Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the OrganiGram Holdings Second Quarter 2023 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. We ask that you please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. Thank you. Max Schwartz, you may begin your conference.
Good morning, thank you for joining us today. As a reminder, this conference call is being recorded and a replay will be available on OrganiGram's website. Listeners should be aware that today's call will include estimates and other forward-looking information from which the company's actual results could differ. Please review the cautionary language in today's press release on various factors, assumptions, and risks that could cause our actual results to differ. Further reference will be made to certain non-IFRS measures during this call, including adjusted EBITDA, free cash flow, and adjusted gross margin, among others. These measures do not have any standardized meaning under IFRS and are intended to provide additional information, and as such, should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today's earnings report for more information about these measures. Listeners should also be aware that the company relies on reputable third-party providers when making certain statements relating to market share data. Unless otherwise indicated, all references to market data are sourced from Hifyre in combination with data from WeedCrawler, provincial boards, retailers, and our internal sales figures. I will now introduce Beena Goldenberg, Chief Executive Officer of OrganiGram. Please go ahead, Ms. Goldenberg.
Thank you. Good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today's call, we'll discuss the results for the three months ended February 28th, 2023, and a general business update. We will open the call for questions. We continued to generate solid financial results in the second quarter of fiscal 2023. We achieved a 24% year-over-year net revenue increase. The quarter reflected the typical seasonality we have seen in previous years, where sales into provincial boards decline from December through March. We delivered record-adjusted gross margin and our 5th consecutive quarter of positive adjusted EBITDA while maintaining our number three market position among Canadian LPs. In Q2, we were number one in the milled flower segment, number three in gummies overall, number one in pure CBD gummies, and have had the number one hash brand nationally.
I'd like to point out that the wins we've had in the hash segment are a great illustration of our core strength. We acquired Laurentian Organic in December 2021. We leveraged our in-house sales and marketing team to achieve national distribution for Tremblant hash. We expanded our presence in the segment by introducing Wô Lá and HOLY MOUNTAIN pressed hash. Additionally, we innovated in the category with the launch of SHRED X Rip-Strip Hash, the first product of its kind in Canada. To sum it up, we identified the right acquisition, applied our CPG expertise to gain share in a new segment, and introduced a new product that created consumer excitement. Let's talk about SHRED. It is a well-recognized cannabis brand in Canada with SKUs in the most popular market segments.
SHRED milled flower holds the number one position in its category by a wide margin, and with three of those SKUs, Tropic Thunder, Funk Master, and Gnarberry, have been the top-selling SKUs nationally for the six months ended February 28th, 2023. SHRED products are now available in almost 90% of retail stores in the country, and the brand has generated CAD 190 million in retail sales in the past 12 months. This is a brand platform that continues to deliver success. Looking at regional board data, we have the leading market share in the Maritime, and we're number one in milled flower, gummies, and hash. In Ontario, we were the number two LP. We were number one in milled flower and capsules, number one in hash, number three in gummies.
We are also very pleased with our growth in Quebec, where we have held a strong number three position. This is partly from the addition of Laurentian's products but also due to significantly increased sales of our overall portfolio. Based on the data from WeedCrawler, we had the number one hash SKU, and we're number one in milled flower. Our strong position in the market and our continued success comes from our focus on creating innovative products that excite consumers as their tastes evolve. In Q2, we introduced 18 new SKUs, including eight new HOLY MOUNTAIN SKUs. As I mentioned, we launched SHRED X Rip-Strip Hash at the end of Q2, and the response has been extremely strong. It is an exciting new hash format that addresses many pain points consumers report when using hash products and opens the hash segment to new consumers.
The hash is formatted in 10 pre-cut strips that can be used to make your own infused pre-roll and offered in Tropic Thunder and Blueberry Blaster flavor profiles. Our patent-pending Edison JOLTS continue to lead in the ingestible extract category with 85% growth in sales compared to Q2 of fiscal 2022. On March 13th, we announced that Health Canada determined that JOLTS lozenges in the 100 mg THC per package format were improperly classified as an extract rather than an edible. Health Canada has allowed us to continue to sell and distribute our inventory of JOLTS until May 31st. OrganiGram launched JOLTS in 2021 following significant research, development, and regulatory work. We remain of the view that the patent-pending JOLTS are properly classified as cannabis extracts and compliant with cannabis regulations. We have filed an application with the Federal Court of Canada seeking judicial review of Health Canada's determination.
