Organigram Holdings Inc (TSE:OGI) Future Growth into Edible and Derivative Cannabis Market

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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.

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.

Organigram Holdings Inc (TSE:OGI) (NASDAQ:OGI) CEO Greg Engel joins Midas Letter to discuss the company’s strong fundamentals as the cannabis sector is down over 50 percent.

“We’ve had four quarters now consecutively with positive adjusted EBITDA, and we’re certainly seeing a shift to large institutional funds that are looking at more fundamentals” – Organigram Holdings Inc CEO Greg Engel

The CEO highlights the company’s strong gross margin and balance sheet while outlining their strategic commitment to growth in the edible and derivative-based product market. Organigram are one of four companies with a partnership with PAX; a leading consumer technology brand in the design and development of premium vaporizers for dry flower and concentrates. With concentrates due to become legal in Canada later this year. In terms of edibles, Organigram are focused on high-speed, high-capacity, fully-automated production line of chocolates having invested $15 million in Ganong Bros Limited. The investment has the ability to produce an estimated 4 million kilograms of chocolate cannabis edibles per year. Lastly, the company is focusing on a unique dried powder dissolvable beverage isolate stable for both CBD and THC. The dissolvable powder will allow consumers to add their favourite marijuana molecules to their beverage of choice.

Transcript

James West: I’m joined by Greg Engel, now, CEO of Organigram Holdings. Greg, welcome back.

Greg Engel: Thanks for having me again today, James.

James West: Greg, it’s a market characterized by what we can only term as contraction, I suppose, is the most polite way to describe the cannabis sector now. All stocks are on sale; the sector is down by over 50 percent. How does Organigram view this in terms of its future strategy and plans?

Greg Engel: Yeah, I think, you know, what we’re seeing is that the investor base is shifting, right? And we’ve been predicting this for a while, certainly, that investors are focused more on fundamentals, right? So, for ourselves, you know, we’ve had four quarters now consecutively with positive adjusted EBITDA, and we’re certainly seeing a shift to large institutional funds that are looking at more fundamentals that you would typically look at in, kind of, existing industries, right?

So you know, we’re really positive about this shift, actually, in terms of, you know, what the investor base is looking like and moving towards, as well, at the same time.

James West: Is that because Organigram is soon going to display the fundamentals that attract institutional investors?

Greg Engel: Well, we believe we have been. I mean, again, you know, having four quarters in a row of positive adjusted EBITDA, having a strong gross margin, you know, having a very strong balance sheet as well in terms of – and showing discipline in terms of how we manage our balance sheet, right? So you know, at the end of our last quarter, Q3, we had $88 million on the balance sheet, but we’ve accessed additional capital through more traditional debt, right? So building a more traditional balance sheet, you know, in the syndicate led by BMO, to allow us to access, you know, at this point, up to $140 million in debt. But we can increase that up to 170 as our facility is fully built out.

So I think, again, that’s a more traditional balance sheet that traditional industries would have versus, you know, simply doing equity financing rounds that do have dilutive effects on kind of an ongoing basis, which is what we had seen historically in the cannabis space.

James West: Sure. In your last financials, I noticed that your average sale cost per gram had gone down, while your costs had not really decreased in that, sort of coincidentally. Is that a trend that investors should be concerned about?

Greg Engel: No, I think, so you know, I think it’s very dependent upon the product mix at the time, right? So you know, when we look at different products and we, you know, we’ve seen a lot of response to our trailblazer brand, which is kind of our lower, mid-range THC product, especially in provinces like Alberta, which has a lower average selling price. So I think, you know, a shift away from oils – I mean, we’ve seen other companies – we actually, very early, if we go back to kind of the first few months after the launch of the rec space, we saw that, other than CBD oils, there wasn’t really much demand for the current forms of, you know, THC-based oils in the rec space.

