Organigram’s Competitive Edge: Paolo De Luca on BAT, M&A Strategy, and the Cannabis Long Game

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Bryan Fields: What's up, guys? Welcome back to another episode of The Dime. I'm Bryan Fields, and with me as always is Kellan Finney. This week we've got a very special guest, Paolo De Luca, Chief Strategy Officer of Organigram. Paolo, thanks for taking the time. How are you doing today? Paolo De Luca: Very good, and thanks for having me. Bryan Fields: Kellan, how are you doing? Kellan Finney: I'm excited to talk to Paolo. How are you, Bryan? Bryan Fields: I'm stoked. I think there's a lot we're going to talk about today. Before we got on the call, we were talking about building long-term sustainable businesses, and I think sometimes in cannabis the cycles are so violent and so short-circuited that it's hard to understand the dynamics of the differences. What Paolo is doing at Organigram is set up for long-term success, and we're going to dive into some of those specific pieces of the puzzle. But for our listeners who are unfamiliar with you, Paolo, can you give a quick background on yourself and how you found your way to the cannabis space? Paolo De Luca: Yeah, I'm actually an accountant and financial person by background. I joined Organigram in December of 2017, so approaching eight full years now. In my past lives I was involved in a mix of large corporate and more entrepreneurial-style companies, and I thought cannabis was actually a nice mix of the two. Organigram was already public and I have a lot of experience in public markets, so I joined as CFO for the first two years. Then I was actually involved in a lot of the M&A and corporate development, as you would in that role, and found my time split between all the obligations of being CFO and working on the growth elements of the company. So they created this new role, Chief Strategy Officer, which really entails setting long-term strategy and then executing on that through a lot of M&A and corporate development. I think of myself as the growth engine of the company — I help fund and build strategic alliances, including the one we have with BAT, and then execute on M&A to fulfill the corporate strategy we've set as a company. Bryan Fields: I think that's great. One of the things we should talk about at a high level, just in case people listening are unfamiliar with Organigram — can you give us a high-level rundown of what Organigram does and where you focus your efforts? Paolo De Luca: Yeah, so we're a Canadian company by origin. We started off in Moncton, New Brunswick, and that's where our largest production still resides today — a huge indoor, three-level cultivation facility with a lot of post-production happening there as well. I think we probably have the largest indoor facility in terms of production. We're at about 100,000 kilos right now, and we're looking to expand that further through some plant science and other interesting developments. Then we branched out into three other locations from a manufacturing perspective. We bought a facility in Winnipeg focused exclusively on edibles — historically just gummies, but we're also working on a small beverage setup there. We did an acquisition outside of Montreal, in a ski resort town near Mont-Tremblant, called Collective Project, where there's a small cultivation footprint growing craft flower, and where we hold the number one market position in hash. And then most recently we did an acquisition near London, Ontario — Motif — about two hours southwest of Toronto, which is one of the leading extractors and fuels the number one vape market position we have there. We have a corporate head office in Toronto, where I'm based. Organigram is the number one company by market share in Canada, and we're number one or top three in almost every category. We've built a nice little business here. Bryan Fields: Are all of those strategic acquisitions based on a higher-level approach of saying, okay, we want to be in these certain categories, we've identified the leaders in them, and we think these assets fit not only the short-term of where the market is, but the long-term too — when things open up and change, these core assets will make a big difference for us across the supply chain? Paolo De Luca: Yeah, it's an excellent question. I just mentioned that Organigram is number one in market share, at around 12% right now. You'd think a number-one market share position would be much larger, and we expect that share to grow over time. When we looked at just having, for example, the Moncton facility alone, it was a bit much to service all the different categories that exist in cannabis. So now we have specialized manufacturing facilities in different categories, which has diversified our manufacturing base and let us specialize within each of them — each facility can do that much more. Again, with only 12% market share and being number one, as the Canadian market matures and consolidates, each of those facilities can expand their output further and drive even larger economies of scale. On an international basis, we're seeking EU-GMP certification for Moncton, which will allow us to do a lot more with that facility and improve our margins there as well. Having multiple facilities is strategic and gives us a lot of operational flexibility, both now and in the future. Bryan Fields: The diversification aspect you alluded to is really important, right? Because there are aspects you can control for, but some down the road are really hard to know when they're happening — obviously your U.S. counterparts are taking their time on certain federal fronts that maybe hinder their ability to go international. So the international piece has to be highly opportunistic. There seems to be massive growth out there, and everyone's calling it the new frontier. Do you think those areas are poised for the next growth period? Paolo De Luca: A hundred percent. We had our best quarter from an