OrganiGram Holdings Inc (CVE:OGI) CEO on $98 Million Debenture Conversion into Common Shares

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

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OrganiGram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) (FRA:0OG) CEO Greg Engel  shares details of the company’s decision to covert its remaining debentures (due in 2020) into common shares at a rate of $5.42 per share. Engel acknowledges that the move will add 18 million shares to the company’s existing volume, but notes there has been considerable demand for OrganiGram shares this year. Engel addresses the 50 percent recreational market share enjoyed by Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) and Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1). Engel reminds viewers that OrganiGram produced more cannabis in that quarter than both companies. OrganiGram recently announced a supply agreement with Quebec, making it one of only three LPs that have supply agreements with all 10 provinces.

Transcript:

James West:   Hey, everybody. Greg Engel joins me now, 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, I had an immersive experience in your cannabis environment for the second time, practically, and I was really impressed with the sort of initiative demonstrated in terms of marketing the company with this little device that you’ve been sending out to media personalities like myself. Tell me about the motivation behind that, and how that’s bringing attention to the facility in Moncton.

Greg Engel:   Yeah, I mean, look: you’ve been to the facility and you’ve done the virtual tour, so one of the things we always get comments on is when people come to our facility, that it’s world-class, the whole experience is one where it’s, you know, having a three-level indoor production facility that’s the largest in the world has really given them a different experience.

So we wanted to offer that to others, to be able to go in and, so really, anybody can log in. we did send out to media and investors and some of the analysts, etcetera, goggle sets to be able to do the tour. But it was really an initiative so you can actually experience what it’s like to be in a room, and you can, you know, look around, look at production areas, look at processing areas, and it’s narrated, so you can get a sense of kind of what you’re looking at. But it does give you that full 360 VR experience, which, you know, again – you’ve been there, but you’ve had the VR experience so you can compare and contrast.

James West:   Well, the 360 experience, to me, is so relevant, because having been to almost all of the LPs in Canada, growing operations, it’s quite impressive to see three levels of cannabis. I mean, it’s really walls of cannabis everywhere you look, and that comes across very well with the 3D experience.

Now, yesterday you announced that you were going to, you’ve elected to exercise your right under the indenture governing your 6 percent convertible debentures, to convert all of the principal amount into common shares of the company. Some investors are curious as to how does that impact dilution overall.

Greg Engel:   Yeah, so certainly, when we did that initial debenture deal, you know, the intent was always – it did have a forced convert at a 10 day VWAP of $7.05. You know, we certainly were confident that our share price would go above that, and we’ve reached that point. So you know, we’ve already had almost $20 million of people convert themselves, right, because people wanted to have access to the shares. So, you know, the intent of this is now to convert the remaining kind of 18 million share – you know, the conversion of the $98 million into 18 million shares.

So it does add an additional 18 million shares, but certainly there’s a demand out there for shares. Like for example, yesterday, when we announced our deal with Quebec, we saw our largest trading day ever, with over 6.6 million shares traded on the TSX Venture. So definitely a lot of demand, so having more shares available through that conversion of the debenture is a positive thing for the market.

James West:   Sure. Certainly more compelling for institutions who want to get involved.

Greg Engel:   It is, certainly, and that’s where we’ve seen, you know, historically, actually a lot of institutions. Our debenture is one of the advantages of them as well was that they were free trading, so we actually saw institutions that didn’t participate in one of our previous financings build a position in the company through those debentures, so now they’re in a position where they convert those to equity.

James West:   You bet. The most recent financials of Canopy and Aurora, the two largest Canadian ones, arguably, demonstrated that they had achieved 50 percent of all the marijuana sold in the Canadian system. From Organigram’s perspective, how do you attack that to sort of crowbar off more market share for Organigram, especially when you’ve got such strong brands across medical, recreational and organic categories?

