VIDEO: Organigram Holdings Inc (CVE:OGI) Lowest Cash Cost per Gram in Sector

MidasLetter Live
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Organigram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG) CEO Greg Engel discusses their third quarter financial results and key factors which allow Organigram to be competitive with all cannabis corporations in the industry. Organigram are pursuing further supply agreements in Ontario, Nova Scotia, Newfoundland, and Saskatchewan in the near future as they get set for the start of the federally legalization of cannabis in Canada. Their expanding facilities, growing production capacity, and differentiated brands put them in a great position for the launch of the market.

Transcript:

James West:    Hey, welcome back to Midas Letter Live. My guest in this segment is Greg Engel. He’s the CEO of Organigram Holdings, trading on the TSX Venture under the symbol OGI. Greg, welcome back.

Greg Engel:    Thanks for having me again, James.

James West:    Greg, you just released third quarter results: give me an update, what do you think?

Greg Engel:    Well, a couple of key things. I mean, great quarter for us, and really some exciting things in there. I mean, I guess one of the keys would be that, you know, we continuously do our record yields; our cost of goods continue to come down. So, you know, our strategy as a major indoor producer or premium product has come forward and it’s been very well accepted in terms of preparing for the adult rec market, but at the same time we’ve driven down costs. So our cash costs right now for the quarter reported were $0.66, and then an all-in cost including amortization down to $0.80, which we believe is, you know, one of the best in the marketplace, whether or not you’re a greenhouse or indoor producer. We’re showing as a major indoor producer, we can actually compete with the greenhouses, or maybe potentially be better.

I haven’t seen any numbers that have come out better than what we presented today.

James West:    Yeah, I always find it interesting when people try to differentiate a greenhouse from indoor, because every greenhouse I’ve been in, I’ve been indoors, and so it’s just glass walls versus other walls. So yeah, well, that’s interesting. That strikes me as among the lowest all-in cost per gram production of the whole sector.

Greg Engel:    Yeah, it is, and I think what’s really driving it is again, our record yields is a big factor, but also our efficiency, right? I mean, you’ve been to our facility a few months ago, and you’ve seen what we’re doing, not only from our unique three-tier production, but also how we’re managing our plants, how we’re treating each of the strains very differently, and how we’re processing as well, right? And that’s all having an impact in terms of keeping our costs down and allowing us to continue to really produce a premium product, but at the same time at a very low cost, which is phenomenal for the marketplace.

James West:    Sure. So you’re all set for the recreational market in October; you’ve got shelf space in Nova Scotia?

Greg Engel:    Yeah, our agreements to date, so we’ve got agreements that we’ve announced in New Brunswick, PEI, Manitoba and Alberta, and we’re actively pursuing agreements right now in Ontario, Nova Scotia, Newfoundland, and then potentially with private retailers in Saskatchewan, because certainly independent retailers in Saskatchewan are looking to come and sign agreements. So we expect those agreements to be in place in the not-too-distant future, but again, we can’t comment on whether or not, you know, we’ve gotten an agreement or not; they’re target markets for us, right? So certainly, we’re really positioned, but also, we’ve been building up inventory. I mean, that’s one of the keys as our yields continue to go up in terms of where we’re at, we’re well positioned to be able to meet that demand when the market launches.

We expect first shipments to happen in September, as both the Crown corps and the private retailers are looking to kind of stock shelves and prepare for an October 17th launch. And we’re well positioned in terms of, you know, our total production capacity.

Great news for us as well is, you know, not only has our Phase II been online since February, but our Phase III, which started to come online in June, we’ll start to get our first harvest in August. So we’ll actually have product from our Phase III, which brings our total production capacity up to 36,000 kilos right now on an annual basis. So we’re in a great position for launch the market, and we’re going to be in a great position to supply the market with a premium indoor product going forward.