international perspective last quarter, with over $7 million in Canadian sales, and we expect to grow on that in upcoming quarters — and that's without EU-GMP yet. We hope to get EU-GMP in the next quarter, and that allows us to move flour faster and get better margins on it. I think international is a huge market we've only really started to penetrate in a meaningful way recently. I've actually just taken on responsibility for the international portfolio at Organigram, so I'll be able to fuel that a bit better now that I have strategy and M&A as well, because I can dovetail some of the deals we're looking to do going forward into international, which is a great growth opportunity for us. Bryan Fields: On EU-GMP specifically, can you talk about how challenging and long-term an investment that is? It's not like you can check a couple of boxes and be ready to go — it's an investment in the facility, in the personnel, making sure everything is ready. It's a separator that maybe isn't a defining one today, but is massively critical down the road. Can you speak to why you started that process and how complicated and expensive it is? Paolo De Luca: Yeah, it is complicated, expensive, and takes a lot of time and resources, and it varies a lot depending on the company that applies and who the sponsor is. We're using a German sponsor based out of Berlin, and for whatever reason it's a more rigorous process, I think, than some of our peers have gone through. There aren't that many companies in Canada that actually have EU-GMP, but I've been to some facilities that have it and I'm honestly alarmed they were able to get it so quickly. We weren't, because our facility — for anybody who's been to it — is pristine. It's notable how clean it is, and it's indoor, so we can control the environment much better than a lot of greenhouses can. The unfortunate part is there's only so much we can do; the rest is always in the hands of the regulators, and standards seem to differ even between countries as to how EU-GMP is granted. Having said that, once we get our EU-GMP, people can be assured we went through the most rigorous process, because it has been very rigorous and we've been working on it for the past year. Kellan Finney: Can you touch on the complexities of distributing into each different country in the European Union? Paolo De Luca: Yeah, so you don't need EU-GMP to get product into Europe — if you don't have it, and we currently have the GACP standard, you have to use a converter. Converters are available in Canada, in Portugal, and in some of the destination countries as well. What not having EU-GMP does is slow things down, because you have to ship in advance of when the product's actually needed, and there's a cost to that. That cost can be recaptured once we have EU-GMP, so it's margin accretion for us once we have it, and it lets us move product that much quicker. It'll be a welcome relief once we get it. But you don't strictly need EU-GMP — you need GACP — it's just a big benefit to have EU-GMP on top of it. Bryan Fields: This is another one of those aspects where maybe today it's not recognized as a key difference, but down the road, if it becomes mandatory, your team's already way out in front — which I think is part of the strategic balance of your role. Understanding what you can do today to set yourselves up for future success, not just short-term but long-term, and balancing the two. Paolo De Luca: Yeah, what you've seen in Canada is really a divergence — some of the bigger companies have leaned into international, an example being Aurora, and other companies are exclusively focused on rec, an example being Auxly. They both have advantages and disadvantages. At Organigram, we're already number one in Canada in market share, but we're probably under-indexed against some of the other large players on international. With EU-GMP and the expanded capacity we're getting through investment in plant science and LED lighting, we'll be able to catch up on the international side, and then we'll be top-tier in both categories, which is where we want to be as a company going forward. Bryan Fields: From an export standpoint, for partners overseas looking for a long-term partner, is that highly lucrative for you? Do you see that being a continued growth focus — exporting overseas? Paolo De Luca: Yeah, we have to decide how much of our production we want to keep for Canada versus international. We're always looking for ways to increase our cultivation capacity through R&D and plant science, and absolutely, the margins right now on international are definitely better. How long that lasts, and when supply and demand on international markets come into balance, is a question we're monitoring — I don't think we want to lean into international to the detriment of our Canadian business, so we keep on top of that almost monthly to see what the market dynamics look like. The German market especially has exploded, which has driven a lot of the international growth. We've seen companies in Canada completely turn around their business on the back of international. We're selling into at least three different German companies right now, and we have a strategic investment in Sanity Group, which is our largest customer in Germany. That gives us a certain level of competitive advantage — we can build the relationship and develop our strains, distributed across the country under their brand, which over time builds brand awareness and loyalty. That's a long-term process. The German market, in earnest, has really only been growing at this pace for just over a year, so there's still more growth ahead, and it'll take some time to determine the real winners and losers there. The first year is always a bit of a land grab, and it takes time for the real winners to emerge. Bryan Fields: That has to be such a challenging balance — sitting there modeling out, saying, okay, we could sell more here at the detriment of our Canadian market and those numbers