OrganiGram Holdings Inc.: Exhibit 99.5 - Filed by newsfilecorp.com
NOTE TO READER
This Management’s Discussion and Analysis for the year ended September 30, 2024 is being refiled to correct errors in the outstanding share data table on page 34.
INTRODUCTION
This Management’s Discussion and Analysis dated December 18, 2024 (this “MD&A”), should be read in conjunction with the audited annual consolidated financial statements (the “Financial Statements”) of Organigram Holdings Inc. (together with its subsidiaries, the “Company”, "Organigram",, "we", "us", or "our") for the year ended September 30, 2024 ("Fiscal 2024") and the thirteen months ended September 30, 2023 ("Fiscal 2023"), including the accompanying notes thereto.
CHANGE IN YEAR END
In May 2023, to better align our financial statement reporting periods with that of other public companies and with calendar quarters, we announced a change to our fiscal year end from August 31 to September 30. This change resulted in a transitional thirteen month period for Fiscal 2023 as opposed to a twelve month period, and a four month fourth quarter as opposed to a three month fourth quarter.
As required by International Financial Reporting Standards (“IFRS"), our Financial Statements for Fiscal 2024 compare our financial results for the twelve month period of Fiscal 2024 with the thirteen month period of Fiscal 2023. However, for comparative purposes in this MD&A, and to more accurately reflect period-over-period performance, this MD&A presents our financial results for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023, and the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023. Management believes these comparative periods provide readers with more relevant information to better understand the Company’s financial performance.
References in this MD&A to "Fiscal 2024" are to the twelve month period beginning October 1, 2023 and ending September 30, 2024. References in this MD&A to “Fiscal 2023” are to the thirteen month period beginning September 1, 2022, and ending September 30, 2023. References to "Q4 Fiscal 2024" are to the three month period beginning July 1, 2024 and ending September 30, 2024. References to “Comparative Fiscal 2023” are to the twelve month period beginning October 1, 2022, and ending September 30, 2023. References to “Q4 Fiscal 2023” are to the four month period beginning June 1, 2023, and ending September 30, 2023. References to “Comparative Q4 Fiscal 2023” are to the three month period beginning July 1, 2023, and ending September 30, 2023.
Under the heading below titled Comparative Key Annual Financial and Operating Results is a comparison of the results of Fiscal 2024, Fiscal 2023, and Comparative Fiscal 2023. Under the heading further below titled Comparative Key Quarterly Financial and Operating Results is a comparison of the results of Q4 Fiscal 2024, Q4 Fiscal 2023, and Q4 Comparative Fiscal 2023.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 1
Comparative Key Annual Financial and Operating Results
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Fiscal 2024
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Fiscal 2023 (thirteen months ended September 30, 2023)
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Comparative Fiscal 2023 (twelve months ended September 30, 2023)1 |
Financial Results |
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Gross revenue |
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$ |
247,177 |
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$ |
233,647 |
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$ |
217,354 |
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Net revenue |
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$ |
159,841 |
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$ |
161,639 |
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$ |
150,397 |
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Cost of sales |
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$ |
111,390 |
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$ |
136,437 |
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$ |
128,142 |
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Gross margin before fair value adjustments |
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$ |
48,451 |
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$ |
25,202 |
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$ |
22,255 |
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Gross margin % before fair value adjustments |
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30 |
% |
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16 |
% |
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15 |
% |
Realized fair value on inventories sold and other inventory charges |
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$ |
(52,078) |
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$ |
(56,187) |
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$ |
(56,187) |
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Unrealized gain on changes in fair value of biological assets |
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$ |
51,151 |
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$ |
68,981 |
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$ |
68,981 |
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Gross margin |
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$ |
47,524 |
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$ |
37,996 |
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$ |
35,049 |
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Operating expenses |
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$ |
83,195 |
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$ |
300,963 |
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$ |
295,067 |
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Loss from operations
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$ |
(35,671) |
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$ |
(262,967) |
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$ |
(260,018) |
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Other (income) expenses |
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$ |
9,769 |
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$ |
(10,554) |
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$ |
(9,204) |
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Net loss
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$ |
(45,440) |
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$ |
(248,601) |
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$ |
(247,002) |
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Net loss per common share, basic and diluted
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$ |
(0.477) |
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$ |
(3.058) |
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$ |
(3.116) |
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Net cash provided by (used in) operating activities |
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$ |
3,872 |
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$ |
(38,778) |
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$ |
(52,134) |
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Adjusted Gross Margin2 |
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$ |
53,934 |
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$ |
40,214 |
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$ |
37,268 |
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Adjusted Gross Margin %(2)
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34 |
% |
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25 |
% |
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25 |
% |
Adjusted EBITDA(2)
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$ |
8,416 |
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$ |
5,951 |
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$ |
5,405 |
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Comparative Key Quarterly Financial and Operating Results
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Q4 2024
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Q4 2023 (four months ended September 30, 2023)
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Comparative Q4 Fiscal 2023 (three months ended September 30, 2023)3
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Financial Results |
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Gross revenue |
$ |
69,877 |
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$ |
71,458 |
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$ |
56,179 |
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Net revenue |
$ |
44,698 |
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$ |
46,040 |
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$ |
36,698 |
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Cost of sales |
$ |
30,907 |
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$ |
42,885 |
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$ |
34,321 |
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Gross margin before fair value adjustments |
$ |
13,791 |
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$ |
3,155 |
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$ |
2,377 |
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Gross margin % before fair value adjustments |
31 |
% |
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7 |
% |
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6 |
% |
Realized fair value on inventories sold and other inventory charges |
$ |
(15,365) |
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$ |
(15,901) |
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$ |
(15,901) |
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Unrealized gain on changes in fair value of biological assets |
$ |
18,790 |
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$ |
21,751 |
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$ |
21,751 |
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Gross margin |
$ |
17,216 |
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$ |
9,005 |
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$ |
8,227 |
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Operating expenses |
$ |
16,933 |
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$ |
45,550 |
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$ |
38,244 |
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Income (loss) from operations |
$ |
283 |
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$ |
(36,545) |
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$ |
(30,017) |
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Other (income) expenses |
$ |
5,686 |
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$ |
(1,275) |
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$ |
(1,143) |
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Net loss
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$ |
(5,433) |
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$ |
(32,991) |
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$ |
(26,595) |
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Net loss per common share, basic and diluted
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$ |
(0.050) |
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$ |
(0.105) |
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$ |
(3.058) |
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Net cash provided by (used in) operating activities |
$ |
8,893 |
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$ |
(17,017) |
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$ |
(8,469) |
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Adjusted Gross Margin(2)
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$ |
16,543 |
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$ |
7,939 |
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$ |
7,161 |
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Adjusted Gross Margin %(2)
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37 |
% |
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17 |
% |
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20 |
% |
Adjusted EBITDA(2)
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$ |
5,860 |
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$ |
(1,890) |
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$ |
58 |
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1 Comparative Fiscal 2023 results is for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023
2 Adjusted gross margin, adjusted gross margin %, and Adjusted EBITDA are non-IFRS measures. See "Cautionary Statement Regarding Certain Non-IFRS Measures" and "Financial Results and Review of Operations" in this MD&A.
3 Comparative Q4 Fiscal 2023 results are for the unaudited three month period beginning July 1, 2023 and ending September 30, 2023
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 2
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Adjusted EBITDA (Non-IFRS Measure) |
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Adjusted EBITDA Reconciliation |
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Fiscal 2024 |
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Fiscal 2023 (thirteen months ended September 30, 2023) |
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Comparative Fiscal 2023 (twelve months ended September 30, 2023)4 |
Net income (loss) as reported
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$ |
(45,440) |
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$ |
(248,601) |
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$ |
(247,002) |
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Add/(deduct):
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Financing costs, net of investment income |
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(3,311) |
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(3,692) |
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(3,423) |
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Income tax (recovery) expense
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— |
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(3,812) |
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(3,812) |
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Depreciation, amortization, and (gain) loss on disposal of property, plant and equipment (per statement of cash flows)
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11,446 |
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26,606 |
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23,959 |
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Normalization of depreciation add-back due to changes in depreciable assets resulting from impairment charges |
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757 |
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3,037 |
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3,037 |
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Impairment of intangible assets and goodwill |
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— |
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44,856 |
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44,856 |
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Impairment of property, plant and equipment |
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— |
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165,255 |
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165,255 |
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Share of loss (gain) from investments in associates and impairment loss (recovery) from loan receivable
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5,284 |
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938 |
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829 |
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Realized fair value on inventories sold and other inventory charges |
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52,078 |
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56,187 |
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56,187 |
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Unrealized gain on changes in fair value of biological assets |
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(51,151) |
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(68,981) |
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(68,981) |
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Share-based compensation (per statement of cash flows) |
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7,182 |
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5,727 |
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5,008 |
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Legal provisions (recoveries), government subsidies, insurance recoveries and other non-operating expenses (income) |
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(176) |
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(482) |
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(482) |
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Share issuance costs allocated to derivative liabilities and change in fair value of derivative liabilities, other financial assets and contingent consideration |
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8,605 |
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(7,736) |
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(6,158) |
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ERP implementation costs
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1,636 |
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7,687 |
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7,175 |
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Transaction costs |
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915 |
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1,463 |
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1,437 |
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Provisions (recoveries) and net realizable value adjustments related to inventory and biological assets |
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5,483 |
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15,012 |
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15,012 |
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Research and development expenditures, net of depreciation |
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10,869 |
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12,487 |
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12,038 |
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Adjusted EBITDA as previously reported |
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$ |
4,177 |
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$ |
5,951 |
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$ |
4,935 |
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Add: Provision for Canndoc expected credit losses |
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4,239 |
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470 |
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470 |
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Adjusted EBITDA (revised) |
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$ |
8,416 |
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$ |
6,421 |
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$ |
5,405 |
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Divided by: net revenue |
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159,841 |
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161,639 |
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150,397 |
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Adjusted EBITDA Margin % (revised) (Non-IFRS Measure) |
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5 |
% |
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4 |
% |
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4 |
% |
4 Comparative Fiscal 2023 results are for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 3
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Adjusted EBITDA (Non-IFRS Measure) |
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Adjusted EBITDA Reconciliation |
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Q4-F24
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Q4-F23 (Four months ended September 30, 2023)
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Comparative Q4 Fiscal 2023 (three months ended September 30, 2023)5 |
Net income (loss) as reported
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$ |
(5,433) |
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$ |
(32,991) |
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$ |
(26,595) |
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Add/(deduct):
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Financing costs, net of investment income |
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(960) |
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(923) |
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(652) |
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Income tax (recovery) expense
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30 |
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(2,279) |
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(2,279) |
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Depreciation, amortization, and (gain) loss on disposal of property, plant and equipment (per statement of cash flows)
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3,097 |
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5,581 |
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3,294 |
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Normalization of depreciation add-back due to changes in depreciable assets resulting from impairment charges |
|
— |
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3,037 |
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|
3,037 |
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Impairment of intangible assets and goodwill |
|
— |
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|
6,951 |
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6,951 |
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Impairment of property, plant and equipment |
|
— |
|
|
11,918 |
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|
11,918 |
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Share of loss (gain) from investments in associates and impairment loss (recovery) from loan receivable
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4,895 |
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(51) |
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|
(51) |
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Realized fair value on inventories sold and other inventory charges |
|
15,365 |
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|
15,901 |
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|
15,901 |
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Unrealized gain on changes in fair value of biological assets |
|
(18,790) |
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(21,751) |
|
|
(21,751) |
|
Share-based compensation (per statement of cash flows) |
|
1,093 |
|
|
1,208 |
|
|
797 |
|
Legal provisions (recoveries), government subsidies, insurance recoveries and other non-operating expenses (income) |
|
(184) |
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|
(407) |
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|
(407) |
|
Share issuance costs allocated to derivative liabilities and change in fair value of derivative liabilities, other financial assets and contingent consideration |
|
1,911 |
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(53) |
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|
(53) |
|
ERP implementation costs
|
|
465 |
|
|
2,415 |
|
|
1,588 |
|
Transaction costs |
|
74 |
|
|
580 |
|
|
505 |
|
Provisions (recoveries) and net realizable value adjustments related to inventory and biological assets |
|
2,752 |
|
|
4,784 |
|
|
4,784 |
|
Research and development expenditures, net of depreciation |
|
1,545 |
|
|
3,720 |
|
|
2,601 |
|
Adjusted EBITDA as previously reported |
|
$ |
5,860 |
|
|
$ |
(2,360) |
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|
$ |
(412) |
|
Add: Provision for Canndoc expected credit losses |
|
— |
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|
470 |
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|
470 |
|
Adjusted EBITDA (revised) |
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$ |
5,860 |
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|
$ |
(1,890) |
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$ |
58 |
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Divided by: net revenue |
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44,698 |
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|
46,040 |
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36,698 |
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Adjusted EBITDA Margin % (revised) (Non-IFRS Measure) |
|
13 |
% |
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(4) |
% |
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— |
% |
Financial data in this MD&A is based on the Financial Statements of the Company, and has been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”), unless otherwise stated. All financial information in this MD&A is expressed in thousands of Canadian dollars (“$”), except for share and per share calculations, references to $ millions and $ billions, per gram (“g”) or kilogram (“kg”) of dried flower and per milliliter (“mL”) or liter (“L”) of cannabis extracts calculations.
This MD&A contains forward-looking information within the meaning of applicable securities laws, and includes the use of Non-IFRS Measures (as defined herein). Refer to “Cautionary Statement Regarding Forward-Looking Information” and “Cautionary Statement Regarding Certain Non-IFRS Measures” included within this MD&A.
The financial information in this MD&A also contains certain financial and operational performance measures that are not defined by and do not have any standardized meaning under IFRS, but are used by management to assess the financial and operational performance of the Company. These include, but are not limited to, the following:
•Adjusted gross margin; and
•Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA").
The Company believes that these Non-IFRS Measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate the Company’s operating results, underlying performance and prospects in a similar manner to the Company’s management. The Non-IFRS Measures are defined in the sections in which they appear. Adjusted gross margin and Adjusted EBITDA are reconciled to IFRS in the “Financial Results and Review of Operations” section of this MD&A.
As there are no standardized methods of calculating these Non-IFRS Measures, the Company’s approaches may differ from those used by others, and the use of these measures may not be directly comparable. Accordingly, these Non-IFRS Measures are
5 Comparative Q4 Fiscal 2023 results are for the unaudited three month period beginning July 1, 2023 and ending September 30, 2023
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 4
intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Refer to "Cautionary Statement Regarding Certain Non-IFRS Measures" included within this MD&A.
This MD&A contains information concerning our industry and the markets in which we operate, including our market position and market share, which is based on information from independent third-party sources. Although we believe these sources to be generally reliable, market and industry data is inherently imprecise, subject to interpretation and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey or data collection process. We have not independently verified any third-party information contained herein.
Additional information relating to the Company, including the Company’s most recent annual information form (the “AIF”), is available under the Company’s issuer profile on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR+”) at www.sedarplus.ca. The Company’s reports and other information filed with or furnished to the United States Securities and Exchange Commission (“SEC”) are available on the SEC’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) at www.sec.gov.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain information herein contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation (“forward-looking information”). Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “could”, “would”, “might”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”, “continue”, “budget”, “schedule” or “forecast” or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, forecasts or other characterizations of future events or circumstances, and the Company’s objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to the Company’s plans and objectives, or estimates or predictions of actions of customers, suppliers, partners, distributors, competitors or regulatory authorities; and statements regarding the Company’s future economic performance. These statements are not historical facts but instead represent management beliefs regarding future events, many of which by their nature are inherently uncertain and beyond management control. Forward-looking information in this MD&A is based on the Company’s current expectations about future events.
Certain forward-looking information in this MD&A includes, but is not limited to the following:
•Moncton Campus (as defined herein), Winnipeg Facility (as defined herein) and Lac-Supérieur Facility (as defined herein) licensing and production capacity and timing thereof;
•Expectations regarding production capacity, facility size, tetrahydrocannabinol ("THC") content, costs and yields;
•Expectations regarding the prospects of the Company’s collaboration and investment transaction with a wholly-owned subsidiary of British American Tobacco p.l.c. ("BAT");
•Expectations regarding the prospects for the Company’s primary operating subsidiary, Organigram Inc., being the resulting entity from the October 2023 amalgamation between Organigram Inc., The Edibles and Infusions Corporation ("EIC") and Laurentian Organic Inc. ("Laurentian");
•The final outcome of the Anti-Dumping Investigation (as defined herein) in respect of Canadian cannabis exports to Israel;
•Expectations around demand for cannabis and related products, future opportunities and sales, including the relative mix of medical versus recreational cannabis products, the relative mix of products within the recreational category;
•Changes in legislation related to permitted cannabis classes, formats, cannabinoid content and potency, including regulations relating thereto, the timing and the implementation thereof, and our future product formats;
•Expectations around branded cannabis products with respect to timing, launch, product attributes, composition and consumer demand;
•Expectations around the Company's ability to develop current and future vapour hardware, and the Company's ability to enter into and expand its share of the cannabis vapour products market;
•Expectations around the revenue growth from innovative products, particularly the commercialization of its new FASTTM (Fast Acting Soluble Technology) nanoemulsion technology ("FASTTM");
•The scope of protection the Company is able to establish and maintain, if any, for its intellectual property ("IP") rights;
•Strategic investments and capital expenditures, and expected related benefits;
•The expectation that the planned technical arrangement between Organigram and Phylos Bioscience Inc. ("Phylos") will permit Organigram to transition a portion of its garden to seed-based cultivation over time, and the anticipated benefits of seed-based production;
•Expectations regarding the Company's investments in Weekend Holdings Corp ("WHC"), the parent company of Green Tank Technologies Corp. ("Greentank"), Steady State LLC (d/b/a Open Book Extracts) ("OBX"), and Sanity Group GmbH ("Sanity Group");
•Expectations regarding European Union Good Manufacturing Practice ("EU-GMP") certification, including successful completion of the audit and timing for the issuance of the certification, if successful;
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 5
•Expectations regarding the resolution of litigation and other legal proceedings;
•The general continuance of current, or where applicable, assumed industry conditions;
•Changes in laws, regulations, guidelines, and policies, and the interpretation thereof, including those relating to the recreational and/or medical cannabis markets domestically and internationally, minor cannabinoids and environmental programs;
•The price of cannabis and derivative cannabis products;
•Expectations around the availability and introduction of new genetics including consistency and quality of seeds and plants and the characteristics thereof;
•The impact of the Company’s cash flow and financial performance on third parties, including its supply partners;
•Fluctuations in the price of Common Shares and the market for Common Shares;
•The treatment of the Company’s business under governmental regulatory regimes and tax laws, including the Excise Act 2001 (Canada) and the renewal of the Company’s licenses thereunder and the Company’s ability to obtain export permits from time to time;
•The treatment of the Company's business under international regulatory regimes and impacts on changes thereto on the Company's international sales;
•Expectations related to the war between Israel and Hamas and its impact on the supply of product and collection of accounts receivable and the demand for product in Israel;
•The Company’s growth strategy, targets for future growth and forecasts of the results of such growth;
•Expectations concerning access to capital and liquidity, the consummation of the outstanding tranche of the follow-on strategic equity investment from BT DE Investments Inc., a wholly-owned subsidiary of BAT (the "Follow-on BAT Investment" and the Company’s ability to access the public markets from time to time to fund operational activities and growth;
•The Company’s ability to remain listed on the Toronto Stock Exchange (the "TSX") and Nasdaq Global Select Market ("NASDAQ") and the impact of any actions it may be required to take to remain listed;
•Expectations concerning the Company's financial position, future liquidity and other financial results;
•The ability of the Company to generate cash flow from operations and from financing activities;
•The competitive conditions of the industry, including the Company’s ability to maintain or grow its market share;
•Expectations regarding the Company's ability to generate cost savings from operational effectiveness and automation initiatives;
•Expectations regarding capital expenditures and timing thereof; and
•Expectations concerning the Company's performance during the first quarter of fiscal year 2025 ("Fiscal 2025"), including with respect to revenue, adjusted gross margin, selling, general and administrative expenses ("SG&A") and Adjusted EBITDA.
