OrganiGram Holdings Inc. (NASDAQ:OGI) Q2 2020 Earnings Conference Call April 14, 2020 8:00 AM ET
Company Participants
Amy Schwalm – Vice President of Investor Relations
Gregory Engel – Chief Executive Officer
Derrick West – Chief Financial Officer
Paolo de Luca – Chief Strategy Officer
Conference Call Participants
Tamy Chen – BMO Capital Markets
Andrew Partheniou – Stifel GMP
Rupesh Parikh – Oppenheimer & Co. Inc.
Graeme Kindler – Eight Capital
Christopher Carey – Bank of America Merrill Lynch
John Zamparo – CIBC Capital Markets
Matthew Bottomley – Canaccord Genuity Group Inc.
Douglas Miehm – RBC Dominion Securities, Inc.
David Kideckel – AltaCorp Capital Inc.
Operator
Good morning. My name is Lisa and I’ll be your conference operator today. At this time, I would like to welcome everyone to Organigram Holdings, Inc.’s Second 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 that you please limit yourself to one question and one follow-up question. You may re-queue if 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, [Technical Difficulty] Investor Relations. Ms. Schwalm, you may begin.
Amy Schwalm
Thank you, operator. Joining me today are Organigram’s Chief Executive Officer, Greg Engel; Chief Financial Officer, Derrick West; and our Chief Strategy Officer, Paolo de Luca. Please bear with us today, as we all are doing this call remotely from our homes.
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 press release regarding various factors, assumptions and risks that could cause our actual results to differ.
Furthermore, during this call, we will refer to certain non-IFRS 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 these measures.
I will now hand the call over to Greg.
Gregory Engel
Thanks, Amy. Good morning and thank you for joining us today. This morning, we reported results from our second quarter fiscal 2020 ended February 29, 2020. Before I begin, I would like to welcome Derrick to his first earnings call as our Chief Financial Officer and Paolo as our Chief Strategy Officer.
I’ll provide some overall remarks on the quarter as well as on current developments and then Derrick will take you through our financials in more detail. All 3 of us will be available to answer questions before we close the call, but no later than 9:00 AM Eastern Time.
First of all, stepping back, 2 important messages I want to come through clearly this morning. First, we are pleased with our continued execution in the second quarter and the demand for our new products in the market today, including Rec 2.0 SKUs, as well as new core strains been introduced across the country.
And secondly, we believe we are well positioned with our plans to manage through these very uncertain times for a number of reasons, which I’ll go through shortly. So turning to the quarter, adult-use recreational revenue was up 16% sequentially, driven by the launch of our first Rec 2.0 products, despite total revenue being down on lower wholesale revenue.
The adult-use rec market is our core business and represents the most significant growth opportunity for us. We also continue to introduce new strains after these sold exceptionally well as limited-time offers in the past. Limelight, which averages about 20% to 25% THC was available in Alberta, BC, Quebec, Nova Scotia and New Brunswick in mid- to late-February, and has launched in the remainder of the provinces including Ontario in Q3.
El Dorado, a recent addition to our hybrid category, averages about 18% to 20% THC, and had distribution to all provinces in Q2 with exception of Nova Scotia and BC, both of which are expected to come in Q3. We expect to continue to see wholesale market demand for our indoor-grown product over the next couple of quarters. But it is not our primary focus and more of an opportunity for us in the near-term.
We have continued to diversify our revenue streams. During the quarter, Rec 1.0 products represented about 52% of net revenue. New 2.0 products, including chocolates and vapes represented 13% of net revenue. Wholesale revenue from other large Canadian LPs represented 24%, with Canadian medical sales representing 10% and international sales representing 1%.
The company continues to actually seek opportunities to expand its product mix and customer base. The second marked a milestone for us; the launch of our initial Rec 2.0 products; we began shipping Trailblazer Torch vape cartridges on December 17, 2019; and right before the quarter close, we made our first shipments of Edison vape pens and Edison Bytes, our premium cannabis-infused chocolates.
Powered by Feather technology, Edison vape pens are ready-to-use inhalation-activated pens that are designed to offer a simple and intuitive user experience. Feather is a cannabis vape pen company, currently selling products in Colorado, and we have secured exclusivity with them in the Canadian market.
Edison Bytes are premium truffles in both milk and our chocolate formulations and available as a single chocolate containing 10 milligrams of THC each and a set of 2 truffles containing 5 milligrams of THC each.
PAX ERA cartridges, our third and final vape offering for the premium segment of the market are expected to launch before the end of calendar Q2 2020. Notably, we secured listings in all provinces that allow edibles and vapes for our Rec 2.0 products.
Along with our license renewal received this month, we also obtained licensing approval for the remainder of Phase 5 of our facility, which houses a dedicated edibles and derivatives product facility. The market continued to see price compression for Rec 1.0 products, but our average net selling price held up well and remained above $5 per gram, excluding wholesale.
Our cost of cultivation remained one of the lowest in the industry, which better positions us against pricing headwinds. In fact, our cost of cultivation decreased from the previous quarter to $0.53 per gram on a cash basis and to $0.75 per gram all-in.
Q2 gross margin before fair value changes to biological assets and inventories sold declined somewhat from Q1, as we launched a number of Rec 2.0 products for the first time. Importantly, we see opportunity to drive improved gross margin as we continue to scale and optimize Rec 2.0 products’ impact.
Adjusted EBITDA was negative in Q2, primarily due to a large brand campaign for Edison that ran during the quarter and higher costs related to the launch of 2.0 products. As I’ve said before, prudent cost management is deeply embedded in our culture at Organigram.
We have seen most of our competitors announce executive turnover and/or complex cost restructuring plans. But we’ve been able to stay focused on execution and have not faced these same disruptions. However, we are all facing even more challenging times today with COVID-19 global pandemic.