would look really good in the short term, but there's that balancing approach. Where's the right line? Is it a range, a moving target, a lot of conversation? That's got to be really complicated. Paolo De Luca: Yeah, what's really missing in the industry as a whole is good data. Canada has its own issues, and in Germany there's no one source of truth on how big the market is, what market share the participants have, how much they're buying or selling flour for. In Canada we have Hifyre and Headset, but even the data in Canada has been very bad on the supply-demand side for years. One of the things I've been pushing for, though I haven't had much traction yet because a lot of competitors are secretive, is a supply-demand analysis that all the LPs feed into — how much they plan to grow, and even what their costs are. We disclose our production every quarter, how much we produce and how much we've sold. If that information had been available five or six years ago, you wouldn't have had companies continuing to build up facilities — they would have known they were on the wrong side of the cost curve, that it didn't make sense to spend $200 million on another inefficient cultivation facility. Instead, Canopy, Aurora, Tilray, Aphria — they built multiple facilities in multiple jurisdictions that were never competitive in some cases, and they got shuttered. That's all capital that got destroyed. Having companies work together on even just basic information — no different than how OPEC gives visibility into which countries will produce oil or take production offline — would have been valuable and saved a lot of capital destruction. So going back to your question, the absence of information makes forecasting that much more difficult. You really have to have a lot of conversations with a lot of people, follow the public information since the companies are public, and make sure you're connected enough to figure out where the pluses and minuses are coming from on supply and demand. Bryan Fields: That's such a great point. Everyone was growth, growth, growth, and then all of a sudden there's a cliff and people didn't see it coming — and by then it was too late, no going back. Can U.S. companies learn from that at all? Maybe they have to go through their own learning curve, but can they apply any lessons from what Canadian companies went through? Paolo De Luca: Look, I think every cannabis company can learn from every jurisdiction and every other company's successes and failures. I think the U.S. market is a little different because it's not a monolith — it's all state by state, there's no federal framework, and each state is its own thing. You almost need a SWOT analysis for each state, because the regs really influence your strategy. The regs in California are completely different from New York or Michigan or Oregon, so I think drawing parallels between Canada and the U.S. is a bit dangerous for that reason. I do think that over time, if cannabis is legalized federally in the U.S., that framework will learn from other countries that have adopted federal frameworks — Canada, Germany, Australia. You'll see that some U.S. companies are better positioned than others depending on how they've developed their business. Every time I talk to a U.S. MSO, they're really focused on their stores, their retail experience, where the stores are located. In Canada, we tend to be more focused on cost of production and on our brands and products. Again, it's very specific to the regs — the regs dictate what you can and can't do and how you should set up your business. Bryan Fields: Why do you think U.S. companies focus more on dispensary location versus the inward-facing approach of understanding operational efficiencies and their numbers? Paolo De Luca: I should say they've probably changed recently, because capital is a lot scarcer now. But I think they were just so focused on growth, and having retail stores was the fastest way to generate it. Now we're in a period of austerity in terms of capital availability, so my suspicion is they're a lot more focused now on getting their efficiencies in place. But it's a lot harder to drive efficiencies if you have cultivation facilities scattered across a bunch of smaller states. In Canada, we can ship anywhere; in the U.S., you can't ship across state lines, so you have to have cultivation facilities in each state, which doesn't allow the same efficiency. So I think the companies best positioned for a federal framework that allows movement across state lines are the ones who've built larger facilities and focused on cost early in the process. Kellan Finney: With your guys' large footprint, do you ever envision, in the long term, even planting a flag in the U.S. if there's eventually the ability to export and import? Paolo De Luca: Yeah, that's going to depend on a lot of things. Obviously tariffs are a big topic of conversation right now, so it's hard to predict how trade between the countries will work once the U.S. goes fully legal. We're already in the U.S. on the hemp-derived Delta-9 side with beverages, and we'll be there with edibles soon as well. We'd love to be in the U.S. market as much as we could, but we're cognizant of being on NASDAQ, so we're just not able to touch the plant directly on the cannabis side right now. But absolutely, if there was a pathway for us to ship from Canada into the U.S., we'd do that in a heartbeat. Bryan Fields: As you're going through the companies you're picturing, my brain kept going — this one, no, this one, no. I think your strategy is focused on the long-term. Today, the markets are being fought individually, state by state, and maybe that's how it works out long-term, or maybe there's interstate commerce and rescheduling comes quickly and the whole game changes. Then the facilities some of these smaller operators have set up — say four facilities in the Northeast — could become burdensome, where your team is looking for one core asset instead. Now the game