Smaller Canadian cannabis companies have often been ignored this year while the bigger ones like Aphria, Tilray, and Canopy Growth are grabbing all the attention. Aphria and Tilray's mega-merger, which closed this month, was the highlight of the industry at the start of 2021. Meanwhile, Canopy Growth is working hard to lead the market for cannabis beverages, a new form of recreational cannabis derivatives that Canada legalized in October 2019 as part of "Cannabis 2.0."
OrganiGram Holdings (OGI -2.07%) is a smaller company by market capitalization, with a market cap of just $787 million compared with Canopy Growth's $8.7 billion. Its second-quarter fiscal 2021 results were a tad disappointing, but its efforts to grow cannot be ignored. Its wide range of popular and innovative cannabis products could help it flourish over the long term, making it a fascinating stock to invest in. However, there are other factors to consider before you dive in to buy the stock this month. Let's take a look.
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OrganiGram's financials could pick up
OrganiGram's second quarter ended Feb. 28, and results weren't wonderful. Revenue declined 37% year over year to 14.6 million Canadian dollars -- not a good sign when cannabis sales have been progressing amid the pandemic, particularly after cannabis was declared as an "essential item" in Canada. The company said pandemic-related production and processing disruptions affected revenue, and the decline in wholesale revenue and lower prices for its products also contributed to the dip.
As a result, the company reported negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$8.6 million, a more than 14,000% increase from the negative adjusted EBITDA of CA$59,000 it posted in the year-ago period. Net losses also came in higher at CA$66.3 million compared to a net loss of CA$6.8 million in Q2 fiscal 2020.
Just a few days after the results, the company announced its CEO, Greg Engel, would be stepping down but would continue as a special advisor to the board of directors through a transition period. Meanwhile, the board's chairman, Peter Amirault, will serve as interim CEO until the company fills the position permanently.
A sudden leadership change makes investors skeptical. However, every CEO has a unique way of running a company, and a new CEO might bring changes that could benefit the company over the long term. We will have to wait and see.
Management believes in innovation
What I find appealing about OrganiGram is its interest in adapting different technologies to develop innovative products. In 2018, the company entered into a strategic investment deal of $10 million with Hyasynth Biologicals, a Montreal-based biotech company that uses a process called biosynthesis to produce cannabinoids more cheaply and efficiently. Besides OrganiGram, only peer Cronos has adapted this technology to produce cannabinoids.Departing CEO Engel noted that"this technology has the potential to change the cannabis landscape."
Another such innovation is the company's use of nano emulsification technology, which allows faster absorption of cannabinoids by the human body compared with traditional edibles and beverages. This will help with a "more reliable and controlled experience" of cannabis products, according to management. Using this technology, OrganiGram launched Edison RE:MIX dissolvable cannabis powder in November 2020.
These kinds of innovative technologies could give Organigram a competitive advantage over its peers.
This pot stock has the potential to shine, but ...
OrganiGram wants to take advantage of the high-margin edibles category, one of the forms of derivatives that is currently most in demand. On April 6, the company announced the acquisition of Edibles and Infusions Corporation, a Canada-based cannabis processor and soft chew manufacturer.
Management believes this acquisition will help the company bolster its revenue growth through the category of edibles, soft chews, and gummies. But it may not be a wise decision to use its cash balance on acquisitions now, when losses are piling up. OrganiGram recently received an influx of cash -- about CA$221 million -- when a subsidiary of British American Tobacco purchased a stake in the company in exchange for 19.9% equity. The company ended its second quarter with CA$232 million in cash and short-term investments and total current and long-term debt of CA$58 million.
While higher revenue and profits from the company's innovative products are possible, that could take awhile. Many external factors will come into play, such as brand marketing, packaging, a slow rollout of legal stores in Canada, and black-market competition. Investors should keep an eye on the Canadian federal government in October, when the Cannabis Act marks its third anniversary. Any changes to that law could determine how things in the cannabis industry will progress this year in Canada.
OrganiGram's management remains optimistic about its future, both in Canada and internationally, with rising demand for new recreational products and the increase of legal stores in some provinces in Canada.However, I would still wait for OrganiGram's financials to improve -- higher revenue growth and profits, with a stronger balance sheet -- before considering investing a larger stake in this pot stock. For now, investors interested in the marijuana industry might want to consider U.S. cannabis stocks that are in much better shape financially.