Our priority is to protect the health and wellbeing of our employees. It was clear many facility staff were not comfortable coming in to work, particularly if they weren’t able to practice sufficient physical distancing even with the additional measures we put in place.
It was no longer possible to continue to operate our facility in a business-as-usual approach. We know we’re not alone and other LPs are also experiencing employee absences and reduced operational activity for the same reasons. As such, we developed a plan intended to help protect the health of our employees and maintain business continuity to service our medical patients and customers.
We offer temporary voluntary layoffs to facility staff and those had expected made up the majority of those temporarily laid off. Lump-sum payments equating to approximately 2 weeks’ worth of work have been paid to the affected employees to help bridge the gap to government programs.
In addition, we will absorb the employee pay portion of health, dental and short-term disability premiums for all employees during this difficult time. The impact of these temporary layoffs will result in a one-time charge of approximately $0.6 million.
We have maintained an experienced group of employees at the facility with skills flexible enough to work on various production and packaging lines as demand dictates. There were also a select number of administrative and other employees who were temporarily laid off as a result of reduced operations and/or deemed non-essential in the short-term.
To be clear, we did not make these changes because we had any employees that tested positive for the virus, nor have we made these changes because New Brunswick is anywhere soft in any other parts of the country.
In fact, even though New Brunswick is reported to conduct about 10% less testing than the national average to date, the province has reported to have 78% fewer confirmed cases per capita than the national average. We applaud the actions the government has taken in an effort to contain the virus in New Brunswick.
By prioritizing the health of employees and be proactive in our containment efforts, we believe this puts us in a better position in the medium- to long-term while still being able to manage our operations in the near-term. We continue to closely monitor the evolving situation and prepare to make decisions in the best interest of our employees balanced with the long-term sustainability of our business.
We have no current plans to reduce medical production, as we intend to continue our service to our patients who have come rely on our products. In fact, just last week, we expanded our distribution with our first shipment to Shoppers Drug Mart, under distribution agreement we previously announced in February.
With reduced capacity, we are focusing on the most automated and efficient lines of production and packaging, and are able to supplement with finished goods inventory on hand, in an effort to meet demand in the short-term. A good example is our Edison Bytes chocolate truffles, with our automated production and packaging equipment.
Also, we recently started operating a T-Zero trimming machine, since we received licensing approval for the remainder of Phase 5 in mid-March. T-Zero does the same work as 12 T4s and requires significantly less manual labor to clean than multiple T4 machines.
It also means that we have to de-prioritize certain products with lower margins and/or those reliant on more manual processes in this temporary period. Where possible, we also shift our production next to larger format SKUs, as online purchasers tend to prefer those. We are also evaluating new brand and product launches during this time.
We are no longer providing guidance as to the launch timing of our new powder beverage product and Ankr, our recreational organic dried flower product. Although there is being great interest in our powder beverage from our provincial partners, it is still estimated to comprise a smaller percentage of sales relative to the vapes and chocolates. Similarly, despite having Ankr product ready to package, we need to assess priorities in light of a reduced workforce and current consumer demand. Dried flower vape pens and chocolates will be our mainstays for the foreseeable future.
Now turning to current demands. We’ve seen an uptick in March sell through as well as more orders from provinces have happened. Consumers continue to have access to purchase cannabis across the country with most retail stores remaining open. We’re offering click and collect or curbside pickup. In addition, online sales run by the provincial cannabis bodies and private retailers were applicable, are experiencing surges in sales as purchasers adhere to stay-at-home directives.
As a company, we are actively monitoring these trends, but still need more time and data to evaluate just how much is due to pantry loading versus a sustained change to purchasing habits. While it remains to be seen there is evidence to support cannabis demand is just as inelastic as demand for alcohol.
A survey of 1,005 U.S. consumers by MKM Partners found that media, alcohol and cannabis were the categories that show the highest indications of discretionary spending as a result of the pandemic. There are factors that tend to support increased consumption even light of an economic downturn. As consumers pare back spending on higher ticket items such as dining out and travel, cannabis is relatively less expensive and still provides a recreational experience. Stay at home and physical distancing directives offering more opportunity consume cannabis in private settings, which is what our own market research indicates is to be expected particularly for edibles.
I would now like to turn to our ability to supply this demand. As we announced last week, we believe we have sufficient inventory levels to supplement reduced harvest plans and enough contingency staff to keep packaging intact to meet anticipated demand in the short-term. We also remain comfortable with our current inventory from external suppliers such as vape product hardware and packaging materials and have not experienced any significant disruptions to date.
We provide some detail on the breakdown of inventory in Note 7 of our financial statements; I’d ask you to please turn to that to review. Our finished good dried flower inventory is largely comprised of higher THC product and our most popular strains. Further, the majority of upcoming harvests are comprised of strains in higher demand including Limelight and El Dorado. As we have been saying, we can distribute this to the benefit of our early views on retail sell through allowing us to ship their production mix starting last year.
With that, I will now turn the call over to Derrick.
Derrick West
Thank you, Greg. Since I joined early last month, it has certainly been an eventful time in the industry and globally to say the least. In any event, I am very happy to be here and look forward to meeting many of you on the call virtually and eventually in person when it is safe to do so. I have been getting up to speed quickly and it has helped to have had the advantage point from previously being on the company’s Board and Chair of the Audit Committee.
I will begin with some comments on our financial position. As at quarter-end, our remaining estimated capital spend on Phase 5 was $11 million, largely related to the installation of certain equipment in edibles and extraction area. We expect to spend at a slower pace to balance near-term priorities with respect to COVID-19.