becomes a global game. Paolo De Luca: A hundred percent. I think the way I think of the U.S. now — not to pivot back to hemp-derived Delta-9 — but that market, and the cannabis market generally, is really constrained in both Canada and the U.S. by where it's distributed. The stores aren't particularly friendly in some states, or definitely weren't in Canada until recently — some of the rules are changing now — but here in Ontario, you walk up to a store and can't see inside it. It's daunting for someone who doesn't already have the idea "I need to buy cannabis," so you're leaving out a large chunk of the population. I think hemp-derived Delta-9 on the beverage side, in particular, demystifies the product, especially when it's sold in places like Minnesota, where we're seeing it take over shelf space at stores like Top Ten Liquors and Total Wine — even a small allocation of footprint is driving exponentially higher sales for that square footage. So I think there are opportunities to grow the cannabis category beyond the heavy user, which is really what's driving a lot of sales in Canada and the U.S. right now. There's more opportunity than there are resources for us to pursue, so we're happy to take what's available now and keep emerging opportunities in mind as the regs unfold. Bryan Fields: Let's talk a little more about beverages. I'll make an assumption — maybe long-term you assumed beverage would be a critical focal point and that you'd eventually want to be involved in that category, and then you watched the absolute explosion. Does the timeline change the strategy — like, maybe you were thinking 2028, 2029, but given the growth, do you think this is a true signal, not just noise? Paolo De Luca: Yeah — and correct me if I'm not answering the right question — but beverages in Canada represent about 2% of sales, basically nothing. That's because they're sold in cannabis stores, and the people who go to cannabis stores generally need something stronger than 10 milligrams, which is the cap in Canada for edibles, including beverages. So it's not a cost-efficient way for someone who needs a lot of THC to get their effect. It's a limited category as long as it's confined to cannabis stores. If we can get beverages outside of cannabis stores in Canada — which is something I'm working on, hopefully into liquor stores if possible — that category explodes. It brings in a completely different user. We've seen it in Minnesota, probably the best market to look at in the U.S., where they've embraced it and are regulating the space — a lot of soccer moms switching from wine to low-dose THC beverages, novel cannabis users experimenting with the product. In many respects it's a safer product, since it's very hard to overdose on THC beverages, especially dosed at 5 or 10 milligrams a can — you'd have to drink five of them to get the same experience people sometimes get by mistake eating a really high-dose gummy, or eating five or ten 10-milligram gummies. It's very difficult to abuse, and hard to have unforeseen consequences. So from a safety and curiosity perspective, it's going to bring in a lot of new users. We all know alcohol is in secular decline, beer especially, and we're seeing that where cannabis is prevalent, people are switching from alcohol and beer to cannabis. I think THC beverages are another catalyst helping that transformation along. Bryan Fields: A hundred percent, and you've also had the chance to use the brand equity you're building in the U.S., which is growing pretty exponentially, and now you can leverage that for future opportunities globally. Paolo De Luca: A hundred percent, a hundred percent. Bryan Fields: What other areas do you have your eye on from an M&A standpoint? Paolo De Luca: Well, in Canada we're still digesting the two acquisitions we did — Motif, which we closed in early December, and Collective Project, which is a smaller one. So the company has to digest that; there are a lot of synergies from the Motif acquisition in particular. We recently upgraded the estimate from $10 million of cost savings on that acquisition to $15 million over, I'd say, roughly two years post-close. So that's fantastic, and I think there's a lot of opportunity for us to build on the acquisitions we've made here in Canada — don't expect us to be active in Canada anytime soon. From an international perspective, the German market is certainly the one that keeps growing — there may be opportunities to add to our investment in Sanity Group or look at other potential investments in Germany or beyond. The UK seems to be a market that's starting to unlock a little bit, and Australia is obviously a market that's been around a while from a medical perspective, not growing as fast as Germany but still decent-sized. So international is certainly something we'll look at from an M&A perspective, but we're in no rush to do anything — no clear need right now. We'll be opportunistic, but we'd definitely consider something on the international stage. Bryan Fields: That's really interesting — it takes time for the synergy to show up, and I think investors sometimes forget that just buying the business doesn't unlock all those synergistic areas. How do you communicate with shareholders and the internal team — here's the timeline, here's the numbers we want — and then monitor to make sure the investment is on track to hit that goal? Paolo De Luca: Yeah, we had a whole post-integration team that's been meeting regularly and continues to meet to make sure we track all the objectives of the deal and execute on it. One thing that blew my mind in Canada was seeing some of these companies do massive M&A deals and then just drop market share afterward. So we're balancing the need to hold onto market share and hopefully grow from there, while also realizing the synergies that make the deal accretive. Some of those synergies take a little longer, just because of the cannabis growth cycle — you have to grow the plants, extract them, and