Organigram Holdings Loss Could Be an Investor’s Gain

Organigram Holdings Inc. (TSXV:OGI), one of the Canadian marijuana stocks, leads all Canadian License Producers in terms of profitability

SmallCapPower | April 18, 2019: Organigram Holdings Inc. (TSXV:OGI), one of the Canadian cannabis stocks, Monday announced its financial results for the second quarter ended February 28, 2019. For Q2 2019, net revenue increased almost seven-fold on YoY basis to $26.9 million, driven mainly by adult-use cannabis sales (~91% of total net revenues). The Company recorded the first full quarter of adult-use recreational sales after it was legalized in Canada in October 2018. Legalization resulted in a huge increase in the Company’s revenue in Q2 2019. Organigram sold ~4,248 kg of dried flower and ~5,735 L of oil in Q2 2019, as compared to ~238 kg of dried flower and ~552 L of oil sold in Q2 2018. Gross revenue (excluding excise taxes) was $33.5 million, compared to $2.9 million in same period last year. Sequentially, net revenue increased 117%.

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Gross profit came in at $8.0 million (margin of ~30%) in Q2 2019, an increase of 29% compared to Q2 2018. This increase was driven mainly by adult-use recreational revenue, partially offset by the negative fair value change on biological assets and inventory sold. Excluding fair value adjustment, gross profit increased 806% to $16.0 million with margins of ~60% in Q2 2019.

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Total expenses were up by 154% to $9.7 million, attributable mainly to an increase in General & Administrative expenses (+50% YoY), Sales & Marketing expenses (+236% YoY) and Share-based compensation (+245% YoY). Higher expenses led to a loss from continuing operations in the amount of $1.8 million, compared to income of $2.3 million in Q2 2018.

Net loss came in at $6.4 million as compared with net income of $1.1 million in Q2 2018, impacted mainly by higher operating expenses and financing costs as the Company continued to scale up its operations.

On the operational front, Organigram intends to complete its Phase 4 expansion of the Moncton facility by year-end 2019. The facility will add 92 incremental grow rooms in series of stages, which would triple the Company’s production capacity to 113,000 kg annually from 36,000 kg, once completed. Moreover, in March 2019, Organigram submitted an amendment to its license to Health Canada for Phase 4a and Phase 4b of the Moncton facility as well as for 13 of the Phase 4a grow rooms.

Organigram’s Phase 5 refurbishment is well under progress for an edibles & derivative facility and an additional in-house extraction capacity. The Company expects primary construction on Phase 5 to be completed by October 2019.

Additionally, in Q2 2019, Organigram signed a letter of intent with SQDC, making it one of only three Canadian licensed producers to be in all 10 provinces. The Company also entered into a multi-year extraction agreement with Valens, in which Valens will extract cannabis flowers and trim produced from Organigram’s Moncton operation as well as hemp from 1812 to produce extract concentrate. This move would help Organigram to strengthen its position for the derivatives launch in the fall of 2019.

Following Organigram’s results, Canaccord Genuity increased its target price on OGI to $10.50 a share, saying the Company leads all LPs in profitability, with a cash cost of approximately $0.65 per gram of cannabis cultivated. And, as one of only three LPs in the space with a purchase order in every province, Canaccord increased its longer-term recreational market share assumption for OGI to 9% (up from 7%).

Organigram Holdings is the parent company of Organigram Inc., a licensed producer of cannabis and cannabis-derived products in Canada. Organigram is engaged in producing indoor-grown cannabis for medical patients and recreational consumers in Canada.

Organigram Holdings stock trades at a market capitalization of C$1.4 billion with price-to-book multiple of 4.8x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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