Forward-looking information is provided for the purposes of assisting the reader in understanding the Company and its business, operations, risks, financial performance, financial position and cash flows as at and for the periods ended on certain dates, and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned that such statements may not be appropriate for other purposes. In addition, this MD&A may contain forward-looking information attributed to third party industry sources. Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. Forward-looking information does not guarantee future performance and involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in the forward-looking information. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the expectations, predictions, forecasts, projections and conclusions will not occur or prove accurate, that assumptions may not be correct, and that objectives, strategic goals and priorities will not be achieved. These and other factors may cause actual results or events to differ materially from those anticipated in the forward-looking information.
Factors that could cause actual results to differ materially from those set forth in forward-looking information include, but are not limited to: financial risks; cyber security risks; dependence on senior management and other key personnel, the board of directors of the Company (the "Board of Directors"), consultants and advisors; availability and sufficiency of insurance including continued availability and sufficiency of director and officer and other forms of insurance; the Company and its subsidiaries being able to, where applicable, cultivate cannabis pursuant to applicable law and on the currently anticipated timelines and in anticipated volumes; industry competition; global events, including heightened economic and industry uncertainty as a result of any pandemic or epidemic and governmental action in respect thereto, including with respect to impacts on production, operations, disclosure controls and procedures or internal control over financial reporting, and supply chain and distribution disruptions; facility and technological risks; changes to government laws, regulations or policy, including environmental or tax, or the enforcement thereof; agricultural risks; ability to maintain any required licenses or certifications; supply risks; product risks; construction delays or postponements; packaging and shipping logistics; inflationary risk, expected number of medical and recreational cannabis users in Canada and internationally; continuation of shipments to existing and prospective international jurisdictions and customers; potential time frame for the implementation of legislation to legalize cannabis internationally; the Company’s, its subsidiaries' and its investees’ ability to, where applicable, obtain and/or maintain their status as licensed producers (a "Licensed Producer" or "LP") or other applicable licensees; risk factors affecting its investees; availability of any required financing on commercially acceptable
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 6
terms or at all; the potential size of the regulated recreational cannabis market in Canada; demand for and changes in the Company’s cannabis and related products, including the Company’s derivative products, and the sufficiency of the retail networks to supply such demand; ability of the Company to develop current and future vapour hardware and to expand into the vapour market; ability to enter and participate in international market opportunities; general economic, financial market, regulatory, industry and political conditions affecting the Company; expectations related to the ongoing war between Israel and Hamas and its impact on the supply of product in the market and the demand for product in Israel as well as the impact of the war on collection of accounts receivable; the outcome of the final Anti-Dumping Investigation; the ability of the Company to compete in the cannabis industry and changes in the competitive landscape; a material decline in cannabis prices; the Company’s ability to manage anticipated and unanticipated costs; the Company’s ability to implement and maintain effective internal control over financial reporting and disclosure controls and procedures; risks relating to potential failure of the Company's information technology ("IT") system; ongoing expansions to the Company's enterprise resource planning ("ERP") system; continuing to meet listing standards for the TSX and the NASDAQ; risks relating to the Company's IP; liquidity risk; concentration risk; and other risks and factors described from time to time in the documents filed by the Company with securities regulators in Canada and the United States. Material factors and assumptions used in establishing forward-looking information include that production activities will proceed as planned, and demand for cannabis and related products will change in the manner expected by management. All forward-looking information is provided as of the date of this MD&A.
The Company does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.
ADDITIONAL INFORMATION ABOUT THE ASSUMPTIONS, RISKS AND UNCERTAINTIES OF THE COMPANY’S BUSINESS AND MATERIAL FACTORS OR ASSUMPTIONS ON WHICH INFORMATION CONTAINED IN FORWARD-LOOKING INFORMATION IS BASED IS PROVIDED IN THE COMPANY’S DISCLOSURE MATERIALS, INCLUDING IN THIS MD&A UNDER “RISK FACTORS” AND THE COMPANY’S CURRENT AIF UNDER “RISK FACTORS”, FILED WITH THE SECURITIES REGULATORY AUTHORITIES IN CANADA AND AVAILABLE UNDER THE COMPANY’S ISSUER PROFILE ON SEDAR+ AT WWW.SEDARPLUS.CA, AND FILED WITH OR FURNISHED TO THE SEC AND AVAILABLE ON EDGAR AT WWW.SEC.GOV. ALL FORWARD-LOOKING INFORMATION IN THIS MD&A IS QUALIFIED BY THESE CAUTIONARY STATEMENTS.
CAUTIONARY STATEMENT REGARDING CERTAIN NON-IFRS MEASURES
This MD&A contains certain financial and operational performance measures that are not recognized or defined under IFRS (“Non-IFRS Measures”). As there are no standardized methods of calculating these Non-IFRS Measures, the Company's approaches may differ from those used by others and this data may not be comparable to similar data presented by other Licensed Producers of cannabis and cannabis companies. For an explanation of these measures to related comparable financial information presented in the Financial Statements prepared in accordance with IFRS, refer to the discussion below.
The Company believes that these Non-IFRS Measures are useful indicators of operating performance and are specifically used by management to assess the financial and operating performance of the Company. These Non-IFRS Measures include, but are not limited to, the following:
•Adjusted gross margin is calculated by subtracting cost of sales, before the effects of: (i) unrealized gain on changes in fair value of biological assets; (ii) realized fair value on inventories sold and other inventory charges; (iii) provisions and impairment of inventories and biological assets; and (iv) provisions to net realizable value. Adjusted gross margin percentage is calculated by dividing adjusted gross margin by net revenue. Adjusted gross margin is reconciled to the most directly comparable IFRS financial measure in the "Financial Results and Review of Operations" section of this MD&A.
Management believes that these measures provide useful information to assess the profitability of our operations as they represent the normalized gross margin generated from operations and exclude the effects of non-cash fair value adjustments on inventories and biological assets, which are required by IFRS. The most directly comparable measure to adjusted gross margin calculated in accordance with IFRS is gross margin before fair value adjustments.
•Adjusted EBITDA is calculated as net income (loss) excluding: financing costs, net of investment income; income tax expense (recovery); depreciation, amortization, impairment, normalization of depreciation add-back due to changes in depreciable assets resulting from impairment charges, (gain) loss on disposal of property, plant and equipment (per the consolidated statement of cash flows); share-based compensation (per the consolidated statement of cash flows); share of loss (gain) from investments in associates including impairment loss; change in fair value of contingent consideration; change in fair value of derivative liabilities, other financial assets and preferred shares; expenditures incurred in connection with research and development activities (net of depreciation); unrealized gain on changes in fair value of biological assets; realized fair value on inventories sold and other inventory charges; provisions and net realizable value adjustments related to inventory and biological assets; government subsidies, insurance recoveries and other non-operating expenses (income); legal provisions (recoveries); ERP implementation costs; transaction costs; share issuance costs; and provision for Canndoc (as defined herein) expected credit losses. Adjusted EBITDA is reconciled to the most
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 7
directly comparable IFRS financial measure in the "Financial Results and Review of Operations" section of this MD&A.
During the second quarter of Fiscal 2024, Management changed the calculation of Adjusted EBITDA and has conformed prior quarters accordingly to include provision for expected credit losses.
Adjusted EBITDA is intended to provide a proxy for the Company’s operating cash flow and derives expectations of future financial performance for the Company, and excludes adjustments that are not reflective of current operating results. The most directly comparable measure to Adjusted EBITDA calculated in accordance with IFRS is net income (loss).
Non-IFRS Measures should be considered together with other data prepared in accordance with IFRS to enable investors to evaluate the Company’s operating results, underlying performance and prospects in a manner similar to the Company’s management. Accordingly, these Non-IFRS Measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
BUSINESS OVERVIEW
NATURE OF THE COMPANY’S BUSINESS
The Company is a federally incorporated Canadian cannabis cultivator and manufacturer of finished cannabis goods. Our principal operating subsidiary, Organigram Inc., is a Licensed Producer of cannabis regulated by Health Canada. Organigram is authorized to cultivate cannabis and to manufacture and distribute cannabis products to wholesale and retail channels in the recreational and medical cannabis regimes.
The Company’s head office is located at 1400-145 King Street West, Toronto, Ontario, M5H 1J8. The Company's registered office is located at 35 English Drive, Moncton, New Brunswick, E1E 3X3. The Company’s common shares (“Common Shares”) are listed under the ticker symbol “OGI” on both the NASDAQ and the TSX. Any inquiries regarding the Company may be directed by email to investors@organigram.ca.
The Company conducts its operations at several facilities: (i) our primary indoor cultivation and manufacturing facility in Moncton, New Brunswick (the “Moncton Campus”); (ii) our edibles manufacturing facility in Winnipeg, Manitoba (the "Winnipeg Facility"); and (iii) our craft flower cultivation and hash production facility in Lac-Supérieur, Québec (the "Lac-Supérieur Facility"). We also export cannabis to various international jurisdictions.
On December 6, 2024, the Company acquired Motif Labs Ltd. ("Motif"), a leading cannabis company, specializing in cannabis extraction and vape and infused pre-roll formulation and production. As a result of the acquisition, the Company now operates two additional cannabis processing facilities in Southwestern Ontario: one in Aylmer (the "Aylmer Facility") and the other in London (the "London Facility"). The Aylmer Facility houses best-in-class CO2 and Hydrocarbon extraction capabilities, and is optimized for formulation refinement, post-processing of minor cannabinoids, and pre-roll production. The London Facility will be optimized for labelling, packaging, and national fulfillment. The Aylmer Facility and London Facility provide the Company with physical footprints in Canada's most populous province, and are expected to aid the Company in further optimizing its production and logistics.
STRATEGY
Our corporate strategy is to leverage our broad consumer brand and product portfolio and our culture of innovation to increase our market share, drive profitability, expand internationally, and continue to be an industry leader that delivers long-term shareholder value.
The pillars of our strategy are:
1.Innovation;
2.Consumer Focus;
3.Efficiency; and
4.Market Expansion.
1. Innovation
Meeting the demands of a fast-growing industry with changing consumer preferences requires innovation and the creation of breakthrough products that are embraced by the market and provide a long-term competitive advantage. We are committed to maintaining a culture of innovation and have a track record of introducing differentiated products that quickly capture market share, specifically:
•SHRED: Canada's first milled flower product blended to create curated flavour profiles;
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 8
•Monjour Wellness gummies: a cannabidiol ("CBD") focused wellness brand available in a large format and offering multiple flavours in one package;
•SHRED X Rip-Strip hash: a patent-pending botanical terpene-infused hash product sold in convenient pre-cut strips;
•SHRED X Heavies: a line of ultra-high THC (40%+) infused pre-rolls with diamonds, distillate and botanical terpenes;
•THCV: Canada's first whole-flower derived tetrahydrocannabivarin ("THCV") products, including gummies and whole and milled flower, offering consumers a differentiated experience compared to THC;
•SHRED Dartz: tube-style pre-rolls delivered in a format familiar to consumers in a sleek and low-profile package;
•SHRED Rainbow Oz. Dartz: a multi-flavour offering containing 7 different packs of pre-rolls, for a total of 70 pre-rolls per package; and
•Edison Sonics: Canada's first gummy product utilizing FASTTM which is clinically validated to show onset of up to 50% faster and results in nearly double the amount of peak cannabinoid levels compared to gummies without FASTTM. Edison Sonics were launched in November 2024.
Consistent with our innovation culture, we have a product development collaboration ("PDC") with BAT, our largest institutional shareholder and a leading multi-category consumer goods business, through which we established a "Centre of Excellence" (the "CoE") to focus on developing the next generation of cannabis products. The CoE is located at the Moncton Campus, where Organigram has been authorized to conduct research and development activities with cannabis. Under the terms of the Product Development Collaboration agreement (the "PDC Agreement") between the parties dated March 10, 2021, we have a worldwide, royalty-free, sub-licensable, perpetual license to exploit IP developed in the PDC in any field. This license, which is exclusive to us in Canada and non-exclusive to us outside of Canada, enhances our ability to enter international markets, including through sublicensing arrangements with established operators. Both companies contributed scientists, researchers, and product developers to the CoE, which is governed and supervised by a steering committee consisting of an equal number of senior members from both companies.
2. Consumer Focus
Organigram seeks to address the changing needs of the cannabis consumer through its broad brand and product portfolio in which it offers products in the most popular categories and at attractive price points. Based on ongoing consumer research, the Company's product portfolio is frequently refreshed with different flower strains and new package formats and product introductions. Organigram's alignment with consumers is evidenced by its #2 market position6 as of the end of Q4 Fiscal 2024, and its category leadership:
•SHRED: $225 million in annual retail sales as of the last twelve months ("LTM") at the end of Q4 Fiscal 20246
•Hash: since acquiring the Lac-Supérieur Facility, Organigram has expanded hash distribution nationally and introduced the innovative Rip-Strip Hash product. On September 30, 2024, Organigram held the #1 market position in the hash category
•SHRED’ems and Monjour gummies: among the top-selling gummies in Canada. As of the end of Q4 Fiscal 2024, the Company held the #3 market position in the gummy category with Monjour being the best-selling CBD-only gummy6; and Boxhot: the Company acquired the Boxhot brand through its acquisition of Motif in December, 2024. Boxhot is one of Canada's leading cannabis brands with $158 million in revenue in the last 12 months7, and is the leading vape brand in the country1, that represents products in the vape, infused pre-roll, and concentrates categories
In addition to third-party and direct consumer research, we maintain contact with consumers online via social media.
3. Efficiency
The Moncton Campus utilizes three-tier cultivation technology to maximize the use of facility square footage. It also employs proprietary information technology to track all aspects of the cannabis cultivation and harvest process. This is complemented by automation in post-harvest production, including high-speed pouch filling, pre-roll machines and automated excise stamping.
The Winnipeg Facility is highly automated and efficiently handles both small-batch artisanal manufacturing of edibles and large-scale nutraceutical-grade production, enabling us to produce a wide range of high-quality edible products at attractive price points.
The Lac-Supérieur Facility houses a cultivation and derivative products processing operation. We have strategically invested in the Lac-Supérieur Facility to increase cultivation capacity, processing and storage space, and accelerate automation.
Key efficiency milestones achieved in Q4 Fiscal 2024 include:
•Realized $9.1 million in annualized savings;
•Harvested 23,323 kg of flower representing an increase of 10% compared to Q4 Fiscal 2023;
•Produced 41.5 million gummies in Fiscal 2024, an increase of over 36% compared to Fiscal 2023;
6 As of September 30, 2024 - Multiple sources (Hifyre, Weedcrawler, OCS wholesale sales and e-commerce orders shipped data, provincial boards data and internal sales data)
7 Source: Hifyre (all provinces other than QC, NB and NS), Weedcrawler (QC), and Board Data (NB, NS, PE), R3M Oct 30
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 9
•Completed trials for reducing cannabinoid waste that are expected to deliver meaningful savings in Fiscal 2025, by changing to in-line active dosing tanks for the continuous edibles line;
•Achieved record yield per plant of 187 grams;
•The Company achieved 9% of its cannabis harvest from seeds in Q4 Fiscal 2024 and 22% by the end of calendar 2024, contributing to a reduction in cultivation costs and increased cultivation capacity. The Company expects to further leverage lower-cost seed-based technology by targeting approximately 20% of harvests from seeds in Fiscal 2025, with monthly fluctuations between 15% and 30% depending on the cultivar requirements;
•Optimized shift structure in Winnipeg from 8-hour shifts to 10-hour shifts for increase efficiencies, resulting in $650,000 of annualized salary savings;
•Increased yield per grow room in Lac Supérieur from 82 kg in the first quarter of Fiscal 2024, to 160 kg in the fourth quarter of Fiscal 2024, an increase of 95%;
•Excluding THC-capped Quebec flower, 43% of total harvests were above 26% THC;
•56% of flower harvested in Lac Supérieur was over 26% THC in Q4 Fiscal 2024, up from 30% in Q3 Fiscal 2024;
•Successfully completed trial production of Edison Sonics, the Company's new fast-acting nanoemulsion gummies;
•Converted two vegetation rooms to flower at the Moncton Campus due to extra capacity from seeds which will provide an additional ~1,360kg flower from the garden annually; and
•Produced 1.1 million units of Hash in Fiscal 2024, compared to 0.7 million in Fiscal 2023.
4. Market Expansion
We are committed to expanding our market presence by diversifying our product offerings and broadening our geographical footprint. We expect to enable this via strategic investments and acquisitions, along with assessments for international expansion. Examples of market expansion include:
•The strategic acquisitions of (i) EIC, whose Winnipeg Facility added a purpose-built, highly-automated, 51,000-square-foot cannabis edibles manufacturing facility; and (ii) Laurentian, whose Lac-Supérieur Facility added craft cultivation and hash to our product portfolio and increased our presence in Québec;
•International shipments of bulk cannabis to Germany, Australia and the United Kingdom ("UK");
•The strategic Follow-on BAT Investment of $124.6 million and the creation of the "Jupiter" investment pool targeting international opportunities, with initial investments completed in OBX and Sanity Group; and
•The acquisition of Motif subsequent to Fiscal 2024 resulted in Organigram becoming the #1 LP in Canada by market share8 and added two purpose-built facilities to its portfolio that are optimized for cannabis extraction, processing, manufacturing, and distribution. Motif's product portfolio is highly complementary to Organigram's, with minimal portfolio overlap.
KEY QUARTERLY FINANCIAL AND OPERATING RESULTS
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Q4-2024
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Comparative Q4-2023
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CHANGE |
|
% CHANGE |
Financial Results |
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Net revenue |
$ |
44,698 |
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|
$ |
36,698 |
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|
$ |
8,000 |
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|
22 |
% |
Cost of sales |
$ |
30,907 |
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|
$ |
34,321 |
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$ |
(3,414) |
|
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(10) |
% |
Gross margin before fair value adjustments(2)
|
$ |
13,791 |
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|
$ |
2,377 |
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|
$ |
11,414 |
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|
480 |
% |
Gross margin % before fair value adjustments(1)
|
31 |
% |
|
6 |
% |
|
25 |
% |
|
417 |
% |
Operating expenses
|
$ |
16,933 |
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|
$ |
38,244 |
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|
$ |
(21,311) |
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(56) |
% |
Other expense (income)
|
$ |
5,686 |
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|
$ |
(1,143) |
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|
$ |
(6,829) |
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(597) |
% |
Adjusted EBITDA(2)
|
$ |
5,860 |
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|
$ |
58 |
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|
$ |
5,802 |
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|
10,003 |
% |
Net loss
|
$ |
(5,433) |
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$ |
(26,595) |
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$ |
(21,162) |
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(80) |
% |
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Net cash provided by (used in) operating activities
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$ |
8,893 |
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$ |
(8,469) |
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$ |
17,362 |
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|
205 |
% |
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Adjusted Gross Margin(2)
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$ |
16,543 |
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$ |
7,161 |
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$ |
9,382 |
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|
131 |
% |
Adjusted Gross Margin %(2)
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37 |
% |
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20 |
% |
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17 |
% |
|
85 |
% |
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Operating Results |
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Kilograms harvested - dried flower
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23,323 |
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21,238 |
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2,085 |
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10 |
% |
Kilograms sold - dried flower |
20,677 |
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15,249 |
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5,428 |
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36 |
% |
Note (1): Equals gross margin before fair value adjustments (as reflected in the Financial Statements) divided by net revenue.
Note (2): Adjusted EBITDA, Adjusted Gross Margin and Adjusted Gross Margin % are non-IFRS measures. See "Cautionary Statement Regarding Certain Non-IFRS Measures" and "Financial Results and Review of Operations" in this MD&A.
Note (3): Comparative Q4 Fiscal 2023 results is for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
8 Source: Hifyre (all provinces other than QC, NB and NS), Weedcrawler (QC), and Board Data (NB, NS, PE), R3M Oct 30
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 10
REVENUE
For Q4 Fiscal 2024, the Company reported $44,698 in net revenue. Of this amount $38,839 (88%) was attributable to sales to the recreational cannabis market, $4,075 (9%) to the international market, $513 (1%) to the medical market and $1,069 (2%) to other revenues. Q4 Fiscal 2024 net revenue increased 22%, or $8,000, from Comparative Q4 Fiscal 2023 net revenue of $36,698, primarily due to an increase in sales of dried flower and international sales.