so on. So we actually had a lot of inventory that we would have sold in our Q2, the quarter ending March 31st, that wouldn't have realized any of those synergies yet, because we already had inventory built up before we closed the deal. These things take time, and then there are optimizations. One of the biggest ones we're driving out of the Motif acquisition — they had two facilities, one in Aylmer, near London, Ontario, and they'd just set up a distribution center. We're expanding that distribution center and getting the additional footprint licensed by Health Canada, which will let us optimize our distribution across Canada — a hub in Moncton, a hub in London, and a smaller satellite in Winnipeg to service edibles and beverages going forward. So there's a lot of work to get these deals properly integrated, and the key is doing it in a way that doesn't disrupt the top line. I think we've been pretty successful at that to date. Kellan Finney: Motif was a pretty sophisticated organization — has there been anything from a science perspective that's permeated other parts of the business that you can share, that's been pretty cool? Paolo De Luca: Yeah, certainly. Whenever you bring in another large organization, there are ways of working that differ from yours, and you have to put them side by side to see who's doing it best — the best idea should always win out. Their expertise on extraction was strong; we still have an extraction facility in Moncton, so there's ways we can cross-pollinate ideas there. They were also, being a private company more focused on only a couple of categories, a lot more nimble than Organigram would have been as a bigger company. We've integrated the teams, so we're sharing ideas all the time between the two organizations. There's also the ability to leverage their brands — their Boxhot brand is one of the top brands in the country, along with our Shred brand. That's created a lot of opportunity to cross-pollinate products across different categories and different brands, and it's also let us shrink our combined brand portfolio, since together the two companies had too many brands — we've been able to slim that down by eliminating some of the smaller brands that are too expensive to carry in a post-merger scenario. Bryan Fields: And that's where operational efficiencies and all that data insight you were talking about are so crucial, right — having a good grasp of how your team is currently producing, working with the Motif team, letting the data do the talking, and figuring out the best way to redistribute responsibilities and move forward. Paolo De Luca: Yeah, that's an excellent point, and the other thing is that with the scale we have — being number one in Canada — even just buying input material from other companies, we're a large purchaser now, whether it's biomass for extraction or for infused pre-rolls and so forth. Having that scale, and going to partners with it, lets us make sure we dictate terms that are favorable to us. Bryan Fields: Economies of scale — a real thing the U.S. can only dream of. Talk to us about the involvement with BAT. How close is that relationship? Is there autonomy? What can you share with us there? Paolo De Luca: Yeah. So we're an autonomous company. Actually, by law, they're not allowed to be too involved in Organigram, because of a regulatory rule in the UK called POCA, the Proceeds of Crime Act. By definition — and by their own choice — they have to hold themselves back from being too involved in Organigram, because of that legal concern, which has always existed, and until that rule changes they can't be intricately involved in the company. They do have three board seats out of our ten, so they sit on the board. We collaborate with them extensively on product development, which has been in effect since we closed our first financing with them in March of 2021, and we're able to leverage their insights and their relationships with various suppliers. For example, when it was time for us to put together a strategy on tube-style pre-rolls — essentially, joint-style cigarettes — they had so much experience with suppliers that they got us equipment a lot faster than we could have on our own. So I'd say it's actually a bit of a Goldilocks relationship for Organigram — we get to use them as much as we need, but they don't have the ability to control the company. They've also been an incredible source of capital for us — we've raised close to $450 million from them on very attractive terms. The second raise was done at almost a 100% premium to where our stock price was at, which I think is a testament — we've got to be one of the only cannabis companies with a follow-on investment from a strategic partner. That's a testament that we passed the first level of due diligence when they first invested, and then they got to see from the inside, sitting on our board and working with us daily, what we were like as a company — and they decided to invest again at a 100% premium. That's about the biggest vote of confidence that exists. I think shareholders of Organigram, existing or otherwise, can take comfort that a big, sophisticated company has done that level of diligence, and I think the relationship is only going to grow stronger as we enter new markets — they have international reach and regulatory expertise in countries where we have no presence right now. Again, it's a Goldilocks situation — we get to utilize them as a strategic asset as much as we need, and they let us operate with a certain level of autonomy. Kellan Finney: Their core focus is agricultural products and delivering them to consumers, so the synergy has to run across the whole business. Paolo De Luca: Yeah, I think if you're a tobacco company, the closest adjacency to substituting your revenues longer-term is cannabis. The crossover is quite intuitive, and where research has been done, it shows quite a bit of overlap. I think the only thing that's slowed tobacco's entry into cannabis is that the