As court proceedings can take some time, we intend to file a motion for a stay seeking to set aside the decision in the interim. In terms of production at Moncton, we are achieving scale benefits from the completion of the 4C expansion. We continue to implement environmental and technology improvements designed to increase both yield and cultivar quality. Also, new cultivars, including several developed by our plant science team, are being screened with a view to be added to our portfolio. Finally, CO2 extraction has been optimized to generate higher yields. In Winnipeg, we continue to increase our capacity to meet the high consumer demand for Monjour. As of February 2023, the facility produced an average of 3.1 million gummies per month. We also continue to see solid productivity on the packaging line, with 35,000 pouches-40,000 pouches per day being produced.
Construction is complete at Lac-Supérieur, and while we expect the greenhouse to come online in the summer, we have moved our hash production into the new facility. In February, we commissioned an ultrasonic blade with a capacity of 150 units per minute and automatic labeling equipment to help us meet the demand for our new SHRED X Rip-Strip Hash. The vape category is an area of focus for our product development collaboration with British American Tobacco. This includes analysis of vape volume, particle size, and pressure. This will help us assess the quality of different devices. In parallel with this, we are conducting a quantitative sensory analysis with our in-house expert trained panel of over 200 individuals. This research will serve as a foundation for future development activities, including consumer safety, product quality, and performance.
Further, these insights are expected to enable OrganiGram to capitalize on the new vapor heating technology garnered from our $4 million U.S. investment in Greentank Technologies, a leader in vape hardware and technology. This investment, which took place after quarter end, is reflective of our commitment to grow in the vape category. We believe Greentank's technology is the first true innovation in vaporization in almost a decade. It solves many of the clogging and performance issues associated with vapes and may also increase the perceived potency per puff. We have obtained exclusivity for this new technology in Canada for 18 months after it is introduced to the Ontario market and expect to launch this improved 510 format product by the end of our fiscal year. Moving on to international sales.
In Q2, we delivered a record CAD 10.7 million of dried flower to Israel and Australia. For the first six months of fiscal 2023, our international sales have reached CAD 16.6 million, exceeding the CAD 15.4 million of sales in the full year of fiscal 2022. The significant international sales in the quarter reflected the introduction of several new SKUs in Australia and Israel. Going forward, we expect international revenue to normalize to the levels seen in the past two quarters. Before I turn the presentation over to Derrick, I'd like to comment on the continued pricing pressure we are seeing in the market. Many producers have discussed not wanting to participate in a race to the bottom, we are seeing the opposite in the market.
Large format 28 g offerings with a sub CAD 100 retail price point increased by almost 300% over the past six months. Large format pricing in some markets has reached the point that considering the cost of production and the excise tax burden, the products are being sold at a loss. This is not sustainable and hurts the cannabis industry. While our low-cost structure allows us to compete at these reduced prices, we have not matched the aggressiveness of our competitors and have seen some market share erosion in our large format flower. At OrganiGram, we are focused on delivering value to all stakeholders. We are confident that our branding and marketing expertise, proven track record of innovation and operational efficiency will provide long-term success and leadership in the cannabis industry.
This is supported by our strong balance sheet, which allows us to continue to evaluate investment opportunities that increase our competitive advantage. Over to you, Derrick.
Thanks, Beena. As Beena mentioned, in the second quarter of fiscal 2023, we benefited from the increased efficiency and scale we created in fiscal 2022 and Q1 of 2023, supported by strong international sales and product introductions. In fiscal Q2, gross revenue increased 20%, while net revenue increased 24% compared to Q2 fiscal 2022. The increase over the previous year was primarily due to increased adult use recreational and international sales. As Beena mentioned, price compression across the market did have an impact in the quarter. The cost of sales in Q2 fiscal 2023 was CAD 29.6 million, compared to CAD 24.9 million in Q2 of the prior year, an increase of 19%, which is 5% lower than the growth to net revenues.
The increase in the cost of sales on a year-over-year basis was due to higher recreational and international sales volumes for the same period. A CAD 3.5 million net realizable value provision from saleable inventory is included in the Q2 2023 cost of sales figures. We harvested approximately 21,000 kg of flower during Q2 fiscal 2023, compared to about 10,000 kg in Q2 fiscal 2022, which represents an increase of 110%. In Q2, the harvest continued to benefit from the increased annual capacity at the Moncton growing facility. We expect similar harvest levels to continue through fiscal 2023, which positions us well to meet Canadian and international sales demand. On an adjusted basis, Q2 gross margin was CAD 13.4 million or 34% of net revenue over the CAD 8.3 million or 26% in Q2 fiscal 2022.