James West:    Fantastic, yeah. I’m actually looking forward to trying the recreational product. [laughter] The advent of Doug Ford claiming that he’s going to make the whole Ontario market, which arguably is the largest market in Canada, privatized: does that, in your view, represent an extraordinary opportunity relative to the alternative of supplying it through the Liquor Control Board?

Greg Engel:    Well, from what I understand so far from media reports is that still the OCS is going to play a role, and they’re primarily going to be, if media reports are correct, going to be the mail-order supply as well as the wholesaler. And you know, I do believe potentially there are still going to be some government-run stores; I don’t know for sure, because we haven’t had a final confirmation. All we’ve heard out of some of the announcements is that there is a plan to look forward to private. I think from a market opportunity, I think it’s very unique, and one of the challenges is going to be that to be ready for October, we know those private stores aren’t going to be up and running, right? So, what is that time frame?

So Ontarians are going to have to primarily rely on mail order for, you know, I’d say through the end of this year, in most cases. So that’s going to be a bit of a challenge from a launch perspective, but I think going forward it does present some opportunities. Certainly from a government perspective, they don’t have to put the capital resources in, and they’re going to be reliant. But it’s yet to be determined which model they’re going to follow. Is it going to be, you know, an Alberta model, with a series of, you know, almost unlimited number of suppliers? Or is it going to be a Manitoba model where you’ve kind of picked a number of key suppliers?

But I think at the end of the day, you know, I think on one hand it’s unfortunate we’ve seen OCS and we’ve seen their plans, what the stores look like, and they were very focused on training their staff and making sure the experience was one that consumers walked out with a very positive. So we’d ideally like to see a mix of those OCS stores and some private retailers at the same time, because they’ll both bring a different experience.

James West:    Sure. And your branding strategies, you seem to be sort of ahead of the curve on that as well with the differentiated brands, the Trailer Park Buds, the anchor Organics, and then, of course, the Edison Cannabis. Are you finding that the uptake from your existing client base is appreciating the rebranding, and sort of onside with that? Or are they exposed to it at this point?

Greg Engel:    Yeah, I mean, so they’re certainly exposed to it, but one of the keys that all the provincial jurisdictions and the Federal program is relying upon is that you’re going to have different brands in terms of the rec market and the medicals, right? So it’s key that you have different brands, and I think, you know, it’s important from a messaging perspective that you do separate. We did test the Edison brand in the medical market as The Edison Project by OGI, to see were consumers looking for, you know, a premium handcrafted, hand-trimmed, you know, high terpene profile product, and now we’re transitioning that product into the Edison Cannabis Company and the Reserve version of that as well. So far, the response to our branding has been phenomenal, both from the public retailers, you know, the Crown Corp. stores, as well as the private retailers and some of the conventions and consumer events that we’ve seen. So, for example, at Lift and some of the other conferences, we’ve seen phenomenal response from the potential consumers to our brand strategy.

James West:    Yeah. So there is a large demand for premium high-terpene, high-THC content bud?

Greg Engel:    Absolutely, and I mean, we have, you know, a partnership with a company in Colorado called The Green Solution, so we have an understanding of kind of what their sales look like. And you know, four years in, we saw product supply outpace demand this year, kind of at the end of last year, and we know that there’s been some price compression on the low end. But certainly from a premium flower perspective, and that’s why we made a decision to really focus on indoor production, is that they’re still sustaining a $14 per gram price in Colorado, even when there’s an oversupply in the market. And that oversupply is impacting the kind of lower-end product, certainly.

James West:    Sure. But the higher-end product retains it’s high margin?

Greg Engel:    It does, and I think, you know, because again, and I think that’s where we’re in a unique position, because really only ourselves, and Kronos and Canopy to some degree, that have really kind of a key to expand with large indoor facilities – although Kronos recently announced they’re also adding a greenhouse. So I think with our cost of goods, and producing, you know, a premium product at a low cost, really puts us in a great position for this marketplace.

James West:    Yeah, you bet. The onset of the recreational rules is, you know, in October – will that start to show up on balance sheets in calendar Q4, or will it sort of have to wait and see until Q1?

