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Organigram Holdings Inc. (TSX: OGI) (NASDAQ: OGI)

Organigram Holdings Inc. (TSX: OGI) (NASDAQ: OGI) is the parent company of Organigram Inc., a leading Canadian licensed producer (“LP”) of premium-quality cannabis and extract-based products. Founded in 2013, Organigram is focused on producing high-quality, indoor-grown cannabis for patients and adult recreational consumers in Canada, as well as developing international business partnerships to expand the company’s global footprint. 

The company has sales in all 10 provinces. Organigram delivers industry-leading yields and maximizes quality cannabis production at one of the lowest cultivation costs per gram1 among publicly reporting Canadian LPs. Organigram is focused on translating operational excellence into strong financial results and return on investment for shareholders.

Financial Results

Fiscal year-to-date, the Company has reported net revenue of C$64.1 million, adjusted gross margin of C$37.1 million or 58%1 and adjusted EBITDA of C$27.8 million or margin of 43%1, the latter of which has been positive for four consecutive quarters.

Significant Expansion on Schedule

Located on a 14-acre campus in Moncton, New Brunswick, Organigram’s production facility and research and development program includes a state-of-the-art, indoor, three-tier cultivation system that maximizes facility square footage. Design and automation improvements of the three-tier system include an ergonomically friendly grow room design, automatic potting, pre-roll and packaging machines, and larger propagation rooms with advanced environment systems.

Organigram’s Phase 4, fully funded expansion project is on target to be completed by the end of 2019 and is expected to increase target production capacity to 113,000 kg/year (249,000 lbs), once fully licensed and operational.

Beyond Phase 4, Organigram is refurbishing 56,000 square feet of space within its existing Moncton Campus designed under EU GMP standards for its own edibles and derivative production facility as well as additional extraction capacity. Substantial construction of Phase 5 is expected to be completed in October 2019.

Proprietary Nano-emulsification Technology

Organigram has developed a proprietary nano-emulsification technology that is anticipated to provide an initial onset of the effects of the cannabinoids within 10 to 15 minutes. The emulsion process developed by the Organigram team generates micro-droplets that are very small and uniform (size of 20 nanometers), translating to an absorption and onset of effect that is rapid, reliable and controlled. With traditional edibles and beverages, the body spends significant time breaking down fat soluble cannabinoid particles which are then absorbed and metabolized in the body before effects are felt. This lengthy process can result in accidental overconsumption and undesirable experiences. Organigram, subject to the receipt of any required approvals, plans to conduct further testing, to confirm the onset of action and duration of effect.

The nano-emulsion technology is stable to temperature variations, mechanical disturbance, salinity, pH, and sweeteners.

The Company’s researchers have also recently developed a way to transform this emulsification system into a solid form, turning it into a dissolvable powder. This shelf-stable, thermally-stable, water-compatible and palatable cannabinoid nano-emulsion formulation will also provide an initial onset of effect within 10 to 15 minutes if used in a beverage.

The powdered formulation will offer consumers a measured dose of cannabinoids which they can then add to the beverage of their choice, while also offering the discretion, portability and shelf life expected of a dry formulation.

The Company is planning to launch a variety of dried powder formulation beverage products in early calendar 2020 and is actively seeking a strategic partner with proven experience in beverage product development to take advantage of the liquid formulation it has developed.

Disruptive Production Technology

Organigram is one of only two Canadian LPs to make a strategic investment in biosynthesis – a disruptive production technology.

Biosynthesis has the potential to create cannabinoids at large scale at a fraction of the cost of traditional cultivation.

Organigram has invested in Hyasynth Biologicals Inc. a Montreal-based biotechnology company and leader in the field of cannabinoid science and biosynthesis. Hyasynth has developed a disruptive technology using proprietary yeast strains and patent-pending enzymes to naturally produce cannabinoids without growing the cannabis plant.

