Organigram Q3 Financial Results: Why its Stock Rallied

Organigram Holdings Inc. (TSXV:OGI), one of the Canadian marijuana stocks, announced Q3/19 financial results before markets opened on July 15, 2019

SmallCapPower | July 16, 2019: Organigram Holdings Inc. (TSXV:OGI) (NASDAQ:OGI), one of the Canadian cannabis stocks, reported its Q3/19 financial results on Monday, July 15, 2019, before the markets open. Net loss for the period was $10.2M on revenues of $24.8M, while adjusted EBITDA was $7.7M.

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Revenues down 8.1% sequentially QoQ. Organigram reported Q3/19 net revenues of $24.8M, constituting a decline of 8.1% from $26.9M in revenues in Q2/19. Management attributed the revenue decrease to a poor roll-out of retail stores in Ontario and Quebec, as a majority of cannabis sales come from retail locations. However, revenues are expected to increase with the roll-out of 50 additional cannabis retail locations in Ontario and the commencement of edible and derivative product sales beginning in December 2019. The Company sold 3,926 kg of dried cannabis flower and 5,090 L of oil in Q3/19, compared with 4,248 kg of dried flower and 5,735 L of cannabis oil in Q2/19. Third-quarter gross margins fell by 10%, driven by higher cash costs per gram and all in cost of cultivation per gram, which increased by 46.2% and 35.8%, respectively, over Q2/19. The increase was due primarily to a temporary decrease in yield per plant as a result of a change in growing protocol. Organigram stated that it had reverted to the previous growing method and that it expects margins to improve in subsequent quarters. Q3/19 increase in net loss from $6.4M to $10.2M was due mainly to non-cash fair value changes to biological assets in inventory.

Organigram PAX Labs Vaporizer Cartridges

Source: Company Reports

Expansion plans on track and well positioned for upcoming legalization of edibles and derivatives. On June 7, 2019, Organigram announced a partnership with vaporizer company PAX Labs. OGI was one of four companies selected for the partnership for premium vaporizer products. Organigram is expected to produce and fill PAX vaporizer cartridges with oil from its Edison Brand premium cannabis. The Company has also developed a nano-emulsification technology, which is anticipated to provide an initial onset of effect within 10-15 minutes if used in any beverage. Organigram’s researchers have also developed a way to transform the emulsification system into a dissolvable power, which is shelf-stable and water compatible, however the powered product is still subject to regulatory testing. During Q3/19, the Company also announced a $15M investment in a high speed, high capacity, fully automated chocolate production line, capable of producing 4M kg of chocolate edibles.

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Additionally, all Phase 4A growing rooms have received Health Canada licensing approval and OGI’s current licensed capacity is 61,000 kg annually. An additional 28,000 kg of capacity is expected to be added once all Phase 4B rooms come online. Currently, Health Canada licensee applications for 17/33 Phase 4B rooms have been submitted in June 2019, while applications for the remaining rooms are expected to be submitted in September 2019. Construction of Phase 4C (29 rooms) is expected, which would increase annual capacity by an additional 24,000 kg, bringing total capacity to 113,000 kg. Organigram is also refurbishing a 56,000 sq. ft facility to meet EU GMP standards, which will be used for extraction, vaporizer pen filling, automated packaging, powdered drink mixing and packaging line, and manufacturing of edibles. The construction of this facility is expected to be completed by the end of 2019.

Key Takeaways. While revenues missed consensus estimates of $31M and its net loss also missed estimates of $7M, Organigram is ready for legalization of edibles and derivatives on October 17, 2019. Revenue misses were due to a weak retail roll-out, with 50 additional retail locations opening this October in Ontario as well as edibles legalization. We are expecting revenues to increase in subsequent quarters as OGI is well known for its premium cannabis. On another high note, the Company has had three positive quarters of adjusted EBITDA and is currently one of the most profitable companies in the sector, compared with other cultivators with significantly higher valuations. We expected this valuation gap to close once the market realizes superior profitability.

Shares of Organigram ended Monday’s trading session 4% higher at C$7.92. Organigram stock trades at a market cap of C$1.2 Billion.

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