Sale of flower from all product categories in the recreational market comprised 81% of total net revenue in the quarter. The average net selling price ("ASP") of recreational flower decreased to $1.47 per gram in Q4 Fiscal 2024 as compared to $1.59 per gram for Comparative Q4 Fiscal 2023. This decrease reflects historical price compression in the recreational market, as both the Company and the Canadian cannabis industry adapted to consumer and product mix increasingly focused on value offerings. Price compression for recreational flower stabilized in the third quarter of Fiscal 2024, with an ASP of $1.51 per gram. While selling prices are prone to fluctuation, the Company is committed to refining its product mix as customer preferences evolve.
The volume of flower sales in grams increased 36% to 20,677 kg in Q4 Fiscal 2024 compared to 15,249 kg in Comparative Q4 Fiscal 2023, primarily as a result of success of the Company's large format value products, as well as a significant increase in sales of infused pre-rolls.
COST OF SALES
Cost of sales for Q4 Fiscal 2024 decreased to $30,907 compared to $34,321 in Comparative Q4 Fiscal 2023, primarily due to lower cost of sales per unit and lower inventory provisions in Q4 Fiscal 2024. Included in Q4 Fiscal 2024 cost of sales are $2,752 of inventory provisions for unsaleable inventories. The Comparative Q4 Fiscal 2023 had inventory provision adjustments of $4,784.
GROSS MARGIN BEFORE FAIR VALUE ADJUSTMENTS AND ADJUSTED GROSS MARGIN
The Company realized gross margin before fair value adjustments for Q4 Fiscal 2024 of $13,791, or 31% as a percentage of net revenue, compared to $2,377, or 6%, in Comparative Q4 Fiscal 2023. The increase in gross margin before fair value adjustments, as a percentage of net revenue, is primarily driven by a higher proportion of international sales with stronger margins, lower cost of sales per unit achieved through greater scale and operating efficiencies (including but not limited to an improvement in yields), and reduced inventory provisions and net realizable value adjustments.
Adjusted gross margin9 for Q4 Fiscal 2024 was $16,543, or 37% as a percentage of net revenue, compared to $7,161, or 20%, for Comparative Q4 Fiscal 2024 . This was largely due to lower cost of sales per unit and higher international sales.
OPERATING EXPENSES
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Q4-2024
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Comparative Q4-2023
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CHANGE |
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% CHANGE |
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General and administrative |
$ |
9,544 |
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$ |
11,524 |
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$ |
(1,980) |
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(17) |
% |
Sales and marketing |
4,756 |
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4,263 |
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493 |
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12 |
% |
Research & development |
1,667 |
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2,856 |
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(1,189) |
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(42) |
% |
Share-based compensation |
966 |
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732 |
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234 |
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32 |
% |
Impairment of intangible assets and goodwill |
— |
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6,951 |
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(6,951) |
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(100) |
% |
Impairment of property, plant and equipment |
— |
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11,918 |
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(11,918) |
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(100) |
% |
Total operating expenses |
$ |
16,933 |
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$ |
38,244 |
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$ |
(21,311) |
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(56) |
% |
Note (1): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $9,544 decreased from the Comparative Q4 Fiscal 2023 expenses of $11,524 primarily due to lower technology costs including implementation expenses for a new ERP system, as well as reduced insurance costs, professional fees, and depreciation and amortization.
SALES AND MARKETING
Sales and marketing expenses of $4,756 increased from Comparative Q4 Fiscal 2023 expenses of $4,263. The increase in expenses was due to the Company's continued investment in developing its share of the recreational market. These expenses as % of net revenue decreased to 12% from 13% in the Comparative Q4 Fiscal 2023.
9 Adjusted gross margin is a non-IFRS financial measure. See the cautionary statement regarding non-IFRS financial measures in the “Introduction” section of this MD&A, and the discussion under the heading “Adjusted EBITDA” and the reconciliation to IFRS measures in the "Financial Results and Review of Operations" section of this MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 11
RESEARCH AND DEVELOPMENT
Research and development costs of $1,667 decreased from the Comparative Q4 Fiscal 2023 costs of $2,856 primarily due to higher scientific research and experimental development (SR&ED) credits and reduced activity under the PDC Agreement with BAT and other product innovation projects.
SHARE-BASED COMPENSATION
Share-based compensation expense of $966 increased from the Comparative Q4 Fiscal 2023 expense of $732, primarily due to employee equity awards that were issued during the first half of the current fiscal year to retain talent.
OTHER (INCOME) / EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4-2024
|
|
Comparative Q4-2023
|
|
CHANGE |
|
% CHANGE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of financing costs |
(960) |
|
|
(652) |
|
|
(308) |
|
|
(47) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of loss (including impairment) from investments in associates
|
4,895 |
|
|
(10) |
|
|
4,905 |
|
|
(49,050) |
% |
|
|
|
|
|
|
|
|
Loss on disposal of property, plant and equipment |
24 |
|
|
45 |
|
|
(21) |
|
|
(47) |
% |
Change in fair value of contingent consideration |
— |
|
|
(466) |
|
|
466 |
|
|
(100) |
% |
Share issue costs allocated to derivative liabilities and preferred shares |
269 |
|
|
— |
|
|
269 |
|
|
100 |
% |
Change in fair value of derivative liabilities and other financial assets |
1,642 |
|
|
413 |
|
|
1,229 |
|
|
(298) |
% |
|
|
|
|
|
|
|
|
Other non-operating income |
(184) |
|
|
(473) |
|
|
289 |
|
|
(61) |
% |
Total other income |
$ |
5,686 |
|
|
$ |
(1,143) |
|
|
$ |
6,829 |
|
|
(597) |
% |
Note (1): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
INVESTMENT INCOME
Investment income (net of financing costs) of $960 increased from the Comparative Q4 Fiscal 2023 of $652, primarily due to a higher cash balance in the current period.
SHARE OF LOSS FROM INVESTMENTS IN ASSOCIATES
During Q4 Fiscal 2024, the Company determined that there are indicators of impairment related to its investment in Hyasynth Biologicals Inc. ("Hyasynth"). The Company determined the recoverable amount to be approximately $nil and a result, an impairment loss of $4,773 was recognized in the consolidated statement of operations and comprehensive loss for Fiscal 2024.
SHARE ISSUE COSTS
During Q4 Fiscal 2024, the Company closed the second tranche of the Follow-on BAT Investment and issued 4,429,740 Common Shares and 8,463,435 Preferred Shares (as defined herein). The transaction costs of $269 incurred in relation to the issuance of Preferred Shares were recognized as an expense in the consolidated statement of operations and comprehensive loss for Fiscal 2024.
CHANGE IN DERIVATIVE LIABILITIES AND OTHER FINANCIAL ASSETS
Change in fair value of derivative liabilities and other financial assets was a loss of $1,642 during Q4 Fiscal 2024 compared to a loss of $413 in Comparative Q4 Fiscal 2023. The increase is primarily due to a fair value loss of $2,872 and $3,070 recorded in relation to the increase in the derivative warrant liabilities and top-up rights (the "Top-up Rights") granted to BAT under the amended and restated investor rights agreement dated January 23, 2024 (the "Amended IRA"), which amended and restated the original investor rights agreement between BAT and the Company dated March 10, 2021 (the "Original IRA"). This decrease was partially offset by a fair value gain on other financial assets.
ADJUSTED EBITDA
Adjusted EBITDA10 was $5,860 in Q4 Fiscal 2024 compared to Adjusted EBITDA of $58 in Comparative Q4 Fiscal 2023. The $5,802 increase in Adjusted EBITDA from the comparative period is primarily attributable to higher net flower revenue, lower general and administrative expenses and the increase in adjusted gross margins11. Please refer to the “Financial Results and Review of Operations” section of this MD&A for a reconciliation of Adjusted EBITDA to net loss.
10 Adjusted EBITDA is a Non-IFRS Measure. See "Cautionary Statement Regarding Certain Non-IFRS Measures" in this MD&A, and the discussion under the heading “Adjusted EBITDA” and the reconciliation to IFRS measures in the "Financial Results and Review of Operations" section of this MD&A.
11 Adjusted gross margin is a Non-IFRS Measure. See "Cautionary Statement Regarding Certain Non-IFRS Measures" in this MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 12
NET LOSS
The net loss was $5,433 in Q4 Fiscal 2024 compared to a net loss of $26,595 in Comparative Q4 Fiscal 2023. The decrease in net loss from the comparative period is primarily due to higher adjusted gross margins10 and lower impairment losses in the current period.
KEY DEVELOPMENTS DURING THE QUARTER AND SUBSEQUENT TO SEPTEMBER 30, 2024
In July 2024, Organigram bolstered its auto-flower and rare cannabinoid portfolio with a partial third tranche investment of US$1 million in Phylos, a U.S. cannabis genetics company and provider of production-ready seeds, with the remaining portion of the final tranche to be funded upon completion of a newly expanded final milestone. Already a cultivation leader in high potency THCV cultivars, Organigram is expected to pilot higher potency rare cannabinoids such as cannabigerol ("CBG"), cannabichromene ("CBC") and cannabidivarin ("CBDV"). As part of the expanded milestone, Phylos delivered to Organigram 21 unique auto-flower seed varietals for testing and phenotyping, and will deliver a second cohort of 21 auto flower seed varietals by January 31, 2025. In addition to the auto-flower seeds, Organigram received an expanded genetics license from Phylos that, in addition to THCV, includes access to high potency CBG, CBC and CBDV seed-based cultivars. The balance of the third tranche, being an additional US$1 million, will be advanced to Phylos conditional upon successful completion of the expanded milestone no later than March 31, 2026.
In July 2024, the Company announced the appointment of Craig Harris to the Board of Directors, as BAT's third nominee under the Amended IRA, bringing the number of directors to 10.
In August 2024, the Company unveiled the preliminary results of a landmark clinical pharmacokinetic (PK) study conducted via the PDC on the Company's latest innovation, nanoemulsion technology. This patent-pending technology, branded as FAST™ , is the first innovation to be commercialized by Organigram leveraging the output of the PDC. The final results of the study revealed: up to a 50% faster onset time of effects compared to gummies without FAST™; improved bioavailability of cannabinoids delivering nearly double the cannabinoids at peak effect; and early indicators of a more predictable duration of effects.
In August 2024, the Company closed the second of three tranches of the previously announced $124,559,674 Follow-on BAT Investment for gross proceeds $41,519,891. The third and final tranche is expected to close around February 28, 2025.
In November 2024, the Company launched Edison Sonics gummies, its inaugural product powered by FAST™, an advanced nanoemulsion delivery system that breaks down cannabinoids into tiny particles, allowing them to be absorbed more quickly and efficiently during consumption, as described in the results of the PK study cited above.
In December 2024, the Company announced its acquisition of Motif, which resulted in the Company becoming Canada's largest cannabis company by market share12. The Company acquired 100% of the issued and outstanding shares of Motif for upfront consideration of $90 million, consisting of $50 million in cash and $40 million of Common Shares based on the 30 trading day volume weighted average price ("VWAP") of $2.3210 per Common Share. Motif's former shareholders will also be entitled to receive additional contingent consideration of $10 million payable in Common Shares with a deemed issue price of $3.22031 per Common Share, conditional on the Company achieving a price per Common Share exceeding $3.2203, based on the rolling 30-trading day VWAP within 12 months of the date of the transaction.
DISCUSSION OF OPERATIONS
Moncton Campus (Indoor Cultivation and Manufacturing)
We have implemented various initiatives that have increased the average THC potency in our products. We have also implemented changes to our growing and harvesting methodologies to improve operating conditions, resulting in higher quality flower and reduced production costs.
In Fiscal 2023, the Company continued to invest in driving operational efficiencies through automation and internalizing certain post-harvest processes including commissioning a new automated packaging line for SHRED milled products, internalizing THC testing, internalizing remediation, and commissioning new drying machines. These initiatives have reduced headcount and significantly reduced costs while streamlining operations and increasing efficiency. Of the $10 million in annual savings targeted by the Company in Fiscal 2024 as a result of the Fiscal 2023 capex programs, $9.1 million was realized, with the remainder expected to be realized in early Fiscal 2025.
The Company harvested 23,323 kg of dried flower during Q4 Fiscal 2024 compared to 21,238 kg of dried flower in Comparative Q4 Fiscal 2023.
12 Source: Hifyre (all provinces other than QC, NB and NS), Weedcrawler (QC), and Board Data (NB, NS, PE), R3M Oct 30
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 13
Winnipeg Facility (Edibles)
This purpose-built, highly automated 51,000 square-foot manufacturing facility was designed to produce highly customizable, precise, and scalable cannabis-infused products in various formats including pectin and gelatin-based sugar-free gummies. The Winnipeg Facility is capable of producing over 4 million gummies on a monthly basis. In May 2024, Organigram installed specialized manufacturing equipment for its nanoemulsion technology, and launched its first nanoemulsion gummies in November 2024.
Lac-Supérieur Facility (Hash/Concentrates and Craft Flower)
This facility initially had 6,800 square feet of cultivation area, which the Company expanded to 33,000 square feet in Q4 Fiscal 2023. The facility is equipped to produce 2,400 kilograms of flower and over 2 million packaged units of hash annually. The production of SHRED X Rip Strip Hash started in February 2023 using proprietary patent-pending technology with a capacity of 150 units per minute. The Company is currently producing Quebec-grown cannabis for its Trailblazer and Wola brands at this facility.
Aylmer Facility (Extraction and Manufacturing)
The Aylmer Facility, acquired by the Company in December 2024, houses best-in-class extraction and manufacturing capabilities including hydrocarbon and CO2 extraction and refinement, formulation, post-processing of minor cannabinoids, and infused and regular pre-roll production. The facility provides low cost ingredients to Organigram, and produces on a monthly basis approximately 1,350 kg of distillate, 400,000 kg of hydrocarbon extract, 750,000 pre-rolls, and 1 million vapes.
London Facility (Warehousing and Distribution)
The London Facility, acquired by the Company in December 2024, is a centralized warehouse distribution hub in Canada's most populous province of Ontario. The facility will support growing demand for Organigram products, optimize fulfillment, and reduce the cost and complexity of shipping product from the Company's Moncton Campus in New Brunswick.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes that the cannabis industry is still in the nascent stages of product development and that product innovation backed by core fundamental research and development ("R&D") is necessary to establish a long-term competitive advantage in the industry. Our investments in these areas are expected to position the Company at the forefront of launching new, innovative, differentiated products and formulations that appeal to consumers.
BAT Product Development Collaboration and Centre of Excellence
The CoE was established to focus on R&D activities for the next generation of cannabis products, as well as fundamental cannabis science.
Under the PDC Agreement, both Organigram and BAT have access to certain of each other’s IP and have the right to independently and globally commercialize the products, technologies, and IP created in the PDC. Costs relating to the CoE are funded equally by Organigram and BAT. Approximately $31 million of BAT’s initial investment in Organigram has been reserved for Organigram’s portion of its funding obligations.
The CoE's state-of-the-art biological experiment laboratory ("BioLab") enables us to conduct advanced research on plant science. Organigram has conducted R&D on several minor cannabinoids, which have since been introduced into our expanding product portfolio. The CoE is also developing a suite of emulsions, novel vapour formulations, flavour innovations, and packaging solutions that are expected to enhance Organigram's product portfolio.
The PDC has completed a PK study that enables us to substantiate certain innovations with application in the edibles and vapour product formats. The PK study was a significant milestone that generated a robust dataset validating our development efforts and enabling us to commercialize nanoemulsion technology beginning with the launch of our Edison Sonics gummies in November 2024.
Plant Science, Breeding and Genomics Research and Development in Moncton
Organigram’s sophisticated cultivation program has continued its expansion with the addition of a dedicated cultivation R&D space. The new space has accelerated rapid assessment and screening, delivering 20 to 30 unique cultivars every two months while freeing up rooms for commercial grow operations. The plant science team continues to move the garden towards unique, high-terpene and high-THC cultivars, while also leveraging the BioLab for ongoing plant science innovation focusing on quality, potency and disease-resistance marker discovery to enrich the cultivation pipeline. This activity is supported by the wide-ranging technical collaboration being undertaken as part of the Company's strategic investment in Phylos.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 14
OUTLOOK
Market Size
The Company maintains a positive outlook on the cannabis market, both in Canada and internationally. Canada-wide legal sales for the industry are expected to total $6 billion in calendar 202813. Canada's cannabis exports have increased significantly over the last five years, growing from $8 million in 2020, to approximately $218 million in its 202414.
The momentum of global cannabis reform has encouraged many cannabis operators to seek exposure to emerging medical and recreational markets. Furthermore, as international revenue is not subject to onerous Canadian cannabis excise duties, LPs have increasingly sought to grow this revenue stream to expand their revenues and margins, while further solidifying Canada's strong reputation for producing high quality cannabis abroad.
Business Outlook
Opportunities to scale new cannabis strains require a patient and deliberate process where cultivation protocols are trialed for each strain and adjusted through multiple growth cycles before roll-out across the facility. Organigram’s commitment to investing in new genetics and innovations continues, and we expect to launch new genetics, ready-to-consume innovations, and products containing minor cannabinoid stacks in various formats.
In addition to traditional dried flower and pre-roll offerings, Organigram expects to be in a position to generate more revenue growth from innovative products, particularly through the commercialization of FASTTM , which was first introduced to the Canadian market in November 2024 with the launch of Edison Sonics gummies. FASTTM gummies have been clinically validated to produce up to a 50% faster onset and nearly double the level of cannabinoid concentration at peak compared to traditional gummies without FASTTM. The Company anticipates garnering a competitive edge in the gummy category with this new ingestible technology.
The Company's international sales have increased sequentially throughout Fiscal 2024. Organigram further diversified its international supply partners in Fiscal 2024, and established a foothold in the rapidly growing German cannabis market through a $21 million investment in Sanity Group. This investment enhanced Organigram's previously announced supply agreement with Sanity Group such that its cannabis export volumes to the German market are expected to increase throughout Fiscal 2025. The anticipated EUGMP certification of Organigram's Moncton Campus is also expected to drive the growth of its international revenue.
Organigram achieved significant production, manufacturing, and logistics efficiency gains in Fiscal 2024, driving notable growth in adjusted gross margins in Fiscal 2024.
The Company expects adjusted gross margin to exceed 35% for Fiscal 2025. It also anticipates positive full-year Adjusted EBITDA15 surpassing Fiscal 2024 levels, along with positive cash flow from operations.
Organigram has identified the following opportunities that it believes have the potential to improve margins in the future:
•Increased sales of higher-margin ready-to-consume products, including edibles, vapes, and tube-style pre-rolls
•Growth in high-margin international sales, with a strategic focus on the growing German market
•Continued operational efficiencies across the Company's facilities and a ramp-up of seed-based production, reducing input costs and improving profitability
•The Company’s acquisition of Motif in December 2024 also brings several margin-enhancing opportunities:
◦Expanded production capabilities, enabling better utilization of assets, improved inventory turnover, and economies of scale
◦Integration of Motif’s operations, which is expected to deliver significant cost savings, including $10+ million in incremental EBITDA synergies within 24 months of the acquisition. The central Ontario distribution hub is anticipated to further reduce shipping costs and streamline logistics, enhancing overall operational efficiency
◦Leadership in high-margin categories such as vapes and infused pre-rolls, combined with the Product Development Collaboration with BAT, which supports the introduction of innovative, premium products tailored to evolving consumer preferences
13 June 30, 2024 data from BDSA, Hifrye, Headset Data, Internal Modelling
14 Source: https://mjbizdaily.com/canada-medical-cannabis-exports-jump-to-ca220-million-domestic-sales-decline/
15 Adjusted EBITDA is a Non-IFRS Measure. See "Cautionary Statement Regarding Certain Non-IFRS Measures" and "Financial Results and Review of Operations" in this MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 15
Industry Trends
Competition and Supply
The cannabis industry is highly competitive and has historically experienced oversupply owing both to regulated LPs and the still largely unfettered operations of the illicit market, including many online delivery platforms. Recently, supply and demand dynamics have stabilized as many LPs have reduced surplus cultivation capacity through M&A and liquidation, with increasing levels of cultivation surplus being directed toward international markets. Consumer trends and preferences continue to evolve, including strong demand in the large format value segment, a desire for higher THC potency particularly in dried flower, as well as a penchant for newness, including new genetic strains and ready to consume products such as infused pre-rolls, vapes, beverages and novel edibles.
