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Cultivation and Product Expansion Take Focus as OrganiGram Reports a Modest Third-Quarter Loss

By Sean Williams - Jul 16, 2019 at 7:51AM

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OrganiGram remains on track to complete its Moncton campus by year's end, and is eagerly awaiting the launch of derivative cannabis products in December.

The cannabis industry is budding before our eyes, and according to various Wall Street forecasts, it could be among the fastest-growing industries over the next decade. That puts major growers that are capable of at least 100,000 kilos a year of production -- like OrganiGram Holdings ( OGI 4.82% ) -- firmly in focus.

Before the opening bell on Monday, July 15, OrganiGram became the first major cannabis stock in July to give investors a look under the hood, so to speak. The New Brunswick-based grower wound up reporting its fiscal third-quarter operating results that, while featuring a modest net loss, exuded optimism about ongoing cultivation and product portfolio expansion. Let's take a closer look at what OrganiGram was up to in its fiscal third quarter, ended May 31. 

A businessman in a suit pressing the quarterly report tab on a digital screen.

Image source: Getty Images.

OrganiGram Holdings Q3 results: The raw numbers

Metric Q3 2019 Q3 2018 Change
Net sales CA$24.75 million  CA$3.44 million  621%
Net income (CA$10.18 million) CA$2.82 million  N/A
Earnings per share (adjusted) (CA$0.068) CA$0.03 N/A

Data source: OrganiGram. All data expressed in Canadian dollars (CA$). 

With most of Canada contending with supply issues, OrganiGram's third-quarter report featured much of what we've seen from its peers: substantial year-over-year sales growth, a very small sequential quarterly decline in cannabis sales, and very modest losses.

However, what's particularly noteworthy about OrganiGram's operating results is the CA$12.5 million negative hit it took from fair-value changes to assets and inventories under International Financial Reporting Standards (IFRS accounting). Without this one-time hit to its CA$12.3 million in gross margin, and the CA$11.1 million in recorded operating expenses, OrganiGram would have been profitable on an operating basis. Inclusive of other expenses, the company wound up losing CA$10.2 million, which reversed a year-ago profit.

In terms of product mix, OrganiGram sold 3,926 kilos of dried flower in the fiscal third quarter to go along with 5,090 liters of cannabis oil. This led to an adjusted gross margin (i.e., before taking fair-value adjustments into account) of 50%. The report notes that the company did experience a decline in yields (and subsequently margins) following a change in growing protocols, but that yields returned to historic levels shortly thereafter during the quarter.

A close-up of a flowering cannabis plant that's growing indoors.

Image source: Getty Images.

What happened with OrganiGram Holdings this quarter?

The word "busy" doesn't quite do justice to summarize what OrganiGram and its management team were up to during the now-ended quarter. Here's a brief summary of a few of the more notable happenings.

  • Phase 4A licensing complete: OrganiGram notes that all of its Phase 4A rooms at its Moncton campus were licensed by Health Canada for cultivation during the quarter, bringing the company's annual run rate output up to 61,000 kilos. Subsequent to the quarter, 17 of the 33 grow rooms in Phase 4B were submitted for licensing.
  • Phase 5 expansion under refurbishment: The company continues to refurbish 56,000 square feet of existing facility space that'll be devoted to additional extraction capacity, as well as house derivative and edible production. OrganiGram spent CA$15 million on a high-speed, fully automated production line for edibles during the quarter. These new derivative products are expected to begin hitting cannabis store shelves by mid-December.
  • Signed partnership with PAX Labs: Subsequent to the quarter end, OrganiGram signed a partnership with vape device manufacturer PAX Labs to be one of its four supply partners for the PAX Era platform.
  • Announced proprietary nano-emulsification technology: During the quarter, OrganiGram also announced that it had developed a nano-emulsification technology that provides a quicker onset of the effects of cannabinoids. It will be initially available to consumers in a dried powder, with the company actively seeking out an experienced partner with which to explore a line of beverage products featuring this technology.
A person holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

What management had to say

Despite OrganiGram swinging to a third-quarter loss, OrganiGram CEO Greg Engel remains very pleased with the company's progress in all facets of its expansion. Said Engel:

We continued to report strong sales in our third quarter and now have distribution in all ten provinces. In our fiscal year to date, we have generated strong operating and financial results, placing us among the leaders in the Canadian industry. While we saw a temporary reduction in yield per plant in Q3 due to temporary changes in growing protocols, not only have our yields returned to historical levels, but we have seen a meaningful increase in average cannabinoid levels in harvests to date in Q4.

Hinting to the future, Engel expounded:

We are very excited for fiscal 2020 which should build upon an already successful 2019. By the first half of fiscal 2020, we expect to benefit from record harvests of high-quality indoor-grown dried flower, the sale of a variety of vape pen products as well as our initial edible product forms.

A vape pen next to a vial of liquid and neatly arranged dried cannabis flower.

Image source: Getty Images.

Looking forward

Of course, the big question is: What does the future hold for OrganiGram?

On the production side of the equation, there's keen focus on completing expansion at Moncton, and in getting all associated grow rooms licensed with Health Canada. The remainder of Phase 4B (16 grow rooms) should be submitted for licensing in September, with Phase 4C (29 grow rooms) forecast to be complete by the end of the current calendar year. Phase 4B's completion will add 28,000 kilos a year to the run rate, thereby boosting it to 89,000 kilos, with Phase 4C lifting output by 24,000 kilos per year. When complete, Moncton will be capable of 113,000 kilos of cannabis output annually.

OrganiGram also dished on its focus for what it calls "Rec 2.0," or the launch of derivative products later this year. The company will focus its efforts on vape pens and edibles, which are projected to be the top-selling derivative cannabis products. As noted, OrganiGram is also expected to sell a dried powder version of its nano-emulsion technology, with the company exploring partnerships to roll out a line of infused beverages.

On an operating basis, OrganiGram anticipates that higher yields, improved efficiencies, and economies of scale should result in improved margins in the quarters that lie ahead.

And, lastly, the company hasn't overlooked opportunities that lie outside of Canada's borders. Though management believes Canada offers the best near-term opportunity, OrganiGram does expect to participate in the U.S. and international markets "in due course."

In sum, things are progressing on track and on budget.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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