Ladies and gentlemen, thank you for standing by. Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to OrganiGram Holdings Inc.'s Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded and a replay will be available on OrganiGram's website. At this time, I would like to introduce Amy Schwalm, Vice President Investor Relations. Ms. Schwalm, please go ahead.

Thanks, Amy. Joining me today are OrganiGram's Chief Executive Officer, Greg Engel; and Chief Financial Officer, Paolo De Luca. Before we begin, I'd like to remind you that today's call will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report regarding various factors, assumptions and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS measures. Please see today's earnings report for more information on these measures. I will now hand the call over to Greg.

Thanks, Amy. Good morning. And thank you for joining OrganiGram's first earnings call. This morning, we reported results for our second quarter ended February 28, 2019. I'll start with the highlights of the quarter, as well as our progress on our strategic priorities, including the facility expansion and our preparations for derivatives and edible legalization later in this year, then I will turn the call over to Paolo De Luca, our CFO, to discuss the financial results in some more detail. We delivered another quarter of excellent results, a testament to the OrganiGram team, a reflection of our state-of-the-art facility and our commitment to continuos [ph] improvement, and I'm also excited about leveraging our strength to see the next tremendous opportunity expected with the expansion of the market to include derivative-based products. As we indicated with last quarter's results, we expected Q2 revenue to be at least double that of Q1 and we met this target nicely. Q2 2019 revenue was a new record for the company and reflected the first full quarter of adult-use recreational sales. We were able to translate our strong operating results into excellent fundamentals as we remain focused on building sustainable business to generate long-term value for our shareholders. We reported industry-leading adjusted gross margins and positive adjusted EBITDA for the third quarter in a row, which continues to differentiate OrganiGram's performance in the space. At OrganiGram, we've built a strong culture of continuous improvement and it truly is the foundation of our company. Our decisions and actions are guided by lean manufacturing principles, as well as our own in-house proprietary software, OrganiGrow. This is a database which tracks all grow cycles by harvest period, strain, room, environmental conditions and other factors to allow us to understand and refine the optimal methods to grow the…

Thanks, Greg. This quarter, we generated gross revenue of $33.5 million and net revenue of $26.9 million from approximately 4,248 kilograms of dried flower and 5,735 liters of oil sales. Of the total net revenue, approximately $24.5 million of it was sold to the rec market and about $2.4 million to the medical market with a negligible amount coming from other items. Even with the launch of the adult-use rec program, medical sales have not suffered and remained relatively flat sequentially. By the end of March 2019, we reached a record number of registered patients at 16,157. We have generated what we believe, based on our review of public comparables, industry-leading gross margins. In Q2, we posted reported gross margin of $8 million, but adjusted gross margin of $16 million or 60%. Adjusted gross margin excludes fair value adjustments on biological assets and inventory. We prefer to reference adjusted gross margin because based on our interactions with industry analysts, investors and media, there seems to be a preference to exclude fair value adjustment. For the quarter, we harvested 8,315 kilograms of dried flower, up from 880 kilograms in Q2 of the prior year. Our second quarter cash costs and all-in cost of cultivation were $0.65 and $0.85 per gram, respectively. We believe these are the lowest cost among the Canadian licensed producers, but caution listeners and readers that there is no consistent or accepted method for calculating cost of cultivation, and that cost of cultivation is only one component that drives total cost of sales as post harvest costs such as extraction, packaging and shipping are not yet added. We are continuing to disprove the theory that high-quality indoor production results in high cost of cultivation. In fact, we are - we believe we're realizing the best of both worlds,…

Thanks, Paolo. As a company, we continue to focus on our key priority of providing a consistent high-quality supply to the marketplace. We remain committed to building a sustainable, profitable business, providing a return on investment and increasing value for our shareholders. That concludes our formal remarks. Operator, if you could go ahead and open up the line for questions.

[Operator Instructions] Your first question comes from the line of Graeme Kreindler with Eight Capital. Graeme, your line is open.

