Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Organigram Holdings, Inc.'s First Quarter 2020 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 to please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. As a reminder, this conference call is being recorded, and a replay will be available on Organigram's website. At this time, I would like to introduce Amy Schwalm, Vice President, Investor Relations. Ms. Schwalm?

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

Thanks, Amy. Good afternoon and thank you for joining us today. This afternoon, we reported results for our first quarter fiscal 2020, which ended November 30, 2019. I'll provide some overall comments on the quarter, our progress on Rec 2.0 products as well as some views on the industry and then Paolo will go over the quarterly results in more detail before we open up the call to your questions. We're pleased with our results in the first quarter of our fiscal 2020 year. As we expected and guided with our last quarterly results, Q1 saw marked improvement from Q4 across a number of key metrics we track to assess our performance. Net revenue grew, our cost of cultivation per gram declined, gross margin substantially increased, and we returned to positive adjusted EBITDA. Net revenue included wholesale revenue as well as exports to Australia. Despite pricing pressures seen by other Canadian licensed producers with lower quality product, our average selling price to the provinces fared well. It was largely consistent with our -- with prior quarters at over $5 per gram when you back out wholesale revenue. This is a testament to our indoor facility where we have the ability to better control consistency and quality when compared to greenhouses and outdoor grow operations. We expect to see gradual pricing pressure in the market, but are in the enviable position of having one of the lowest costs of cultivation as well as consistent indoor quality product, which better positions us against pricing headwinds. In fact, our Q1 all-in cost of cultivation decreased from Q4 to $0.87 per gram, and the cash component of that came in at $0.61 per gram. Overall, we executed well in the first quarter, balancing our existing Rec 1.0 business and ensuring readiness for Rec 2.0.…

Thanks, Greg. Upfront, I want to address our financial capacity as it is certainly a key topic for all licensed producers in the industry right now. We have always been very careful about ensuring we have sufficient capital and capital sources available and keep vape price and keeping our spending in check. We believe we have sufficient capital to execute on our operational and expansion plans. As at quarter end, our remaining spend on Phase 5 was $20 million of the estimated budget of about $65 million. Our remaining estimate to spend on Phase 4 was about $16 million of which $13 million relates to finishing Phase 4C as originally designed. As Greg mentioned, and as we had previously disclosed, we have strategically delayed completion of this final Phase 4C, but even if and when we decide to spend the remaining CapEx, we will have the financial resources available. As at quarter end, we reported about $34 million in cash and short-term investments and still have $30 million in available capacity on our term loan, which remains undrawn today. In addition, we also have a revolver of up to $25 million available to be drawn against specified receivables. Lastly, included in our credit facility is an uncommitted option to increase the term loan and/or revolving debt by an additional $35 million to a total of $175 million, subject to agreement by the lenders and satisfaction of certain legal and business conditions. As announced with our Q4 results, we made amendment to our credit facility to further improve balance sheet flexibility. We extended the final draw deadline on the term loan from November 30, 2019 to March 31, 2020 to avoid drawing committed portion of the term loan prematurely and postpone the principal term loan prepayments to May 31, 2020. The…

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

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

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

Sure. Those are three questions, Erica. So, a couple of key points I would make. One is, when we look at certainly the landscape in Canada, there's still a limited number of offerings available under 2.0 products, primarily vape products as well as edibles. And so, the category currently we only have our vape products in market and -- but as I alluded to earlier, we've seen good response, good online consumer reviews of the product. And as noted, we've already had at least one province reorder very quickly. So, positive response to date, so good response to vapes overall. And for edibles, with our chocolates, we have already seen even though we've not shipped product yet, one of the key large provinces has already tripled the order that they have wanted to place, based on the consumer demand that they're seeing in the marketplace. We know in Ontario, for example, that by the weekend, this past weekend that edibles were virtually sold out across all their stores. So, very strong demand, both on vapes and edibles. And that's the predominant 2.0 products that are available in the market. But, we certainly -- we have not launched for edibles yet. But in anticipation of that launch, we've had very good response in terms of preorders. I think, certainly so, when we look at what that cycle looks like, again, as I mentioned, it's going to be critical to add new stores in Ontario to take advantage of that market opportunity and that's going to be one of the key aspects of market growth going forward.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Well, so -- and also, this is why -- and we alluded to this, right? Our Phase 5 facility is designed and built completely to EU GMP standards. And so, we are working through that process. We -- again, getting the EU GMP is always dependent upon the regulatory authority in the jurisdiction you're working with. But certainly, starting from scratch, designing the facility to that may provide an opportunity for us to expand more in international markets. I mean, we have been selling to Australia for a number of years. We're seeing growth in that marketplace. But certainly, we're looking at are there other opportunities outside of Canada.

Okay.

