Ms. Beena Goldenberg reports

ORGANIGRAM REPORTS FISCAL 2023 RESULTS1

Organigram Holdings Inc. has released its results for the fourth quarter and 13 months ended Sept. 30, 2023.

"In fiscal 2023, our continued focus on innovative products that address consumers' evolving preferences toward convenience drove our growth across several ready-to-consume categories like prerolls and edibles, and we ended the year in the No. 2 market position which we held as of Nov. 30," said Beena Goldenberg, chief executive officer. "Our success in innovation is exemplified by being awarded KIND's Most Innovative Product for the second year in a row. We won in 2022 for Edison Jolts and this year for our Shred X Rip-Strip hash. In fiscal 2024 we expect improved margins from efficiencies tied to our completed facility upgrades and growth in higher-margin categories such as craft flower and vapes, while the $124.6-million financial commitment from BAT expedites our plans for international growth."

Fiscal 2023 financial highlights:

• Net revenue of $161.6-million, an increase of 11 per cent over $145.8-million in fiscal 2022;
• Adjusted gross margin of $40.2-million, an increase of 20 per cent over $33.4-million in fiscal 2022;
• Adjusted gross margin percentage of 25 per cent compared with 23 per cent in fiscal 2022;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $6-million, compared with $3.5-million in fiscal 2022;
• Ended fiscal 2023 with $51.8-million in cash and negligible debt.

Key financial results for fiscal 2023:

• Net revenue increased 11 per cent to $161.6-million from $145.8-million in the previous year primarily due to an increase in recreational and international revenue, the extended reporting period, partially offset by a decrease in medical sales.
• Cost of sales was $136.4-million, compared with $119-million in the previous year, primarily due to higher net revenue, and the extended reporting period.
• Gross margin before fair value changes to biological assets, inventories sold and other charges declined to $25.2-million from $26.8-million in fiscal 2022, due to higher inventory provision and net realizable value adjustments.
• Adjusted gross margin was $40.2-million, or 25 per cent of net revenue, compared with $33.4-million, or 23 per cent in fiscal 2022. The improvement was primarily due to increased sales in higher-margin categories and higher international sales.
• Selling, general and administrative expenses increased to $72.4-million, compared with $59.8-million in fiscal 2022.
• Annual SG&A expenses as a percentage of net revenue increased from 41 per cent to 44.8 per cent, primarily due to the implementation of the company's enterprise resource planning (ERP) program.
• Adjusted EBITDA was $6-million for fiscal 2023, compared with $3.5-million in fiscal 2022.
• Net loss was $248.6-million, compared with $14.3-million in fiscal 2022, primarily due to impairments on PP&E (property, plant and equipment), intangibles, and goodwill.
• Net cash used in operating activities before working capital changes was $38.8-million, compared with $36.2-million in fiscal 2022. The year-over-year increase to cash used in operating activities is primarily due to the higher ERP implementation expense in the current period.

"We are pleased with our year-over-year adjusted EBITDA growth of 71 per cent and remain optimistic about our growth potential on the back of many successfully completed initiatives in fiscal 2023," added Paolo De Luca, interim chief financial officer and chief strategy officer. "With our investments in differentiated advantages yet to be fully realized, such as THCV [tetrahydrocannabivarin], cost savings from seed-based production and novel vape hardware technology, we remain laser focused on leading the industry in Canada and beyond. Our recently announced private placement financing, at a significant premium, underscores the valuable franchise we are creating at Organigram centred around sustainable long-term competitive advantages, and bolsters our balance sheet to ensure financial flexibility as opportunities continue to arise."

