Organigram Holdings Inc. (OGRMF) reports impressive growth for 2018 in advance of adult recreational sales results

Organigram Holdings Inc. (TSX VENTURE: OGI) (OGRMF), the parent company of Organigram Inc. (the “Company” or “Organigram”), a leading licensed producer of cannabis, is pleased to announce its 2018 fiscal year and fourth quarter results. The Company’s fiscal year-end and fourth quarter encompasses operations up to and including August 31, 2018 and as a result, does not include adult-use recreational cannabis revenue.

“The importance of 2018 can not be overstated for Organigram as well as the industry,” said Greg Engel, the Company’s Chief Executive Officer. “We are incredibly proud of our ability to meet the challenges of scaling our business in preparation for the adult recreational use market. We are pleased with our progress to date and believe that we have performed well in a highly competitive space while always maintaining a sustainable cost structure. Ultimately, it is our view that our Moncton Campus will be seen as a crown jewel in the industry as it is able to produce consistent, high-quality indoor grown product at scale to support our brands with the lowest dried flower cultivation costs reported to date in Canada.”

Select Highlights for Fiscal 2018

The Company is proud to report record net sales of $12.4 million for the 2018 fiscal year (up 131% from $5.4 million in 2017).

Gross margin increased to $52.5 million in 2018 from $(3.3) million in 2017. Excluding fair value adjustments on biological assets those figures would be $6.5 million and $(1.9) million, respectively.

Registered medical patients increased to 15,730 in 2018 from 7,404 in 2017 or 112%.

Reported net income of $20.5 million in 2018 up from $(10.9) million in 2017.

Outlook

Fiscal 2019 sales will be dominated by adult recreational use revenue and the Company estimates that Q1, 2019 sales will exceed that of the full year for fiscal 2018, despite only a portion of Q1, 2019 including adult recreational use market sales. Further, the Company expects that Q2, 2019 sales will exceed Q1, 2019 sales based on purchase orders received to date.

The Company reported biological assets and inventories of $19.9 million and $45.0 million, respectively, as of August 31, 2018. The Company believes that these balance sheet categories are an important indicator of a licensed producer’s ability to service its medical and adult recreational customer.

The Company continues to add resources to refine and streamline its packaging, excise stamp application and logistics processes to draw down its dried flower and oil inventories to meet ongoing demand.

Based on media coverage and physical presence in stores, the Company is confident that it currently has the leading market share position in the Maritime provinces of New Brunswick, Nova Scotia and Prince Edward Island with a strong presence in Alberta, Manitoba, Newfoundland and Ontario.

Operational Highlights (also includes events after year-end)

Sales and Marketing

• The Company has signed adult-use recreational supply deals or listing agreements with customers in nine out of the ten Canadian provinces (Quebec is the exception) and has already shipped to all nine of those provinces. Quebec remains a target for 2019.
• Organigram has received positive feedback from its jurisdictional partners on fill rates as it has been proactive in setting and managing expectations as a reflection of its focus on long-term relationship building. Further to this, the Company has hired a national sales force from Tier 1 organizations to detail and educate retail staff on its brands.
• The Company has successfully launched its Edison Cannabis Company brand focused on the four pillars of quality, sophistication, creativity and innovation as well as the Edison Reserve line which features hand-manicured and craft-cured top flower. The Company has also launched the Trailblazer brand, as a celebration of the industry’s history for value-focused consumers. The Company anticipates launching its ANKR Organics and Trailer Park Buds lines in calendar 2019.
• In October 2018, the Company was one of few licensed producers to successfully enter the adult recreational use market with a full line of compliant products including dried and milled flower, cannabis oil and pre-rolls.