Inflated THC
In 2024, Organigram joined the board of directors of the Cannabis Standards Alliance of Canada (CSAC), an organization dedicated to furthering the establishment of THC potency testing standards with the goal of developing a level playing field when it comes to THC potency levels indicated on labels of cannabis products. Both Health Canada and the Alberta Gaming and Liquor Corporation are members of the observer groups and are engaged in ongoing initiatives at CSAC.
In January 2024, the Ontario Cannabis Store ("OCS"), the largest provincial government purchaser of cannabis in Canada, launched a temporary program of secondary testing of high-THC flower products to verify the accuracy of potency claims on labels. Products with labelled potency outside an acceptable range of variance are at risk of being returned-to-vendor for re-labelling. This initiative by OCS signals the seriousness of inflated THC potency, and affirms our stance on the issue. In April, 2024, the OCS reported a decrease in the number of high-THC products in its catalog.
In July 2024, Health Canada launched a cannabis data gathering program to assess potency levels in cannabis products by randomly purchasing and testing cannabis from authorized retailers in Canada. The program aims to support Health Canada's efforts to ensure that legal cannabis products in the Canadian market meets regulatory requirements, including with respect to accurate potency labeling, which has been an issue in recent years. If Health Canada identifies deficiencies with the products they analyze, they may take enforcement action to mitigate health and safety risks to the public.
Product Formats
Dried Flower and Pre-Rolls
Dried flower and pre-rolls remain the first and second largest product categories, respectively, in the Canadian recreational cannabis market16 and we believe these categories will continue to dominate based on market data from mature legal markets in certain U.S. states and due to regulatory restrictions on other product formats (e.g. the 10 mg per package THC limit in the edibles category). While we expect that consumer preferences will gradually shift away from THC content and price as primary purchase drivers, they appear to be the most important attributes to consumers for flower products today. Over time, we expect that genetic diversity and other quality-related attributes such as terpene profile, bud density, the presence of minor cannabinoids, and aroma, will become increasingly important to consumers. We continue to conduct R&D on genetic breeding and pheno-hunting, and are transitioning a portion of our production to seed-based cultivation, with the goal of offering unique and consistent flower assortments to consumers.
Our portfolio of brands continues to show strong momentum within the flower segment in Canada and as of September 30, 2024, Organigram holds the #3 market share position in the flower category16. The growth and significant prevalence of dried flower value segment brands, however, has contributed to overall margin pressure for Organigram and many of its peers over the last number of quarters. To counteract this phenomenon, the Company revitalized its Trailblazer brand, using added capacity at the Lac-Supérieur Facility to supply the brand with premium cannabis. To address the growing demand for strain differentiation in the value segment, the Company has routinely expanded the strains available in its Big Bag O' Buds brands. Organigram is also a leader in infused and non-infused pre-rolls. As of September 30, 2024, Organigram held the #4 market position in infused pre-rolls and the #3 market position in all pre-rolls16.
Cannabis Derivatives
While dried flower and pre-rolls are currently the largest categories in Canada, derivative cannabis products, including vapes, concentrates and edibles, are projected to continue to gain market share over the next several years at the expense of dried flower. Organigram is committed to these growing categories.
The Winnipeg Facility enables Organigram to produce high quality ingestible products (such as gummies) at scale, positioning it to effectively compete in this segment. The Lac-Supérieur Facility enables Organigram to produce high-quality products in the
16 As of September 30, 2024 - Multiple sources (Hifyre, Weedcrawler, OCS wholesale sales and e-commerce orders shipped data, provincial boards data and internal sales data)
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 16
growing hash segment. The Company has leveraged its industry-leading national distribution and field sales network to accelerate the distribution and sale of Tremblant Cannabis, its flagship hash brand, to all provinces in Canada. As of September 30, 2024, Organigram continues to hold the #1 market share in the hash category16.
In Q4 Fiscal 2024, Organigram held the number #3 position in the gummy category between its SHRED'ems and Monjour brands16.
Monjour, Organigram's wellness brand, predominantly provides consumers with THC-free products that are focused on CBD and other minor cannabinoids. In Q4 Fiscal 2024, Monjour was the leading pure CBD-infused gummy brand16. The Monjour product line was expanded to include gummies that contain minor cannabinoids beyond CBD. The CBN Bedtime Blueberry Lemon gummies combine the cannabinoid cannabidiol ("CBN") with CBD and THC, and the Twilight Tranquility gummies combine CBD, CBN and CBG.
Following the Company's acquisition of Motif, Organigram leads in market share in the vape category17, and adds considerable vape expertise to its team, positioning the Company to better leverage its strong pipeline of vape innovation. After an initial test launch in the second quarter of Fiscal 2024 of Greentank's quantum vape technology, the Company elected to refine its go-to-market approach and re-launch the technology in an all-in-one vape format. The Greentank technology will now be added to Motif's vape portfolio plan. The vape segment is driving significant growth and is one of the fastest growing segments in the total Canadian cannabis category.
International Market
Outside of Canada, the Company serves several international markets via exports and seeks to augment these sales channels over time. Future international shipments are contingent upon the timing and receipt of regulatory approval and an export permit from Health Canada, as well as timing and receipt of regulatory approval and an import permit from the purchaser's regulatory authority.
The Company serves eight international medical supply customers in Australia, Germany, the UK, and Israel, and has completed a major strategic investment in a German cannabis leader, Sanity Group, to establish a foothold in the growing European cannabis market. The Company has also completed strategic investments into two U.S.-based companies, OBX and Phylos, and continues to monitor and explore opportunities in the U.S. as regulations allow.
EU-GMP certification opens up business opportunities in international markets. Organigram submitted its EU-GMP certification application for its Moncton Campus in the first quarter of Fiscal 2024. A preliminary audit of the facility was completed in February 2024, enabling us to proceed to the next step in the process of securing an audit date with the European Union regulatory authority. The Company completed its EU-GMP audit in November, 2024, and is awaiting the results.
Jupiter Investment Pool
International expansion initiatives are expected to be supported in Fiscal 2024 and beyond by the Follow-on BAT Investment, with approximately $83 million earmarked for the "Jupiter Pool", a strategic investment pool targeting emerging growth opportunities. This positions the Company to expand into the U.S. and other international markets when appropriate and in compliance with to applicable laws. On Mach 26, 2024, the Company completed its inaugural Jupiter Pool investment, acquiring a stake in U.S.-based OBX. The Company completed its second Jupiter Pool investment and first European strategic investment in Sanity Group on June 25, 2024.
In January 2024, the Israeli government launched an "anti-dumping" investigation in respect of Canadian cannabis exports to Israel (the "Anti-Dumping Investigation"), the participation in which is voluntary for LPs. In March 2024, we submitted a response to the Israeli government with data demonstrating that we had not engaged in the practice of dumping. In June 2024, the Israeli government conducted an on-site data verification visit at Organigram's offices. In July 2024, the Israeli Anti-Dumping Commissioner issued a preliminary decision, finding dumping by all Canadian exporters, including the Company. We have since continued to make submissions advancing our original position that we did not engage in dumping. In November 2024, the Commissioner issued its final decision, continuing to find dumping by all Canadian exporters, including the Company, despite data to the contrary. The Israeli Ministry of Health, which regulates medical cannabis distribution in Israel, has opposed the Anti-Dumping Commissioner's decision on the basis that it is biased, inconclusive, and harmful to patients in Israel. The Anti-Dumping Commissioner's decision is being reviewed by Israeli authorities, and a final decision on the question of dumping is expected in 2025. A finding of dumping under international trade law could result in the imposition of a dumping duty on Israeli importers of Canadian cannabis exports by LPs. See "Risk Factors" in this MD&A.
17 Source: Hifyre (all provinces other than QC, NB and NS), Weedcrawler (QC), and Board Data (NB, NS, PE), R3M Oct 30
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 17
Without limiting the generality of risk factors disclosed in the “Risk Factors” section of this MD&A and in the "Risk Factors" section of the Company's current AIF, the expectations concerning revenue, adjusted gross margin18 and SG&A (comprised of general and administrative and selling and marketing expense) are based on the following general assumptions: consistency of revenue experience with indications of performance to date, consistency of ordering and return patterns or other factors with prior periods, and no material change in legal regulation, market factors or general economic conditions. The Company disclaims any obligation to update any of the forward looking information except as required by applicable law. See "Cautionary Statement Regarding Forward-Looking Information".
18Adjusted gross margin is a Non-IFRS Measure. See "Cautionary Statement Regarding Certain Non-IFRS Measures" and "Financial Results and Review of Operations" in this MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 18
FINANCIAL RESULTS AND REVIEW OF OPERATIONS
CAUTIONARY NOTE REGARDING NON-IFRS FINANCIAL MEASURES
The Company uses certain Non-IFRS Measures such as Adjusted EBITDA and adjusted gross margin in its MD&A and other public documents, which are not measures calculated in accordance with IFRS and have limitations as analytical tools. These performance measures have no prescribed meaning under IFRS, and therefore, amounts presented may not be comparable to similar data presented by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance such as net income or other data prepared in accordance with IFRS. See the "Cautionary Statement Regarding Certain Non-IFRS Measures" section in this MD&A, and the following discussion.
FINANCIAL HIGHLIGHTS
Below is the period-over-period analysis of the changes that occurred between Fiscal 2024 and Comparative Fiscal 2023. Commentary is provided on the pages that follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
Comparative Fiscal 2023
|
|
$ CHANGE |
|
% CHANGE |
|
|
|
|
Financial Results |
|
|
|
|
|
|
|
|
|
|
|
Gross revenue |
$ |
247,177 |
|
|
$ |
217,354 |
|
|
$ |
29,823 |
|
|
14 |
% |
|
|
|
|
Net revenue |
$ |
159,841 |
|
|
$ |
150,397 |
|
|
$ |
9,444 |
|
|
6 |
% |
|
|
|
|
Cost of sales |
$ |
111,390 |
|
|
$ |
128,142 |
|
|
$ |
(16,752) |
|
|
(13) |
% |
|
|
|
|
Gross margin before fair value adjustments |
$ |
48,451 |
|
|
$ |
22,255 |
|
|
$ |
26,196 |
|
|
118 |
% |
|
|
|
|
Gross margin % before fair value adjustments |
30 |
% |
|
15 |
% |
|
15 |
% |
|
100 |
% |
|
|
|
|
Realized fair value on inventories sold and other inventory charges |
$ |
(52,078) |
|
|
$ |
(56,187) |
|
|
$ |
4,109 |
|
|
(7) |
% |
|
|
|
|
Unrealized gain on changes in fair value of biological assets |
$ |
51,151 |
|
|
$ |
68,981 |
|
|
$ |
(17,830) |
|
|
(26) |
% |
|
|
|
|
Gross margin |
$ |
47,524 |
|
|
$ |
35,049 |
|
|
$ |
12,475 |
|
|
36 |
% |
|
|
|
|
Operating expenses |
$ |
83,195 |
|
|
$ |
295,067 |
|
|
$ |
(211,872) |
|
|
(72) |
% |
|
|
|
|
Loss from operations
|
$ |
(35,671) |
|
|
$ |
(260,018) |
|
|
$ |
224,347 |
|
|
(86) |
% |
|
|
|
|
Other (income) expenses |
$ |
9,769 |
|
|
$ |
(9,204) |
|
|
$ |
18,973 |
|
|
206 |
% |
|
|
|
|
Net loss
|
$ |
(45,440) |
|
|
$ |
(247,002) |
|
|
$ |
201,562 |
|
|
(82) |
% |
|
|
|
|
Net loss per common share, basic
|
$ |
(0.477) |
|
|
$ |
(3.116) |
|
|
$ |
2.639 |
|
|
85 |
% |
|
|
|
|
Net loss per common share, diluted
|
$ |
(0.477) |
|
|
$ |
(3.116) |
|
|
$ |
2.639 |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
$ |
3,872 |
|
|
$ |
(52,134) |
|
|
$ |
42,650 |
|
|
82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Gross Margin(1)
|
$ |
53,934 |
|
|
$ |
37,268 |
|
|
$ |
16,666 |
|
|
45 |
% |
|
|
|
|
Adjusted Gross Margin %(1)
|
34 |
% |
|
25 |
% |
|
9% |
|
36 |
% |
|
|
|
|
Adjusted EBITDA(1)
|
$ |
8,416 |
|
|
$ |
5,405 |
|
|
$ |
3,011 |
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
Working capital |
$ |
208,897 |
|
|
$ |
133,545 |
|
|
$ |
75,352 |
|
|
56 |
% |
|
|
|
|
Inventory and biological assets |
$ |
82,524 |
|
|
$ |
80,953 |
|
|
$ |
1,571 |
|
|
2 |
% |
|
|
|
|
Total assets |
$ |
407,860 |
|
|
$ |
298,455 |
|
|
$ |
109,405 |
|
|
37 |
% |
|
|
|
|
Non-current financial liabilities(2)
|
$ |
3,369 |
|
|
$ |
3,630 |
|
|
$ |
(261) |
|
|
(7) |
% |
|
|
|
|
Note (1): Non-IFRS Measures that have been defined and reconciled within their respective subsections in this section of the MD&A.
Note (2): Non-current financial liabilities excludes non-monetary balances related to contingent share consideration and derivative liabilities.
Note (3): Comparative Fiscal 2023 results is for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
NET REVENUE
Net revenue is defined as gross revenue, net of customer fees, discounts, rebates, and sales returns and recoveries, less excise taxes. Revenue consists primarily of dried flower and cannabis derivative products sold to the recreational cannabis, medical cannabis, wholesale, and international cannabis markets.
For Fiscal 2024, the Company recorded net revenue of $159,841 compared to net revenue of $150,397 for Comparative Fiscal 2023. Net revenue increased on a period-over-period basis primarily as a result of an increase in recreational cannabis revenue.
For Fiscal 2024, the ASP of recreational flower decreased to $1.50 per gram compared to $1.65 per gram for Comparative Fiscal 2023. The ASP of recreational flower in Q4 Fiscal 2024 as compared to Comparative Q4 Fiscal 2023 declined, as both the Company and the Canadian cannabis industry continued to experience general price compression in the recreational markets as the customer and product mix evolved to focus more on value offerings. Selling prices are prone to fluctuation, however, the Company has observed a more balanced supply and demand dynamic resulting in a stabilization of recreational flower ASP in Q4 Fiscal 2024 compared to Comparative Q4 Fiscal 2023.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 19
Sales volumes of all flower in grams increased by 19% to 71,167 kg for the year ended September 30, 2024 compared to 59,797 kg in Comparative Q4 Fiscal 2023, primarily due to an increase in recreational cannabis sales.
REVENUE COMPOSITION
The Company’s net revenue composition by product category was as follows for Fiscal 2024 and Comparative Fiscal 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
Comparative Fiscal 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Recreational Flower, net of excise duty |
$ |
91,193 |
|
|
$ |
82,117 |
|
|
|
|
|
Recreational Vapes, net of excise duty |
2,205 |
|
|
3,781 |
|
|
|
|
|
Recreational Hash, net of excise duty
|
11,294 |
|
|
11,208 |
|
|
|
|
|
Recreational Infused Pre-rolls, net of excise duty
|
12,205 |
|
|
2,871 |
|
|
|
|
|
Recreational Edibles, net of excise duty |
21,414 |
|
|
22,113 |
|
|
|
|
|
Recreational Ingestible Extracts and Oil, net of excise duty
|
4,740 |
|
|
4,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical, net of excise duty
|
1,732 |
|
|
2,986 |
|
|
|
|
|
International Flower and Oil
|
9,651 |
|
18,874 |
|
|
|
|
Wholesale and Other |
5,407 |
|
|
2,131 |
|
|
|
|
|
Total Net Revenue |
$159,841 |
|
$150,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note (1): Comparative Fiscal 2023 results is for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
COST OF SALES AND GROSS MARGIN
The gross margin for Fiscal 2024 was $47,524, compared to $35,049 for Comparative Fiscal 2023. The changes and significant items impacting Fiscal 2024 were: (i) higher recreational cannabis revenue; (ii) lower cultivation and post-harvest costs; and (iii) lower unrealized gains on changes in the fair value of biological assets.
Included in gross margin are the changes in the fair value of biological assets related to IFRS standard IAS 41 – Agriculture. Unrealized gain on changes in the fair value of biological assets for Fiscal 2024 was $51,151 as compared to $68,981 in Comparative Fiscal 2023.
Cost of sales primarily consists of the following:
•Costs of sales of cannabis (dried flower, pre-rolls, and wholesale/international bulk flower), cannabis extracts, vapes, chocolates, and other wholesale formats such as extract) include the direct costs of materials and packaging, labour, including any associated share-based compensation, and depreciation of manufacturing building and equipment. This includes cultivation costs (growing, harvesting, drying, and processing costs), extraction, vape filling, quality assurance and quality control, as well as packaging and labelling;
•Costs related to other products, such as vaporizers and other accessories;
•Shipping expenses to deliver product to the customer; and
•The production costs of late-stage biological assets that are disposed of, plants destroyed that do not meet the Company’s quality assurance standards, provisions for excess and unsaleable inventories, provisions related to adjustments to net realizable value that reduce the carrying value of inventory below the original production or purchase cost, and other production overhead.
ADJUSTED GROSS MARGIN
Adjusted gross margin is a Non-IFRS Measure that the Company defines as net revenue less cost of sales, before the effects of: (i) unrealized gains on changes in fair value of biological assets; (ii) realized fair value on inventories sold and other inventory charges; (iii) provisions and impairment of inventories and biological assets; and (iv) provisions to net realizable value. The Company believes that this measure provides useful information to assess the profitability of the Company's operations as it represents the normalized gross margin generated from operations and excludes the effects of non-cash fair value adjustments on inventories and biological assets, which are required by IFRS. See "Cautionary Statement Regarding Certain Non-IFRS Measures". The most directly comparable measure to adjusted gross margin calculated in accordance with IFRS is gross margin before fair value adjustments.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1-F23
|
Q2-F23
|
Q3-F23
|
Comparative Q4-2023 |
Q1-F24
|
Q2-F24
|
Q3-F24
|
Q4-F24
|
2024 |
Net revenue |
$ |
43,321 |
|
$ |
39,493 |
|
$ |
32,785 |
|
$ |
36,698 |
|
$ |
36,455 |
|
$ |
37,628 |
|
$ |
41,060 |
|
$ |
44,698 |
|
$ |
159,841 |
|
Cost of sales before adjustments |
30,492 |
|
26,121 |
|
26,711 |
|
29,537 |
|
25,259 |
|
26,019 |
|
26,474 |
|
28,155 |
|
105,907 |
|
Adjusted Gross margin |
12,829 |
|
13,372 |
|
6,074 |
|
7,161 |
|
11,196 |
|
11,609 |
|
14,586 |
|
16,543 |
|
53,934 |
|
Adjusted Gross margin % |
30 |
% |
34 |
% |
19 |
% |
20 |
% |
31 |
% |
31 |
% |
36 |
% |
37 |
% |
34 |
% |
Less: |
|
|
|
|
|
|
|
|
|
Provisions of inventories and biological assets
|
1,067 |
|
1,256 |
|
2,823 |
|
532 |
|
1,672 |
|
314 |
|
628 |
|
2,043 |
|
4,657 |
|
Provisions to net realizable value |
62 |
|
2,265 |
|
2,755 |
|
4,252 |
|
13 |
|
33 |
|
71 |
|
709 |
|
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before fair value adjustments |
$ |
11,700 |
|
$ |
9,851 |
|
$ |
496 |
|
$ |
2,377 |
|
$ |
9,511 |
|
$ |
11,262 |
|
$ |
13,887 |
|
$ |
13,791 |
|
$ |
48,451 |
|
Gross margin % (before fair value adjustments) |
27 |
% |
25 |
% |
2 |
% |
6 |
% |
26 |
% |
30 |
% |
34 |
% |
31 |
% |
30 |
% |
Add:
Realized fair value on inventories sold and other inventory charges
|
$ |
(12,528) |
|
$ |
(14,170) |
|
$ |
(13,588) |
|
$ |
(15,901) |
|
$ |
(11,923) |
|
$ |
(11,062) |
|
$ |
(13,728) |
|
$ |
(15,365) |
|
$ |
(52,078) |
|
Unrealized gain on changes in fair value of biological assets |
$ |
24,714 |
|
$ |
14,121 |
|
$ |
8,395 |
|
$ |
21,751 |
|
$ |
9,112 |
|
$ |
9,400 |
|
$ |
13,849 |
|
$ |
18,790 |
|
$ |
51,151 |
|
Gross margin(1)
|
$ |
23,886 |
|
$ |
9,802 |
|
$ |
(4,697) |
|
$ |
8,227 |
|
$ |
6,700 |
|
$ |
9,600 |
|
$ |
14,008 |
|
$ |
17,216 |
|
$ |
47,524 |
|
Gross margin %(1)
|
55 |
% |
25 |
% |
(14) |
% |
22 |
% |
18 |
% |
26 |
% |
34 |
% |
39 |
% |
30 |
% |
Note (1): Gross margin reflects the IFRS measure per the Company’s Financial Statements.