Greg Engel:   Well, I think when you look at – so one of the things we saw in those, you know, those results from those companies was, you know, two key things I would highlight: one is that, you know, it was a bit surprising to me, based on kind of some of the projections they’d given to the market, that their level of production in that quarter that they reported was actually lower than our production. So we were actually producing more cannabis in the quarter that was reported than our last quarter that was reported. So even though in some cases they’ve got millions of square feet of, you know, greenhouse, they’re not necessarily producing the volume that they need to, to meet the market demand.

And we’ve heard that there are a number of companies that are out there that are actually purchasing product wholesale from other, smaller companies to try and meet up with their demand. So that’s not a sustainable, cost-effective model. So, you know, our approach of continuing to expand in our facility, building our brands ourselves, with, arguably, as we talked about last time I was on, you know, the lowest cost of production in the industry, is one that’s sustainable to help us build our brand.

So you know, going into Quebec now, that we just announced yesterday, makes us, along with Aphria and Canopy, the only three national players that are in all 10 provinces. So giving access to all Canadians to our brands, I think, has been critical; and we’ve been very selective as we’ve added new provinces. So bringing in, you know, British Columbia and now, most recently, Quebec, we’ve done that at a time frame when we were in a position to begin to look to start to supply them.

And so, you know, we’ve been very thoughtful in making sure that we supply the provinces that we go into, and that we’re increasing. And we did announce at the end of our last quarter, you know, we had a significant backlog in packaging. Our issue wasn’t production. So at the end of our last quarter, we had $91 million worth of product; you know, 38 million of that was product for extraction, which we’re working with Valens GroWorks now to extract. But the remaining product, we’ve been moving through to get out into the market.

So we did give guidance that in this current quarter that finishes up tomorrow, we’ll be at least double our previous quarter. So at a minimum, we’ll be at $25 million, and we continue to kind of increase. We’re now at 24/7 packaging and pre-rolls to kind of meet that consumer demand.

James West:   Sure. So the, commanding half of the demand on the part of the two biggest incumbents is probably a temporary phenomenon, is what you’re saying.

Greg Engel:   Well, I think we, you know, again, we’re in a really strong position to supply the market, right? I mean, we have consistent yields, batch after batch; we have low cost of production. We’ve worked through our bottleneck on packaging, so our ability is to supply, and as I said, you know, arguably in the last quarter the three companies presented, we had more product produced in that quarter than either of those two companies. Which again, was surprising to me, you know, based on some of the projections they previously or guidance had given.

I know you’ve been to their facilities, but I mean, you know, surprising when you’re talking about millions of square feet of greenhouse, to not be able to kind of come up with the production numbers that they’ve previously outlined.

James West:   Right, right. I’m assuming, having been a bit of an agronomist myself in this sector from long ago, that, you know, actually getting a crop to follow through right from seedling to full harvest in a large-scale environment like that is extremely difficult with a plant like cannabis, which lends itself so readily to so many pests and pathogens. Do you think that these companies – we know that there’s been a number of crop failures or incomplete crops; certainly anecdotally we’re hearing that from former LPs from a lot of the LPs. Is that a persistent problem that is representative of growing pains in the industry, or is that a persistent problem that’s based on the unfortunate reality that growing cannabis in one large space is too susceptible to pathogens and to pests?

Greg Engel:   Yeah, I think – when I look back at, so, you know, I joined Organigram two years ago now, and at the time I had been in the industry for a couple of years at that time, and we made a decision to go with expanding indoor production, right? Take our proven, 3-level growing technology, improve what we’re doing, and it’s a kind of process of continuous improvement. And we did that when the majority, and really most other players, were going with large greenhouses as their expansion.

The premise for us was based on improving quality, again, and that’s the key in the environment an indoor producer has over a large greenhouse, is that we have a consistent environment. We can control that environment; we also limit, you know, the size and capacity of any individual room. So if you do have a challenge, then it’s limited in scope.

And that’s proven out not only in terms of our consistent ability to produce, you know, a premium, high-quality product, but secondly in terms of our cost, right? We didn’t do that necessarily to try to reduce our costs, but as our yields have grown so dramatically, and you’ve seen, you know, flowers this big in our facility –

James West:   Biggest one I’ve ever held in my life.