Despite price compression in the market, this is our highest adjusted gross margin rate in the past three years. The significant improvement in adjusted gross margin was primarily due to the higher overall sales volumes, combined with a lower cost of production and increased international shipments. SG&A, excluding non-cash share-based compensation, increased to CAD 16.1 million in Q2 2023 from CAD 14 million in Q2 2022. While there was a small increase to the total dollar spend, as a percentage of net revenue, SGA expenses decreased to 41% from 44% in the previous year's quarter. The increased dollar amounts over the prior year's comparison period was primarily due to the following: the increased general corporate and office expenses as a result of the company's growth, increased employee costs, and ERP implementation costs.
In the quarter, we achieved positive adjusted EBITDA of CAD 5.6 million, compared to CAD 1.6 million in Q2 2022. Adjusted EBITDA for the first six months of fiscal 2023 was CAD 11.2 million, exceeding the CAD 3.5 million realized for the full fiscal 2022 year. The primary drivers of this significant improvement in profitability were the higher volume of products sold, the lower per-unit cost of production, and increased international shipments, which collectively contributed to our increased gross margin. Q2 2023 was our fifth consecutive quarter of positive adjusted EBITDA. Based on our outlook for revenue, including international sales and improved efficiencies primarily achieved through scale and automation, we expect this trend to continue. In the quarter, we had a net loss of CAD 7.5 million, compared to a net loss of CAD 4 million in Q2 2022.
The increase in net loss was primarily due to a lower gain in the fair value adjustment to derivative liabilities. From a statement of cash flows perspective, net cash used in operating activities was CAD 19.7 million in Q2 2023, compared to CAD 803,000 in the prior year period. The increase in cash used is primarily due to the increase in accounts receivable in the quarter due to increased sales, including significant international shipments during February. As well, there was a large decrease to payables at the end of February as the company reduced their obligations in preparation for the Phase 1 ERP Go-Live, which was done on March 1st. Cash provided by investing activities in Q2 2023 was CAD 11.7 million, compared to cash used of CAD 22.6 million in Q2 2022.
The current quarter's cash was provided from a CAD 15 million redemption of GICs, net of CAD 5.6 million in CapEx spendings. In terms of our balance sheet, on February 28th, 2023, we had CAD 72 million in unrestricted cash and short-term investments, compared to CAD 99 million as at August 31st. The decrease is primarily the result of capital expenditures of CAD 14 million and an increase in net working capital assets of CAD 6 million. With OrganiGram generating positive adjusted EBITDA, the stabilization of net working capital assets, combined with the completion of the fiscal 2023 CapEx spend, we expect to generate positive free cash flow by the end of calendar 2023. This concludes my comments. I will now turn the call back to Beena.
Thanks, Derrick. As a leading pure-play cannabis company, we aren't just looking for short-term wins. We're invested in and advocating for the success of our industry for years to come. We have put in place industry-leading production facilities to achieve our goals and are committed to continuously improving our efficiency. We have brought CPG expertise to the industry and are committed to exciting consumers with novel products that build our brand. This focus and our financial discipline are expected to deliver solid results through the rest of the fiscal year. Thank you for joining us today. Operator, you may open the call for questions.
Thank you. At this time, in order to ask a question, press star then the number one on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Andrew Partheniou from Stifel GMP. Your line is open.
Hi. Good morning. Thanks for taking my questions, and congrats on the great gross margin here. Just wanted to talk a little bit about the rec channel and the pricing environment that you were talking about during the call. You know, you mentioned that you're not necessarily going to compete at these at the same irrational price levels that you're seeing on the value side. You know, that has resulted in a little bit of market share loss and you've introduced some new products to try and compete a little bit differently in that market. Inventory seems to have increased this quarter as you expanded production. I'm just wondering, you know, what kind of inventory level do you think is adequate for the business?
How are you thinking about this, given it sounds like it may be challenging to drive volumes in, you know, the segment that's responsible for a large majority of your sales in this irrational price environment?