U.S. has moved as slowly as it has — but we all know that can switch in a heartbeat. Political expediency has a lot of power, and if Trump needs an uptick in his polling, it won't take much — we're seeing people like Mike Tyson lobbying Donald Trump, for God's sake. There's momentum building that will eventually overcome the resistance to actually moving on this file in the U.S. Bryan Fields: I can only dream that one day we're sitting here recording and that just crosses the screen, and it's happened overnight, and now it's go time. But going back to the BAT relationship — I think it's important that they got to see how the sausage is made and didn't run the other way; they doubled down and recognized they want to be part of this organization for the future, showing their alignment going forward. That's an important marker for your team making these acquisitions with a forward-looking approach, because sometimes what we see here in the U.S. is people making short-term decisions for share price or growth because that's what they feel they have to do right now, and maybe it's not what's better long-term. This gives your company comfort knowing that maybe today it's not amazing, but in two months or two years, when things change the way we know they will, you'll be best positioned to move forward. Paolo De Luca: Yeah, and one of the things I talk about internally at the company all the time is — whatever we're doing, whether it's M&A or any kind of corporate development, is it in furtherance of a lasting competitive advantage? It's very easy for us to turn around and just buy market share and top-line revenue growth, but what you've seen in Canada — and I think you'll see it in almost any market that starts off with an unlock, whether medical or recreational — is a lot of dynamic movement in market share within categories. Someone comes up with a product, sometimes pushing the regulatory envelope, doing something in a gray area the regs didn't quite address, and they capture a bunch of market share, and then everybody follows. Is that market share sustainable? Is it backed by a real competitive advantage? In our case, I can list our competitive advantages. One, we have the largest indoor facility by production in the world, so we can produce high-quality flour at a very competitive cost. We have a dedicated facility that does hash in Canada — hash is a very popular product, particularly in Eastern and Central Canada, and we're number one in market share there. We have Motif, which specializes in extraction and vape — another category where we're number one. Those insights can travel to any other market. But probably the best example of a longer-term competitive advantage is what we're doing with BAT and the product development collaboration. There's been a lot of work there the market hasn't seen yet, because it hasn't manifested in actual products yet. We have launched products with the PDC technology — the fast-acting emulsion we use in our gummies came out of some plant science developments in the PDC. But a lot of the work in there is deep science, the kind of work you'd need if you were trying to inform regulations in a country like the U.S., with the FDA. That's really the master plan behind why BAT wanted to invest in Organigram in the first place — they saw the U.S. would eventually go legal, they know the FDA will be tasked with regulating that, and they have a lot of experience with the FDA on vapes and nicotine in the U.S. There's going to be a certain standard of safety testing and efficacy understanding needed to inform those regs, and we've started that work in the PDC. Now we've actually turned the PDC into more of a commercially focused exercise, so we're looking to get some of these products into market — the fast-acting gummies are the first of them, but you'll see more in the upcoming years. Bryan Fields: I love it. I'm just thinking through the synergy and the resources they can provide — from guidance, from a personnel standpoint, on the types of mistakes they've made in the past, and recommendations based on where they see the industry going. That's another beneficiary, another partner on the board guiding you, because sometimes, as you said, you don't have the data to make those decisions, which makes it so complicated — having a partner who's seen some things is really helpful for the unknown decisions. What about AI? Is your team experimenting with it at all? Anything you can share? Paolo De Luca: I'm not the expert in AI — we have a group of individuals working on and experimenting with it. I think some of the more commercially focused people are using AI to make their day-to-day tasks easier. I think the plant science area is probably a real opportunity for us to exploit AI, because one of the things we have at Organigram is data — we've kept all our cultivation data by strain going back to 2013, even before I joined the company. We've developed our own proprietary software, called OrganiGrow, that captures every element of when we fed the plant, what nutrients, what lighting we used, how long, what the cultivar was. There's a treasure trove of data there we can probably use AI to filter through and work with, but that's not something I'm particularly close to, so I don't want to overstate my knowledge on it. Bryan Fields: For sure. Given your long-term focus and all the competitive-advantage elements you've laid out, it seems like AI is part of the stack, and maybe not something you can share today, but down the road things like that will become more apparent as decisions are made — or, as you said, the data gathering itself is the first step in using it best, long-term. Paolo De Luca: Yeah, and going back to my first IT class 30 years ago in school, it's garbage in, garbage out. We don't have a lot of great information in some instances, in the market in general. Even providers like Hifyre and Headset — when we get their data, we have to manipulate it to correct it, because we can