Yeah, hi. Good morning, gentlemen and thanks for taking my call here. I just wanted to get your thoughts on the derivative products expected to hit the market later this year. When do you think we could expect to see OrganiGram products hitting the market?

Yes, thanks, Graeme. So it's Greg here. And so at this point, as I stated, we are prepared and planning to launch vaporizable pens, a number of different product lines in the fall. We expect, as per the Sunshine Provision in the Cannabis Act, that the regulations will allow for a launch of those products on October 17, 2019. We are working on a number of different edible products. However, we do not feel that we'll have sufficient inventory available to launch those on October 17, so we expect to have at least the initial products from that line available by the end of the year. And our key is, we've talked about in the past as we approached the adult rec launch last year is we focus on depth and we want to make sure that when we launch products we have sufficient inventory of those products to continuously supply the marketplace.

Okay. Thanks, Greg. And as a follow up here, with respect to all the moving pieces, Phase 5 being part of that for the derivative products as well as the relationship with Valens. I was just wondering, is there - have you made any shipments already to Valens with respect to delivering product for oils? How does that get phased as you're looking to time everything accordingly?

Thanks, Graeme, that's a great question. So Valens has already been processing material for us and we've actually received our first initial shipments of concentrate back from Valens. So we actually expect to begin using that product at least for some product launches before the end of this quarter.

Okay, thanks. I’ll get back in the queue here.

Your next question comes from the line of Peter Sklar with BMO Capital Markets. Peter, your line is open.

Good morning. It's Peter Sklar on behalf of Tamy Chen. The first question is, like your expenses, your SG&A and your sales and marketing expense, like as you pointed out, is pretty disciplined and relatively low. We're just wondering, like how should we think about that? Is that going to a ramp up as you start with the value-added products and as you bring Phase 5 on? And are you worried that you're under spending from - on marketing from a strategic perspective?

Yes, thanks for the question, Peter. So our perspective is that we're investing heavily in our sales team as well as the in-store experience that consumers are experiencing. So where you're seeing a lot of investment from us is what our sales team does in the retail environment, as well as point-of-sale material and materials for the consumer once they're in the retail environment. I'll let Paolo answer the question kind of on a forward-looking perspective.

Peter, it's Paolo here, thanks for the question. So as a percentage of our revenue, I would expect our SG&A to actually continue to drop over time just because we're looking to triple our expansion - our production and our sales based on our expansions that we've already publicly outlined. I would say up until now the most important thing from a marketing and sales perspective is just to get your product to the stores. So you could spend all the money you want on sales and marketing, but if you can't execute on getting product to the stores, you're failing to deliver to your customers. So the best kind of marketing we can possibly do is to execute on that, and we think we're doing a reasonable job on that.

Okay. And then the other thing I wanted to ask about, like your grow is all indoor grow and how is - like how is your pricing falling out in terms of good, better, best and relative to other licensed producers who are supplying from greenhouse? Are you getting a premium for your indoor product or like how is it fitting into the - to the whole pricing universe?

Yes, Peter, it's Greg here. So we don't necessarily know exactly what other companies are getting from a price perspective. We do know that certain jurisdictions like Ontario do set standards for their good, better, best. So for example, in Ontario, they will only accept indoor grown product into their best category, so we fit into that category with our product. And we do have a range of products certainly, right. We're not only selling a premium and a mainstream line, we did launch our trailblazer line, which was more of a value play, but it's targeting kind of new consumers and consumers with an experience base, so has a lower THC, which has been very well accepted. So again pricing is dependent on product SKU or type. But yes, in general, we see the provinces and the private retailers slotting our products as indoor grown into the mainstream and premium lines.

Okay. Thank you.

Your next question comes from the line of Neal Gilmer with Haywood Securities. Neal, your line is open.