Greg Engel:   Yeah, and that’s part of when people do the virtual reality tour they’ll be able to see some of the sizes of the flowers that we’re growing, and you know, that’s not necessarily possible in the greenhouse environment, because you can’t control the environment. And I think for us, that’s a huge advantage in terms of having that consistent supply, but also, it’s reduced our costs. I mean, a $0.56 cash cost in our last quarter, arguably half of where anybody else is, you know, at a minimum; others have been much, much higher than that.

James West:   Sure. How does the future look for advertising for cannabis? One of the main things that strikes me as extremely disadvantageous to LPs, especially relative to the alcohol industry, is how constricted you are from any form of advertising or differentiation in the media outside of earned media, so to speak, to, you know, to really communicate the differences in your product and your approach. Is that constrictive environment going to ease up as this industry matures? Or is that something that you think we’re just going to have to live with, and is just always going to be a challenge for LPs?

Greg Engel:   I have two perspectives on that. One is that we’ve been very focused on the whole in-store experience, so making sure that when – and again, that’s a challenge in Ontario today without retail, but you know, in the rest of the country, where retail is growing and the number of stores continues to increase, or in Atlantic Canada where there’s a set number, what we’re seeing is that we’ve invested heavily in digital and in-store materials, point of sale, and training staff, right, so the staff understand your product. And I think that’s critical so they can convey, you know, the features and benefits of your product over others.

So that’s a critical aspect today. I think as we move into kind of cannabis launch 2.0 this fall, when we have derivative products, edibles, vaporizable products, there has to be some loosening around some of the education aspects. People want to understand the effect, so you know, if you have, you know, an edible that’s going to have a 60-90 minute effect until you have an onset of action, versus some of the formulations we’ve developed where potentially we have, you know, a beverage that is a 10 to 15 minute onset, you’ve got to be able to communicate that and differentiate that.

And so we may have a lower cannabinoid number in terms of the number of milligrams versus in our product, but the onset of action is faster, and there’s shorter duration. So that’s going to be critical, and I know from attending, you know, one of the round table sessions in the consultation, I think Health Canada is aware of that. It’s going to be important for companies to be able to convey that information to consumers to be able to understand what to expect, and you know, again, I’m optimistic that, the second point would be that we’ll see an evolution in kind of the ability to brand and communicate, right? I mean, you know, Organigram is focused on building brands: you know, Edison Cannabis Company, ANKR Organics, our reserve line on the Edison. But we’ve got to be able to interact more with the consumer, right? And I think as the consumer – and that’s the only way we’re going to continue to push out the illicit market at the end of the day.

I’m optimistic that it’ll evolve and Health Canada will kind of loosen up regulations over time on that.

James West:   You bet. Okay, so, rest of 2019: what are the big events on the calendar for Organigram that investors can keep an eye out for?

Greg Engel:   Well I think, you know, again, our Q2 2019 ends tomorrow, so we’ll be reporting that in mid-April, and you know, again, we’ve given guidance already in terms of what to expect in terms of revenue. And I think, you know, we’re very focused. We’ve talked before about our partnership with Hyasynth, and Hyasynth continues to evolve and work towards, you know, commercial production in 2020 of, you know, biosynthetic cannabinoids.

I think the other is, we haven’t made any announcement yet on our plans for the edibles and derivatives market, so you’ll start to see that in the not-too-distant future from us in terms of what cannabis launch 2.0 looks like. And you know, we’ve got a great team that’s got a ton of experience from the food and beverage area, so we’ve got a lot of experience in – you know, we’ve already announced we’re doing development work on chocolates because of our past experience with Cannabis Smartest Kitchen, but you’ll continue to see more announcements and kind of what our 2.0 products look like.

James West:   You bet. All right, Greg, that’s a long discussion. We could probably go on forever, but let’s leave it there, and we’ll leave some topic matter for the next time. Thanks for joining me today.

Greg Engel:   Awesome. Thanks again, James.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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