see there are issues in it. Internally, when we send out our reports, we have the Hifyre data unadjusted, and then we have our adjusted data, because the system they use isn't perfect — they use a lot of interpolations that aren't necessarily accurate. It's better in situations where they have actual data from the stores; in some cases, they're just estimating. Bryan Fields: Not helpful at all in those cases, right, because we could do the same thing on our own side. Talk to us about some of those long-term bets — we've talked about IP, efficiency, and export. Is there anything else a listener familiar with Organigram might not know about that you think is really important? Paolo De Luca: Yeah. One thing we haven't talked about yet is our investment in seed-based cultivation. We made an investment in Phylos, an Oregon-based company, and we've been — I won't say experimenting, because we're actually producing now — about 20% of our production comes from seed-based cultivation. For your listeners who aren't familiar, the majority of cannabis companies clip clones off existing mother plants, and that's the way it's been done in the industry forever. But if you look at agriculture broadly, the majority of it is done through seeds, and seeds offer a whole bunch of advantages, including consistency and a lack of genetic drift, and they're also way more efficient — we can get more turns out of our rooms using seeds than through clones. We know we're on the right track, because we see our competitors now starting to copy us and experiment with seeds as well, but we have a two-year head start on that, and I think it's going to help us get even more efficient and drive our margins. As a company that's rebranded itself as global, we'll eventually have cultivation facilities beyond Canada, so we can take everything we've learned on seeds to those markets too. We're even seeing U.S. MSOs starting seed-based production. I think in ten years the majority of cannabis companies are going to move that direction. Kellan Finney: Do you think that's the way toward consistent products for flower and pre-rolls across the board? Paolo De Luca: Yeah, the benefit of seeds is you get more turns per room, and you don't have to remediate genetics the way you do with clones, which drift a lot. There's a certain amount of experimenting you have to do to make sure it grows well in different conditions, but we expect, for example, outdoor grow — which is becoming a bigger part of the Canadian business as the market's grown and as people have shuttered their greenhouses — to benefit a lot from this too. We know the majority of outdoor growers and farmers are now starting to experiment with seeds as well. Bryan Fields: They were a super impressive team — I spoke with Phylos a year or two back, and it was clear they were ahead of their time, and like you said, this is inevitably what we believe the future of the industry will look like. It's expensive today given where the development is. But you said a couple of things I really want to highlight — you pulled a lesson from Big Ag, another industry. Cannabis is a microcosm of all these other industries blended together. For extraction specifically, are there techniques your team is pulling from oil and gas extraction to bring to the facility and find efficiencies? Paolo De Luca: Yeah — actually, the one thing I didn't mention with Motif is that when I was first introduced to their team and asked about their backgrounds, three of the top five guys were chemical engineers, which is the perfect background — they'd worked for oil companies in the refining space. We have people in our company who come from tobacco, people who come from alcohol, people who come from more food-based CPG, finance people like myself who bring a completely different skill set. I think bringing in lessons and capabilities from other industries is very useful — Big Ag for sure, on the cultivation side. The Phylos guys like to describe themselves almost as the Monsanto of seeds, without the negative connotations associated with that. But a hundred percent, I think anything we can take from other industries is going to be beneficial in turning cannabis into an investable space, which, for better or worse, hasn't necessarily happened yet over the last couple of years. Bryan Fields: That also comes to fruition with the investment from BAT, where you can invest long-term knowing that, okay, today it's not like this, but down the road here are some of the tools we need to apply — they might not come out of the box perfect and ready to go, but if we get them integrated ahead of our competitors, we have a massive head start, and they'll all be playing catch-up, which gives us even more advantage when the tides turn. Paolo De Luca: Yeah, and I think a lot of what we've done — the investment in Phylos, the M&A deals, the commitment and spend on the PDC — is all meant to be a lasting competitive advantage. It's a lot harder for a company with a broken balance sheet that's struggling to make payroll to make an investment in seed-based technology, because the payoff isn't immediate. A lot of what differentiates us from the competition is these investments and advantages that will help us in the medium term in Canada, and beyond that internationally. As we go into a new market that unlocks — Europe, the U.S., anywhere in the world — all the learnings we've taken from Canada, plus our leading extraction capability and leading indoor cultivation capability, can be transported across borders a lot faster than learning from scratch. Organigram in particular is also really focused on derivative products — edibles, vapes, and so on — which move over even faster, because you don't have to build a cultivation facility, which requires a lot more lead time and capex. Kellan Finney: It takes up a lot less space, too. Paolo De Luca: Exactly. Bryan Fields: Is there anyone listening where you'd say, hey, if a company is doing X or Y, this tool or solution