Our remaining estimated spend on Phase 4 is quite marginal edible $2 million. We are pleased to see our capital expansion near in completion, we believe we have built and impressive indoor facility capable of producing high-quality low-cost flower as well as premium chocolates and other derivate products.
We ended the quarter with $41 million in cash in short-term investments. As of today, there is $30 million undrawn on our term loan, and the $25 million revolver available to be drawn against specified receivables.
As at quarter-end, working capital declined to $97 million from $152 million at fiscal 2019 year-end. This was largely due to an IFRS requirement to classify the long-term portion of the term loan to current liabilities, because we were in violation of our fixed charge coverage ratio covenant. We’ve obtained a waiver from our lenders that waives compliance until May 30, 2020. We are currently negotiating an amendment to the credit facility agreement in an effort to provide flexibility as a result of the impact of COVID-19.
We reported approximately $85 million in current and long-term debt as at quarter-end, which primarily represents the carrying value of the term loan in our credit facility with BMO and a syndicate of lenders. In December 2019, we announced an aftermarket offering of ATM Program, which allowed us to issue $55 million or its U.S. dollar equivalent of common shares from treasury.
We issued approximately 16.2 million common shares pursuing to the ATM Program in Q2 for gross proceeds of approximately $55 million at a weighted average price of $3.39 per common share. Although the price per share I just quoted was in Canadian dollars approximately two-thirds of the shares issued were on the Nasdaq Exchange with the remaining on the TSX.
Net proceeds were $52.9 million after agents’ commissions, regulatory and legal and professional fees. We have used and intend to continue to use the net proceeds to fund capital projects for general corporate purposes and to repay indebtedness. The ATM Program was completed before quarter-end.
Moving to our quarterly results. Q2 net revenue of $23.2 million compared to $26.9 million prior year quarter. The decline from 2019 was largely due to a decrease in adult-use recreational sales volumes as a result of the timing of the large pipeline fill orders in Q2 2019; it was to fulfill supply shortages in Alberta and Ontario following the legalization of adult-use recreational cannabis; a lower average net selling price from increased competition; a provision for returns and price adjustments largely related to cannabis oil, which has seen less than anticipated demand in the industry and other slow moving product. This decline was partially offset by the launch of our initial Rec 2.0 products and continued wholesale revenues in Q2 2020.
Q2 2020 net revenue of $23.2 million compared to Q1 2020 net revenue of $25.2 million. Adult-use recreational sales were up approximately $2.1 million or 16% offset by a decrease in wholesale revenue. Q2 2020 net revenue of $23.2 million was largely comprised of $15 million in sales to the adult-use recreational market, $2.4 million sales to the medical market, and $5.6 million and $0.2 million in wholesale and international sales respectively. This compared to Q1 2020 net revenue of $25.2 million, which was largely comprised of $12.9 million in sales to adult-use recreational market, $2.7 million in sales to the medical market, and $9.2 million and $0.3 million in wholesale and international sales respectively.
As Greg mentioned, Q2 cash and all-in cost of cultivation were $0.53 and $0.75 per gram respectively and decreased from $0.51 and $0.87 per gram in Q1 2020, as more economies of scale were realized with increased cultivation capacity and as the yield per plant increased from 150 grams in Q1 to 155 grams in Q2 2020.
Q2 2020 cost of sales of $15.8 million compared to Q2 2019 cost of sales of $10.8 million. Higher cost of sales in Q2 2020 was primarily due to more staffing for increased cultivation and post-harvest capacity without the benefit of full economies of scale. Inventory provisions and write-offs primarily related to legacy packaging, and thirdly, higher cost associated with the launch of Rec 2.0 products as a company scales and optimizes production and packaging.
Q2 gross margin before fair value changes to biological assets and inventories sold was $7.4 million or 32% in net revenue. As we have said in the past, we’ve focused on gross margin before fair value change to biological assets and inventories. As one of the key measures to assume underlying performance and generally find this to be what the investment community tends to track.
Q2 IFRS gross margin was $11.3 million largely due to a net non-cash fair value gain on biological assets and inventories sold of $3.9 million versus a net non-cash fair value loss of $8.1 million in Q2 2019.
Q2 2020 SG&A, excluding share-based compensation was $14 million compared to $5.7 million in Q2 2019 as the company increased staffing and sales and marketing efforts including a significant brand marketing campaign and higher cost related to the launch of our new Rec 2.0 products.
We reported negative adjusted EBITDA of $1.1 million in Q2 versus positive adjusted EBITDA in Q1 due to the combination of higher cost of sales and higher SG&A as just described. Our Q2 net loss was $6.8 million or $0.041 per share on a diluted basis, compared to our Q2 2019 net loss of $6.4 million, or $0.049 per share, largely due to higher SG&A in Q2 2020.
I will now turn the call back to Greg for closing remarks.
Gregory Engel
Thanks, Derrick. To wrap up our formal remarks, I’d like to summarize why we believe we’re well positioned during this temporary period and beyond.
First of all, we believe we have developed brand loyalty and there is strong demand for our Rec 2.0 products, and we are rolling out new higher THC popular strains across the country. Secondly, we have forged excellent partnerships and have strong relationships with suppliers, regulators and our provincial and private retail customers. Third, we maintain a lean cost-structure and a relentless focus on proven discretionary spending. Fourth, we have further strengthened our executive team with the addition of another experienced finance executive and a Chief Strategy Officer who is intimately familiar with the business. Fifth, we can supplement reduced production capacity with existing inventory as well as leverage our investments in automation to meet demand in the short-term.
And lastly, we remain committed to focusing on disciplined capital allocation to generate sustainable value for our shareholders. I’d like to expressly thank the regulators as well as government authorities for including cannabis in stimulus packages and in subsidies in this challenging period.