So we made a decision very early and we avoided those. Those are typically higher margin kind of products, average selling price on a per-gram equivalent. So I think, you know, it is dependent upon the product load in the quarter, and you know, there’s a bit of lumpiness right now in terms of which products you’re selling in which quarter.

One thing we did do, and again, I think it’s one of the advantages we have of being in all 10 provinces in Canada and having close relationships with both the public and private retailers is, we’ve been able to adapt and adjust, kind of, to our high-demand strains. And I mean, the ability of getting a lot of product out there and getting response is, you know, products like our Rio Bravo, which was Guavanache (phon) in our medical space, which won the award for top sativa in 2017, we’ve increased our production of that dramatically, because we know it’s in really high demand.

And adjusting to areas like that, where you know you can shift to higher-demand products, I think, is really important for the future.

James West: Do you think that the onset of edibles is going to represent a boost to the balance sheet for all cannabis companies who have a product to offer, and what is Organigram’s?

Greg Engel: Yeah. No, I think we’re certainly, I think, you know, we’ve certainly seen two things have an effect on the growth of the industry. One is kind of the slower-than-expected rollout of retail in Ontario in particular, but also Quebec, to a lesser extent. And we know that retail stores matter in terms of, kind of, you know, the consumer experience and purchasing. And Alberta, you know, the market there is booming; there are over 250 retail stores.

And I think product mix is the second thing, right? So, having the edibles and derivative-based products. So our focus is, you know, on derivative based, we’ve got a range of different vape pens; I think we’ve got, you know, we’re one of four companies with a deal with PAX on the air, which is a leading kind of closed-loop system. We’ve got our feather disposable pen, which is, you know, which is here, which is, you know, having this full range of products is, you know, is a great technology. 

And I think, and then we’ve got a value product with a 510 cartridge, and I think the value with transferring the company we’re getting from is, we know this unit is, it doesn’t leak, it doesn’t fail; it’s lead-free. I mean, we’ve seen some data out of California that talks about kind of heavy metals in some of the low value products out of China.

I think for edibles, you know, we’ve got, we focused on chocolates, because we have a team that has a proven experience from Ganong and other companies, and we know that we can produce a premium chocolate. And that’s one of the things we’re going after, that mainstream, premium line. And you can differentiate chocolates, and we know they’re one of the two leading edibles.

We’ve also got something very unique in a dried powder dissolvable beverage form. So we’ve created, you know, a low molecular weight, water-soluble, thermally and kinetically stable additive for both CBD or THC, and the value of being low molecular weight is that it’s fast-acting, right? So you’re going to see an onset of action in the first 10 to 15 minutes – faster peak, and faster onset. So people can microdose and have multiple beverages, and having this dissolvable powder will allow consumers to choose which beverage they want to use. If they want to put it in a tea, if they want to put it in a non-alcoholic cocktail. If they’re using the CBD, if they want to add it to their Vitamin Water, they can do that.

So I think it’s pretty unique, and we’ve had great response from both the public and private retailers on that product as we’re talking about bringing it to market in the first quarter of next year.

James West: Sure. Does the faster onset and faster peak also equate to a faster offset?

Greg Engel: It does.

James West: Oh, okay.

Greg Engel: So you hit the peak sooner; instead of kind of a long, you know, 60 to 90 minute onset and kind of a four to five hour kind of offset, you know, the faster onset in the first ten minutes and then the duration of the effect is kind of 90 minutes to two hours. So what we know is that, you know, if you’re a consumer and you’re microdosing with the dissolvable powder, you can choose to have three, four beverages over an evening at a social event or wherever, and you’re able to keep yourself at a moderate level versus, you know, some of the stories we’ve heard with some of the beverages or edibles out of the US, where people, you know, wait 60, 90 minutes, have this effect which is more than they expected. And this allows this microdosing concept, so it’s a great product. We’re really excited about it.

James West: Yes, I’ve seen the effect of too many edibles on individuals who presumed that they can handle any quantity of THC. Well, so that’s great. I’m curious as to what level are we seeing vape products displace, and oils displace, premium dried flower since the onset of regulations in the medical space? Because that’s a longer time frame to measure.