Yes. No problem. Thanks for the question, Andrew. I think right now, just to be clear, we feel pretty comfortable with our inventory levels where we're at. Remember at last year, we struggled to supply our consumer demand. We were hand-to-mouth for most of the year. We were buying significant amount of flower from other LPs to meet our commitments, and we were restricting our international sales opportunities. You know, right now, we're watching our inventory. We don't anticipate having any kind of issues with the amount of production because we believe we need it to meet our demand for our rec and our international business. We did build in sort of extra safety stock so that we could improve our customer service levels.
Last year we struggled with On- Time In- Full, and by building some extra safety stock, we're able to maintain, you know, higher levels of service to our customers, which was important. And just remember, and, you know, a lot of people look at market share erosion, and they're looking at dollar market share, but we're selling more kgs to get to the same level, right? We're watching that difference as well. You know, our current difference between the kilos that we're selling and our dollars is about one and a half market share point. Just to be clear, we need the volume to compete even when we're not driving down to the irrational pricing.
It means we're pulling back from certain markets that are less rational to say, but we are still competing in the flower segment. We are, you know, we have a strong SKU in our Big Bag o' Buds that continues to perform at a much higher price than others with our Pink Cookies offering. You know, we've introduced some new large format flower under HOLY MOUNTAIN, and we believe that brand really speaks to a specific consumer. You know, we're not walking away from large flower formats. We're out there. We will compete. We will continue to bring new specific strains at, you know, good quality, higher THC offerings, but we just won't compete at the very low prices. It's just not sustainable.
We have, by the way, had conversations with some of the boards, where there aren't price floors in the market and have said, you know, it's introducing a consumer price point when you go below, even below sub CAD 100 that isn't sustainable, and it's really tough to move consumers off of a price point once it's established. It's really not a good practice for the industry, and we have received recognition that there needs to be something done here. You know, as I said in my comments, we're in it for the long term. We wanna make sure we're being, you know, responsible and we're gonna generate profitable growth. You know, if there's a short-term impact, in terms of loss of some market share, you know, we're accepting that as we move forward.
Appreciate that. Just thinking about, you know, your gross margin outlook, the international sales outlook and your operating cash flow. You know, you did have the best gross margin in three years, and you did, it seems, you know, correct me if I'm wrong, but you did, it seems, to adjust your gross margin outlook higher for this fiscal year. You mentioned international sales could normalize a little bit below what we saw in this quarter, Q2. I'm just wondering if you can expand a little bit on that. Where are you seeing the drivers of gross margin, of the better gross margin outlook for this fiscal year and the negative operating cash flow before working capital? Could we see that reverse in the next quarter?
So let me-
Yeah.
Let me maybe talk a little bit about international sales, and then I'll turn it over to Derrick to respond to your gross margin question. So just to be clear on international sales, as I mentioned earlier, last year we were restricting our sales in international markets because we just didn't have the flower inputs. With the completion of our 4C expansion, we were able to build our flower inventory that allowed us to do a certain amount of pipeline fill to Australia and Israel in this quarter, with some new cultivars in the market. That was, you know, a higher than expected growth in international sales. We do expect it to normalize back to the level of repeat purchases that we're seeing in the last two quarters.
This was really a pipeline impact on the international sales after not being able to supply last year. With that note, I'll pass it over to Derrick to talk about gross margin.
Yes. Thanks, Beena. There's no question that the increase in the current quarter on the high water mark for our adjusted margin of 34%, was as, you know, assisted by the larger international shipments that did occur this quarter. What I would note, there are other factors that have allowed us to achieve the current quarter's margin rate, and really it's been driven by the cost of cultivation, which is not just the expansion at 4C, but higher flower yields that we've been achieving over the end of Q4 of last year and Q1 of this year that lower our cost of cultivation in total and improved our flower margins on all product categories, on all our flower categories, not just on the international shipments.
Of course, our margin as we look forward is impacted not just by the product category mix, but the channel on the rec versus international. We do think that moving forward, the margin rate will modulate somewhat from the Q2 print that we just have. We are comfortable in providing guidance that we do believe that we can achieve a gross margin rate at greater than 30% for the rest of this fiscal year, even given the price compression, and again, it's a combination of just lower operating cost and continued initiatives that we're doing around automation and process efficiency. In terms of the operating working capital statement, we did build...
We did have a working capital adjustment that was negative that put our operating cash flow negative for the quarter. Part of that would be reversible. Part of it is just the growth to sales, in the month of February that put receivables up. There was a small increase to the inventory level, which we wouldn't expect to see large changes from here, now that we've been operating at this higher level for a couple quarters now. We did reduce our payables by over CAD 13 million in the quarter, and that did create a significant, you know, reduction to our cash position and our cash flow working capital change in the quarter. Part of that was actually just done that, part of our phase one implementation of our new ERP system.