Cultivation and Other Operations

• Completion of Phase 2 and Phase 3 expansions at the Moncton Campus bring the total available grow rooms to 52 (13 smaller grow rooms from Phase 1 and 39 larger rooms from Phases 2 and 3). When fully utilized, these grow-rooms have a targeted production capacity of 36,000 kg/yr of dried flower (or equivalent) production.
• Significant improvements in cash and all-in “cost of cultivation” from beginning of the year to end of the year. “Cost of cultivation” is a non-IFRS measurement that the Company tracks to assess the cost of the raw material that is ultimately sold or before it is extracted. “Costs of cultivation” includes direct labour, direct materials, and allocated overhead related to cultivation as well as non-cash measures such as depreciation and stock option compensation related to the operations department. Readers should be cautioned that this figure excludes packaging, shipping and SG&A and is not necessarily comparable between licensed producers. For internal purposes, the Company estimates a blended packaging estimate of $0.46 per dried flower gram equivalent and a blended shipping estimate of $0.19 per dried flower gram equivalent. These figures are estimates only.
• “Cost of cultivation” is tracked as follows throughout the year:

• On October 24, 2018 the Company began utilizing power from a new 40 megawatt substation which provides the Company with a cleaner electrical supply, improves the Company’s electrical consumption efficiency and lowers the Company’s maintenance cost on equipment.
• Phase 4 construction at the Moncton Campus began in July 2018. Phase 4 itself will be completed in stages: 4A, 4B and 4C. Phase 4A is expected to come online in April 2019 with 31 grow rooms, 4B in August 2019 with 32 grow rooms and 4C in October 2019 with 29 grow rooms bringing the Company’s target production capacity to 62,000 kg/yr, 89,000 kg/yr and 113,000 kg/yr respectively.

Other Milestones and Strategic Initiatives

• First International Medical Shipments – on July 6, 2018 and on September 24, 2018the Company fulfilled its first shipments of dried flower and cannabis oil respectively to an Australian medical cannabis enterprise.
• Investment in Hyasynth – on September 13, 2018 the Company entered into a strategic investment in convertible secured debentures of Hyasynth Biologicals Inc., a biotech company based in Montreal and leader in the field of cannabinoid science and biosynthesis. The initial investment of $5 million can increase up to $10 million upon achievement by Hyasynth of certain funding milestones. In addition to the investment, pursuant to an offtake agreement, Organigram has the right to purchase 25% of Hyasynth’s cannabinoid production at a discount. Hyasynth’s patent‐pending enzymes, genetically engineered yeast strains and processes make it possible to produce phytocannabinoids and phytocannabinoid analogues through biosynthesis. To date, Hyasynth has already used its proprietary enzymes and yeast strains to produce CBG, CBD and THC and is currently in the process of scaling up to commercial production for cannabinoids to be used in novel and specialized products, including vaporizable cannabis products and cannabis‐infused beverages, as well as pharmaceutical ingredients for a fraction of the cost of traditional plant‐based production. Hyasynth will continue to develop a comprehensive platform of cannabinoids beyond THC, CBD and CBG for both medical and adult recreational use.
• Investment in Eviana – on October 2, 2018 the Company completed a $5 millioninvestment into Eviana Health Corporation, a CSE listed company with hemp operations in Serbia. Organigram entered into an offtake agreement with Eviana for up to 25% of the CBD production of Eviana for a period of five years at 95% of the wholesale price. Eviana holds certain assets in Serbia relating to the cultivation of industrial hemp plant including but not limited to: 310 metric tonnes of harvested hemp from 2017 to 2018; a 40,000 sq ft processing facility in Mladenovo, Serbia (near Novi Sad); and a 22,000 sq ft. pharma-grade leased facility in Belgrade which houses ethanol and CO2 extraction equipment.
• Investment in Alpha-Cannabis Germany – on October 17, 2018 the Company announced a definitive agreement whereby the Company makes a 1.625 million Euro(approximately $2.44 million CAD) investment in Alpha-Cannabis Germany paid in cash with another 875,000 Euros (approximately $1.35 million CAD) payable on the achievement of certain milestones. As part of the investment and effective upon the closing of the investment, the Company’s wholly‐owned subsidiary, Organigram Inc. will enter into two supply agreements with ACG: one for the supply of cannabidiol isolate from ACG to Organigram Inc., and the other for the supply of dried cannabis flower from Organigram Inc. to ACG. In addition, ACG and Organigram Inc. anticipate entering into an agreement pursuant to which the companies will jointly evaluate and bid on certain licenses to supply medical cannabis to the German market.

Financial Highlights

The following results do not include any of the sales to the adult recreational use market which began in September to fill supply pipelines for adult recreational use launch on October 17, 2018. Those sales will be reflected in the first quarter of fiscal 2019 which includes the three-months ended November 30, 2018.