Greg Engel:    Yeah, what we’re going to see – so, all the discussions that we’ve been having with the various provinces that we have agreements with or promises that we’re looking to target agreements with is, they’re expecting shipments in September. So, kind of mid-September, they’d like to fill their warehouses and start to stock shelves. So you’re going to start to see revenue, and that’s why it’s important to have, you know, a supply, and have inventory built up, which we’ve been doing both on the dried flower perspective as well as, you know, the oil side. And we also are doing something very unique: we, you know, I think we’ve only seen announcements out of one or two other companies. Working with a company on a custom-made bespoke pre-roll machine that’s going to be capable, that is capable, of producing up to 8.5 million pre-rolls a year and also has downstream packaging as well in a child-resistant form.

So I think being prepared for that, having everything in place, it’s not about just what you can produce, but you’ve got to be able to package it and have it labeled and ready for the market.

James West:    Sure. So is the model generally with the liquor control agencies and whatever the alternatives are, is it generally COD? You ship the product, they receive it, they pay for it? Or they pay in advance, or do they pay once it’s sold?

Greg Engel:         Uh, no. Primarily, it’s all pre-payments.

James West:    Oh, okay.

Greg Engel:    You’re paying at the time that when you ship. I mean, there’s terms associated with that, as you would see with any, almost like a consumer packaged good. So those terms are typically 30 days kind of payment, you know, and there are some slight differences in terms of distribution, in terms of, are you shipping directly to a warehouse or are you shipping – you know, for example, we’re based in Moncton, so for New Brunswick we’re going to be shipping directly to each of the 20 stores that they have up and running. But beyond that, in most places, we’re shipping to a central warehouse. So it’s a great partnership for us with NB, you know, the province of New Brunswick.

James West:    Sure. And then on the other side of the premium flower spectrum is your investment in Hyasynth, and I’m really interested in Hyasynth and what they’re doing, because if they are able to provide the whole range of profile of CBDs and THC as ingredients in, you know, micro sort of dosed concentrations, then that’s arguably a game-changer for the whole industry in terms of edibles and vapes and whatnot. So what is the progress there?

Greg Engel:    Yeah, so Hyasynth, we expect that deal to close in the next month, so in August. So for those of the viewers not familiar with Hyasynth, they’re a biotech company based out of Montreal that are working on bio-fermentation, which is a proven methodology producing vitamins and insulin and other biological pharmaceuticals where they’re taking the gene that is, you know, a precursor for THC, CBD, CBG. And through a proprietary enzymatic process, fermenting that production and then converting through enzymes. So you can actually get a pure THC or a CBD or CBG, or potentially other cannabinoids as well, right, as they continue to evolve.

So they’ve proven that at a lab scale; the technology is proven at a production scale. So the next steps for them will be optimizing their process with a contract manufacturer, and then having their own facility built out. And, you know, this is potentially a very disruptive technology, right? We can produce – you know, Hyasynth could be producing cannabinoids at pennies on the dollar in terms of plant-based. And you know, the advantage to that is that it’s a very pure form; could be used as an API in a pharmaceutical, but also as you alluded to, can be used in vaporizer pens or edibles or those products.

James West:    Sure.

Greg Engel:    And/or, you could mix it with a plant-derived extract as well to kind of give it some of that terpene mix and minor cannabinoids at the same time.

So, exciting times. We expect that deal to close in August, and they’re a great partner and we look forward to working with them. And with that agreement, we can get up to 25 percent of the offtake at a discount to the market price, so we’re not the only company they’ll be supplying, but I think there’s a huge market for them.

James West:    And your interest in the company?

Greg Engel:    So we haven’t fully announced all the financial details; we’ll be doing that once the agreement is closed.

James West:    Okay, so we’ll keep our eyes peeled for that. All right, Greg, that’s a great update as usual. Congratulations on a great quarter, and we’ll look forward to having you back soon.

Greg Engel:    Okay, thanks, James.

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