at expanding internationally as we see the right opportunities come for us.

Andrew Bond — Jefferies — Analyst

Great. Thanks for that color. Congrats on the quarter.

Beena Goldenberg — Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Frederico Gomes of ATB Capital Markets.

Frederico Gomes — ATB Capital Markets — Analyst

Hi, good morning, and thank you for taking my question. I’ll keep it one. In terms of your market share, so you guys have a good momentum going there, but the market is still very, very competitive for demand. And so just going forward, would you expect to continue gaining share in the market? Now is there any target you guys have in mind in terms of how much share you can take organically? Or would you expect that that market share curve to kind of flat line and so the market consolidates? Thanks.

Beena Goldenberg — Chief Executive Officer

Thanks for the question. I think what we’ve said so far is, obviously, we’re not taking full advantage of our SHRED offering because we are capacity constrained. So we do believe as we build out our capacity, there is more upside to gain on our SHRED as well as our Big Bag o’ Buds, our 28-gram format. As we build out our capacity, we do believe there is more market share to grab from those offerings and we do have a derivatives business that we continue to build out. So we have more offerings coming in our gummy line up. We have yet to really see the full benefit of our new launch behind our Monjour brand. We have some new innovation on pre-rolls, more dual pack, Pinners coming out and more vapes coming out, which we are under-developed in the vape category, but we have some new vapes coming out both under our SHRED brand and our Edison brand.

So I think the answer is, we do think that there is opportunity to gain market share. And I’ll also say that while Quebec is a challenging market to take a good read on because of the limited data coming out of that marketplace, we certainly believe we’ll have a larger market share simply through the benefit of the acquisition of Laurentian.

Frederico Gomes — ATB Capital Markets — Analyst

Great, thank you very much.

Operator

This concludes today’s Q&A session. I will now turn the call back to Beena.

Beena Goldenberg — Chief Executive Officer

Thank you, everyone, for listening this morning and thank you for some great questions. We’re very excited about the momentum we have on the business, and I look forward to updating you again soon. Thanks for joining the call.

Operator

[Operator Closing Remarks]