I’d also like to thank our customers, patients and investors for their support, and last but not least, the entire Organigram team and our Board of Directors.
With that concludes my formal remarks. Operator, if you could go ahead and open up the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Tamy Chen from BMO Capital Markets. Your line is open.
Tamy Chen
Yeah, thanks. First question is, just wanted to understand, is it at this point your intention to re-hire back the temporarily laid-off workers after the COVID-19 developments go past us or do you intend to wait and see how quickly, for example, stores open in Ontario before bringing back those workers?
Gregory Engel
Yeah, it’s a good – it’s Greg here. Tamy, that’s a good question. So certainly the intent and the way we structured this is a temporary layoff. So this was structured in that manner that we can bring and plan to bring employees back. But I think the timeframe and the cadence of how we bring employees back is going to be dependent on kind of the growth of the market back into place. So it is our intention to bring them back and that’s why we’ve structured it this way.
Tamy Chen
Got it. Okay. Thanks. And my second question is, so I noticed your Rec 1.0 sales were flat to slightly down sequentially. But I believe in Ontario, the province has, I think, almost doubled their store-count over this sort of period into March. So I would have thought you would have experienced some shelf filling during this period and increased your Rec 1.0 sales sequentially. So, just any color there would be helpful. Thank you.
Gregory Engel
Sure. In Q2, we were still drawing down on inventory that we had placed in Ontario in Q1 and as well as a move to kind of the more high-velocity strains, as we said, Limelight and El Dorado, and ensuring we moved inventory there. So it was a bit of a combination of both. So we did have sufficient inventory. So certainly for the majority of Q2, Ontario revenue was still taking through inventory from Q1.
Tamy Chen
Got it. Thank you.
Operator
Our next question comes from the line of Andrew Partheniou from Stifel GMP. Your line is open.
Andrew Partheniou
Hi, thanks for taking my questions. I’m just curious, how is your cost profile now changed with the workforce reduction and especially also the licensing of Phase 5?
Gregory Engel
Yeah, so – I mean, I’ll start off and maybe ask Derrick to add some color. I mean, so we had a workforce reduction. I think we’re still assessing our capabilities and exploring what impact that’s going to have. As we’ve indicated both in our press release related to the temporary layoffs as well as the current information in this press release is we are moving as much as possible to automated lines and system. And so, to make a comment, I think we can’t give guidance yet, in terms of what impact that will have, but it is a shift to as much automated systems and higher SKU, higher large format SKUs as well where possible on flower.
Derrick West
Yeah. Derrick here. I would just add that our largest cost is our labor cost. And so we have – we will achieve, obviously, the savings from the layoffs in terms of our labor costs. And obviously, that will reduce our total production amounts, but we do believe that we’re going to get some balance as it relates to the SKUs that we will be focusing on the product launch and we’re focusing on – but again, we’re not in a position at this time to provide any future guidance on exact amount.
Andrew Partheniou
Okay. Thanks. And well, are you able to provide maybe some kind of a distribution between savings on SG&A versus COGS?
Gregory Engel
Well, I would not at this point, I apologize. So we just – again, we’re still working through kind of – we’ve only now been running 2 weeks with kind of the reduced structures, so we’re not able to give guidance at this point.
Andrew Partheniou
Okay, thanks.
Operator
Our next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.
Rupesh Parikh
Good morning. Thanks for taking my questions. So I wanted to ask a little bit more about gross margins. So as we look at, to the balance of the year, how should we think, how should we be thinking about the gross margin? Should we expect sequential improvement versus what we saw in Q2?
Gregory Engel
Maybe I’ll turn that that over to Derrick to answer. Yeah.
Derrick West
Yeah. Just – I don’t want to comment too much about future margins. But I can comment that for the margin that we have, the adjusted gross margin of 32%, that was after we did allowances for packaging material on certain product lines. And the impact of that was $1.3 million or 5.5%, so while there’s always going to be these types of adjustments, it would probably be a larger-than-normal adjustment to happen in one quarter.
And without that adjustment that margin would have been on a pro forma basis 37.5% and – but I’m not going to, at this point, provide any kind of future guidance in terms of our margins.
Rupesh Parikh
Great. And then, I guess, one follow-up question, just on pricing, so I know there are some pricing pressures within the marketplace right now. Just wanted more color in terms of what you guys are seeing, if there is any forward commentary in terms of how you’re thinking about the pricing pressures going forward?
Gregory Engel
Yeah, maybe so – thanks, Rupesh. It’s Greg here once again. So I think where we’ve seen, I mean, we’ve still maintained an average selling price of the product that we’re selling into the rec market above $5. And I think we are seeing pricing pressures and we have always made the assumption that the pricing pressures would come because of large SKUs that were coming into market and we have seen that.
And I think it’s important to understand that some of these competitions is being driven out of short-term needs from companies who have had to move product. And when you look at the price they’re selling at versus what their production costs are, I’m not sure they’re actually even making money on some of these products, so not a sustainable pricing strategy beyond the near-term.
I think where we have an advantage, we are looking at larger SKU formats that are our average cost cultivation and all-in costs are quite low compared to many of our competitors. So we’ve got the best of both worlds. I guess, when you look at it, we’re producing high-quality product as well as at a very low cost. So I think that’s where we’re seeing most of the pricing pressure, it’s really on the large SKU formats on the lower end.
Rupesh Parikh
Great. Thank you.
Operator
Our next question comes from the line of Graeme Kindler from Eight Capital. Your line is open.