We did do an abnormal number of, say, early check runs in order to pay down all payables, you know, that we could at the end of February because our go live was March 1. We do have an abnormal adjustment that has negatively impacted current quarter's operating cash flow, and some of that would reverse itself as we got back to a more normalized working capital assets and liabilities in the next few quarters.
Appreciate the answers. I'll get back in the queue.
Your next question comes from the line of Tamy Chen from BMO Capital Markets. Your line is open.
Thanks. Good morning. First question is, I want to go back to your flower sales in the recreational market. It was quite a decline sequentially. Beena, I know you called out seasonality, but I guess I'm just surprised that it was such a large sequential decline. You've also then mentioned some of the share erosion in large format flowers. I was wondering, can you help us understand, I guess, how much was seasonality, how much was that share erosion in large format flowers?
Certainly. You know, this isn't different than what I've talked about last year as well. This is our lowest quarter sales every year. We do see the reduction. You know, it's seasonality in this business, which is why sequential... Like, I struggle with sequential growth when you have seasonality on the business. Remember, we did grow, you know, year-over-year, still seeing strong growth versus Q2 of last year. That's where we, you know, we like the comparison where you take out the impact of seasonality. In terms of large format flower, we did see erosion. As I mentioned, we didn't chase some of this low, perhaps, you know, non-profitable sales. However, we've seen really strong growth in some of our other categories.
We're very excited about higher margin, you know, hash growth and higher margin gummies growth. We continue certainly in the quarter with really strong sales on our JOLTS. You know, these are all things that make sense for us to put our time and effort, drive our distribution, because those are things that are going to grow. You know, drive profitable growth as opposed to just, you know, empty calories on the top line. That, you know, that's been our focus. You know, you don't get the, perhaps the tonnage in those categories, but you certainly get the dollars, and that's what's really driving the gross margin improvements and our EBITDA improvements. We're balancing.
This is, you know, we could have chased some of that lower volume, achieved, you know, higher growth in our sales by chasing it and seeing, you know, more diluted margins. That's a choice we made, in terms of how we wanna operate in this category.
Okay. Got it. My follow-up is on a separate topic, the Greentank investment. Can you elaborate a little bit more on this all-in-one product or technology that they've got? Is there nothing else like it in the market right now? I guess it sounds like it's something they've recently developed. Do you know that this is something consumers would want and would attribute a higher price point to? Thank you.
Sure. Let me start by saying, this Greentank technology, we believe really is a game changer in the vape space. You know, we believe that it will, the new technology will address some of the pain points that have been, you know, associated with the vape category. You know, well, first of all, you asked about the all-in-one. Let me start by saying that, you know, we're gonna start by launching a 510. You know, we know that a significant, over 90% of the industry today in vapes is the 510 offering. We wanna have a 510 offering out there that incorporates this new technology.
Down the road, we will introduce the all-in-one, you know, the battery and the cartridge units all in one, calibrated for the optimal, calibrated to power the heating element at an optimal level. That will be down the road. Our going in position is 510 'cause that's where the market is today. What we like about this is that this new technology replaces ceramic coils with a precision heating biocompatible material. That vaporizes all the oil that comes in contact with it at every puff. It doesn't have the oil, the partially cooked oil that saturates the old ceramic coils that causes the clogging and leaks and the unpleasant flavor.
You know, when we look at the vape category and you look at mature markets like California, where vapes represent 29% of the category, and you look at Canada, where we're at 17%, you know, excluding the impact of Quebec, we believe there's a lot of room for growth. We think the real opportunity is bringing in something that addresses those pain points. You know, the other thing on Greentank is, we believe it produces a higher quality vapor cloud that could lead to a higher potency per puff. When you ask sort of what research we've done, look, we've done research in our R&D facility, testing the product. We've actually tested the technology in our product development collaboration labs.
Of course, Greentank has obviously done some of their testing on the technology as well. We're really excited about this because we really think that it is a demonstrable difference in the vape space and a 510 offering that will allow us to differentiate our products in the market. We recognize that we're, you know, underdeveloped in vapes relative to other players. We really believe that finding something that was differentiated, that brought news to the category, that consumers would notice the difference, would really make us, you know, set us apart and give us a reason to grow our position in the vape category.
