Organigram – how to come second and win!

Organigram is a medium-sized Canadian Licensed Producer based in Moncton, New Brunswick. Their only cultivation facility – the Mocton Facility – is now being referred to as the "Main Campus" as the company recently acquired new lands adjacent to the facility, that when fully developed and licensed, would bring Organigram's licensed capacity to just over 533,000 square feet.

The company achieves above average yield and quality from its indoors facility, as it utilises a 3-level growing system, that is managed by their propriety agritech software platform, OrganiGrow. This growing technology allows the company to produce premium-grade cannabis, at very low cost, driving the potential for maximum margin, which is essential, given sales to the recreational market are at wholesale prices.

 

 

The company has now completed Phase 1, 2 and 3 of their expansion, which has increased its growing capacity from 13 to 39 rooms, bringing current production capacity to 36,000 kg per annum.

Phase 4a is expected to complete at the end of this April 2019 and would add an additional 26,000kg per annum. Phase 4b is expected to complete in September 2019 and would add another 27,000kg to the capacity. Finally, Phase 4c is expected to complete by December 2019, bringing total production capacity to around 113,000 kg per annum by the end of the year.

Phase 5, is the process being undertaken to convert a portion of the facility into an EU-GMP compliant facility, which would allow Organigram to export its products into the rapidly expanding European market. Note in the above graphic…edibles, extracts, and processing…the fastest growing area of the industry.

 

Premium Licensed Producer

Organigram currently has supply agreements with all 10 Provinces. During the quarter, they were awarded a supply agreement with Quebec, giving them 100% coverage of the Canadian market. The company will start supplying this agreement in May 2019.

Organigram is a producer of premium grade cannabis flower that has garnered great online reviews and won awards at the various cannabis competitions. Their flower range includes four products, that tackle different segments, and sectors of the market. The Company has emerged as one of the leading suppliers of pre-rolls and dried flower to the adult use recreational market in Canada with the production of approximately 2.6 million pre-rolls from legalisation to date.

 

Edison Cannabis

Positioned as a premium and modern brand for discerning consumers, the Edison Cannabis brand is focused on the four pillars of quality, sophistication, creativity, and innovation. Following the successful launch of Edison by the Company to medical patients, the benefits of hand manicured and craft-cured top flower was extended into the Edison Reserve line, which has been well received in the market as the Company's top quality, indoor grown product.

 

ANKR Organics

The ANKR Organics brand has been developed based on the authentic nature of the Company's lineage in organic growing. As one of the industry's most experienced organic growers in Canada, the Company believes it will have the credentials and capabilities to deliver a top-quality product through a certified organic process that will resonate with an educated and affluent demographic who see the value in organically grown products. The Company plans to have ANKR Organics product available in flower and oil formats in Q1 calendar 2020.

 

 

Trailer Park Buds

The development of Trailer Park Buds, a brand created to appeal to an experienced consumer of cannabis who doesn't take life too seriously, is scheduled for release in 2019. Following several discussions with regulators, the Company has taken a cautious approach to ensure at launch that all elements of the brand align with regulatory requirements including those relating to marketing, and to also understand the early dynamics of the evolving adult-use recreational market in Canada.

 

Trailblazer

Trailblazer, a brand targeted towards the value conscious consumer, was launched in select markets with a product mix consisting of pre-rolls and milled flower (blends) and has recently expanded the brand to include full flower offerings. Trailblazer complements the Company's premium and organic product offerings and is currently planned to be sold at a slight discount to mainstream-priced products across Canada.

 

Edibles and Extracts

The company is also positioning itself for the "real legalisation" set to happen in October this year. It is expected that Canada will legalise products including edibles, beverages, and vape pens around the Northern fall. In mature recreational markets such as Colorado, Oregon and Washington, edibles and extracts account for over 60% of revenue.

The company signed an exclusive agreement with The Green Solutions to help it commercialise large scale extraction and product processing. It has also partnered with Canada's Smartest Kitchen to develop a range of premium cannabis-infused chocolates. The two companies will also work together to expand the edible range over time.

Organigram is preparing for the launch of additional cannabis products in Canada by focusing on vape pens and suggested they will be prepared to launch vape pens on a speculated Oct 17, 2019 (the one-year anniversary of the launch of legal cannabis) legalisation date for additional cannabis products.