Graeme Kindler
Hi, good morning, and thank you for taking my questions here. I was wondering if you could comment on what the ordering patterns from the provinces are looking like, given the current environment that we’re in. I know historically, we went from larger ordering patterns to smaller more frequent orders. Now, that we’re in a situation where it looks like there is spikes in demand followed by a commensurate sort of decline in demand. Just wondering if the ordering pattern behavior from the provinces has changed at all and then how you’re responding to that. Thanks.
Gregory Engel
Yeah, I think, certainly we’ve saw, as kind of stay-at-home orders started to come into place, a pretty significant shift in [corn-up] [ph] demand, and provincial retailers and private retailers were looking to stock up in advance at or with the demand they were seeing.
I think one of the challenges that we have seen for those that operate large warehouses like Ontario and Alberta is that they have staffing reductions within those facilities as well. So even though they wanted significant amounts of products, they ended up having to take them over a more pushed out period of time.
So while the demand – there was a sudden kind of increase in demand and we still see very strong online sales and we are still seeing strong cannabis sales, it has been pushed out even more. So the demand was there, but they’re getting the shipments in was kind of spaced out a little more. So in many ways it’s actually easier to manage for companies like ourselves and others to get sequential product in. We continue to see strong demand, especially for, as I commented, our leading strains and our Rec 2.0 products.
Graeme Kindler
Okay. Thank you. And as a follow-up, with respect to the wholesale market, I was wondering if there’s been any increase in demand there, given – I would assume there is a number of operators who are working on a reduced staffing level, which could impact our harvest. And given – looking at some of the breakdown of the inventory value that’s disclosed on balance sheet there, is there potential for any more opportunistic sales moving forward on the wholesale channel?
Gregory Engel
So I guess the comment I would give on that, Graeme, as we’ve had additional inbounds. We’ve expanded who we sell to. So I mean, we do have one additional company that we have been selling wholesale to than previous quarter, and we’ve had additional inbounds as well. So the answer is yes, there’s demand there. And I think again, having that inventory and having quality inventory, which we’ve commented in past, is a big differentiator. So – but I can’t necessarily – until you completed an agreement until you made a sale, there’s inbound interest, but I can’t say more than that.
Graeme Kindler
Okay. I appreciate the color. Thank you.
Operator
Our next question comes from the line of Chris Carey from Bank of America. Your line is open.
Christopher Carey
Hi, good morning.
Gregory Engel
Hi, Chris.
Christopher Carey
So I guess maybe just one question on the cash flow then I have a follow-up. But, I guess, this quarter cash burn represents about a quarter of the cash on hand. And then, I guess, when you add the term loan and the credit facility, which is another $55 million, you have about 2 quarters of liquidity relative to cash burn this quarter. So I wonder, if you can help me just understand the cadence of cash flow expectations from here. And I appreciate that CapEx is likely to step down perhaps you can provide some visibility there and maybe how operating cash flow – so just big picture there, how this cash used versus cash sourced is likely to move over the next several quarters?
Derrick West
Yeah. Derrick here…
Gregory Engel
Yeah, go ahead, Derrick. I was going to refer to you, please.
Derrick West
Yeah. For the first 6 months a large amount of the reduction in our cash position has that related to the CapEx spend, yes, there is a working capital or cash from operations efficiency of $25 million to the end of February as a consequence of working capital build that did occur, mostly as a consequence of inventory and bio asset build. But I would indicate that as at the end of the second quarter, our cash was at $41 million. We are not required to continue on an aggressive program.
To complete 4C, we’re talking about $2 million more that could be spent over the next period, and $11 million as it relates to equipment for edible extraction, but that’s not equipment that we’d be looking to put in place right away [Technical Difficulty] we would be able to bring the professionals into assist to load up the equipment and make it certified, because of the COVID-19 impact and social distancing.
So we have a modest spend going forward of approximately $13 million and that $13 mil spend is going to be done, and it’s going to be slowed down dramatically from what we spent in the past. So when you consider that and the fact that we have $41 million in cash at the end of the second quarter, that we do have $25 million remaining on the term loan for the credit facility, and while there is no guarantee that will be successful in amending the credit facility, we do believe that we will be successful, we just can’t guarantee at this time. So the combination of that does provide sufficient liquidity and cash that will take us past – that will take us into the future. And we always have – whenever the company has been in a situation where it’s wanted to access other source of the capital, it’s always been so when it’s required, but we don’t believe it’s required at this time.
Gregory Engel
Maybe just to clarify, Derrick, you were referring to what we had remaining on the long-term debt. So we have $25 million as a revolver, and we have $30 million on the debt itself remaining. So…
Christopher Carey
Right. Okay. Okay. All right. That’s helpful. And then I guess as the follow-up, it just feels – and I think, Tamy mentioned it as well, it just feels like the adult-use business after kind of storming out of the gates last year and I fully appreciate that that was a pipeline fill. But it does feel like, it just has struggled to really regain that position to the market that it had before. And I appreciate the comments on provinces like Ontario are starting to work down the inventory that they have. But it doesn’t sound to me from the answer to the prior question that you are at a point where your inventory levels in the channel have now reached kind of a clean level and that you can start to refill at an area where maybe you start to retake some market share.
And so I wonder, just a high-level question, if you think it’s an unfair assessment that the business has stalled a little bit and maybe how you might see things starting to develop over the next couple of quarters? And then if I could sneak one in here. I mean, do you think that the industry can even grow in your upcoming quarter with so many stores going click and collect? Or is the click and collect and online demand such that the category, the industry at large, it can still grow? So – Thanks so much, fellows.
Gregory Engel
Yeah. So maybe I’ll take part of that question, Chris. And then, I’ll turn things over to Paolo. So I think, first of all to answer the second part of your question, I mean, there is significant – the majority of stores across the country with the – and if you include Ontario are still open. PI only has 4 stores. They’ve closed their stores. And they’re doing click and collect – sorry, online. And then in Ontario, they made a decision to close the stores here you’re aware of. And then within a couple of days, reverted back to click and collect and local, and they aren’t going to have local orders. So the demand is there. And I think the comment I made earlier, which is interesting, is that, again, consumers and the population in general has limited opportunities for spend.