With respect to margin, your question on margin, look, it is, you know, the carts are gonna be perhaps a little bit more expensive than a traditional cart, but at the end of the day, we're such a small player in what is a higher margin category that this is truly an opportunity for us to break out in the vape segment.
Got it. Thank you.
Your next question comes from the line of Frederico Gomes from ATB Capital Markets. Your line is open.
Hi, good morning. Thanks for taking my questions. My first question is on your revenue outlook. You guided for sequential growth in Q3. Obviously, as you mentioned in Q2, you had a large contribution from international, which you expect to normalize. First, when you say normalize, what sort of level of repeat purchases are we talking about? Second, I imagine that because of that, you know, most of the sales growth that you're expecting is coming from the rec side. What's the key driver here? You know, is it about timing of shipments, or are you regaining share this quarter? You know, can you talk a little bit about that?
Sure. First of all, let me answer the question on the international sales. When we say normalize back to the last two quarters, so if you look at our run rate on international sales in Q4 and Q1, that would be sort of our normalized level. The incremental sales in Q2 were really some pipeline on some new SKUs into the markets that we deliver to. That's kind of what the normalized level we expect on international sales. Still significantly higher than year-over-year, and Q3 of last year will have higher sales, but not at the level we had in Q2 of this year.
In terms of our sequential growth, we actually do see every year an improvement in Q3 over Q2, and then again in Q4 over Q3, and that is really again back to seasonality, where our highest seasonal quarter is always our fourth quarter during the summer, where there's a significant consumer uptick in consumption. We do see there some of it is really coming from, you know, category dynamics and just seasonality will help drive some of the sequential growth. When you get down to where do we expect to see our sales, we do expect flower sales will be a challenge in the short term, but we have a strong innovation pipeline to help drive our back half revenue. You know, we're still ramping up on HOLY MOUNTAIN. I mentioned we launched 18 SKUs in the quarter.
Eight of them were behind HOLY MOUNTAIN. We introduced that brand to help us not only, you know, enter into a value offering that could get into smaller formats. Not only, you know, playing in the 28 g large format flower, but into 3.5 g formats. We're excited about ramping that brand up and getting distribution across the country. We are actually, you know, very excited about some of the work we have on our hash introduction SKUs that I talked about. We have a really strong pipeline of pre-rolls. You know, pre-rolls are heavily. They grow significantly in the summer months, and we've invested in a high-speed pre-roll machine, as well as new technology to improve the efficiency of infused pre-rolls.
We have a strong innovation pipeline on both those that will hit the market at the end of Q3 and into Q4. We're also looking at introducing a new premium brand that we could put into the marketplace in the fourth quarter. That would be featuring some high-potency THC, but it would be from flowers that have been hang-dried, so we've introduced hang-drying into our facility with some unique genetics, some improved terpene profiles, right? We're excited about, you know, balancing our portfolio with a little bit more premium brands as we move our Edison brand into a more mainstream position given its value profile to consumers. You know, we expect also, Lac Supérieur products will help us, you know, gain some of that momentum as well.
We have a lot of things in terms of innovation coming, some stronger entries into the flower segment on the three and a half gram and premium brands and, you know, we have confidence in what we could do with these products.
Thank you. That's great color, Beena. Then my second question is just on your balance sheet. You finished the quarter with CAD 72 million in cash. You have no debt, at the same time, you know, you are investing for growth for the remainder of the year. You have a pretty ambitious CapEx plan. How should we look at that, you know, your cash balance? What sort of minimum cash balance are you comfortable with? Thank you.
Yeah. I mean, during the quarter, listen, we did have, you know, a larger drain on our operating cash that brought our expected cash levels slightly below what would be on a normalized level. Again, some of that operating portion, we would reverse itself to a certain extent, particularly with regards to that large accounts payable pay down. We do have, you know, in a larger CapEx program that we're partway through the spend on this year. We expect to have it complete this year in terms of the expansion out at Lac Supérieur along with the automation at all facilities, and then we'd have that complete at the end of the year.
We would end up, you know, ending the year, you know, post that in a lower cash position than we are today because of that CapEx spend. However, we are forecasting that given our profitability metrics and the stabilization of working capital assets and the CapEx spend behind us, that we will in fact not just be operating cash flow positive, but free cash flow positive at the end of this calendar year. We, we believe that we will have a strong balance sheet at the end of the year.