Fiscal 2023 Canadian recreational market introductions

• Holy Mountain -- a new value brand from Organigram launched in November, 2022, with an initial lineup of dried flower strains and value pressed hash.
• Monjour Twilight Tranquility -- a sugar-free soft-chew in pear, plum and lavender flavours, containing cannabidiol, cannabinol and cannabigerol, and sold in a pack of 25.
• Shred X Rip-Strip hash -- this botanical terpene-infused hash is unlike any other on the market -- with 10 precut strips of hash available in a two-gram format. This product is a new ultraconvenient hash offering from Shred that is available in the legendary Tropic Thunder and new Blueberry Blaster flavour profiles.
• Shred X Heavies -- infused with both diamonds and distillate, this is the first infused preroll offering from Organigram that will have a potency of over 40 per cent. The infusion of botanical terpenes further enhances the natural terpene profiles of the blends, taking them to new and delicious heights.
• Shred'ems Grapple Juice gummies -- Grapple Juice gummies are vegan-friendly indica gummies with a mouth-watering grape and apple medley. Each pack contains four gummies, infused with 2.5 milligrams of tetrahydrocannabinol and 2.5 mg of CBG.
• Holy Mountain GMO Tropical Reign (28 grams) -- Organigram introduced one of its newest high-THC cultivars, Tropical Reign, in large format 28-gram bags, under its Holy Mountain brand. Tropic Reign THC levels are testing as high as 27.6 per cent.
• Edison Limelight x Cobra Milk combo pack -- Cobra Milk is a high-potency cultivar from Organigram. This product combines Cobra Milk and Limelight pinners in a combo pack for consumers who value quality and variety.
• Shred Dartz and Holy Smokes -- these tube-style prerolls mark the inception of 0.4-gram prerolls for Organigram, crafted using the state-of-the-art, high-speed Cantos tube-style rolling machine, complemented by cutting-edge packaging capabilities.
• Shred'ems Guava Lime Go-Time -- this exotic new flavour profile, bursting with guava and lime flavours, provides a unique cannabinoid experience with an initial 1:1 THC:THCV (10 mg THC plus 10 mg THCV) ratio per pack. An entry point for those looking to experience this new minor cannabinoid.
• Shred All Dressed -- an aromatic mix of three bestselling milled blends: Tropic Thunder, Gnarberry and Funkmaster.
• Shred Rainbow Oz. -- four colourful seven-gram pouches of Shred's bestselling blends: Tropic Thunder, Gnarberry, Funk Master and Dessert Storm.
• Shred'ems POP! Orangezilla Float -- 40 mg CBD and 10 mg THC per pack: These sativa gummies are sure to please with an unmistakable orange pop and vanilla flavour profile.
• Monjour Quiet Chamomile -- each gummy features 25 mg of CBD and five mg of CBN. This large-format, high-potency, sugar-free gummy pack is a delicious blend of soothing chamomile and peaceful pomegranate.
• Holy Mountain Purple Punch-Out!! -- Purple PunchOut joins the legendary Holy Mountain lineup and is packed with sweet grape and berry aromas. These mesmerizing buds are light green, flecked with orange pistils, and are made up of dominant terps b-Carophyllene, limonene and humulene coming in at 24 to 30 per cent THC.

Research and product development

Product development collaboration (PDC) and centre of excellence (CoE):

• Organigram and British American Tobacco PLC continue to work together through their PDC on new workstreams to develop innovative technologies in the edible, vape and beverage categories in addition to new disruptive inhalation formats aimed at addressing the biggest consumer pain points that exist in the category today. Organigram is preparing to deliver new products in these spaces and the launch priority includes gummies which will feature a new nanoemulsion technology.
• The PDC is conducting clinical pharmacokinetic studies which will provide Organigram with the ability to make claims regarding the onset and half-life of these products.

Follow-on strategic investment from BAT and creation of Jupiter investment pool:

• In March of 2021, BAT invested approximately $221-million into Organigram which has served to propel product innovations resulting from CoE at Organigram's Moncton facility.
• On Nov. 6, 2023, Organigram announced a $124.6-million follow-on investment from BAT and the creation of the Jupiter, a strategic investment pool designed to expand Organigram's geographic footprint and capitalize on emerging growth opportunities.

International:

• In fiscal 2023, the company completed international shipments totalling $18.9-million, an increase of 25 per cent over fiscal 2022.
• The company continues to monitor and develop a potential U.S. entry strategy, backed by the Jupiter investment pool, that could include THC, CBD and other minor cannabinoids. The company is also monitoring recreational legalization opportunities in European jurisdictions based on the size of the addressable market and recent regulatory changes.
• In fiscal 2023, Organigram signed additional supply agreements to distribute medical cannabis to 4C Labs for patients located in the United Kingdom, and Sanity Group for patients located in Germany. Shipments to these new jurisdictions are expected to commence and continue in fiscal 2024, while the company also expects continued shipments to Israel and Australia.

Strategic investments

Greentank:

• In March, 2023, Organigram announced it has entered into a product purchase agreement with Greentank, a leading vaporization technology company, and a subscription agreement with Greentank's parent company. The purchase agreement provides Organigram with an exclusivity period in Canada for a new technology incorporated into 510 vape cartridges (along with other formats) for use with cannabis, including the development of a custom all-in-one device that will be proprietary to Organigram. Pursuant to the terms of the subscription agreement Organigram subscribed for preferred shares for an aggregate subscription price of $4-million (U.S.) (approximately $5.5-million) representing an approximate 2.6-per-cent interest in Greentank. Organigram's investment combined with the purchase agreement is expected to transform Organigram's current and future vapour hardware lineup across its portfolio of recreational brands. Greentank-enabled vapes will solve clogging and flavour performance issues associated with vapes, elevating the consumer experience by generating unique aerosols which can efficiently deliver consistent performance, increased potency and superior flavour from start to finish.