We’ve seen and we look at – I mentioned some of the survey data from earlier – we’ve seen in the past, for example, if you go back, there was a major ice storm in Canada, back in the late 90s on the East Coast. And in Quebec, alcohol sales for the month of February where the power was out for 3 weeks was the highest it had been for the last couple of years at that point. So with limited availability for spending kind of there entertainment dollars, I think certainly demand for cannabis continues to be strong.
Back to your first question, I think, when you look at, I think, there was a lot of excitement to Rec 2.0 products. And that has brought an expanded consumer base into the legal market. I think one of the challenges has still done on the 2.0 products, is product availability as we saw 1.0 launched. And secondly, is that the provinces and some cases didn’t expect the demand to be as high as possible. So they were – they wanted to keep their inventory level down and then make decisions on reorders for one of the large provinces for example, we had reorders happened on our Trailblazer vape pens before that even hit the store shelves, because the fill demand from the stores was very, very high. So I think, there has been a lot of excitement and brought new consumers in through the 2.0 products. And maybe I’ll let Paolo add a little bit. I know, he’s – this is one of the areas he focuses on.
Paolo de Luca
Hey, can you guys hear me, okay?
Gregory Engel
Yeah.
Paolo de Luca
Hey, Chris. So – look this quarter that we’re in is obviously kind of a once in a lifetime quarter in terms of the uncertainty around the COVID. And we’re just learning right now what’s happened and in terms of consumer behavior both kind of in the pantry loading that we saw last month when people were worried that the stores would close down, and subsequently – that hasn’t been the case for the most part as Greg alluded to. And then we do have a little bit of a different world right now where you have click and collect in the province, for example, like Ontario online ordering.
So we’re monitoring that we’re trying to see what’s happening there, but we do see some positive anecdotes, for example, people are actually shifting to the legal market now, because they don’t want to interact with their black market dealer and they don’t want to meet the person physically. They don’t want to exchange cash, which is a concern for people in terms of the virus spreading. So that’s all to be determine, and we’re going to obviously respond in whichever way we think is best take advance of the opportunity that may present itself as a result of that. But in terms of just the logistics of the entire market, we are dependent, obviously, on the consumer behavior. We’re dependent on the ability of the provinces to have the logistics in place and not have disruptions there in terms of their ability to stock at the distribution centers and so forth.
Our view is that this quarter is difficult to forecast. There could be opportunities for us to do well in certain products and take advantage of opportunities, but we just don’t know, it’s a very unknown quarter. Where we are focused is longer term on our core strengths, which is to become a leader in the chocolate segment and to become a leader obviously for some of our new streams like Limelight and El Dorado, which we mentioned in the past. I think one of the things to look at in the way that the rec market has developed over the last, call it, 6 to 9 months. We’ve seen some of our competitors adopt pretty aggressive pricing strategies and move to larger SKU format. There is nothing proprietary in what they’ve done in those segments. And in fact, we are actually in the best position to take advantage of some of those opportunities. So if we need to toggle our SKU mix and our product offering to participate in that market we can do so.
And we’re going to do so cautiously and with a lot of thought. But right now, we really are focused this quarter on our best performing products and to use our reduced workforce in a matter, which can drive the most revenue for the lease amount of cost.
Christopher Carey
Okay. Thanks so much.
Operator
Our next question comes from the line of John Zamparo from CIBC. Your line is open.
John Zamparo
Thanks. Good morning. I want to go back to the questions about sell-through. Greg, maybe you can talk about your market share in the quarter versus the prior quarter, particularly in larger provinces. Was there any notable changes among your different categories and how about your 2.0 products versus 1.0?
Gregory Engel
So, I guess, we don’t typically share market share information in part, because some of the agreements with the provinces prohibit you from doing that. So some of the data you see at there is actually a bit of a breach of some of the agreements, I mean, there is public information on a few of them, and I know the analysts are kind of accessing – or media’s accessing some to publish. But I think, 2 comments I would make is I think in – certainly with our 2.0 products launch, our vape portfolio starting with Trailblazer and then adding in the Feather pen has had a strong position. There is one company certainly that has with the price strategy on vapes, and they have a very – they would – in Ontario, for example, they would be the leader.
And one of the other key comments I would make on vapes is, we have seen challenges from other companies right, with leakage and with product returns, and that’s not an issue we’ve faced. And I think, it’s important to contemplate that we’ve really focused on very high quality suppliers. We’ve vetted our suppliers. We know that there’s not performance issues or leakage issues or heavy metal leaching, and those are critical for us.
On our chocolates, still early days. We only shipped at the end of the quarter, our first couple of shipments, and in this quarter, we’ve been getting significantly more product out. But I mean, there were provinces like Ontario that went a few weeks without our chocolates available. So demand has been there. And I think, we’re seeing a shift as we alluded to, and we’ve allowed to our production capability and capacity – we’ve really shifted our production to our core strains. And we – it was the advantages of being a leader last year in kind of in the first couple of quarters, as we got information about what those core strains are.
So our Rio Bravo and our La Strada are strong strains for us. But then subsequently we did these onetime offers with Limelight and El Dorado, and we’ve had really strong response them. So we’ve got additional strains that we’re going to do one-time offer with as well that are high THC, we believe will be somewhat unique in the market. And again, the ability to shift again to those products, I think, it’s going to continue to provide assistance for us.