Note (2): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
Both adjusted gross margin and gross margin before fair value adjustments have improved throughout Fiscal 2024, approaching historical levels observed in first and second quarters of Fiscal 2023. Notably, the adjusted gross margin in Q4 2024 reached the highest level reported in the preceding eight quarters. This increase is attributed to several factors, including lower cultivation and post-harvest costs, reduced inventory provisions, lower depreciation resulting from impairment charges recorded in Fiscal 2023 and higher recreational cannabis revenue.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
Comparative Fiscal 2023 |
|
CHANGE |
|
% CHANGE |
|
|
|
|
|
|
|
|
General and administrative |
$ |
45,870 |
|
|
$ |
49,748 |
|
|
$ |
(3,878) |
|
|
(8) |
% |
Sales and marketing |
19,851 |
|
|
17,913 |
|
|
1,938 |
|
|
11 |
% |
Research and development |
11,200 |
|
|
12,709 |
|
|
(1,509) |
|
|
(12) |
% |
Share-based compensation |
6,274 |
|
|
4,586 |
|
|
1,688 |
|
|
37 |
% |
Impairment of property, plant and equipment
|
— |
|
|
44,856 |
|
|
(44,856) |
|
|
(100) |
% |
Impairment of intangible assets and goodwill
|
— |
|
|
165,255 |
|
|
(165,255) |
|
|
(100) |
% |
Total operating expenses |
$ |
83,195 |
|
|
$ |
295,067 |
|
|
$ |
(211,872) |
|
|
(72) |
% |
Note (1): Comparative Fiscal 2023 results are for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
GENERAL AND ADMINISTRATIVE
For Fiscal 2024, the Company incurred general and administrative expenses of $45,870 compared to $49,748 for Comparative Fiscal 2023. The decrease in expenses mainly relates to lower technology costs including implementation expenses for a new ERP system, insurance costs, professional fees and lower depreciation resulting from impairment charges recorded in Fiscal 2023.
SALES AND MARKETING
For Fiscal 2024, the Company incurred sales and marketing expenses of $19,851 or 12% of net revenues as compared to $17,913 or 12% of net revenues for Comparative Fiscal 2023. The increase in the current period is on account of higher trade investments with retail partners, driven by a more competitive retail landscape.
RESEARCH AND DEVELOPMENT
Research and development costs of $11,200 for Fiscal 2024 decreased from $12,709 in Comparative Fiscal 2023. The decrease in expenses mainly relates to higher SR&ED credits, which is an offset to research and development expenses, and reduced activity under the PDC Agreement relative to Comparative Fiscal 2023.
SHARE-BASED COMPENSATION
For Fiscal 2024, the Company recognized $6,274, in share-based compensation expense in relation to selling, marketing, general and administrative, and research and development employees, compared to $4,586 for Comparative Fiscal 2023.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 21
Total share-based compensation charges, including those related to production employees that are charged to biological assets and inventory, and amounts expensed, for Fiscal 2024, were $7,182 compared to $5,008 for Comparative Fiscal 2023. The increase in expense is mainly due to a greater number of equity settled awards issued during the current period, a portion of which vested immediately.
Share-based compensation represents a non-cash expense and was valued using the Black-Scholes valuation model for stock options and using the fair value of the shares on the date of the grant for restricted share units ("RSUs"). The fair value of performance share units ("PSUs") was based on the Company’s share price at the grant date, adjusted for an estimate of likelihood of achievement of the defined performance criteria.
OTHER (INCOME) EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2024 |
|
Comparative Fiscal 2023 |
|
CHANGE |
|
% CHANGE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of financing costs |
(3,311) |
|
|
(3,423) |
|
|
(112) |
|
|
(3) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of loss (including impairment) from investments in associates
|
5,284 |
|
|
895 |
|
|
4,389 |
|
|
490 |
% |
Change in fair value of contingent consideration |
(50) |
|
|
(3,364) |
|
|
(3,314) |
|
|
99 |
% |
|
|
|
|
|
|
|
|
(Gain) Loss on disposal of property, plant and equipment |
(633) |
|
|
30 |
|
|
(663) |
|
|
(2,210) |
% |
Share issue costs allocated to derivative liabilities |
937 |
|
|
— |
|
|
937 |
|
|
N/A |
Change in fair value of derivative liabilities |
7,718 |
|
|
(2,794) |
|
|
(10,512) |
|
|
376 |
% |
|
|
|
|
|
|
|
|
Other non-operating income |
(176) |
|
|
(548) |
|
|
(372) |
|
|
68 |
% |
Total other (income) expenses |
$ |
9,769 |
|
|
$ |
(9,204) |
|
|
$ |
18,973 |
|
|
(206) |
% |
Note (1): Comparative Fiscal 2023 results are for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
INVESTMENTS IN ASSOCIATES AND CONTINGENT CONSIDERATION
During Fiscal 2024, the Company determined that there are indicators of impairment related to its investment in Hyasynth. The Company determined the recoverable amount to be approximately $nil and a result, an impairment loss of $4,773 was recognized in the consolidated statement of operations and comprehensive loss for Fiscal 2024.
In connection with the Company's acquisition of Laurentian, the Company had contingent commitments to deliver additional consideration should Laurentian achieve certain milestones. There was a $50 decrease in the estimated fair value of the Laurentian contingent liability for Fiscal 2024, compared to $3,364 in the prior year comparative period.
(GAIN) LOSS ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT
During Fiscal 2024, the Company recognized a gain on disposal of property, plant and equipment of $633 compared to loss of $30 in Comparative Fiscal 2023. The change in (gain) loss on disposal of property, plant and equipment was primarily as a result of an early termination of one lease agreement in the current period, which resulted in a gain of $416.
SHARE ISSUE COSTS
On April 2, 2024, the Company closed an offering (the "Unit Offering") for gross proceeds of $28.8 million pursuant to the Company's final Canadian base shelf prospectus dated October 6, 2023, and a corresponding amended Form F-10 registration statement filed with the SEC on October 6, 2023, and declared effective by the SEC on November 29, 2023 (SEC File No. 333-274686). The Company sold 8,901,000 units (each a "Unit") at a price of $3.23 per Unit, which included 1,161,000 Units sold pursuant to the exercise in full of the underwriters’ over-allotment option. Each Unit is comprised of one Common Share and one-half of one warrant (a "Warrant"). Each Warrant is exercisable to acquire one Common Share (a "Warrant Share") for a period of four years following the closing date of the Unit Offering at an exercise price of $3.65 per Warrant Share, subject to adjustment in certain events. $7,798 of the gross proceeds was allocated to derivative liabilities with the residual, $20,953, which represents the value allocated to the Common Shares, being recorded in share capital. Share issue costs were $2,464 which included a 4.7% cash commission of $1,366 paid to placement agents with the balance related to filing, legal, and other professional fees directly related to the Unit Offering. Of the total, $668 of the share issue costs were allocated to the derivative liabilities and expensed in the consolidated statement of operations and comprehensive loss in the current period. Refer to Note 11 (iv) of the Financial Statements for more details.
CHANGE IN DERIVATIVE LIABILITIES AND OTHER FINANCIAL ASSETS
Change in fair value of derivative liabilities and other financial assets was a loss of $7,718 for Fiscal 2024, compared to a gain of $2,794 for Comparative Fiscal 2023.
During Fiscal 2024, the Company recorded a fair value loss of $6,208 and $5,390 for Top-up-Rights and derivatives in relation to the Follow-on BAT Investment, respectively. Additionally, during the year ended September 30, 2024, the Company recorded a fair value loss of $1,275 for the Preferred Shares liability. Refer to Note 11 and 12 of the Financial Statements for more details.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 22
The above fair value loss was partially offset by gain in fair valuation of other financial assets. Refer to Note 9 of the Financial Statements for more details.
The comparative period fair value gain of $2,794 was primarily related to derivative warrant liabilities.
NET LOSS
Net loss for Fiscal 2024 was $45,440 or $0.477 per Common Share (basic and diluted), compared to $247,002 or $3.116 per Common Share (basic and diluted) for Comparative Fiscal 2023. The decrease in net loss from Comparative Fiscal 2023 is primarily due to higher adjusted gross margins and lower impairment loss that was recorded in Fiscal 2023.
SUMMARY OF QUARTERLY RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1-F23
|
Q2-F23
|
Q3-F23
|
Comparative Q4-2023 |
Q1-F24
|
Q2-F24
|
Q3-F24
|
Q4-F24
|
Financial Results |
|
|
|
|
|
|
|
|
Adult-use recreational cannabis revenue (net of excise)
|
$ |
35,859 |
|
$ |
27,415 |
|
$ |
29,202 |
|
$ |
35,249 |
|
$ |
34,425 |
|
$ |
33,118 |
|
$ |
36,467 |
|
$ |
38,839 |
|
|
|
|
|
|
|
|
|
|
Medical international, wholesale and other revenue
|
$ |
7,462 |
|
$ |
12,078 |
|
$ |
3,583 |
|
$ |
1,450 |
|
$ |
2,030 |
|
$ |
4,510 |
|
$ |
4,593 |
|
$ |
5,859 |
|
Net revenue |
$ |
43,321 |
|
$ |
39,493 |
|
$ |
32,785 |
|
$ |
36,699 |
|
$ |
36,455 |
|
$ |
37,628 |
|
$ |
41,060 |
|
$ |
44,698 |
|
Net income (loss)
|
$ |
5,329 |
|
$ |
(7,488) |
|
$ |
(213,451) |
|
$ |
(26,595) |
|
$ |
(15,750) |
|
$ |
(27,075) |
|
$ |
2,818 |
|
$ |
(5,433) |
|
Net income (loss) per common share, basic
|
$ |
0.068 |
|
$ |
(0.096) |
|
$ |
(2.708) |
|
$ |
(0.330) |
|
$ |
(0.194) |
|
$ |
(0.297) |
|
$ |
0.027 |
|
$ |
(0.050) |
|
Net income (loss) per common share, diluted
|
$ |
0.068 |
|
$ |
(0.096) |
|
$ |
(2.708) |
|
$ |
(0.330) |
|
$ |
(0.194) |
|
$ |
(0.297) |
|
$ |
0.026 |
|
$ |
(0.050) |
|
Operational Results |
|
|
|
|
|
|
|
|
Dried flower yield per plant (grams)
|
168 |
|
156 |
|
144 |
|
163 |
|
164 |
|
164 |
|
185 |
|
187 |
|
Harvest (kg) - dried flower |
22,296 |
|
20,624 |
|
18,604 |
|
21,238 |
|
19,946 |
|
20,962 |
|
21,420 |
|
23,323 |
|
|
|
|
|
|
|
|
|
|
Employee headcount (#) |
921 |
|
939 |
|
923 |
|
935 |
|
984 |
|
987 |
|
914 |
|
875 |
|
Note (1): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
The Company saw a decrease in net revenues from the first quarter of Fiscal 2023 until the third quarter of Fiscal 2023, followed by an increase in Q4 Fiscal 202319. This was followed by a sequential decrease in net revenues in the first quarter of Fiscal 2024 and a subsequent increase in remaining quarters of Fiscal 2024. Net revenue in Q4 Fiscal 2024 was the highest that the Company has reported in the preceding eight quarters. The variability in net revenues over the preceding eight quarters is primarily as a result of fluctuations in international sales.
Continued growth in net revenues, lower costs of production (on a per unit basis) and lower impairment charges, resulted in net income or a reduced net loss as compared to net losses recognized during the different quarters of Fiscal 2023. In the first quarter of Fiscal 2023, the Company generated positive net income as a result of higher international sales and higher unrealized gain on changes in fair value of biological assets. In the remaining quarters of Fiscal 2023, the Company recorded a higher net loss than historical periods primarily due to impairment charges and lower net flower revenue. In the first and second quarters of Fiscal 2024, the Company recorded a higher net loss primarily due to lower gross margin, higher operating expenses and lower gain on the change in fair value of derivative liabilities. In the third quarter of Fiscal 2024, both net revenue and gross margin increased, resulting in net income. In Q4 Fiscal 2024, the Company recorded a net loss primarily due to an impairment loss of $4,773 for investments in associates and change in fair value of derivative liabilities and other financial assets (investments which are measured at fair value through profit and loss) of $1,642.
Adjusted EBITDA
Adjusted EBITDA is a Non-IFRS Measure and the Company calculates Adjusted EBITDA as net income (loss) excluding: financing costs, net of investment income; income tax expense (recovery); depreciation, amortization, impairment, normalization of depreciation add-back due to changes in depreciable assets resulting from impairment charges, (gain) loss on disposal of property, plant and equipment (per the consolidated statement of cash flows); share-based compensation (per the consolidated statement of cash flows); share of loss (gain) from investments in associates and impairment loss from loans receivable; change in fair value of contingent consideration; change in fair value of derivative liabilities. Preferred shares and other financial assets; expenditures incurred in connection with research and development activities (net of depreciation); unrealized (gain) loss on changes in fair value of biological assets; realized fair value on inventories sold and other inventory charges; provisions and net realizable value adjustments related to inventory and biological assets; government subsidies, insurance recoveries and other non-operating expenses (income); legal provisions (recoveries); incremental fair value component of inventories sold from acquisitions; ERP implementation costs; transaction costs; share issuance costs; and provision for Canndoc expected credit losses. Management believes that Adjusted EBITDA is intended to provide a proxy for the Company’s operating cash flow and derives expectations of future financial performance for the Company, and excludes adjustments that are not reflective of current
19 Q4 Fiscal 2023 results are for the four month period from June 1, 2023 through September 30, 2023
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 23
operating results. See "Cautionary Statement Regarding Certain Non-IFRS Measures". The most directly comparable measure to Adjusted EBITDA calculated in accordance with IFRS is net income (loss).
During the second quarter of Fiscal 2024, management changed the calculation of Adjusted EBITDA to include provisions for expected credit losses and has conformed prior quarters accordingly.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (Non-IFRS Measure) |
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Reconciliation |
Q1-F23
|
Q2-F23
|
Q3-F23
|
Comparative Q4-2023 |
Q1-F24
|
Q2-F24
|
Q3-F24
|
Q4-F24
|
Fiscal 2024
|
Net income (loss) as reported
|
$ |
5,329 |
|
$ |
(7,488) |
|
$ |
(213,451) |
|
$ |
(26,595) |
|
$ |
(15,750) |
|
$ |
(27,075) |
|
$ |
2,818 |
|
$ |
(5,433) |
|
$ |
(45,440) |
|
Add/(deduct):
|
|
|
|
|
|
|
|
|
|
Financing costs, net of investment income |
(815) |
|
(1,051) |
|
(903) |
|
(652) |
|
(522) |
|
(650) |
|
(1,179) |
|
(960) |
|
(3,311) |
|
Income tax (recovery) expense
|
(232) |
|
1 |
|
(1,302) |
|
(2,279) |
|
— |
|
(30) |
|
— |
|
30 |
|
— |
|
Depreciation, amortization, and (gain) loss on disposal of property, plant and equipment (per statement of cash flows)
|
7,183 |
|
6,867 |
|
6,975 |
|
3,294 |
|
2,837 |
|
3,180 |
|
2,332 |
|
3,097 |
|
11,446 |
|
Normalization of depreciation add-back due to changes in depreciable assets resulting from impairment charges |
— |
|
— |
|
— |
|
3,037 |
|
757 |
|
— |
|
— |
|
— |
|
757 |
|
Impairment of intangible assets and goodwill |
— |
|
— |
|
37,905 |
|
6,951 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
Impairment of property, plant and equipment |
— |
|
— |
|
153,337 |
|
11,918 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
Share of loss (gain) from investments in associates and impairment loss (recovery) from loan receivable
|
406 |
|
296 |
|
287 |
|
(51) |
|
155 |
|
112 |
|
122 |
|
4,895 |
|
5,284 |
|
|
|
|
|
|
|
|
|
|
|
Realized fair value on inventories sold and other inventory charges |
12,528 |
|
14,170 |
|
13,588 |
|
15,901 |
|
11,923 |
|
11,062 |
|
13,728 |
|
15,365 |
|
52,078 |
|
Unrealized gain on changes in fair value of biological assets |
(24,714) |
|
(14,121) |
|
(8,395) |
|
(21,751) |
|
(9,112) |
|
(9,400) |
|
(13,849) |
|
(18,790) |
|
(51,151) |
|
Share-based compensation (per statement of cash flows) |
1,852 |
|
1,342 |
|
1,325 |
|
797 |
|
2,007 |
|
1,995 |
|
2,087 |
|
1,093 |
|
7,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal provisions (recoveries), government subsidies, insurance recoveries and other non-operating expenses (income) |
— |
|
(75) |
|
— |
|
(407) |
|
(218) |
|
87 |
|
139 |
|
(184) |
|
(176) |
|
Share issuance costs allocated to derivative liabilities and change in fair value of derivative liabilities, preferred shares, other financial assets and contingent consideration
|
(1,012) |
|
(2,457) |
|
(4,214) |
|
(53) |
|
406 |
|
12,529 |
|
(6,241) |
|
1,911 |
|
8,605 |
|
|
|
|
|
|
|
|
|
|
|
ERP implementation costs
|
1,334 |
|
1,377 |
|
2,561 |
|
1,588 |
|
991 |
|
173 |
|
7 |
|
465 |
|
1,636 |
|
Transaction costs |
318 |
|
27 |
|
538 |
|
505 |
|
590 |
|
(170) |
|
421 |
|
74 |
|
915 |
|
Provisions and net realizable value adjustments related to inventory and biological assets
|
1,129 |
|
3,521 |
|
5,578 |
|
4,784 |
|
1,685 |
|
347 |
|
699 |
|
2,752 |
|
5,483 |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenditures, net of depreciation |
2,271 |
|
3,239 |
|
3,257 |
|
2,601 |
|
4,387 |
|
2,556 |
|
2,381 |
|
1,545 |
|
10,869 |
|
Adjusted EBITDA as previously reported |
$ |
5,577 |
|
$ |
5,648 |
|
$ |
(2,914) |
|
$ |
(412) |
|
$ |
136 |
|
$ |
(5,284) |
|
$ |
3,465 |
|
5,860 |
|
4,177 |
|
Add: Provision for Canndoc expected credit losses |
— |
|
— |
|
— |
|
470 |
|
— |
|
4,239 |
|
— |
|
— |
|
4,239 |
|
Adjusted EBITDA (revised) |
$ |
5,577 |
|
$ |
5,648 |
|
$ |
(2,914) |
|
$ |
58 |
|
$ |
136 |
|
$ |
(1,045) |
|
$ |
3,465 |
|
5,860 |
|
8,416 |
|
Divided by: net revenue |
43,321 |
|
39,493 |
|
32,785 |
|
36,698 |
|
36,455 |
|
37,628 |
|
41,060 |
|
44,698 |
|
159,841 |
|
Adjusted EBITDA Margin % (revised) (Non-IFRS Measure) |
13 |
% |
14 |
% |
(9) |
% |
— |
% |
— |
% |
(3) |
% |
8 |
% |
13 |
% |
5 |
% |
Note (1): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 25
In the fist quarter of Fiscal 2023, the Company achieved Adjusted EBITDA of $5.6 million and in the second quarter of Fiscal 2024, the Company continued its track record of Adjusted EBITDA growth with $5.6 million reported in the second quarter of Fiscal 2023. During the third quarter of Fiscal 2023, the Company's Adjusted EBITDA decreased to a loss of $2.9 million due to lower international sales, continued price compression in the recreational market, low flower yields, and higher SG&A costs. In Q4 Fiscal 2023, continued price compression and lower international sales led to an Adjusted EBITDA loss of $1.9 million. In the first quarter of Fiscal 2024, the Company returned to a positive Adjustive EBITDA position due to a higher adjusted gross margin (31%) resulting from lower cultivation and post-harvest costs and positive contributions from Edison Jolts product sales. In the second quarter of Fiscal 2024, the Company's Adjusted EBITDA position was a loss of $1 million and the decrease in Adjusted EBITDA from the first quarter of Fiscal 2024 was primarily due to increased sales and marketing expenses. In the third quarter of Fiscal 2024, as a result of higher recreational cannabis revenue and a higher adjusted gross margin resulting from lower cultivation and post-harvest costs, Adjusted EBITDA increased to $3.5 million. In Q4 Fiscal 2024, the Company continued the momentum and achieved Adjusted EBITDA of $5.9 million which was the highest Adjusted EBITDA the Company had ever reported in any quarter.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 26
BALANCE SHEET, LIQUIDITY AND CAPITAL RESOURCES
The following represents selected balance sheet highlights of the Company at the end Fiscal 2024 and Fiscal 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30, 2024
|
|
SEPTEMBER 30, 2023
|
|
% CHANGE |
Cash, restricted cash & short-term investments |
$ |
133,426 |
|
|
$ |
51,757 |
|
|
158 |
% |
Inventories |
$ |
67,351 |
|
|
$ |
63,598 |
|
|
6 |
% |
Working capital |
$ |
208,897 |
|
|
$ |
133,545 |
|
|
56 |
% |
Total assets |
$ |
407,860 |
|
|
$ |
298,455 |
|
|
37 |
% |
Total current and long-term debt |
$ |
25 |
|
|
$ |
79 |
|
|
(68) |
% |
Non-current financial liabilities(1)
|
$ |
3,369 |
|
|
$ |
3,630 |
|
|
(7) |
% |
Total shareholders' equity |
$ |
305,989 |
|
|
$ |
271,623 |
|
|
13 |
% |
Note 1: Non-current financial liabilities excludes non-monetary balances related to contingent share consideration, derivative liabilities and deferred income taxes.