Biosynthesis vs Traditional Cultivation:

  • Reduced operating and capital costs
  • Scalable, consistent, superior purity and quality
  • Production of minor cannabinoids just as feasible as major ones
  • Able to meet even more rigorous standards of Consumer Product Goods and Pharma
  • Smaller environmental footprint

Well Positioned for Adult-Use Recreational Launch 2.0 (“Rec 2.0) – Legalization of Edibles and Derivative Products

  • Organigram’s production and product development teams have made significant preparations to execute its strategy and plans for the derivatives and edibles launch later in 2019. The Company has chosen to initially focus on the two most popular product forms based on US state sales data: vaporizer pens and edible products. Estimates suggest vaporizer pens, alone, currently represent the largest segment of derivative and edible products at about 23%2 of cannabis sales based on form factor. Edibles, including cannabis-infused beverages, are the next largest segment at about 13%2 of cannabis sales.
  • The Company also has an exclusive consulting agreement with TGS International LLC, a vertically integrated cannabis company and proven market leader in Colorado3, to better understand demand for certain derivative-based products, market share trends over time.
  • The Company expects to be ready to sell vaporizer pen products when they are authorized for sale in December 2019 and has plans to sell cannabis-infused chocolates and a variety of dried powder formulation beverage products in early calendar 2020.
  • The Company announced a $15 million investment commitment in a high speed, high capacity, fully automated production line with the ability to produce up to 4 million kilograms of chocolate edibles.
  • Organigram entered two innovative partnerships with two vaporizer hardware and technology companies to offer vaporizer pens to all its provincial partners. The Company was selected as one of the four Canadian launch partners of PAX Era, the premium closed loop vaporizer solution created by PAX Labs, Inc. (“PAX”) a leading consumer technology brand in the design and development of premium vaporizers for dry flower and concentrates. The Company also signed an agreement with Feather Company Ltd. (“Feather”) for an exclusive Canadian license to Feather’s proprietary vaporizer pen technology.
  • As discussed above, Organigram has developed a proprietary nano-emulsification technology that is anticipated to provide an initial onset of the effects of the cannabinoids within 10 to 15 minutes and is planning to launch a variety of dried powder formulation beverage products in early calendar 2020.

Outlook

  • The Company believes the best near-term growth opportunity remains Canada. The Canadian market is positioned for significant growth with additional retail store planned openings and the legalization of edible and derivative products.
  • The U.S. and International markets, particularly the cannabidiol (“CBD”) market, also represent significant opportunities and the Company expects to further participate in these markets in due course and in compliance with applicable law.
  • The Company expects to be a national leader in Rec 2.0 as retailers and provincial distributors are likely to increasingly move to producers, like Organigram, with a strong track record of delivering on supply commitments.

Experienced Executive Team

  • CEO Gregory Engel has 30 years of national and international experience in pharmaceuticals, biotechnology, cannabis, and consumer packaged goods (CPG). He most recently served as CEO of Tilray Inc. where he was instrumental in the company becoming the first Canadian exporter of medical cannabis, as well as establishing several trailblazing industry standards.
  • Jeff Purcell, Senior Vice President of Operations, has more than 25 years of experience in operations and will oversee implementation of quality systems, safety and continuous improvement initiatives. He is also overseeing significant facility expansion, essentially creating an entirely new production environment.
  • Tim Emberg, Senior Vice President of Sales and Commercial Operations, is an accomplished bilingual, senior sales and marketing leader with more than 20 years of experience in pharmaceutical sales and marketing in the OTC and CPG industries. He brings extensive knowledge of the Canadian market access and regulatory environments.
  • Paolo DeLuca, Chief Financial Officer, has more than 20 years of diversified financial business experience and has held senior financial, investor relations and accounting leadership roles at companies such as West Face Capital and TD Securities. DeLuca brings extensive insight into both traditional and nontraditional financing and debt offerings.
  • Ray Gracewood, Senior Vice President, Marketing & Communications, has more than 15 years of experience in the marketing space and was Senior Director of Dales and Marketing for Moosehead Breweries Ltd. He brings extensive experience in building and developing brands, positioning and segmentation.

1 Cultivation cost per gram, adjusted gross margin, and adjusted EBITDA are nonIFRS measures. Please see the Company’s latest MD&A.
2 QUICK TAKE – Cannabis – Cowen’s THC Tracker: U.S. Brands – Cowen and Company, March 29, 2019
3 The Company has no investment or ownership in any entity in the United States nor does it provide any products or services to entities in the United States.

Investment Considerations
  • Increasing target production capacity to 113,000 kg/year by the end of 2019
  • One of only four Canadian LPs with distribution agreements in all 10 Canadian provinces
  • Well-positioned for edibles and derivative products with investments in innovative products and refurbishing, as well as more in-house extraction capacity
  • Invested in biosynthesis to produce cannabinoids without growing the plant at a fraction of cultivation costs
  • Focused on developing further international partnerships, prioritizing the CBD market
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