John Zamparo
Okay. That’s helpful. Thanks. Particularly on the LTOs, it seems like that’s kind of untapped part of this market. My follow-up is going back to the balance sheet and cash burn. What do you expect in terms of investments in working capital over the next couple of quarters? And generally, maybe we’re fast forwarding to next 12 months. What do you view as a normalized maintenance CapEx number?
Gregory Engel
Yeah. First – I mean, it’s important to kind of maybe answer the first part of it like from a cash flow perspective, I mean, we ended the quarter with $41 million. As Derrick outlined earlier, we have limited CapEx mainly to spend and the $2 million on 4C to get it up to fully functional. Not all of the growers’ operating, but it likes occupying the space. And then $11 million on Phase 5, which, as noted, the spend on that will be delayed because of some of the OEMs and working with them to get kind of equipment certified to be operating in.
So we’ve got really at the end of our CapEx spend, which is one of the most important things. So I think it’s – we feel, we have a strong balance sheet at this point in the market relative to our peers personally with having $3 million of undrawn debt capacity with BMO and the syndicate, I mean, there’s still no guarantee, we can drive that $30 million, but we’re certainly working closely with them to be able to do that. Derrick, I don’t know if you want to add any commentary?
Derrick West
Yeah, thanks, Greg. I just want to add just specifically as it relates to the working capital, even in our receivables we have government HST refunds from the prior CapEx spend that we’ve already done that’s been realized during the third quarter. And also with working capital, our inventory and bio assets are already fairly significant on our balance sheet, and we would not – where we have done the reduction to our workforce and we are emphasizing the focus on moving the inventory that’s there and producing near-term saleable product, we are not anticipating there to be a cash strain as it relates to further investment into our working capital, just as a general comment based upon the reductions to the staff and production levels combined with the – some of the near-term realization on the working capital.
Gregory Engel
And John, maybe just to add to the earlier question, part of your question about maintenance CapEx. So we don’t have a general rule of thumb, because this is primarily a new facility that’s been really built over the last couple of years. We expect it to be low-single-digit percentages against the total CapEx, right. The majority of the equipment is new and other than kind of standard maintenance, I mean, we’re not in replacement mode, I think, even on our irrigation systems in the last 2 years, we’ve had to replace 1 pump, and we have redundancies as ever. So again, I think, just based on the age of it, you typically might see a maintenance CapEx that’s in the 4% to 5%, but we significantly less that that based on what we’re seeing today even based on the age of the equipment.
One thing I didn’t comment on earlier, and I think, was in the kind of prepared remarks that we made. But we have not tapped into any government opportunities. And I’d say one of the things that – now that with weight subsidies and that being offered, and the cannabis industry is included in that, and that was a big win for our association. And I know Cameron Bishop, who is our VP of Government Relations worked really closely with government on that. I think there’s also an opportunity for us and for the cannabis industry both federally and even provincially, to look for some assistance during this period if needed, and I think that’s going to be taken into consideration as well. I mean, there are significant funds available, and I think there’s definitely an opportunity to access some of those.
John Zamparo
Okay. Thank you very much.
Operator
Our next question comes from the line of Matt Bottomley from Canaccord Genuity. Your line is open.
Matthew Bottomley
Yeah. Good morning, everyone. Just wondering if you could provide just a little more color on the nature of the fixed charge covenant. And is the plan right now, like, just to negotiate with the lender? Or is there anything that’s remedial in the interim that can be done independently?
Derrick West
Yeah, Derrick, here. It’s a standard cash flow covenant in the sense that you need a certain amount of EBITDA to cover the future debt service on the term loan, on the $85 million. And we did not meet our Q2 covenant, just looking at the trailing 12 months as a consequence of the EBITDA metric, not achieving the standard that had been set. There were reasons for that as we’ve already outlined in our presentation of the information during the call.
I would indicate that we’ve already been – have been in discussions with the lender. And since it came to our attention that was going to be an issue for our Q2 filing, and they very quickly moved forward and obtained the approval of all the lenders in the syndicate to provide the covenant waiver and for us in a very timely way and that was part of our disclosures.
Going forward, we’re still midway through on these negotiations. They provided the forgiveness, which is until we file our Q3 – until our Q3 balance sheet, is until the May 31st period. And as mentioned, we’re in discussions with them now. And while I cannot provide any guarantee, based on our working assumption, we don’t believe there should be an issue, based on those discussions we had with them today.
Matthew Bottomley
Great. That’s helpful. And there’s been a lot of good color on this call as well with respect to some of the assumptions that inputs here on various parts of your income statement. But the follow-up I had is more on the SG&A part. So I know you touched on this briefly already. But just with respect to pairing back with only your operational planting and et cetera, with your existing facilities, but also with some of the pair backs as it relates to COVID, what’s the best way for us to look at that SG&A line? Obviously, there is a ramp up this quarter in relation to the launch of 2.0 and all the things you’ve been doing with your vape pens, et cetera.
Maybe in the next 6 months, what’s the best way to look at this from a volatility standpoint, given that, it seems your existing operations now are right around that breakeven on adjusted EBITDA, so just looking for what might make it plus or minus on that breakeven in the next couple of quarters with respect to your SG&A plan.
Gregory Engel
Yeah. I think, I guess, I alluded to this earlier, Matt, is that it’s still early and challenging to give a prediction. I mean, yes, we’ve had a reduction in our workforce and certainly there are savings associated with that. It does impact our operational efficiency, which is why we moved to the most automated systems and lines, and focused on those as a way to best utilize the staff and personnel we have.
And I think that is a way for us to optimize both the inventory we already have in existence and then going forward continue to get out products that give us really the greatest return for the amount of labor hours that we have available. And that’s how we’re mapping it. But as I said earlier, we’re only a couple of weeks into this adaptive workforce.