On September 30, 2024, the Company had unrestricted cash of $133,426 compared to $51,757 at September 30, 2023. The increase is primarily a result of proceeds from the Follow-on BAT Investment and the Offering of Units that closed on April 2, 2024. Subsequent to year-end, the Company acquired Motif which included a cash component of approximately $50 million and approximately $5 million in transaction costs. The funds to finance this acquisition were not drawn from the Jupiter Pool. Furthermore, the Company is expecting to close the third tranche from the Follow-on BAT Investment in the amount of $41.5 million on or about February 28, 2025.
Management believes its capital position is healthy and that sufficient liquidity is available to fund operations and strategic growth initiatives in the medium term. Furthermore, the Company may be able to, if necessary and subject to prevailing market conditions, obtain equity or debt financing through capital markets. Additionally, subject to the restrictions in the Amended IRA, the Company may be able to use its shares as a currency for additional acquisitions. The Common Shares are listed for trading on both the NASDAQ and TSX, and there is analyst coverage among sell-side brokerages. However, there can be no assurance that capital will be available on terms acceptable to the Company or at all.
On October 6, 2023, the Company filed a final Canadian base shelf prospectus and corresponding amended Form F-10 registration statement (SEC File No. 333-274686) under the United States Securities Act of 1933, as amended, enabling the Company to qualify for the distribution of up to $500,000,000 of Common Shares, debt securities, subscription receipts, warrants and units, during the 25-month period that the base shelf prospectus remains effective. The specific terms of any future offering of securities are required to be disclosed in a prospectus supplement filed with the applicable Canadian securities regulators and the SEC. In April 2024, the Company successfully closed the Unit Offering pursuant to the base shelf prospectus and the corresponding Form F-10 registration statement.
The following highlights the Company’s cash flows during Q4 Fiscal 2024 and Comparative Q4 Fiscal 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4-F24 |
|
Comparative Q4 Fiscal 2023 (three months ended September 30, 2023) |
|
Fiscal 2024 |
|
Comparative Fiscal 2023 (twelve months ended September 30, 2023) |
Cash provided (used) by: |
|
|
|
|
|
|
|
Operating activities |
$ |
8,893 |
|
|
$ |
(8,469) |
|
|
$ |
3,872 |
|
|
$ |
(52,134) |
|
Financing activities |
41,011 |
|
|
(151) |
|
|
107,779 |
|
|
(748) |
|
Investing activities |
(22,415) |
|
|
$ |
(1,499) |
|
|
(38,770) |
|
|
$ |
8,456 |
|
Cash provided (used) |
$ |
27,489 |
|
|
$ |
(10,119) |
|
|
$ |
72,881 |
|
|
$ |
(44,426) |
|
Cash position |
|
|
|
|
|
|
|
Beginning of period |
79,256 |
|
|
43,983 |
|
|
33,864 |
|
|
78,290 |
|
End of period |
$ |
106,745 |
|
|
$ |
33,864 |
|
|
$ |
106,745 |
|
|
$ |
33,864 |
|
Short-term investments |
821 |
|
|
— |
|
|
821 |
|
|
— |
|
Cash and short-term investments |
$ |
107,566 |
|
|
$ |
33,864 |
|
|
$ |
107,566 |
|
|
$ |
33,864 |
|
Note (1): Comparative Q4 Fiscal 2023 results are for the unaudited and unreviewed three month period beginning July 1, 2023 and ending September 30, 2023.
Note (2): Comparative Fiscal 2023 results are for the unaudited twelve month period beginning October 1, 2022 and ending September 30, 2023.
Cash provided by operating activities for Q4 Fiscal 2024 and Fiscal 2024 was $8,893 and $3,872, respectively, compared to cash used for Comparative Q4 Fiscal 2023 and Comparative Fiscal 2023 of $8,469 and $52,134, respectively. The decrease in cash
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 27
used by operating activities is primarily attributed to a reduced net loss. Working capital changes included an increase in accounts payable and accrued liabilities, reflecting the Company's focus on cash flow management.
Cash provided by financing activities for Q4 Fiscal 2024 and Fiscal 2024 was $41,011 and $107,779, respectively. In comparison, for Comparative Q4 Fiscal 2023 and Comparative Fiscal 2023 cash used by financing activities was 151 and 748, respectively. The increase in cash from financing activities in the current period was primarily due to proceeds from the Offering of Units that closed on April 2, 2024, and the Follow-on BAT Investment.
Cash used by investing activities for Q4 Fiscal 2024 and Fiscal 2024 was $22,415 and $38,770, respectively, compared to cash (used) provided by investing activities of $(1,499) and $8,456 in Comparative Q4 Fiscal 2023 and Comparative Fiscal 2023, respectively. The increase in cash used is primarily on account of purchase of other financial assets (investment in Sanity Group and Phylos).
OFF BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during Q4 Fiscal 2024 and Fiscal 2024.
RELATED PARTY TRANSACTIONS
MANAGEMENT AND BOARD COMPENSATION
Key management personnel are those persons having the authority and responsibility for planning, directing, and controlling activities of the Company, directly or indirectly. The key management personnel are the members of the Company’s executive management team and Board of Directors. The transactions are conducted at arm’s length and in the normal course of operations.
For Q4 Fiscal 2024 and Fiscal 2024 and for Q4 Fiscal 2023 and Fiscal 2023, the Company's expenses included the following: management and Board of Directors compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4-F24 |
|
Q4-F23 |
|
Fiscal 2024 |
|
Fiscal 2023 |
Salaries, bonus and consulting fees |
$ |
1,743 |
|
|
$ |
1,195 |
|
|
$ |
7,155 |
|
|
$ |
4,388 |
|
Share-based compensation |
806 |
|
|
494 |
|
|
4,620 |
|
|
3,446 |
|
Total key management compensation |
$ |
2,549 |
|
|
$ |
1,689 |
|
|
$ |
11,775 |
|
|
$ |
8,262 |
|
During Q4 Fiscal 2024 and Fiscal 2024, Nil and 62,000 stock options (Fiscal 2023 – 6,250 and 206,250) were granted to key management personnel with an aggregate fair value of $nil and $123, respectively (September 30, 2023 – $34 and $665). In addition, during the Q4 Fiscal 2024 and Fiscal 2024, 29,762 and 2,175,879 RSUs, (September 30, 2023 – nil and 285,191), were granted to key management personnel with an aggregate fair value of $nil and $4,373, respectively (September 30, 2023 – $nil and $1,325). For the Q4 Fiscal 2024 and Fiscal 2024, nil and 678,717 PSUs, (September 30, 2023 – nil and 136,920) were issued to key management personnel with an aggregate fair value of $nil and $543, respectively (September 30, 2023 – $nil and $305).
SIGNIFICANT TRANSACTIONS WITH ASSOCIATES AND JOINT OPERATIONS
The Company has transactions with related parties, as defined in IAS 24 Related Party Disclosures, all of which are undertaken in the normal course of business.
For Q4 Fiscal 2024 and Fiscal 2024, under the PDC Agreement, BAT incurred $504 and $3,708 (Fiscal 2023 - $635 and $3,134) for direct expenses and the Company incurred $1,266 and $9,623 (Fiscal 2023 - $3,764 and $10,638) of direct expenses and capital expenditures of $nil and $96 (Fiscal 2023 - $462 and $1,768) related to the CoE, respectively. The Company recorded $885 and $6,666 (Fiscal 2023 - $2,001 and $6,886) of these expenditures in the consolidated statements of operations and comprehensive loss. For Q4 Fiscal 2024 and Fiscal 2024, the Company recorded $nil and $49 (Fiscal 2023 - $231 and $884) of capital expenditures in the consolidated statements of financial position.
During Q4 Fiscal 2024 and Fiscal 2024, BAT exercised nil and nil Top-up Rights. As at September 30, 2024, there is a receivable balance of $167 (September 30, 2023 - receivable of $167) from BAT.
FAIR VALUE MEASUREMENTS
(i) Financial Instruments
Financial instruments recorded at fair value on the consolidated statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 28
techniques. A level is assigned to each fair value measurement based on the lowest-level input significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described as follows:
•Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date;
•Level 2 inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
•Level 3 inputs are unobservable inputs for the asset or liability.
The fair values of cash, short-term investments, accounts and other receivables, accounts payable and accrued liabilities and restricted cash approximate their carrying amounts due to their short-term nature. The fair value of long-term debt approximates $25.
The fair value of the investment in WHC is primarily based on Level 3 unobservable inputs and is determined using a market-based approach, based on revenue multiples for comparable companies.
In determining the impairment loss, the FVLCD of property, plant and equipment was determined based on a third-party appraisal using market and replacement cost approaches. Consideration is given to information from historical data and industry standards which constitute both observable and unobservable inputs (level 2 and level 3).
The fair value of the convertible promissory note issued to OBX was determined using the binomial lattice model. The key assumptions used in the model are OBX stock price, dividend yield, expected future volatility of OBX stock, credit risk-adjusted discounting rate, risk-free rate, and probability and timing of certain qualified events. The credit risk-adjusted discounting rate and the expected equity volatility are based on unobservable inputs and are categorized as Level 3 in the fair value hierarchy.
The fair value of the Secured Convertible Loan advanced to Phylos was determined using the binomial lattice model and has been classified as level 3 in the fair value hierarchy. The fair value of the Secured Convertible Loan was based on certain assumptions, including likelihood, and timing of the federal legalization or decriminalization of cannabis in the United States. Similarly, the fair value of the commitment to fund an additional US $1 million was based on certain assumptions, including the probability of Phylos meeting certain required milestones.
The fair value of the Convertible Note advanced to Sanity Group was determined using the binomial lattice model. The key assumptions used in the Model for are Sanity Group stock price, dividend yield, expected future volatility of Sanity Group stock, credit risk-adjusted discounting rate, risk-free rate, and probability and timing of certain qualified and non-qualified events. The credit risk-adjusted discounting rate and the expected equity volatility are based on unobservable inputs and are categorized as Level 3 in the fair value hierarchy.
The fair value of equity interest in the Sanity Group was determined using the option pricing model wherein the current value of the Sanity Group was allocated to the various types of shares based on their rights and preferences. The current value of the Sanity Group was determined using the backsolve approach which benchmarks the original issue price of the Sanity Group's latest funding transaction.
The fair value of the Laurentian contingent share consideration is primarily based on Level 3 unobservable inputs in a Monte Carlo pricing model. The determination of the fair value of this liability is primarily driven by the Company’s expectations of Laurentian achieving its business objectives. The key assumptions used in the model are the expected future sales volumes and selling prices used in determining Laurentian's future adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") and WACC. At September 30, 2024, the fair value of the Laurentian contingent share consideration was $Nil.
The fair value of derivative warrant liabilities is based on Level 1 and 2 inputs utilized in a Black-Scholes option pricing model to estimate the fair value of such Warrants. The key assumption used in the model is the expected future volatility in the price of the Company’s Common Shares. If the expected future volatility in the common share price of the Company increased by 10%, the estimated fair value of the derivative warrant liability and net loss would increase by $456, or if it decreased by 10%, the estimated fair value of the derivative warrant liability and net loss would decrease by $508.
The fair value of the Top-up Rights is based on Level 3 inputs utilized in a Monte Carlo pricing model to estimate the fair value of such Top-up Rights. The key assumptions used in the model are the expected future price of the Company’s Common Shares, the weighted average expected life of the instruments and the expected future volatility in the price of Common Shares. A sensitivity
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 29
analysis for changes in key inputs was not presented as it was deemed that the impact of reasonable changes in key inputs would not be significant.
The fair value of the contractual commitment to issue Preferred Shares in the future is based on level 1, level 2 and level 3 inputs and is determined based on estimated fair value of the Preferred Shares and the present value of the share price agreed with BAT. The fair value of the Preferred Shares was estimated using certain assumptions, including tenure of BAT's common shares and potential shareholding meeting 30% and 49% thresholds, respectively, market price and volatility of the Company's Common Shares, risk free rate and discount for lack of marketability.
The fair value of Preferred Shares is based on level 1, level 2 and level 3 inputs and is determined based on market price and volatility of the Company's Common Shares, risk free rate and discount for lack of marketability.
During the year, there were no transfers of amounts between Levels 1, 2 and 3.
Derivative Warrant Liabilities
Unit Offering 2024
On April 2, 2024, the Company closed the Unit Offering. The Company sold 8,901,000 Units (each a "Unit") at a price of $3.23 per Unit, which included 1,161,000 Units sold pursuant to the exercise in full of the underwriters’ over-allotment option. Each Unit is comprised of one Common Share of the Company and one-half of one Warrant. Each Warrant is exercisable to acquire one Warrant Share for a period of four years following the closing date of the Unit Offering at an exercise price of $3.65 per Warrant Share, subject to adjustment in certain events.
The holders of the Warrants issued pursuant to the Unit Offering may elect, if the Company does not have an effective registration statement under the United States Securities Act of 1933, as amended, or the prospectus contained therein is not available for the offer and sale of the Common Shares to the Warrant holder, in lieu of exercising the Warrants for cash, a cashless exercise option to receive Common Shares equal to the fair value of the gain implied by the Warrants at the time of exercise. The fair value is determined by multiplying the number of Warrants to be exercised by the weighted average market price less the exercise price with the difference being divided by the weighted average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.
In accordance with IAS 32 Financial Instruments: Presentation, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a derivative liability and measured at fair value with changes in fair value recognized in the statement of operations and comprehensive loss at each reporting period. The derivative warrant liabilities are expected to ultimately be converted into the Company’s equity (Common Shares) when the Warrants are exercised or will be extinguished on the expiry of the outstanding Warrants and will not result in the outlay of any cash by the Company.
At initial recognition on April 2, 2024, the Company recorded derivative liabilities of $7,798 based on the estimated fair value of the Warrants at that date using the Black-Scholes option pricing model. Share issuance costs of $668 were recognized as costs allocated to derivative liabilities based on a pro-rata allocation of total issuance costs based on the relative fair value of the Warrants and the Common Shares issued as part of the Unit Offering.
As at September 30, 2024, the Company revalued the remaining derivative liabilities to an estimated fair value of $7,772. The Company recorded an increase in the estimated fair value change of the derivative liabilities for Fiscal 2024 of $26.
The following inputs were used to estimate the fair value of the Warrants at September 30, 2024:
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|
|
SEPTEMBER 30, 2024 |
Risk free interest rate |
2.70 |
% |
Life of Warrants (years) |
3.51 |
Market price of Common Shares |
$ |
2.45 |
|
Expected future volatility of Common Shares |
123.00 |
% |
Fair value per Warrant |
$ |
1.75 |
|
If the expected future volatility in the common share price of the Company increased by 10%, the estimated fair value of the derivative warrant liability and net loss would increase by $456, or if it decreased by 10%, the estimated fair value of the derivative warrant liability and net loss would decrease by $508.
Unit offering 2020
The Warrants outstanding as at September 30, 2023, have expired in November 2023. See "Other (Income) Expenses - Derivative Warrant Liabilities" in this MD&A for further information.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 30
Top-up Rights
On March 10, 2021, the Company issued 14,584,098 Common Shares to BAT in connection with BAT's initial equity investment in the Company. On January 23, 2024, the Company issued an additional 12,893,175 Common Shares to BAT in connection with the closing of the first tranche of the Follow-on BAT Investment, which, at the time, increased BAT's beneficial ownership in the Company to 29.90% (measured on a non-diluted basis).
In connection with the closing of the first tranche of the Follow-on BAT Investment in late January 2024, BAT and the Company entered into the Amended IRA, which amended and restated the Original IRA between the parties. Pursuant to the Amended IRA, BAT has been granted certain Top-Up Rights to subscribe for additional Common Shares or Preferred Shares, and together with the Common Shares, the "Shares") in specified circumstances where the pre-emptive rights are not applicable (referred to in the Amended IRA as "Exempt Distributions") and in specified circumstances where pre-emptive rights were not exercised (referred to in the Amended IRA as “bought deal Distributions”).
The Follow-on BAT Investment is structured such that the aggregate number of Common Shares beneficially owned or controlled, directly or indirectly, by BAT, its affiliates, associates, related parties and any joint actors, may not exceed 30% of the issued and outstanding Common Shares (the "30% Common Share Limit"). As a result, pursuant to the terms of the Amended IRA, if the issuance of Common Shares upon BAT exercising its Top-Up Rights would result in BAT's aggregate ownership exceeding the 30% Common Share Limit, the Company shall issue Preferred Shares in lieu of Common Shares on the exercise of such rights, in order to restrict BAT's voting control to 30.0% of the issued and outstanding Common Shares. Such Preferred Shares would be convertible into Common Shares in accordance with their terms.
The price per Share to be paid by BAT pursuant to the exercise of its Top-up Rights will equal to the price paid by other participants in the Exempt Distribution or bought deal Distribution, subject to certain restrictions (including, if such price is not permitted pursuant to applicable securities laws, at the lowest price permitted thereunder).