Phylos:

• In May, 2023, Organigram announced that it reached agreement with Phylos, a U.S. cannabis genetics company and provider of production-ready seeds, based in Portland, Ore., to initiate a wide-ranging technical and commercial relationship in Canada. This innovation relationship is expected to further support Organigram's industry-leading cultivation efforts in Canada with patent-pending foundational technologies and genetics. In the future, subject to receipt of any required approvals and permits, Organigram intends to export THCV products to select legal international markets. Under the terms of the loan agreement, Organigram will advance up to $8-million (U.S.) to Phylos in three tranches. Organigram advanced Phylos an initial $3.25-million (U.S.) on the initial closing date of the loan agreement with a commitment to finance up to an additional $4.75-million (U.S.) over two tranches within 12 and 24 months from the initial closing date, upon the completion of certain milestones. Subsequent to Organigram's 2023 year-end, the first milestone was achieved and $2.75-million (U.S.) was advanced to Phylos. This transaction strengthens Organigram's capabilities as follows:
  • Provides exclusive access to high-potency whole-plant-derived THCV in Canada based on Phylos' genetics platform;
  • Allows Organigram to modernize cannabis production and employ seed-based production at scale;
  • Provides access to new, proprietary genetic identification tools that are expected to enable efficient and rapid development of unique, proprietary cultivars driven by consumer preferences;
  • Enables Organigram to develop seed-based F1 hybrid genetics for key Organigram brands such as Shred, providing future opportunities to offer turnkey U.S. and International licensing of seed-based genetics and an established cannabis brand when and where legal.

Liquidity and capital resources:

• On Sept. 30, 2023, the company had cash and short-term investments of $51.8-million compared with $125.4-million at Aug. 31, 2022. The decrease is primarily a result of cash used in operating activities of $38.8-million, capital expenditures of $29.1-million, and investments of $10.5-million (including transaction costs) in Greentank and Phylos.
• In November, 2023, Organigram announced a $124.6-million follow-on investment from BAT of which $83.1-million will be used to create Jupiter, a strategic investment pool designed to expand Organigram's geographic footprint and capitalize on emerging international growth opportunities with the remaining $41.5-million for general corporate purposes, subject to shareholder approval.
• Organigram believes its capital position is healthy and that there is sufficient liquidity available for the near to medium term.

Industry commentary and outlook

Industry

The Canadian industry as a whole continues to grow. BDSA forecasts Canadian total sales rising at a 2022 to 2027 compound annual growth rate of 4.6 per cent to nearly $7.2-billion in 2027. However, the industry in Canada remains saddled by a high excise tax regime and, in some cases, restrictive regulations.

Capital availability (equity or otherwise) in the industry, including to Canadian licensed producers (LPs), is materially diminished from only a few years ago. The impact is being felt directly as certain LPs are either shuttering certain money-losing operations, closing down entirely or entering creditor protection. Others with maturing debt financings that are unable to pay back principle amounts are seeking forbearance or obtaining short-term extensions on their debt.

Organigram's recently announced financing, subject to shareholder approval, for $124.6-million at a significant premium to its trading price is an anomaly that speaks to the intrinsic value of the underlying business.

The company, which is current on all its excise tax remittances, is aware of other LPs that are in arrears, which is effectively acting as a source of alternative financing as taxes are collected from provincial distributors but not remitted to the Canada Revenue Agency on the required date. It is the company's understanding that the CRA has already begun to hold LPs accountable for their tax payment arrears.

The industry has also been affected by THC mislabelling (inflation). The company, through its own independent testing of packaged product in the market, has seen certain stock-keeping units with labelled THC percentages that are overstated by greater than 50 per cent (such as labelled product shows 30 per cent THC versu actual THC when tested at a credible third party lab is 17 per cent). The company believes that recent initiatives by both Health Canada and certain provincial boards will eventually help mitigate this unfair practice.

Notwithstanding the above issues the company has and continues to take measures to fortify itself as market forces prevail and the strongest survive. These include:

• Strong balance sheet with excess cash reserves at all times;
• Investment in production efficiencies, including automation to drive long-term margins;
• Investment in R&D, innovation, and product differentiation to drive competitive defensible advantages;
• Focus on consumer segmentation, need states, and delivering brands and products tailored to meeting their needs.

Net revenue:

• Organigram currently expects fiscal 2024 revenue to be higher than that of fiscal 2023. This expectation is largely due to continuing sales momentum, stronger forecasted market growth, the company's expanded product line in multiple segments, increased throughput in Moncton campus and Winnipeg facilities, and contributions from the completed expansion at the Lac-Superieur facility.
• In addition, the anticipated continuation of shipments to Israel, Australia, as well as new supply agreements signed in fiscal 2023 with Sanity Group in Germany and 4C Labs in the U.K., are expected to generate higher revenue in fiscal 2024 as compared with fiscal 2023.
• The company believes it is better equipped to fulfill demand in fiscal 2024 with larger harvests and greater efficiencies from automation compared with fiscal 2023.