Of course, it will not be as strong as it was at the beginning, but we knew that coming in, as a consequence of the investment that we're going to need to do on both the CapEx and on the net working capital assets to, you know, support just of the business. Again, I think we get there at the end of the year with all three facilities at full capacity. Probably not looking to provide exact guidance on what we a minimum cash balance would be, but we're very comfortable on our ability to manage our cash flows without the need for additional capital. Of course, we'll always consider options that are available to us, but at this time, we're not concerned about our cash liquidity.
Thank you. great color. Thanks.
Your next question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.
Hi, good morning. Thanks for the questions. Just wanna talk a little bit about, you know, some of that value segment. Certainly understand why you don't wanna be participating, you know, in those lower prices. Wanna get some color in terms of whether or not you're starting to see some signs of stabilization there. You know, do you believe this is more a sell-off of excess inventory, you know, to get some cash versus some write downs? Just given because of how long this has lasted, do you think this is more of a structural issue of cultivation efficiencies? If so, like, how long can that persist? Because obviously, you know, selling below cost, you know, sometimes, you know, chicken would have to come home to roost.
Just want to get your perspective in terms of, you know, how long you believe this type of dynamic can last, and what you're seeing out there in terms of this lower price offerings. Thanks.
Certainly. Let me start by saying, I think it's a combination of a couple of those things that you mentioned. When you think about some of the low prices, I mean, we've seen 28 g offerings at CAD 70 out in Alberta. You know, if you, if you take a look at what that markup model would be, and then you subtract CAD 28 related to, you know, excise tax and there's really nothing left. As you can imagine, you're, you know, this is something that people are selling off, either aged inventory, you know, inventory that they don't have a home for and will take whatever, you know, monetize whatever cash. I don't think that's around for the long term.
I think that is an impact we're having now in the industry because there's still excess capacity out there. On the good news side, we are closely tracking the market, and there are a number of LPs with meaningful market share who have, you know, significant financial difficulty by the end of the year. We're looking at these, and we're thinking, you know, as companies go through CCAA, take cultivation out of the market, that will help the situation. Also listening to some of our competitors converting some of their cultivation into vegetable or, you know, a fruit-growing facilities, that's good news. Canopy took cultivation out, Aurora took cultivation out.
Um, you know, we've, uh, with the acquisition announced yesterday between, uh, Tilray and HEXO, they're taking out some of the HEXO cultivation. I, I think as, as the market stabilizes in Canada, where the cultivation, um, capacity is m-more approximating the demand, some of this, um, you know, activity or rational pricing behaviors will change. Um, so, you know, I, I do think we're living with this for probably another year while we see perhaps some other cultivation capacity come out of the market. But longer term, this isn't sustainable, and I do believe it will... You know, pricing will move up. Um, I'm, you know, I'm happy, uh, that, that Ontario has a floor on large, um, on large format, uh, flower at, uh, their, uh, just below hundred, uh, dollars per ounce. Um, love to see pricing floor in Alberta. That would improve the situation.
Th`e other good news is one of our competitors, and, you know, if I go back a year ago, between OrganiGram and Village Farms, we were the combined market leaders on the flower category. I think that, you know, hearing Village Farms talk about the fact that they might take some pricing increases is a good sign, right? This is, you know, the moving forward position when you have quality product, you know, out there, high potency quality. Why not, you know, get it out there at a price point that is great for consumers, but also, that, you know, the companies could make a decent margin on?
There are signals that things will turn, but I do suspect that we're, you know, in this compression, for perhaps another, you know, maybe, hopefully not longer than a year as we see the cultivation capacity normalize.
Great. Thanks for that. That was a really helpful color there. Second quick question for me, just in terms of Edison JOLTS, right? Obviously you're taking some nice growth there. You know, can you talk about potential timing, and remedies, and if, you know, you don't win in terms of the classification that you believe is appropriate, are there other things they have available, or it's best to assume that, you know, for right now, that'll be, you know, taken off the market, until you get Edison's results? Just any further clarity in terms of, you know, pausing production, I think they said in the press release, and then potentially, you know, getting that back up, you know, outside of getting that result and any timing within that? Thanks.
Yeah, that's a good question, and I'd love to be able to answer it. Listen, we fundamentally believe in the strength of our position on JOLTS. We believe they are properly classified as ingestible extracts. We really can't comment further on, you know, what is a pending legal matter between OrganiGram and Health Canada. We, you know, hope that we're able to achieve a stay, which would allow us to continue to sell our products while we go through this judicial review. That is still something that is, you know, underway, and we don't know the answer, whether we can. You know, that's our approach right now. Love to be able to get this product back on the market. You know, well, we're still in the market until May 31st, but get it back into the market.