 

But not yet…

Organigram is not expecting to launch its edibles range at that time, as they believe it better to create the required inventory levels in order to facilitate continuous distribution to meet the estimated demand. In the Management Discussion and Analysis (post the earnings release), they also gave further insight into their beverage strategy.

Organigram believes it has developed a shelf stable, water-soluble and tasteless cannabinoid nano-emulsion formulation that will provide an initial onset within 10 to 15 minutes if used in a beverage.  The Company expects to receive appropriate research and development licensing in Q3 of Fiscal 2019 at which point it will be able to conduct testing to confirm the onset of action and duration of effect. At this point, the Company is not necessarily planning to launch its own cannabinoid infused beverages and is actively seeking a strategic partner with proven experience in beverage product development.

This potentially puts Organigram behind the 8-ball when it comes to beverages, as HEXO already have a deal with Molson Coors, and Canopy has Constellation behind them. Something to watch.

 

Second, but with the best.

When they announced their FY19 Q1 results, Organigram gave forward guidance of revenue, saying they would double their Q1 revenue. And they did just that.

  • Record revenue for the quarter of $26.9 million, a massive 117% increase from the previous quarter, and a whopping 693% up on the previous year.  This included recreational revenue of $24.6 million, up 165% from the previous quarter's $9.2 million.
  • They sold a total of 4,987kg of cannabis, up from 2,070kg in the previous quarter. This included medical cannabis sales of 329kg and recreational sales of 4,658kg (compared to only 1,691kg in the previous quarter).
  • This makes Organigram the second highest supplier to the recreational market (behind Canopy, although Aurora may take the second spot when they report in the coming month). A massive effort for Organigram, especially given their current production capacity as compared to Canopy and Aurora.

 

Gross margin for the quarter came in at 60%, which was a decline from the 71% delivered in the previous quarter. The reduction was as a result of lower revenue per gram (more being sold into the wholesale recreational market) and higher costs per gram. Still, 60% puts them in first place when it comes to margin. Only Aurora and Hexo come anywhere near them

The company's record revenue also outgrew their operating expenses, both in dollar terms ($14.5 million versus $4.2 million) and on a percentage basis (revenue grew by 117% while operating costs only grew by 77%). This shows outstaying costs management and efficiencies in scale.

 

"We executed very well again this quarter and have established Organigram as one of the leaders in the Canadian adult-use recreational market"

 – Greg Engel, Chief Executive Officer.

 

Organigram is still not earning positive operating cash flow. As a result of the Company's negative cash flow from operating activities, it continues to rely on the issuance of securities or other sources of financing to generate the funds required to fund the business. The deficit is directly attributable to their growing working capital needs as the business expands

As at the end of the quarter, the company had $63 million in cash. Given this position, and their current free cash flow deficit (their cash burn) of around $35 million, they have about two quarters of runway left. The company acknowledged this and announced on the earnings call that they are close to finalising a $140 million loan from a tier 1 Canadian bank.

 

The Bottom Line

"The Company believes that because of its high gross margins and its rapid scaling up of sales combined with a disciplined SG&A spend, it will achieve positive cash flows from operations by the end of calendar 2019." – Organigram Second Quarter MD&A

The company stopped short of giving guidance for the coming quarter, but as noted, Organigram expects to become cash flow positive by the end of the calendar year, driven by increasing revenue which outpaces operating cost expansion. This would begin in May when their contract with Quebec kicks in. Later in the year, the number of retail stores in Ontario and Alberta should increase, and in October, with the introduction of edibles and extracts, their Vape Pen product range would significantly augment revenue.

Overall, a fantastic quarter for Organigram, with the second highest recreational revenue figure of any cannabis company, and the highest gross margins of any of the Canadian Licensed Producers. And when one considers their valuation, it becomes really interesting.

 

 

In terms of recreational sales to Enterprise value, they rank the best of the bunch. We are extremely bullish on Organigram, and although they have a few small kinks in the armour (not having a beverage partner or being completely ready for edibles and extracts), they are extremely well positioned to grow into these areas and to continue to deliver stellar results for their shareholders.

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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