Yeah. Thanks very much. Good morning. Apologies, if you covered this because I did miss early part of the call. Just you have a couple of comments in your MD&A with respect to going to 24-hour shifts for the excise tax - or stamps and so forth. So I'm just wondering sort of how your view is in looking forward. You obviously have a solid biological assets in the inventory. Do you see an impediment to the sort of revenue growth that you were able to achieve over in Q2 to Q3 or sort of how do you see that outlook? Last quarter, I know you provide a little bit of guidance on what you thought on the revenue growth side, so just wondering whether you have any comments on that in light of the - some of the challenges in the excise tax?

Yes, Neal, it's a great question. So certainly, as we look to a, optimize our equipment and get it fully functioning at 100% capacity and we were certainly working through a backlog of material, so getting that equipment up to full functionality, we made a decision to go to 24/7 both packaging and pre roll. Part of that was also driven by the demand for pre-rolled. And as stated in the MD&A, we did have some temporary workers for a period of time as well as paying over time for some of our support functions like QA and maintenance, but now, we're on a full setup for 24/7. And that's also in anticipation of additional product coming online from Phase 4, if that happens. So it was really about preparing for that next phase of licensing as well. So certainly at this point, we're not facing any hurdles necessarily from a packaging perspective and - or excise stamping and we're certainly looking to be able to work through. We did have backlog of inventory that we had to work through. So I don't see packaging or excise stamping to be a bottleneck for us going forward.

Okay. That's helpful. I guess, I'll jump back in the queue and adhere to the 1 question per analyst.

Your next question comes from the line of Matt Bottomley with Canaccord Genuity. Matt, your line is open.

Yeah. Good morning, everyone. Maybe a quick follow-up just to Neal's comment there on the - on any potential bottlenecks. Is there anything with respect to the provincial governments in terms of how they're handling rolling out retail stores in various provinces as well as their ordering that would cause a headwind on what you're able to sell? Or is it still that I'm just taking everything that I can get as soon as I can get it?

Yeah, Matt, it's a good question. So certainly, for us, we've seen, as Ontario now is adding stores, we serve certainly some large inventory build as those stores came online. We now have indication that additional stores will be coming online in the near term. So they will be beginning to expand. Alberta is also going through a significant expansion as well of the retail stores. And then finally for us, as Quebec is a new market that we plan to enter shortly, based on the agreement with them, so we're going to continue to see increasing demand from the provinces. And I think the key - the two key aspects though, I guess, for the entire industry are the Ontario and Alberta rollout and to a lesser extent BC and then for us, in particular, with Quebec coming online.

Great. Thanks. And just one other question on the derivatives again. We hear a lot of licensed producers, including yourselves that are working hard towards getting derivative products ready, whether that's the edibles or beverages and you made some good commentary on that. Just given how strict or fussy the federal government has been in the past with how they regulate things, how much clarity do you have with respect to how they're going to regulate in edible or a beverage and whether or not that might conflict with how you guys are designing them or any sort of background work that you're doing? Just wondering if they're giving you color on exactly how it's - how things should be formulated and regulated?

So the consultation, as you know, process on amendments to the regulations closed in February. We have been in ongoing dialogue with the regulator on a number of key aspects. One key thing to keep in mind for every product on the edible side is that product samples have to be submitted to the government 60 days before they're sold into the marketplace. So those are the things that have to be worked into the time lines for companies in terms of bringing products to market. So again, that's why we're doing work today on test products and doing a lot of work to have those test products completed at least at a base scale before we go into full scale production. So - and again, our R&D license, which we expect to receive shortly will assist us in being able to do more not only taste testing of those products with cannabinoids in them, but also effect testing so that we can see what is the onset or duration of action and the effect for consumers.

Okay. Thanks, again. And great quarter.

Your next question comes from the line of Douglas Miehm with RBC Capital Markets. Douglas, your line is open.

Yeah. Good morning. A couple of questions. Number one, just has to do with re-ordering patterns you're seeing with the provinces and perhaps any price changes. Is there anything specific that the provinces are requesting or are some products selling better than others? We note that you have more SKUs than almost anyone except Canopy in Ontario. Is this factoring into how well things are going for you?

