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Organigram Holdings Inc. (NASDAQ: OGI): Cheers in the Cannabis Market

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"How does Organigram leverage their debt and achieve profits in 2020 Q1 despite their SG&A expenses and refurbishment plan?"
Organigram Holdings Inc.

SUMMARY

  • Organigram reported first-quarter fiscal 2020 results recenty, which leading $25.2 million net revenue, $9.3 million gross margins accounted for 37.1% of net revenue, and $0.9 million net loss.
  • The refurbishment plan continued as Organigram aimed to restructure its existing facility and to expand production line for new edible and extraction products.
  • Q1 fiscal 2020 SG&A decreased from 41.8% of net revenue in Q4 fiscal 2019 to 37.4%.
  • Organigram showed stability in keeping manageable debt to fund their operation and leverage expenditures.

INTRODUCTION

Organigram Holdings Inc. (OGI) (NASDAQ: OGI) is a public company whose wholly-owned subsidiary, Organigram Inc., is a licensed producer of cannabis and cannabis-derived products in Canada. They’re unique in providing differentiated products which are high-quality, indoor-grown cannabis for patients and adult recreational consumers in Canada. In addition, their portfolio of legal adult-use recreational cannabis brands includes The Edison Cannabis Company, Ankr Organics, and Trailblazer.

FISCAL Q1 2020 FINANCIALS

Organigram reported $25.2 million net revenue with 37.1% gross profit margin (GPM) in their Q1 fiscal 2020, though their GPM decreased from 47.1% in the last period of the fiscal year. Net loss accounted for 0.9 million Canadian dollars, resulted in a decrease in operating margin and a negative net profit margin. Leading cause of net loss derived from increases in sales and marketing and general and administrative expenses (SG&A).

OGI presented capability in increasing return-on-asset (ROA) and return-on-equity (ROE), regardless of their net loss and decrease in GPM. Nonetheless, in order to leverage their debt, OGI kept disciplined execution in managing debt-to-asset (DA) and debt-to-equity (DE), as shown in the figure below.

Profitability, Expenses, and Leverage Ratios of Organigram Holdings Inc.
Source: Organigram Holdings Inc. Public Filings

Financial Analysis

How does Organigram leverage their debt and achieve profits in 2020 Q1 despite their SG&A expenses and refurbishment plan? Organigram demonstrated their execution strategy in aspects of profitability, expenses, and their debt leverage.

Profitability

Organigram generates revenue from differentiated products as vaporizer pens and edible products. Under the circumstance that Canada launched new regulations in January, referred to Adult-Use Recreational Launch 2.0, OGI established a comprehensive vape pen portfolio and cannabis-infused chocolate products. They distributed Trailblazer Torch vape cartridges, the first wave of ‘Cannabis 2.0’ products in December 2019. Along with the distribution of new ‘Cannabis 2.0’ products, OGI released their new vape pens including Edison + Feather ready-to-go distillate pens and Edison + PAX ERA® distillate cartridges. Both are expected to generate substantial revenue during the first quarter of the calendar 2020.

Moreover, OGI’s next-generation product portfolio will include high-quality infused chocolate and a dissolvable powdered beverage product. Ulteriorly, organigram received approval for operating chocolate production lines in December 2019, along with licensing of 16 additional cultivation rooms. Following the completion of the chocolate production line, OGI expects their chocolate’s initial sales in Q1 2020. Similarly, OGI developed a proprietary nano-emulsification technology that can translate an initial absorption of cannabinoids and provide a rapid onset of effect. This emulsification has been transformed into a dissolvable powder by OGI’s researchers, which is scheduled to be launched in Q2 2020.

However, will those newly launched products boost their sales and revenue? OGI hesitated to answer the question due to lack of an inadequate retail store network, because of less than anticipated consumer demand. To cope with the issue, Organigram took their actions in partnering with strategic alliances. On January 16th, 2020, Organigram announced their secured supply agreement with medical cannabis by Shoppers, an online medical cannabis platform. This will inevitably strengthen OGI’s retail network and therefore boost their sales throughout the year 2020.

Expenses

However, will those newly launched products boost their sales and revenue? OGI hesitated to answer the question due to less than anticipated consumer demand resulted from a lack of an inadequate retail store network. To cope with the issue, Organigram took their actions in partnering with strategic alliances. On January 16th, 2020, Organigram announced their secured supply agreement with medical cannabis by Shoppers, an online medical cannabis platform. This will inevitably strengthen OGI’s retail network and therefore boost their sales throughout the year 2020.

Likewise, due to the impact on consumer demand, OGI has to slow down the expansion of their Phase 4 plan which accounts of total $16 million expenditure as of quarter-end. As for a return, the Phase 4 expansion plan would generate additional yearly production capacity, and thus be able to respond to increasing consumer demand. Similarly, OGI’s Phase 5 refurbishment plan aims to restructure an existing 56,000 square foot footprint facility. OGI’s Phase 5 plans to add significant functionality to the Moncton Campus in order to expand their extraction capacity, production and packaging line for newly developed food and beverage products.  

Leverage

Although there is an increasing trend in OGI’s DA and DE as shown in the graph, OGI keeps relatively adequate debts overall, compared to their capital and equity. Specifically, OGI established an at-the-market (ATM) program for a prospectus supplement in December 2019. The ATM program will enable OGI to fund capital projects with their net revenue, to repay leverages, and for general operations.

Outlook

Overall, OGI’s operating suffers a net loss from heavy expenditure on SG&A and plans for expansion and refurbishment. However, their newly launched products would help to generate substantial retail sales and eventually offset SG&A expenses. Moreover, OGI demonstrates strong execution reflected in fiscal 2019 operating and financial results. They established the ATM program to help fund their expansion and refurbishment plans, support corporate operating, and leverage their debts. As a result, after their Q1 fiscal 2020 announcement, OGI’s shares soared more than 35% last week and helped lift the broader cannabis sector higher.

Source: Organigram Holdings Inc., MarketWatch

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JayY@Vapebiz.net
Kentucky-based writer and editor focuses on business, finance, and investment in the cannabis industry. Jay made her first foray into the marijuana market through her friends in college, acknowledging medical cannabinoids in the psychotherapeutic area. Although she stayed active constantly during her college years in social activities including feminist movement and climate change, Jay did preserve with interest in marijuana. By exploring the volatility of weed, Jay intends to dig out innovation, technology, and culture in the cannabis landscape.

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