The Company has classified the Top-up Rights as a derivative liability, and pursuant to the exercise of stock options, RSUs, PSUs and warrants that were outstanding at initial recognition on March 10, 2021 (the date of the Original IRA), the Company recorded a derivative liability of $2,740 based on the estimated fair value of the Top-up Rights at this date using a Monte Carlo pricing model.
As at September 30, 2024, the Company revalued the Top-up Rights of BAT pursuant to the Amended IRA to an estimated fair value of $6,338 (September 30, 2023 – $130). The Company recorded an increase in the estimated fair value of the Top-up Rights for the Fiscal 2024 of $6,208 (Fiscal 2023 - $605).
The following inputs were used to estimate the fair value of the Top-up Rights as at September 30, 2024, and September 30, 2023:
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SEPTEMBER 30, 2024 |
|
STOCK OPTIONS |
|
WARRANTS |
|
PSUs |
|
RSUs |
|
TOP-UP OPTIONS |
Average exercise price(1)
|
$1.20 - $45.08 |
|
$2.50 |
|
$— |
|
$— |
|
$1.20 - $2.23 |
Risk free interest rate |
2.78% - 2.89% |
|
2.79% |
|
2.83% |
|
2.87% |
|
3.10% |
Expected future volatility of Common Shares |
75.00% - 85.00% |
|
75.00% |
|
75.00% |
|
75.00% |
|
60.00% |
Expected life(1)
|
2.14 - 4.40 |
|
0.12 |
|
5.92 |
|
5.18 |
|
1.41 |
Forfeiture rate |
10% |
|
—% |
|
25% |
|
6% |
|
—% |
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September 30, 2023 |
|
STOCK OPTIONS |
|
WARRANTS |
|
PSUs |
|
RSUs |
Average exercise price(1)
|
$1.20 - $45.08 |
|
$2.50 |
|
— |
|
— |
Risk free interest rate |
4.11% - 4.54% |
|
3.59% |
|
3.65% |
|
3.78% |
Expected future volatility of Common Shares |
70.00% - 90.00% |
|
90.00% |
|
85.00% |
|
85.00% |
Expected life(1)
|
1.34 - 5.12 |
|
0.12 |
|
5.92 |
|
5.18 |
Forfeiture rate |
10% |
|
—% |
|
25% |
|
6% |
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|
|
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|
|
(1)Exercise price and expected life for stock options were determined using the range of exercise prices disclosed in Note 13(iv) in the Financial Statements
|
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 31
Secured Convertible Loan Agreement
On May 25, 2023, the Company entered into a secured convertible loan agreement (the "Secured Convertible Loan Agreement") with Phylos. Under the terms of the Secured Convertible Loan Agreement, upon the completion of certain milestones the Company has a commitment to fund US $4.75 million over two tranches within 12 and 24 months from the initial closing date. This commitment meets the definition of a derivative and the value of such derivative was considered as part of the overall transaction price in the initial recognition of the secured convertible loan and intangible assets. At initial recognition, the Company recorded a derivative liability of $1,424 based on the estimated fair value of the secured convertible loan.
In November, 2023, the Company funded the second tranche of US$2.75 million and a derivative liability of $1,385 was derecognized. Thereafter, in July 2024, the Company also funded US$1 million for the third tranche and a derivative liability of $752 was derecognized. As at September 30, 2024, the Company revalued the commitment to fund the remaining third tranche at an estimated fair value of $368 (September 30, 2023 – $1,743) and recorded a change in fair value of $762 for the year ended September 30, 2024.
Convertible Note
The fair value of the Convertible Note advanced to Sanity was determined using the binomial tree model. The key assumptions used in the Model for are Sanity stock price, dividend yield, expected future volatility of Sanity stock, credit risk-adjusted discounting rate, risk-free rate, and probability and timing of certain qualified and non-qualified events. The credit risk-adjusted discounting rate and the expected equity volatility are based on unobservable inputs and are categorized as Level 3 in the fair value hierarchy.
Non-voting Class A preferred shares
In relation to the Follow-on BAT Investment, the Company is required to issue non-voting Class A convertible preferred shares ("Preferred Shares"). The Preferred Shares to be issued as part of future tranches represent an obligation for the Company to deliver a variable number of its own Common Shares and hence meet the definition of an instrument classified as a derivative financial instrument as per IAS 32 Financial Instruments: Presentation. The Company measured the derivative at fair value on initial recognition. The derivative financial instrument is classified as a derivative asset or a derivative liability depending partly on whether the fair value of the Company's Preferred Shares is above or below the $3.2203 subscription price. At initial recognition, the derivative financial instrument was recognized as a derivative financial liability with a fair value off $1,921. Refer to Note 12 and 13 (iii) of the Financial Statements for further information regarding the Follow-on BAT Investment.
In August 2024, the Company closed the second tranche of the Follow-on BAT Investment and issued 8,463,435 Preferred Shares. The fair value of the derivative liability that was derecognized on closing of the second tranche was $4,339. As at September 30, 2024, the Company revalued the derivative liability for the third tranche to an estimated fair value of $4,771. Accordingly, the Company recognized a total fair value loss of $7,189 in the consolidated statements of operations and comprehensive loss.
The fair value of the contractual commitment to issue Preferred Shares in the future is based on level 1, level 2 and level 3 inputs and is determined based on estimated fair value of the Preferred Shares and the present value of the share price agreed with BAT. The fair value of the Preferred Shares was estimated using certain assumptions, including tenure of BAT's common shares and potential shareholding meeting 30% and 49% thresholds, respectively, market price and volatility of the Company's Common Shares, risk free rate and discount for lack of marketability.
Preferred Shares
On August 30, 2024, in relation to the Follow-on BAT Investment (as hereinafter defined), the Company issued 8,463,435 Preferred Shares of the Company. The Preferred Shares are eligible for conversion into Common Shares at BAT’s option, provided that such conversion would not result in BAT’s voting interest in the Company exceeding 30%. The number of shares that will be issued on conversion is not fixed and therefore, Preferred Shares are classified as liabilities. These liabilities are measured at FVTPL. The conversion feature is considered to be an embedded derivative that qualifies for bifurcation. However, the Company has elected to account for the entire instrument as FVTPL after determining under IFRS 9 that the Preferred Shares qualify to be accounted for under such FVTPL method.
On initial recognition, the Preferred Shares were measured at a fair value of $31,594. As at September 30, 2024, the Preferred Shares had an estimated fair value of $31,070, resulting in a fair value gain of $524 which was recognized in the consolidated statements of operations and comprehensive loss.
The fair value of Preferred Shares is based on level 1, level 2 and level 3 inputs and is determined based on market price and volatility of the Company's Common Shares, risk free rate and discount for lack of marketability.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 32
(ii) Biological Assets
The Company measures biological assets, which consist of cannabis plants, at fair value less costs to sell up to the point of harvest, which then becomes the basis for the cost of finished goods inventories after harvest. Subsequent expenditures incurred on these finished goods inventories after harvest are capitalized based on IAS 2 Inventories.
The changes in the carrying value of biological assets as at September 30, 2024 are as follows:
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CAPITALIZED COST
|
|
BIOLOGICAL ASSET FAIR VALUE ADJUSTMENT
|
|
AMOUNT
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Balance, September 30, 2023
|
$ |
6,945 |
|
|
$ |
10,410 |
|
|
$ |
17,355 |
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|
|
|
|
|
|
Unrealized gain on change in fair value of biological assets |
— |
|
|
51,151 |
|
|
51,151 |
|
Production costs capitalized |
40,229 |
|
|
— |
|
|
40,229 |
|
Transfer to inventory upon harvest |
(41,226) |
|
|
(52,336) |
|
|
(93,562) |
|
Carrying amount, September 30, 2024
|
$ |
5,948 |
|
|
$ |
9,225 |
|
|
$ |
15,173 |
|
The fair value less costs to sell of biological assets is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, then adjusts that amount for the average selling price per gram, and for any additional costs to be incurred, such as post-harvest costs. The following unobservable inputs, all of which are classified as level 3 within the fair value hierarchy (see Note 18 of the Financial Statements), are used in determining the fair value of biological assets:
i.average selling price per gram – calculated as the weighted average current selling price of cannabis sold by the Company, adjusted for expectations about future pricing;
ii.expected average yield per plant – represents the number of grams of finished cannabis inventory which is expected to be obtained from each harvested cannabis plant currently under cultivation;
iii.wastage of plants based on their various stages of growth – represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested;
iv.post-harvest costs – calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post-harvest, consisting of the cost of direct and indirect materials and labour related to drying, labelling, and packaging; and
v.stage of completion in the cultivation process – calculated by taking the average number of weeks in production over a total average grow cycle of approximately 14 weeks.
The Company estimates the harvest yields for the cannabis on plants at various stages of growth, based on expected yield of mature plants. As of September 30, 2024, it is expected that the Company’s biological assets will yield 28,889 kg (September 30, 2023 – 26,917 kg) of cannabis when eventually harvested. The Company’s estimates are, by their nature, subject to change, and differences from the expected yield will be reflected in the fair value adjustment to biological assets in future periods. The Company accretes fair value on a straight-line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 14-week growing cycle would be ascribed approximately 50% of its harvest date expected fair value less costs to sell (subject to wastage adjustments).
Management believes the most significant unobservable inputs and their impact on fair value are as follows:
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SIGNIFICANT INPUTS & |
WEIGHTED AVERAGE INPUT
|
|
|
|
EFFECT ON FAIR VALUE
|
ASSUMPTIONS |
SEPTEMBER 30, 2024 |
|
SEPTEMBER 30, 2023 |
|
SENSITIVITY
|
|
SEPTEMBER 30, 2024 |
|
SEPTEMBER 30, 2023 |
Average selling price per gram (excluding trim) |
$ |
1.59 |
|
|
$ |
1.73 |
|
|
Increase or decrease by 10% per gram |
|
$ |
1,463 |
|
|
$ |
1,690 |
|
Expected average yield per plant |
187 |
grams |
|
173 |
grams |
|
Increase or decrease by 10 grams |
|
$ |
781 |
|
|
$ |
978 |
|
The expected average yield per plant at September 30, 2024 primarily reflects the average yield of the flower component of the plant.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 33
OUTSTANDING SHARE DATA
(i) Outstanding Shares, Warrants and Options and Other Securities
The following table sets out the number of Common Shares, options, warrants, Top-up Rights, RSUs and PSUs outstanding of the Company as at September 30, 2024 and December 18, 2024:
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|
|
SEPTEMBER 30, 2024
|
|
DECEMBER 18, 2024 |
Common shares issued and outstanding |
108,585,492 |
|
126,156,673 |
Options |
2,691,336 |
|
2,683,636 |
Warrants |
4,450,500 |
|
4,450,500 |
Top-up rights |
7,136,901 |
|
8,541,031 |
Restricted share units |
2,973,643 |
|
3,710,864 |
Performance share units |
1,117,218 |
|
1,845,571 |
Total fully diluted shares |
126,955,090 |
|
147,388,275 |
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
The following are the estimates and judgments made by management in applying the accounting policies of the Company that have the most significant effect on the consolidated financial statements:
1.Biological assets and inventories
Determination of the fair value of biological assets requires management to make a number of estimates, including estimating the average selling price per gram and expected average yield per plant. The Company records obsolete and unsaleable inventories at the lower of cost and net realizable value. Adjustments to the carrying value of inventories are based on obsolescence trends, historical experience, forecast demand and average selling price for obsolete and unsaleable inventories. Refer to Note 5 and 6 of the Financial Statements for further information.
2.Useful lives and impairment of property, plant and equipment and finite-life intangible assets
Amortization of property, plant and equipment and finite life intangible assets requires estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts, taking into consideration factors such as economic and market conditions.
3.Share-based payments
In determining the fair value of options and related costs, management estimates the expected life of the option, the expected volatility of the Company’s share price, the risk-free interest rate, and the rate of forfeitures. Refer to Note 13 of the Financial Statements for further information.
4.Provision for returns and price adjustments
Government customers typically have the right to return products, and in some cases, the right to pricing adjustments for products that are subsequently discounted or sold for a lower price in another jurisdiction. The estimation of potential future returns and pricing adjustments includes the use of management estimates and assumptions that may not be certain given the evolving nature of the industry.
5.Impairment of non-financial assets
The recoverable amount of an individual CGU and group of CGUs is determined based on value in use which involves the use of a discounted cash flow model and significant assumptions which include forecasted cash flows, terminal growth rate and post-tax discount rates. In allocating any impairment loss, the Company determines the recoverable amounts of its property, plant and equipment. The recoverable amount of property and plant is determined based on fair value less costs of disposal and involves the use of capitalization rates, market rentals, market transactions and demolition costs. Refer to Note 8 for further information.
6. Derivative liabilities
Warrants issued pursuant to equity offerings that are potentially exercisable in cash or on a cashless basis resulting in a variable number of shares being issued are considered derivative liabilities and therefore measured at fair value through profit or loss. The Company uses the Black-Scholes option pricing model to estimate the fair value of such warrants at inception, on
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 34
each exercise, and subsequently at the period end date. The key assumption used in the model is the expected future volatility in the price of the Company’s Common Shares.
The potential issuance of Common Share related to top-up rights is classified as a derivative liability and is therefore measured at fair value through profit or loss. The Company uses the Monte Carlo pricing model to estimate the fair value of such top-up rights at inception, upon each exercise, and at year-end. The key assumption used in the model is the expected future volatility of the price of the Company's Common Shares. The impact of changes in these key assumptions is described in Note 11 of the Financial Statements.
7. Recognition and measurement of preferred shares and derivative financial instrument
In determining the initial and subsequent measurement of the preferred shares and relative derivative, management has applied significant judgment and estimation in regards to the fair valuation of the preferred shares and related derivative liability. Refer to Note 11 and 18 for further information.
8. Recognition and measurement of other financial assets
In determining the initial and subsequent recognition and measurement of the other financial assets, management has applied significant judgment and estimates including but not limited to determing the appropriate valuation methodology and key inputs. Refer to Note 9 and 18 for further information.
Accounting standards issued but not yet effective
The new and amended standards and interpretations that are issued, but are not yet effective, up to the date of issuance of the Company's consolidated financial statements are disclosed below. The Company intends to adopt these new and amended standards and interpretations when they become effective.
Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments to IFRS 10 and IAS 28 apply to situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, under IFRS 10, when an investor loses control of a subsidiary that does not contain a business as a result of a transaction involving an associate or a joint venture that is accounted for using the equity method, the gain or loss resulting from the transaction is recognized in the parent's profit or loss only to the extent of the unrelated investors' interests in that associate or joint venture. The full gain or loss continues to be recognized if the subsidiary contains a business. Similarly, IAS 28 is amended such that a full gain or loss is recognized when a downstream transaction involves assets that constitute a business.
These amendments shall be applied prospectively to the sale or contribution of assets occurring after the effective date. The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. These amendments are not expected to have a material impact on the Company's financial statements.
Amendments to IAS 1: Classification of Liabilities as Current or Non-Current and Non-current Liabilities with Covenants
In January 2020 and October 2022, the IASB issued amendments to IAS 1 to specify the requirements relating to determining whether a liability should be presented as current or non-current in the consolidated statements of financial position. Under the new requirements, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. These amendments also clarify how conditions with which an entity must comply within twelve months after the reporting period affect the classification of a liability. The amendments apply retrospectively for annual reporting periods beginning on or after January 1, 2024. These amendments are not expected to have a material impact on the Company’s consolidated financial statements.
Amendments to IFRS 16: Lease Liability in a Sale and Leaseback
On September 22, 2022, the IASB issued amendments to IFRS 16, Leases, to specify the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction, to ensure the seller-lessee does not recognize any amount of the gain or loss that relates to the right of use it retains. The amendments are effective for annual reporting periods beginning on or after January 1, 2024 and must applied retrospectively to sale and leaseback transactions entered into after the date of initial application of IFRS 16. Earlier application is permitted and that fact must be disclosed. The Company has not entered into any sale and leaseback transactions in the past and does not anticipate doing so in the future. These amendments are not expected to have a material impact on the Company's consolidated financial statements.
Amendments to IAS 7 and IFRS 7: Supplier Finance Arrangements
In May 2023, the IASB issued amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures to clarify the characteristics of supplier finance arrangements and require additional disclosure of such arrangements. The disclosure requirements in the amendments are intended to assist users of financial statements in understanding the effects of supplier finance arrangements on an entity’s liabilities, cash flows and exposure to liquidity risk.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 35
The amendments will be effective for annual reporting periods beginning on or after 1 January 2024. Early adoption is permitted, but will need to be disclosed. These amendments are not expected to have a material impact on the Company’s consolidated financial statements.
IFRS 18 Presentation and Disclosure in Financial Statements
In April 2024, the IASB issued IFRS 18, which replaces IAS 1 Presentation of financial statements. IFRS 18 introduces new requirements for presentation within the statement of profit or loss, including specified totals and subtotals. Furthermore, entities are required to classify all income and expenses within the statement of profit or loss into one of five categories: operating, investing, financing, income taxes and discontinued operations, whereof the first three are new.
It also requires disclosure of newly defined management-defined performance measures, subtotals of income and expenses, and includes new requirements for aggregation and disaggregation of financial information based on the identified ‘roles’ of the primary financial statements (PFS) and the notes.
In addition, narrow-scope amendments have been made to IAS 7 Statement of Cash Flows. These include changing the starting point for determining cash flows from operations under the indirect method from ‘profit or loss’ to ‘operating profit or loss’ and removing the optionality around classification of cash flows from dividends and interest. In addition, there are consequential amendments to several other standards.
IFRS 18 and the amendments to the other standards, is effective for annual reporting periods beginning on or after January 1, 2027, but earlier application is permitted and must be disclosed. IFRS 18 will apply retrospectively. The Company is currently evaluating the potential impact of IFRS 18 on the Company’s consolidated financial statements.
PRODUCT DEVELOPMENT COLLABORATION
On March 10, 2021, in conjunction with the strategic investment we received from BAT, the Company and BAT entered into the PDC Agreement pursuant to which the CoE was established at the Moncton Campus to focus on developing the next generation of cannabis products.
Pursuant to the terms of the PDC Agreement, $31,109 of BAT's original investment in the Company was reserved as restricted cash in order to satisfy certain of the Company’s future obligations under the PDC Agreement, including the Company’s portion of its funding obligations under a mutually agreed initial budget for the CoE. Costs relating to the CoE are funded equally by the Company and BAT. Balances are transferred from restricted cash to the Company's general operating account as CoE related expenditures are periodically reconciled and approved. The balance in restricted cash as at September 30, 2024 is $25,860 (September 30, 2023 - $17,893).
The CoE is accounted for as a joint operation, with the Company and BAT each paying 50% of the costs incurred by the CoE. . For the year ended September 30, 2024, $6,666 (September 30, 2023 - $6,886) of expenses have been recorded in the statements of operations and comprehensive loss.
ACQUISITION OF SUBSIDIARIES
i.Laurentian Organic Inc.
On December 21, 2021, the Company acquired 100% of the shares and voting interests of the non-listed Laurentian for $36,000, consisting of $10,000 in cash consideration, $7,000 on closing and $3,000 held back, with the remaining $26,000 in share consideration at the acquisition date. The Company agreed to provide the seller additional share consideration based on Laurentian's future adjusted EBITDA over a period of two years, which were as follows (all capitalized terms used below not otherwise defined herein have the respective meanings described to them in the Company’s agreement to acquire Laurentian):
a) First Year Earnout calculated for the period January 1, 2022 to December 31, 2022, as the greater of (i) zero and (ii) the difference obtained when the sum of $2,000 and 50% of the agreed capital expenditures is subtracted from 30% of the First Year adjusted EBITDA Multiple, payable in Common Shares, provided that, the sum of the Initial Consideration and the First Year Earnout Amount shall not exceed the First Year adjusted EBITDA Multiple; and
b) Second Year Earnout calculated for the period January 1, 2023 to December 31, 2023, as 19% of the Second Year adjusted EBITDA Multiple less the remaining balance of the agreed capital expenditures, payable in Common Shares, provided that, the sum of the Initial Consideration, the First Year Earnout Amount and the Second Year Earnout Amount shall not exceed the Second Year EBITDA Multiple.