Yeah, so certainly, Doug, I would comment in terms of the provinces that have had kind of ongoing infrastructure in place since day one like New Brunswick, Nova Scotia, PEI. We are seeing a more kind of consistent ordering pattern from them. As you say, with Ontario and Alberta and even BC as stores come online, we are seeing some fluctuations and swings in terms of ordering. I would say from an order perspective, the one big gap in the industry has been -- or two big gaps, one has been CBD. So we're working hard to bring pure CBD and additional CBD products to market in the not too distant future and that's part of the work we've been doing with Valens because there is an overwhelming demand for any CBD based products that's of a pure nature, so that's across the country. And I think secondly, as I commented earlier, the additional work that we've done on pre rolls, and for pre rolls, for us, it's also a great way to get individuals a chance to sample your products and experience your brand with a low out-of-pocket expense. So it really helps us from a marketing and distribution side. And as per the question that was asked earlier by Peter, I mean, certainly that helps us as a group and a company to get exposure to our brand not only within the retail environment, but for consumers.

Okay, great. And then just a follow up. When you talk about potentially doing a deal with a beverage company, is this going to be something along the lines that we have already seen in the marketplace? Or is this going to take a unique turn or anything interesting in terms of an angle to it? And I'll leave it there. Thanks.

Yeah. So as we commented, we formulated what we believe is a very unique low molecular weight water-soluble, tasteless, odorless, kinetically stable formulation. And so the structure of any deal with a strategic partner would really be dependent upon that strategic partner, what they would bring to the table in terms of brand recognition, formulation development and global distribution. So again, to answer your question, it would be very dependent upon the potential strategic partner, what a deal structure would look like.

Okay, thanks.

Your next question comes from the line of Graeme Kreindler with Eight Capital. Graeme, Your line is open.

Yeah, hi. Thanks for the follow up here, guys. I just wanted to get your thoughts on the company potentially exploring a cross listing in the U.S., as well as the uplifting to the big 4 in Canada here?

Thanks for the question, Graeme. I mean, we're always evaluating options as a company. I guess, all I can say, as you know, we're not at liberty to discuss specific plans as this would have to be disclosed at appropriate time and in the appropriate manner in accordance with continuous disclosure obligations.

Graeme, we're always looking to maximize shareholder value. So...

Okay. Got it, understood. Thanks, guys.

Your next question comes from the line of Peter Sklar with BMO Capital Markets. Peter, your line is open.

Can you give us an update on where you're at in terms of your plan for GM certification and potential exports into the EU? And do you anticipate that those exports would take the form of dried flower or oil?

Yeah, so thanks for the question, Peter. So at this point, we had originally looked to convert part of our existing facility, but as we now have possession of additional 56,000 square feet from a call center that was leasing within our building, we designed that entire section of the facility to EU GMP standards. So we expect that to be fully online and completed by October of this year. So that will give us access with GMP certification before the end of the year to the European market. We are also looking at working with third parties who have a GMP certification for derivative-based products to assist us in accessing those markets through those partnerships.

Okay. So - sorry, did you say that you expect GMP certification by the end of this fiscal year or calendar year?

The end of the calendar year potentially is what we're targeting.

Okay. And then - just a last thing I wanted to ask you, I noticed that in Q1, you did provided some guidance on how revenues are going to look in Q2. Can you provide any -- are you providing any revenue guidance on how Q3 revenues will look?

It's Paolo here. We're not at this point just because it's earlier in the quarter than we normally talk in the passage of the quarter is shorter and we just don't have the same visibility that we did in the past and we're just not comfortable at this point in time.

And we are seeing variabilities, as we said - I said earlier on demand curves especially from Ontario and Alberta and Quebec being new to us. We don't have the same level of certainty as we'd had at the end of the last or partway through the previous quarter.

Okay. I understand. Thank you.

[Operator Instructions]

As there are no further audio questions at this time, this concludes today's conference call. Thank you for your participation. You may now disconnect.