Adjusted gross margins:

• The company expects to see an improvement in adjusted gross margins in fiscal 2024 and has put measures in place that it expects will further improve margins over time.
• The extent of the adjusted gross margin improvement in fiscal 2024 will also be dependent on other factors such as product category and brand sales mix, provincial mix, and international sales levels.
• Organigram has identified the following opportunities which it believes have the potential to further improve adjusted gross margins over time:
  • Enhanced growing and harvesting methodologies, and design and environmental improvements in Moncton, which have resulted in higher-quality flower and improved yields;
  • Facility enhancements and the completion of fiscal 2023's capital expenditure projects, combined with anticipated savings related to the partial transition to seed-based production, estimated to reduce costs by $10-million in fiscal 2024;
  • Anticipated growth in the vape category due to the near-term launch of Greentank S1-enabled vapes and THCV vapes;
  • Expansion of the Lac-Superieur facility which yielded its first harvest in December, 2023;
  • Increased investment in building brand equity for the company's Trailblazer brand, geared toward growth in the mainstream segment;
  • Additional innovative product launches to support key brands Shred, Monjour, Holy Mountain, Edison and Tremblant to create new potential avenues for growth.

Adjusted EBITDA:

• The company expects to continue to report increasing positive adjusted EBITDA on year-over-year basis, recognizing that quarterly results may fluctuate.

Cash flow:

• The company is adjusting its prior guidance of generating positive free cash flow (FCF) during calendar 2023. The company expects that FCF is achievable in H2 fiscal 2024.

Q4 fiscal 2023 financial highlights:

• Net revenue of $46-million, up 1 per cent from $45.5-million in Q4 fiscal 2022;
• Adjusted gross margin of $7.9-million or 17 per cent, compared with $10.4-million, or 23 per cent, in Q4 fiscal 2022;
• Adjusted EBITDA of $(2.4-million), compared with $3.2-million in Q4 fiscal 2022.

key financial results for the fourth quarter 2023:

• Net revenue increased 1 per cent to $46-million, from $45.5-million in Q4 fiscal 2022, primarily due to the extended reporting period.
• Cost of sales increased to $42.9-million, from $36.7-million in Q4 fiscal 2022, primarily as a result of lower margins due to lower international sales relative to recreational sales, and the extended reporting period.
• Gross margin before fair value changes to biological assets, inventories sold and other charges declined to $3.2-million from $8.8-million in Q4 fiscal 2022, primarily due to higher inventory provisions and net realizable value adjustments.
• Adjusted gross margin was $7.9-million, or 17 per cent of net revenue, compared with $10.4-million, or 23 per cent, in Q4 fiscal 2022, primarily due to product mix.
• SG&A expenses increased to $21.6-million from $15.7-million in Q4 fiscal 2022, primarily due the extended reporting period.
• Adjusted EBITDA was $(2.4-million) compared with $3.2-million in Q4 fiscal 2022.
• Net loss was $33-million, compared with a net loss of $6.1-million in Q4 fiscal 2022. The quarterly increase was primarily due to impairments on PP&E and goodwill, increased cost of sales, and operating expenses.
• Net cash used in operating activities before working capital changes was $16.4-million, compared with $2-million in Q4 fiscal 2022.

Fourth quarter and full-year fiscal 2023 conference call

The company will host a conference call to discuss its results with details as follows:

Date: Dec. 19, 2023

Time: 8 a.m. Eastern Time

To ensure you are connected for the full call, the company suggests registering a day in advance or at minimum 10 minutes before the start of the call. After registering, a confirmation will be sent through e-mail, including dial-in details and unique conference call codes for entry. Registration is open through the live call.

A replay of the webcast will be available within 24 hours after the conclusion of the call on Organigram's website and will be archived for a period of 90 days following the call.

About Organigram Holdings Inc.

Organigram Holdings is a Nasdaq Global Select Market- and Toronto Stock Exchange-listed company whose wholly owned subsidiaries include Organigram Inc. and Laurentian Organic Inc., licensed producers of cannabis and cannabis-derived products in Canada, and The Edibles and Infusions Corp., a licensed manufacturer of cannabis-infused edibles in Canada.

Organigram is focused on producing high-quality, indoor-grown cannabis for patients and adult recreational consumers in Canada, as well as developing international business partnerships to extend the company's global footprint. Organigram has also developed a portfolio of legal adult-use recreational cannabis brands, including Edison, Big Bag O' Buds, Shred, Monjour and Trailblazer. Organigram operates facilities in Moncton, N.B., and Lac-Superieur, Que., with a dedicated manufacturing facility in Winnipeg, Man. The company is regulated by the Cannabis Act and the Cannabis Regulations (Canada).

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