And one of the comments, Doug, and we've talked about this before is, we've gone through a significant shift in terms of our product mix. So, we know it was one of the key aspects of our early success and having significant product in the market. We were able to get feedback on which strains were successful and which strains was high demand and high throughput. So, we have shifted our production pretty significantly towards those, as well as designating a certain portion to limited time offers, right? So, we are taking with a portion of our facility kind of a craft brew approach while we will be cycling different genetics through, different, something new, because there is a certain part of the market segment that's always looking for hey, what's new and they're kind of more like a craft brew approach.

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

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

Okay. Thank you.

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

Paolo, maybe just to follow-up on some of your comments in prepared remarks on the -- operating expenses obviously did come down from the prior quarter, which you had anomaly. Any sort of color you can provide us on sort of how you expect that to trend going forward? Obviously, as your revenue grows, I get that it'll decline as a percentage of revenue but are you expecting more, much growth on an absolute dollar basis as you proceed through fiscal 2020?

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

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

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

Okay. In and around $30 million?

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

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

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

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

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

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

And then just a quick follow-up. I want to ask for an update on the development of your biosynthesis activities with Hyasynth. And in particular, how you see this as a potential input for your track online, both private and white label?

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

Your next question comes from line of Greg McLeish from MRCC. Your line is open.

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

So, what's interesting is certainly that was a last minute change. I mean, there were, certainly, was unexpected, we knew early about connect. And then Newfoundland, I guess, came out of with cannabinoids as well. What I would say is that, when we look at US state, for example, like Massachusetts to put a hold on vaping products. And once they go through a fulsome review, they're in a position to say, okay, let's release in Massachusetts didn't do that. I think there's a coordination going on here, both provincially and federally to understand. As we know, that vaping health related illness cases out of that USA, CDC is reported that they are linked to vitamin E acetate, and they're linked to illicit base and counterfeit, e-cigarettes based. And the same is true in Canada. There’s been 15 cases reported to date, illicit vape products or counterfeit tobacco products. And I think, how Canada is, there are prohibited substances. Vitamin E acetate, propylene glycol, polyethylene glycol, out of an abundance of caution and how Canada is also they haven't prohibited MCT, but they've given direction to companies that they would not want to see MCT. So I think part of part of the kind of review process that promises are going through is, just understanding in more detail what the risks are associated with. So we're optimistic, that at least one or two of the provinces will make a decision to move forward at some point later in the year. Again it does allow us because we see chocolates as such a big part to also look to say, can we pivot to that market now. With that base to provide more edible products; because we have seen very good response to the edibles in the market place.

Just a question on the edibles, so I was actually over the couple of stores last week. And pretty edible those saying they were from $0.90 per milligrams to a $1.46 per milligrams, so is it $8 to $12.95 edible, that compares to upwards of $0.10 per milligrams in the black market. How fast do you think we're going to see price compression come down on the edibles to make it more competitive with that, you know with the illicit market?

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

I agree on the vapes, because the vape I bought was $0.26 per milligrams versus $0.075 for the black market one. So just a house keeping note, how much and what amount of depreciation was in your cost to goods sold?

Typically, it's about the non-cash, the depreciation and the share based comp is about a quarter. The quarter of point – because I don't have to break down within that…

So is it around consider a depreciation for the quarter was 3.7 million instead of $240,000 in the G&A. So is the balance all in cost to goods or is there is some spread out in different areas.

If it doesn’t look straight for the SG&A, it's going to our inventory which spends close to the cost to goods sold.

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

The cash gross margin looks certainly be higher than what's reported because we have [indiscernible] expenses absolutely.

Your next question comes from the line of David Kideckel of AltaCorp Capital. Your line is open.

Hi, this is actually Frederico filling in for David. Congratulations on the result and thanks for taking my questions. So it's more of a big picture question, given current industry conditions, what's your view on -- do you expect to see possible increase, a consolidation activity in the Canadian market in 2020? Do you think that maybe a key thing going forward?

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

Your next question comes from the line of Matt Bottomley from Canaccord. Your line is open.

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

Yes, I'm not sure, it's Paolo here. Your question is, is the mark up the same on these products at the level or the margin of…

Yes. I guess we can see at the high end of vape pen goes for 125. So is an LT getting $50 of that on the wholesale, if we use the same proportion for dry bud or is it a completely different edible?

From what I understand, and I don't have a definitive answer on this. My understanding of the mark-up model is similar and we certainly have gone through a competitive bid process similar to what we did a year ago with flowers. And there's just a back and forth with the provinces. But my understanding is that they're looking to get pretty much the same mark-up on their own than from our perspective we're trying to obviously make sure that we are sufficient margins that we can live with us as producers.

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

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

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

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

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

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

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

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

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