Greg Engel: Yeah, I mean, we still – like, when we look at medical, I mean, we’re certainly planning to launch some of our vape products. And if we look in US states like Colorado or California where they’ve had kind of existing experience, you know, before, we expect, you know, kind of – because a vape pen is very much like a metered dose inhaler, right? We’ve been optimistically hoped that we could bring vape pens to market earlier for medical patients, but we’re not able to do that. So it won’t be till December. But we certainly have seen that be a big transition.

We actually think our dissolvable powder has a medical application as well, right, for consumers? Because they can, you know, they know, for example – I mean, one of the values of dried flower, for example, as a medical patient, if you’re looking for pain relief is, you know, a fast onset of action. For, you know, for an edible product, or, you know, the oral oils that are available today, it’s got a longer onset of action. So now, you can have an immediate effect.

And what we may see is people kind of using, you know, either a vape pen in combination with another form that has a longer duration, and mixing the two. If I need an immediate pain effect but I want sustainability, I’ll use a combination. So, it’s exciting.

James West: That is exciting. I’m curious as to the, has the powder been approved by Health Canada?

Greg Engel: So basically, the way the system works is, you know, again, we’re an existing oil license, so we made an application for submission to be able to produce these products, and as long as all of the ingredients in it are approved as kind of, they’re a food ingredient, then everything is approved. You can’t modify the THC in terms of coming up with a hydroxy form or something, but if it has THC or CBD or other minor cannabinoids that are found in the cannabis plant, and as long as all the ingredients that go into it are, you know, approved ingredients, then the product is approved de facto.

James West: Sure. Okay, and finally, I’m curious about – and this is kind of not specifically Organigram-related, but you would probably know better than anybody – you go to London, England, and every drug store has a wall full of CBD products that have been approved as a food ingredient or additive, or whatever. But there’s CBD everywhere. Clearly, a lucrative industry.

In Canada we don’t have that, because CBD has, strangely enough, not yet found itself into a category where it can be made broadly available. How soon till that happens?

Greg Engel: Yeah, so there’s a consultation process happening right now with Health Canada, so on the consumer health products side, they’re looking to kind of advance the regulations to allow broader CBD. So we’re very focused on that as a future market opportunity. We’ve got an agreement with a company called The 1812 that is producing high-CBD hemp, and we purchased product from them for this year, and we’re selling CBD from hemp currently in the market. But we’ve increased kind of the potential to purchase up to 60,000 kilos of processed flower for next year from their harvests this year.

So I think we’re going to see the regulations evolve on CBD. We do expect, as you said, when you go to Europe, you go to, you know, if you’re in Austria, if you’re in England, you see it in, you know, pharmacy chains, in health food stores. And I think what still has to happen in Europe, which we’re fortunate here in Canada, is that tighter regulations around production and processing, and making sure that the product that’s there – because we saw, you know, MJBiz, for example, published an article that, you know, did some testing of the CBD products in various European countries and found there was a real mix of consistency in terms of the label versus what’s actually in it.

So we know in Canada that’s going to be a key part of the regulations. But yeah, optimistically we expect in 2020 to have a much broader CBD market where you will be able to buy it in pharmacies and possibly grocery and mass-merchandise.

James West: Okay, and that should give a real bump to the earnings of all Canadian LPs, shouldn’t it?

Greg Engel: The ones that are focused on CBD certainly, and certainly, and if we look at, you know, how do we evolve the technologies, like, you know, the work we’ve done on liquids and soluble powders and even, you know, some of the other things that we’re working on right now on other food products, certainly we can bring those CBD products to market in a more fulsome expanded manner. So, exciting times for the industry.

James West: Great. Greg, that’s a great contribution as usual. Thanks very much for joining me today.

Greg Engel: Great. Nice to see you 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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