I think the one thing we are planning, again is – because again, as I commented, we have flexibility based on our production cost, is to bring a larger SKU product into the marketplace. And that’s been in the plan for a significant amount of time. It would have been on the market already, have we not hit some of the challenges around COVID-19. But – so I guess, I’m not fully answering your question here, because it’s very challenging for us to predict. I mean, that – in many ways, we’ve taken savings and we’ve also looked at where our spends are and relative to, for example, marketing programs. And we’re focusing very much more on kind of digital programs as online increases and less on some of the other programs we’ve done historically.
So it wasn’t just temporary layoffs for health and safety. We also in conjunction with that, looked at our production output and what we could actually get up to market, although we do have significant inventory, so.
Matthew Bottomley
Great. Very helpful. Thank you.
Operator
And our next question comes from the line of Doug Miehm from RBC Capital Markets. Your line is open.
Douglas Miehm
Yeah, good morning. I just wanted to follow-up, it’s…
Gregory Engel
Good morning.
Douglas Miehm
Yeah, hi – with respect to something you just said a minute or two ago. And that is there is no guarantee that we can draw down on that $30 million, did I hear that correctly?
Derrick West
Well, there is no guarantee, because it’s a future effect, I’m just stating a factual comment. We are in discussions with them. However, we have had very positive discussions with our lender group as led by BMO. And they responded very quickly when we – to provide the covenant waiver letter when we had asked for it. And they have indicated the willingness to hear from us on what the renegotiated credit facility would look like.
And clearly, as we do this renegotiation, we’re going to bear in mind what we believe the EBITDA would be on a go-forward basis, based upon the COVID-19 impact to our business, to the industry. And that will be factored in, but I’m just indicating the obvious, that until we’ve done the renegotiation I cannot guarantee it. But we are – it’s reasonable for us to assume that there is not going to be an issue, based on all the indications they provided to us.
Douglas Miehm
Okay, perfect. And then, when you think about the amount of product that are harvested in this latest quarter at almost 14,000 kilos. I believe you sold about 4,000 of that, just over 4,000. Is the remainder going for extraction? And maybe you could tell us what your extraction, not capabilities, but the deals you have with your partners, are those fixed in stone? Do you have to continue to extract a large part of what you’re harvesting? And what could be the impact of the cost there?
Gregory Engel
Yeah, so, it’s a good question, Doug. Greg here. So the – so our agreement with Valens, who is our contract extraction facility, doesn’t have any minimums or requirements. So we have used them and have plans to continue to use them in the future for hemp. But at some point in the future, we will move all of our extraction in house when the Phase 5 extraction is fully operational and certified.
For the time being, we’ve got months worth of – many months’ worth of extract concentrate built up. So we are simply just storing the extractable material before we – and we don’t need to send it to Valens, because it certainly will be more cost effective to extract it in house. But – so to answer the question, I can’t give you an exact number on the inventory, that we had available, be on the quarter, in terms of what will go.
But I mean, part of our – what supported our decision making around doing temporary lay-offs for health and safety reasons was we knew we had sufficient dried flower inventory that we could package and get out into the market and we could reduce kind of our cultivation footprint temporarily, because we had that inventory. And a lot of that is in high THC and high-volume demand strains, Limelights, and Rio Bravo, and El Dorado, and La Strada.
So we’re in a good position in terms of converting a significant portion or parts of that inventory into saleable product.
Douglas Miehm
Okay, perfect. Thanks very much.
Operator
And we have time for one more question today from the line of David Kideckel from AltaCorp Capital. Please limit to one question. Your line is open.
David Kideckel
Hi, good morning, everybody. Congratulations on the quarter and thanks for taking my question. I just wanted to circle back to one of the points Graeme made regarding wholesale revenue. Just not even necessarily specific to Organigram, but the industry as a whole, I’m just wondering, given your remarks, Greg, about consumer loyalty and branding and et cetera, and then how they are loyal to Organigram to your products in particular, what are your thoughts about different LPs selling LPs, through the wholesale revenue metric? And if a consumer is actually purchasing a product from Organigram, but it’s actually coming from a different LP or vice versa, how relevant do you think that is with general branding and consumer loyalty across the board?
Gregory Engel
Yeah. Now, thanks for the question, David. So I think when we look back and we have not historically before Q1 sold product wholesale. And we looked at it very opportunistically. We started to get information back in Q2 of last year regarding which of our strains were in higher demand and which ones weren’t. But as you know, it takes many, many months to change our production cycle.
So we ended up still having production of some of the lower selling SKUs, right, in terms of those flowers and what was available. So we have then getting inbounds from companies that were not satisfied with the product that was available for wholesale out in the market. So we made a decision to take those products, sell them to another LP.
And as to couple of comments that were made earlier about – that Matt made as well about kind of onetime offers, we do see that still that – those consumers the same way that people – if you’re a wine drinker, if you’re a beer drinker, there is your kind of wines that you buy consistently, but everybody will try different wines.
And I think there in the cannabis space, there is a lot of kind of interest and demand in onetime or what’s new. So it’s a combination of brand loyalty, but also testing what’s new. So there have been some opportunities where companies can take product that was not in high demand under our brand. They’ve taken it and put it out and it comes out as a new product under their brand. And I think that’s where some of those products been used. And that is why as I said earlier, our plan to kind of introduce new genetics, cycles and through under onetime offers to see what the demand and response is, and if it’s really strong like on our Limelight, to increase it into, move it into a core offering.
So that’s how wholesale really has been structured and governed, is that it’s going to other LPs and they’re putting their own brand, but it goes in as kind of a bit of a new product, so.
Operator
And, ladies and gentlemen, this will conclude today’s call. We thank you for your participation. You may now disconnect.
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