Organigram Holdings Inc (CVE:OGI) (OTCMKTS:OGRMF) has held up nicely in spite of a a product recall and profit taking in the cannabis sector. The product recall was initially bad news for the company, but the company handled it in the same way that Johnson & Johnson handled the Tylenol recall in the 1980s. Organigram’s aggressive response strengthened the company’s brand in the eyes of its customers and this bodes well for shareholders. Taking a closer look, it’s easy to see why Organigram remains a top cannabis pick for 2017 and beyond.
The latest results showed positive cash flow and significant year over year growth in sales of both dried flower and cannabis oils. For the quarter ending November 2016, Organigram generated over C$2.23 million in sales for the quarter on 260,291 grams of dried bud and 77,200 ml of cannabis oil sold. After adjusting for the change in fair value of inventory and biological assets, gross margin for the quarter was more than 65% and the Company generated adjusted EBITDA of $272,839 and cash flow of $510,015.
Organigram said that it is working closely with Health Canada to determine the origin of the non-permitted ingredients. Since the voluntary product recall, Organigram has successfully harvested and tested new batches of organic as well as non-organic medical cannabis and has maintained inventory in its online store to ensure Organigram patients do not go without medication. As a result of the recall, the unrealized fair value adjustment of inventory includes a loss of C$499,857 for the three-month period ended November 30, 2016 and there may be further adjustments to the unrealized fair value of biological assets and inventory.
The Company has seen great progress with its phase 3 expansion, which is now expected to be completed and operational by December. The expansion infrastructure, which will be built and operated in accordance with the Company’s recently supplemented quality assurance and operating procedures, is expected to increase the Company’s run-rate production capacity to 17,000 kg per year by the early 2018. COO Larry Rogers said:
“Our onsite expansion project positions Organigram to have one of the highest production levels in the industry at a time when we anticipate a very significant increase in consumer demand associated with recreational legalization. There are no additional licenses required, there is no additional capital required for the expansion, and we don’t have additional locations to manage. Our business remains well capitalized, our expansion initiatives are ongoing, and our optimism about the future for Organigram remains absolute.”
Organigram has enhanced its testing protocol beyond the required regulatory testing to ensure that all products currently being sold on its store, and all products sold in the future, will be tested for an expanded quantity of possible contaminants, including Bifenazate and Myclobutanil. Since the recall dates, Organigram has grown, harvested and tested numerous lots of medical marijuana, and all have passed the additional testing protocols. The Company has identified seven key initiatives as part of the process to ensure this issue can not reoccur at Organigram. These initiatives include steps to test each input received from outside suppliers, a comprehensive screening process for existing and new suppliers, pesticide testing of every lot of final product prior to packaging, installation of cameras within mixing areas and a full training program for all employees.
Organigram has also added Michel Robichaud to its Senior Management Team as Director of Edibles & Extraction. He will lead the design, build and implementation stages of a new state-of-the-art facility for allowable edible products under what is currently being established as Canada’s recreational framework for Cannabis. CEO Denis Arsenault said:
“This positon is a critical strategic pillar as it leads a team working closely with TGS Colorado, our partner in extract development. Michel’s experience and professionalism will help us ensure competitive advantage, allowing us to leverage the experience of TGS and get to market faster. Our recent land purchase and focus on this opportunity communicates a clear strategy on extract and edible manufacturing as it relates to the legalisation of recreational marijuana. We’re ecstatic about Mr. Robichaud joining the team and feel it’s one more step in ensuring Organigram does the groundwork now to ensure full preparedness for the recreational marketplace.”
Currently trading with a market cap of C$262 million, Organigram remains one of the top cannabis plays for investors. In December, the company priced 11,339,000 common shares at C$3.55 per Share, for aggregate gross proceeds of $40,253,450. This positions the company to fund its expansion plans and benefit from the legalization of recreational marijuana in Canada this year. We also believe that Organigram could be a takeover target in the same way that Mettrum was bought by Canopy Growth Corp. We expect M&A activity to pick up this year and Organigram is one name that should be on every investor and acquirer’s radar.
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Disclosure: We have no position in Organigram Holdings Inc and have not been compensated for this article.