We know and we have consumer research that shows that, if consumers can't buy this product in the legal market, they will turn to the illicit market. We have, you know, expressed that concern to Health Canada as they, you know, claim concern over product health and safety. You know, we've been on the market for 18 months. We don't have any issues, and if people turn to the illicit market, we know that that's where the problem exists with product health and safety. You know, it is our position that, we believe we are an ingestible extract. We'd love to be back full time in the market for the balance of this year with our product.
You know, we're going to go through the motions because we just don't feel like, you know, shutting it down when we feel strongly that we're compliant is the right move. As a leader in the industry, you know, this is, you know, a battle we feel is right to fight.
Okay. Great. Thank you very much for the call. I'll drop back in the queue.
Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Michael Freeman from Raymond James. Your line is open.
Good morning, Beena. Good morning, Derrick. Thanks very much for taking our questions. I wonder if you could provide an update on the production capacity levels at each of your facilities, Moncton, Lac Supérieur , and Winnipeg, perhaps in a, you know, a percent of total or sort of units per year basis.
Derrick, do you wanna go first?
Sure. I guess for the Moncton flower facility that we have, a conservative estimate would be that we are at 85,000 kilos a year of flower. Of course, in addition, we would have the trim that we would fully utilize for our derivative products. With Lac-Supérieur, with regards to our hash, we've now at, based on the shifts that we have, about 2 million units hash units a year is what our capacity is. The craft flower would be about 2,400 kg. For Winnipeg, we measure gummies, I guess, in units. Beena, I don't have that off the hand. I know that you were looking at that yesterday. Do you have that number?
Well, our monthly volume, average volume is 3.1 million gummies. Just for perspective, that's running really, maybe a 10-hour shift five days a week. You know, obviously lots of excess capacity if we run a second shift and run to seven days a week.
Okay. All right. That's very helpful. I wonder if I guess among those facilities, I guess you shed some light on the Winnipeg capacity or available capacity, where do you see potential places where capacity could increase materially in your other facilities?
I think, just as a general statement, we have been investing quite a bit last year and this year to get our three facilities, you know, up to a certain capacity level that we do believe that we can ultimately operate at or near capacity and flow through and sell the product. I would say that, in all three cases that, you know, at the end of this fiscal year, that we would be, I guess, done the spend to maximize the capacity. I guess there's always extra shifts that can be run, particularly in Lac Superieur and Winnipeg that I guess could allow us to flex on capacity.
I would say, without, you know, significant changes in that structure that, you know, we'll be leaving this year approximating capacity at all three facilities.
And let me just-
Okay. Great
add to what Derrick said to just, you know, expand on the automation. You know, we talk about capacity, but the automation has allowed us to increase our throughput on, you know, on the packaging side, on the milling side, on the, you know, just on the pre-roll side, we'll have significant automation. There's, you know, expanded capacity in those areas simply through automation that we've invested in as well.
Okay. All right. Thank you. That's a very helpful color. Now, looking at international sales, I wonder if you could give us, I guess, your most recent understanding of price fluctuations in Israel in particular. Wondering if you've seen any variations or compression in price in that market.
You know, we've certainly seen commentary out of the market. There is price compression happening in Israel. I continue to see from OrganiGram's perspective, we offer product that is seen as, you know, premium in the market. It's Canadian indoor grown. It's differentiated from what's available in domestic market. We haven't seen pressure on pricing from our end on international shipments. Certainly there is a domestic industry in Israel that is, you know, driving the value segment down. That's just not where we compete right now in the.
Okay. Thank you very much. I'll pass it on.
There are no further questions at this time. Ms. Beena Goldenberg, I turn the call back over to you for some final closing remarks.
Perfect. Well, thank you, everybody, for joining us this morning for our call. We're very excited about the results that we announced this morning. We're happy with our improved gross margin, adjusted gross margin. We're very happy in reporting a fifth consecutive quarter of adjusted EBITDA, providing an outlook that we will grow Q3 over Q2 in terms of net revenue and still holding to our forecast on positive free cash flow by the end of the calendar year. We continue to navigate this challenging industry. We have some great products, some great brands, and we're excited to continue to grow in this space. Thank you, and have a good day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.