Big money is flowing into the legal marijuana industry, and both Wall Street and investors have taken notice. By the end of the next decade, depending on your preferred source, Wall Street investment banks foresee anywhere from $50 billion to $75 billion in annual sales, placing cannabis on par with the global soda industry.
Among the individual pot stocks high on investors' lists is the only major Atlantic-based grower, OrganiGram Holdings (NASDAQ:OGI). The company reported its second-quarter operating results before the opening bell this morning, swinging to a modest loss, but making significant progress on its production expansion, balance sheet improvement, and derivative development.
OrganiGram Holdings second-quarter results: The raw numbers
|Metric||Q2 2019||Q2 2018||Year-Over-Year Change|
|Gross revenue||CA$33.47 million||CA$2.93 million||1,044%|
|Total expenses||CA$9.73 million||CA$3.82 million||154%|
|Net loss/income from continuing operations||(CA$1.78 million)||CA$2.33 million||N/A|
|Earnings per share||(CA$0.049)||CA$0.01||N/A|
As you can see, it was a bifurcated quarter for OrganiGram, with gross revenue soaring more than 1,000%, and net revenue, which includes 6.6 million Canadian dollars in excise taxes paid, more than doubling from the first quarter to CA$26.9 million. This was in line with the company's previous outlook that its net sales would at least double in its fiscal second quarter from the first quarter. The legalization of recreational marijuana in Canada provided the bulk of the sales boost.
At the same time, getting bigger means higher expenditures. On the bright side, general and administrative costs grew a very modest 50% from the previous year. However, a more than doubling in sales and marketing expenses and share-based compensation, coupled with a negative CA$8.1 fair-value adjustment and ongoing phase 4 expansion costs at the company's Moncton campus, swung OrganiGram to a loss.
Of note, though, the company did generate its third consecutive quarter of positive EBITDA, posting CA$13.3 million (49% of net revenue). It also recorded a 60% adjusted gross margin, and all-in cash cultivation costs, which includes noncash depreciation and share-based compensation, fell to CA$0.85 per gram of dried flower harvested from CA$1.48 in the year-ago quarter.
What happened with OrganiGram Holdings this quarter?
This was a busy quarter for OrganiGram, with sales ramping up following the legalization of recreational marijuana use in Canada. The company also worked toward completion of its Moncton campus. Here are a handful of key highlights:
- The phase 4 expansion at Moncton, which will add 92 grow rooms when fully complete this year, remains on track. Expected to outlay CA$125 million in total for this expansion, CA$27 million of which was spent in the fiscal second quarter, this expansion will push peak production capacity from a current annual run rate of 36,000 kilos a year to 113,000 kilos annually. In anticipation of receiving licensing approval from Health Canada for the first portion of its phase 4 expansion, OrganiGram has already begun cloning for its initial 13 grow rooms.
- The company recently began refurbishing 56,000 square feet within its existing Moncton campus (known as its phase 5 expansion) that'll be used for additional extraction capacity, derivative and edibles development, and office space. Derivatives and edibles traditionally have much juicier margins than dried cannabis flower.
- During and subsequent to the quarter, OrganiGram notes that its outstanding convertible debentures were either voluntarily or forcibly converted into shares of common stock.
- Also subsequent to the quarter, the company signed a term sheet with a Canadian bank for approximately CA$140 million in term loan and revolving debt to be used for general and accounting purposes -- in essence, a non-dilutive financing.
- OrganiGram signed a letter of intent to supply cannabis to Quebec, which was the last of Canada's provinces that it didn't have a supply agreement in place with. Now, OrganiGram is one of only three growers with a supply deal in place with all of Canada's provinces.
What management had to say
Despite the quarterly loss, much progress was made, and that gave OrganiGram CEO Greg Engel plenty to crow about. Here's what he had to say to investors:
We executed very well again this quarter and have established Organigram as one of the leaders in the Canadian adult-use recreational market.
For the second consecutive quarter, our results reflected operational excellence which translated into record revenue for the Company, industry-leading adjusted gross margin, and positive adjusted EBITDA, all of which differentiates us from most of the Canadian industry today. Our team has already progressed several key initiatives in preparation for the derivative and edibles launch in the fall of 2019. We are excited about the significant growth ahead expected from these new products, our expanding capacity, our strategic partnerships, and our relentless focus on continuous improvement to consistently deliver high quality product to our customers.
Although Canada's recreational legalization occurred last year, this is really the most transformative year in OrganiGram's history. If all goes to plan, it should complete its Moncton phase 4 and 5 build-out in 2019, leading to 113,000 kilos of production potential at full capacity, as well as the ability to focus on derivative products.
According to Health Canada, new consumption options, which will include vapes, nonalcoholic cannabis-infused beverages, concentrates, topicals, and edibles, will become legal by this fall. In preparation, OrganiGram has focused its attention on vaporizable pen technologies and a variety of edible products. The company has ordered a chocolate molding line and fully automated packaging equipment ahead of its move into alternative consumption options.
Furthermore, the company's press release notes that while it's not intending to launch its own line of cannabis-infused beverages, it is actively seeking a strategic partner with experience in developing beverages. OrganiGram believes it's "developed a shelf-stable, water-soluble, and tasteless cannabinoid nano-emulsion formulation" that provides quicker onset (10-15 minutes) than other infused beverages.
With financing no longer a concern and the company's expansion projects on track, the green rush looks to be in full swing for OrganiGram.