or product would be really enticing — we're looking for something and just haven't found it yet? If there's something like that, can you share it? Paolo De Luca: You mean something we're doing that another company could learn from us? Bryan Fields: More the other way around — you're struggling with this, or looking for a partner in this area, and if anybody listening fits that, this is the type of partnership you're looking for to fuel growth. Paolo De Luca: Yeah, I think the biggest, most greenfield opportunity for us is getting further distribution and partnerships in international markets. We've been building that, for sure, but we've been limited in the amount of flour we've had — and I use flour as the example because it tends to be by far the largest category in international markets. But now that we've got more production, and we've really dialed in our ability to get more flower out of each room, plus the seed base helping us turn more rooms per year, we're just looking for partnerships in different jurisdictions. We've got a good partner in Germany, a good customer partner in Australia, but there are emerging markets like Poland and the UK that are becoming interesting going forward. Anybody listening who wants to reach out can reach out to me or anyone else on my team. Bryan Fields: Those specific markets are always interesting to me, because sometimes people listen and think, I don't know if he's talking about mine — and then you say Poland and it's a light-bulb moment: now is the time to reach out. Those are the helpful parts, because this industry is super small, right, and sometimes it feels really separated, but it's a lot smaller than it seems. What do you think needs to happen for cannabis to go from volatile to investable? Paolo De Luca: I think a lot of it is actually happening now. I think the biggest benefit, but also curse, of cannabis historically has been that the availability of capital was too easy — companies that hadn't really proven anything were able to generate massive capital inflows at very lofty valuations, which led to a series of bad decisions. I think the Canadian LPs were some of the worst culprits — the Canopys, the Auroras, the Aphrias, even Tilray — they raised so much money and squandered a lot of it on oversized cultivation facilities that never had a chance of being successful. That's evaporated now. Some companies are still able to tap into capital because they have great liquidity, like Tilray and Canopy, who can run ATM programs. But now that capital has shrunk, it's forced companies to become efficient very quickly. You're seeing companies now produce not just one quarter of positive EBITDA, but a series of them, and a lot of them have also fixed their balance sheets. So I actually think, as a sector — in Canada, in particular — it's becoming investable, and the valuations are very reasonable. A lot of companies trade for less than one times revenue and five or six times EBITDA, and the revenue and EBITDAs are still growing, and the balance sheets aren't in bad shape. What I think the next domino is, is getting institutional investors into the space — I think they're probably looking at it and seeing that the numbers are turning around, but the market caps of some of these companies are small and the liquidity isn't great. I think that will fix itself in due time. I have a feeling the sector has kind of bottomed out here — there have been more up days than down days over the last couple of months. Any kind of spark out of the U.S. in terms of regulatory development will bring liquidity back to the sector, and that interest will bring up market caps, which will let people feel better about entering the space instead of getting stuck in a position they can never get out of because there's not enough liquidity. But I'm more optimistic now than I was a year ago. Bryan Fields: We'll hold that optimism going forward. Two last questions — hard pivot here. Most impactful book? Paolo De Luca: That I've read, period? Bryan Fields: That you've read, period. Paolo De Luca: My favorite book — it's a business book — is "When Genius Failed: The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein. It was written, I'd say, around 1999 or 2000, after the largest hedge fund in the world at the time crashed and almost brought down the entire financial system. It's a very well-written book, but what's interesting is that all the lessons in it, all the mistakes made, were almost repeated ten years later in the credit crisis. I find it interesting to read because it's really a story about how very rational people who work in finance start doing very irrational things because of ego and overestimating their own ability. That's my favorite business book — the best I can come up with on the spot. Bryan Fields: I love it. Last question — what question do you wish more people asked you? Paolo De Luca: In terms of the cannabis context — I think a question I'd ask, if I were an investor in the space, of any cannabis company executive, is: what are your long-term competitive advantages? I see a lot of companies putting out pretty good numbers financially, but I'm not sure they have anything defensible. So everything we do on the corporate side — M&A or strategic partnerships — is always in furtherance of making sure we have something that will stand the test of time. Whether it's buying a company like Motif, or anything we're doing internationally, we want to make sure we're working with partners that are reliable, and that the assets and people that come with the deal are bankable not just for a couple of quarters, but for years. Bryan Fields: I love it. Paolo, if our listeners want to get in touch and learn more, where can they find you? Paolo De Luca: paolo.deluca@organigram.ca, or anywhere through the website — there should be a contact link on our organigram.ca website. Bryan Fields: Thanks for taking the time, this was a lot of fun. Paolo De Luca: It's been great. Thank you guys.