Earnout payments paid in Common Shares were to be priced based on the five-day volume-weighted average price of the Company’s Common Shares on the TSX as of the day prior to settlement. As at the acquisition date, the fair value of the contingent consideration was estimated to be $6,996 and subsequently as at August 31, 2022 adjusted to $2,913, to reflect changes in estimates.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 36
The first year earnout milestone was not met and during the thirteen months ended September 30, 2023, the Company recognized a fair valuation gain of $2,864 in the statements of operations and comprehensive loss.
The second year earnout milestone was also not met and during the year ended September 30, 2024, the Company recognized a fair valuation gain of $50 in the statements of operations and comprehensive loss.
In July 2024, the Company received a dispute notice from the Laurentian vendors purporting to cover the first year and second year earnout. The Company and the Laurentian vendors have entered into an engagement letter appointing BDO Canada LLP as neutral accountant to review the items in the dispute notice in accordance with the share purchase agreement dated December 21, 2021.
ii.The Edibles and Infusions Corporation
On April 6, 2021, the Company acquired 100% of the shares and voting interests of the non-listed EIC, including SUHM Investments Inc. and Quality Confections Corporation who collectively owned 100% of EIC for $22,000 of share consideration at the acquisition date. The Company has agreed to provide the seller additional share consideration of $13,000 should EIC achieve its milestones.
Contingent share consideration
The acquisition included contingent share consideration based on various milestones as follows:
i) $3,500 to be paid in Common Shares upon the first listing of EIC or Organigram-branded product, manufactured at the EIC facility, in the Ontario or Alberta recreational markets prior to December 31, 2021. This was achieved in the year ended August 31, 2021 and subsequently settled on September 8, 2021;
ii) $7,000 to be paid in Common Shares on the generation of $15 million in net revenue during the 12 months ended December 31, 2022. This was achieved during the thirteen months ended September 30, 2023 and the Company issued 2,621,370 Common Shares as consideration to the former shareholders of EIC, for a total value of $6,500. The remaining $500 has been irrevocably disclaimed and waived as part of a negotiated settlement and the Company recorded it as a change in fair value of contingent share consideration during the thirteen months ended September 30, 2023
iii) $2,500 to be paid in Common Shares on the generation of $7 million in adjusted EBITDA for the 12 months ended December 31, 2022. The third milestone, calculated based on the adjusted EBITDA for the 12 months ended December 31, 2022, was not met.
Refer to Note25 to the Financial Statements for further information.
CONTINGENT LIABILITIES
The Company recognizes loss contingency provisions for probable losses when management can reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the mid-point of the range is used. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed at each reporting date and the estimates are changed when expectations are revised. An outcome that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period.
Alberta Claim
On June 16, 2020, a claim in connection with a proposed national consumer protection class-action lawsuit (the "Alberta Claim") was filed with the Court of Queen's Bench in Alberta (the "AB Court") seeking damages against several Canadian cannabis companies including the Company (the "Defendants"). The Alberta Claim does not particularize all of the claims against the Defendants; however, it makes allegations with respect to the content of THC and CBD in the Defendants' products. In order to proceed as a class action, the AB Court must certify the action as a class action. A certification hearing has not yet been scheduled. The Company has reported the Alberta Claim to its insurers.
Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of, or reasonably estimate, the possible losses or a range of possible losses resulting from the matter described above. In July, 2024, the plaintiffs filed a discontinuance of claim with the AB Court.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 37
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
In accordance with National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”) and Rule 13a-15 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), the establishment and maintenance of Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the responsibility of management.
The Company engaged PKF O'Connor Davies ("PKF") to perform an “integrated audit” which encompassed an opinion on the fairness of presentation of the Company’s annual consolidated financial statements for the year ended September 30, 2024, as well as an opinion on the effectiveness of the Company’s ICFR. PKF, the Company’s independent registered public accounting firm, has audited the Company's consolidated financial statements and has issued an adverse report on the effectiveness of ICFR. PKF‘s audit report on the Company’s ICFR is incorporated by reference into the Company’s annual report on Form 40-F under the Exchange Act for the year ended September 30, 2024.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains a set of DCP designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. As required by NI 52-109 and Exchange Act Rule 13a-15(b), an evaluation of the design and operation of our DCP was completed as of September 30, 2024 under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) using the criteria set forth in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO 2013 Framework”). Based upon this evaluation, our CEO and CFO concluded that because of the material weaknesses in our ICFR described below, our DCP were not effective as of such date.
INTERNAL CONTROL OVER FINANCIAL REPORTING
NI 52-109 requires the CEO and CFO to certify that they are responsible for establishing and maintaining ICFR for the Company and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Similarly, Exchange Act Rule 13a-15(c) requires the Company's management, with the participation of the CEO and CFO, to evaluate ICFR as of the end of the fiscal year. The CEO and CFO are also responsible for disclosing any changes to the Company’s internal controls during the most recent period that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
MATERIAL CHANGES TO INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been a change to the Company’s ICFR during the three months ended September 30, 2024 that has materially affected, or is likely to materially affect, the Company’s ICFR.
Control Environment
With respect to the material weakness related to the control environment during Fiscal 2024, the Company took the following actions:
•Bolstered the financial reporting, IT and accounting department’s internal controls and accounting knowledge by hiring new full-time employees including those in more senior roles; and
•Implemented additional ongoing oversight, training and communication programs for management and personnel to reinforce the Company’s control standards and expectations and clarified individual responsibility for control activities at various levels within the Company. Roles and responsibilities are continually assessed with a view to meeting the needs of the Company’s internal control environment.
During Q4 Fiscal 2024, the Company completed its evaluation of the impact of these actions and concluded that this material weakness related to control environment was successfully remediated.
Information Process
With respect to the material weakness related to the information process during Fiscal 2024:
•The Company substantially progressed its ERP system implementation and successfully completed the second phase of ERP that included the implementation of finance and supply chain modules at our Winnipeg and Lac-Superieur facilities
•During Q4 Fiscal 2024, the Company launched the planning and design phase for a further enhancement to the ERP system, which will allow for improved costing management and reduction of complex spreadsheets related to inventory costing
•During Q4 Fiscal 2024, the Company launched the planning and design phase for a financial planning and management reporting tool, which is expected to further enhance the Company’s analytical and review procedures
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 38
•As of September 30, 2024 the Company completed the implementation of a new human resources information system, or HRIS, that is intended to further streamline internal processes, support employee retention efforts and facilitate remediation activities.
•The Company hired a Director of IT to oversee and enhance the IT department, support the remediation of deficiencies in general IT controls and facilitate the development and implementation of the new ERP system. Under the direction of the Director of IT, the Company continued to make progress during the period in remediating certain IT general controls.
•The Company hired and trained a dedicated resource to review the third-party service organization control reports and assess their impact in relation to the Company’s control environment. The Company streamlined its complex spreadsheet models, with the exception of biological asset models and inventory costing, to reduce the risk of errors in mathematical formulas and to improve the ability to verify the logic of complex spreadsheets.
Control Activities
With respect to the material weakness related to control activities during Fiscal 2024:
•The Company amalgamated Organigram Inc. with EIC and Laurentian. Post amalgamation, the Company’s three facilities continued to operate as a single corporation under the name "Organigram Inc." which significantly simplified and streamlined the financial statement close process.
•The Company added a new dedicated resource with assigned responsibilities to support management in their ongoing remediation efforts.
MANAGEMENT’S EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management, under the supervision and with the participation of its CEO and CFO, conducted an evaluation of the effectiveness of the Company’s ICFR as defined by NI 52-109 and Rule 13a-15(f) of the Exchange Act as of September 30, 2024, using the criteria set forth by the COSO 2013 Framework. Based on this evaluation, management concluded that the Company's ICFR was not effective as of September 30, 2024, due to material weaknesses in internal control over ICFR that have been previously identified but continue to exist.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses:
•Management review controls to ensure the completeness and accuracy of complex spreadsheets used for biological assets and inventory were not designed or operating effectively; and
•The Company had ineffective general IT controls related to security and administration and monitoring of service organizations.
As a consequence of the above, the Company had ineffective control activities related to the design, implementation and operations of process level and financial statement close controls .
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 39
STATUS OF REMEDIATION PLAN
The Company was successful in remediating the material weakness related to the control environment and made progress in remediating other control deficiencies as discussed above under “Material Changes to Internal Control Over Financial Reporting” as at the end of Fiscal 2024. Management, with the assistance of external and internal specialists, has continued reviewing and revising its ICFR, and remains committed to implementing changes to its ICFR to ensure that the control deficiencies that contributed to the remaining material weaknesses are remediated in Fiscal 2025.
The following remedial activities remain in progress as at the date of this MD&A and are expected to continue at least throughout the first half of Fiscal 2025. The controls associated with these remedial activities have not yet been subject to control testing to conclude on the design or operational effectiveness.
•We will continue to engage internal control specialists that will assist management in evaluating internal controls and in designing remediation plans.
•Under the direction of the Chief Information Officer and the Director of IT, the Company will continue to remediate certain IT general controls.
•We will continue to work on implementing controls that are intended to evaluate information from organizations providing services to the Company.
•We will continue to streamline our complex spreadsheet models related to biological assets and inventory to reduce the risk of errors in mathematical formulas and to improve the ability to verify the logic of complex spreadsheets, while continuing to automate processes.
Following the substantial improvement and remediation of the material weakness described above, senior management has discussed the remaining material weaknesses with the Audit Committee which will continue to review progress on these remediation activities. While we believe these actions, including the third phase of the ERP system, will contribute to the remediation of material weaknesses, we have not yet completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the remaining material weaknesses, we may need to take additional measures to address the deficiencies. Until the remediation steps set forth above, including the efforts to implement any additional control activities identified in the process, are fully implemented and operate for a sufficient period of time that they can be concluded to be operating effectively, the remaining material weaknesses described above will not be considered fully remediated. While significant progress has been made toward remediation of the remaining material weaknesses, no assurance can be provided at this time that the actions and remediation efforts will effectively remediate the remaining material weaknesses described above or prevent the incidence of other material weaknesses in the Company’s ICFR in the future. Management expects to fully remediate the remaining material weaknesses identified before the end of Fiscal 2025. See “Risk Factors” in this MD&A and the AIF.
Management, including the CEO and CFO, does not expect that DCP or ICFR will prevent all misstatements, even as the remediation measures are implemented and further improved to address the material weaknesses. The design of any system of internal controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 40
RISK FACTORS
The Company’s business is subject to risks inherent in a high growth, heavily regulated enterprise. We have identified certain risks pertinent to our business that may have affected or may affect our business, financial conditions, results of operations and cash flows, as further described throughout this MD&A and under “Risk Factors” in the AIF. For additional risk factors, readers are directed to the Company’s AIF, which is (a) available under the Company’s issuer profile on SEDAR+ at www.sedarplus.com, and (b) incorporated into and forms part of the Company's annual report on Form-40F filed on EDGAR at www.sec.gov. As a general matter, management of the Company attempts to assess and mitigate any risks and uncertainties by retaining experienced professional staff and ensuring that the Board of Directors and senior management of the Company are monitoring the risks impacting or likely to impact the business on a continuous basis.
(i) Credit Risk
Credit risk arises from deposits with banks, short-term investments, outstanding trade and other receivables, restricted cash and other financial assets. For trade receivables, the Company does not hold any collateral as security but mitigates this risk by dealing only with what management believes to be financially sound counterparties and, accordingly, does not anticipate significant loss for non-performance. For other receivables, outside of the normal course of business, management generally obtains guarantees and general security agreements. The maximum exposure to credit risk of cash, short-term investments, restricted cash, other financial assets and accounts receivable and other receivables on the statement of financial position at September 30, 2024 approximates $211,306 (September 30, 2023 - $90,351).
As of September 30, 2024 and September 30, 2023, the Company’s aging of trade receivables was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30, 2024 |
|
SEPTEMBER 30, 2023 |
0-60 days |
$ |
32,349 |
|
|
$ |
22,946 |
|
61-120 days |
5,502 |
|
|
5,845 |
|
Gross trade receivables |
$ |
37,851 |
|
|
$ |
28,791 |
|
Less: Expected credit losses and reserve for product returns and price adjustments |
(5,196) |
|
|
(1,334) |
|
|
$ |
32,655 |
|
|
$ |
27,457 |
|
(ii) Liquidity Risk
The Company’s liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at September 30, 2024, the Company had $106,745 (September 30, 2023 – $33,864) of cash and working capital of $208,897 (September 30, 2023 - $133,545). Further, the Company may potentially access equity capital through the capital markets if required.
The Company is obligated to the following contractual maturities relating to their undiscounted cash flows as at September 30, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount |
Contractual Cash Flows |
Less than 1 year |
1 to 3 years |
3 to 5 years |
More than 5 years |
Accounts payable and accrued liabilities |
$ |
47,097 |
|
$ |
47,097 |
|
$ |
47,097 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Long-term debt |
25 |
|
85 |
|
60 |
|
25 |
|
— |
|
— |
|
|
$ |
47,122 |
|
$ |
47,182 |
|
$ |
47,157 |
|
$ |
25 |
|
$ |
— |
|
$ |
— |
|
The contractual maturities noted above are based on contractual due dates of the respective financial liabilities.
In connection with the Company’s facilities, the Company is contractually committed to approximately $1,676 of capital expenditures.
(iii) Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk for the Company is comprised of interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt obligations with a floating interest rate. The Company has determined that a 1% change in rates would not have a material impact on the consolidated financial statements.
(iv) Concentration risk
The Company’s accounts receivable are primarily due from provincial government agencies (three of which, individually, represented more than 10% of the Company’s revenues during the year ended September 30, 2024), corporations (none of which
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 41
represented more than 10% of the Company’s revenues during the period), and legal trusts and, thus, the Company believes that the accounts receivable balance is collectible.
(v) Risks related to the listing of Company's Common Shares on TSX and NASDAQ
On January 23, 2023, the Company received notification from NASDAQ that it is not in compliance with the minimum bid price requirement in NASDAQ Listing Rule 5450(a)(1) for continued listing on NASDAQ (the "Minimum Bid Requirement"), since the closing bid price for the Company's common shares listed on NASDAQ was below US$1.00 for 30 consecutive trading days. Under NASDAQ Listing Rule 810(c)(3)(A), the Company had a period of 180 calendar days from the date of notification, or until July 24, 2023, to regain compliance with the Minimum Bid Requirement, during which time the Common Shares would continue to trade on NASDAQ. To regain compliance, the closing bid price of the Common Shares was required to remain at or above US$1.00 per share for a minimum of 10 consecutive business days. In the event the Company did not regain compliance with the Minimum Bid Requirement by July 24, 2023, the Company would have been eligible for an additional period of 180 calendar days to regain compliance or would have been subject to delisting of the Common Shares from NASDAQ.
The Company effected the Share Consolidation regaining compliance with the Minimum bid Requirement, with legal effect from July 5, 2023. However, there can be no assurance that the Company will remain compliant with the Minimum Bid Requirement or otherwise maintain compliance with any of the other NASDAQ listing requirements. Any delisting of the Common Shares from NASDAQ could adversely affect the Company's ability to attract new investors, reduce the liquidity of the outstanding Common Shares, reduce the Company's ability to raise additional capital, reduce the price at which the Common Shares trades on the TSX, result in, negative publicity and increase the transaction costs inherent in trading such shares with overall negative effects for the Company's stockholders. In addition, delisting of the Common Shares could deter U.S. broker-dealers from making a market in or otherwise seeking or generating interest in the Common Shares and might deter certain institutions or persons from investing in the Company's securities at all. For these reasons and others, delisting of the Common Shares from NASDAQ could adversely affect the Company's business, financial condition and liquidity.
(vii) Risks related to third party data
The Company relies on independent third party data for market share position and there is no assurance third party data provides an accurate representation of actual sales as some third parties use different methodologies or calculations to estimate market share position, and because market and industry data is inherently imprecise, subject to interpretation and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey or data collection process. The Company also relies on its own market research and internal data to determine the accuracy of such third-party data.
(vii) Risks related to international sales
The Company currently exports cannabis to a number of countries whose laws vary, and many are unsettled and still developing. There is no assurance that the Company will continue to meet the evolving legal and regulatory requirements applicable to each export jurisdiction. Any change in laws or regulations may adversely impact the Company’s ability to export its products. In Israel, a potential dumping tariff on cannabis imports may impact the Company's ability to resume exports to this jurisdiction.
In January 2024, the Israeli government notified the Company that it was the subject of the Anti-Dumping Investigation in respect of its cannabis exports to Israel. The Company last shipped products to Israel in the second quarter of fiscal year 2023. Future shipments to Israel are contingent on, among other factors, customer buying patterns, receipt of applicable import and export permits, and contractual matters. Although the Company believes it is in compliance with international trade law related to its shipments to Israel, the outcome of the Israeli Anti-Dumping Investigation may result in risks to future shipments to Israel including potential imposition of a dumping duty on Israeli importers of Canadian cannabis exports. In July 2024, a preliminary determination was issued by the Israeli government, finding dumping by all Canadian exporters, including the Company. The Company intends to make submissions to advance its position that it has not engaged in dumping. A final decision on the question of dumping is expected in calendar 2025.
(ix)Israel-Hamas War and Conditions in Israel
On October 7, 2023, a war began between the terrorist organization Hamas and Israel. The Company continues to monitor the conflict in Israel and impacts the conflict has had and potential impacts the conflict could have on the Company's business in Israel. The extent to which the conflict may continue to impact the Company’s business and activities will depend on future developments which remain highly uncertain and cannot be predicted. Any losses or damages incurred by the Company could have a material adverse effect on its business.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 42
(x) Information Systems Risk
The Company’s business operations are managed through a variety of IT systems. Certain of the Company’s key IT systems are dated and require, or are in the process of, modernization. The Company’s IT systems may also be vulnerable to damage or interruption from circumstances beyond the Company’s control, including fire, flood, natural disasters, systems failures, network or communications failures, power outages, public health emergencies, security breaches, cyber-attacks and terrorism. If one of the Company’s key IT systems were to suffer a failure, no assurance can be given that the Company’s backup systems or contingency plans will sustain critical aspects of the Company’s operations, and the Company’s business, results of operations or financial condition could be materially adversely affected. Further, the Company relies on large outsourcing contracts for IT services with major third-party service providers, and if such service providers were to fail or the relationships with the Company were to end, and the Company were unable to find suitable replacements in a timely manner, the Company’s business, results of operations or financial condition could be materially adversely affected.
The Company is continually modifying and enhancing its IT systems and technologies to increase productivity, efficiency and security. As new systems and technologies are implemented, the Company could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to its financial reporting and manufacturing and other business processes. When implemented, the systems and technologies may not provide the benefits anticipated and could add costs and complications to ongoing operations, which may have a material adverse effect on the Company’s business, results of operations or
financial condition.
During Fiscal 2023 and Fiscal 2024, the Company launched a new ERP system, which provides for a more robust and secure financial system of record, among other supply chain and operational data. Various IT general controls are now centralized currently in the midst of stabilizing a new ERP system, which replaces its previous financial system. There can be no assurance
that the ERP system will provide the information and benefits expected by management.
The Company is in the midst of implementing Phase 3 of its ERP system, D365 Advanced Manufacturing ("Phase 3"). The design and implementation of Phase 3 requires an investment of significant personnel and financial resources, including substantial expenditures for outside consultants, system hardware and software in addition to other expenses in connection with the implementation. The Company may not be able to implement Phase 3 successfully without experiencing delays, increased costs and other difficulties, including potential design defects, miscalculations, testing requirements, and the diversion of management’s attention from day-to-day business operations. If it is unable to implement Phase 3 as planned, the effectiveness of the internal control over financial reporting could be adversely affected, the ability to assess those controls adequately and to disseminate its financial documents could be delayed, the Company’s operations can be affected and the Company’s financial condition, results of operations and cash flows could be negatively impacted.
MANAGEMENT’S DISCUSSION AND ANALYSIS | FOR THE YEAR ENDED SEPTEMBER 30, 2024 AND THIRTEEN MONTHS ENDED SEPTEMBER 30, 2023 43