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Organigram swung to a net loss in its second quarter compared to the same three-month period last year, though revenue for the New Brunswick-based company’s first full quarter selling recreational cannabis was ahead of Bay Street’s expectations. After reviewing Organigram’s financials and its 55-page management discussion and analysis (MD&A) document, here are the five key takeaways from Organigram’s results below, complete with commentary from CEO Greg Engel.

Packaging problems persist

The company says it has plenty of dried cannabis flower and oils to meet demand, but notes it “has continued to be constrained in its ability to package and extract cannabis and apply excise stamps to meet all orders in a timely manner.” Those issues are, for the most part, in the past, according to Mr. Engel. Automated packaging equipment Organigram purchased last year was not running at full capacity until late December, he said, noting “based on where we are today, [packaging] will not be as much of a backlog going forward.”

Pre-roll power

Demand from cannabis consumers to avoid having to roll their own joints proved to be far stronger than Mr. Engel was expecting, he said, noting pre-rolls continue to make up roughly 10 per cent of recreational cannabis revenue in the U.S. state of Colorado more than five years after legalization took effect there. Noting the company is “proud” to be national leader in pre-roll production, Organigram disclosed it is produced more than 2.6 million pre-rolls since Oct. 17, 2018, and is currently rolling at a rate of more than 40,000 a day. While the margins on pre-rolls are lower than for dried flower, Mr. Engel noted it is a “great way for consumers to try our products [and] gain exposure to our brand.” The MD&A also noted the company’s “prototype, bespoke automated pre-roll machine has undergone several modifications and upgrades to improve efficiency and accuracy and is now more fully operational.”

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Per-gram costs climb

Organigram spent roughly $0.85 to produce a typical gram of dried flower in the quarter, up from $0.74 in the prior quarter. Those were “primarily related to share-based compensation and additional staffing added,” the company said. “Not only did we go into 24/7 production mode during the quarter with lots of overtime,” Mr. Engel said, “we also had temporary workers and now we no longer have temp workers. We have full staffing now around functions like quality assurance and maintenance, so it was a scale-up period but things are running much more smoothly now.” The company is also in the process of bringing an expansion online that will nearly double its total production capacity to roughly 62,000 kilograms of dried flower per year, Mr. Engel said, and has begun the cost-intensive hiring and training process for that initiative as well.

Better beverages

Towards the end of its MD&A, Organigram claims to have “developed a shelf-stable, water-soluble and tasteless cannabinoid nano-emulsion formulation that will provide an initial onset within 10 to 15 minutes if used in a beverage.” If true, the development would represent a solution to one of the biggest problems with infusing beverages with cannabis extracts: ensuring consumers feel the effects relatively soon after consumption. While the document stresses the company is “not necessarily planning to launch its own” beverages and is “actively seeking a strategic partner” on that front, Mr. Engel said despite having “had discussions in the past and continuing to have discussions now, a lot of these companies are still deciding how they are going to enter the market.” That is what is still the deciding factor, Mr. Engel said, “will they enter in a Canadian partnership? Will they enter with CBD-only in the U.S.? That is very much to be determined.” Organigram is also still waiting for an R&D license that will actually allow them to test and confirm their findings, though Mr. Engel said that should arrive within the next two or three months, before cannabis-infused foods and drinks becoming legal in Canada on or before Oct. 17, 2019.

Gross-margin squeeze

Organigram managed to pull off a 71 per cent adjusted gross margin in the first quarter of its 2019 fiscal year, but the figure declined to 60 per cent in its latest quarter. Pre-rolls, Mr. Engel said, as they rise in both popularity among consumers and as a proportion of Organigram’s sales, provide some of the explanation. “Pre-rolls, from a labour cost and from a packaging cost certainly did have an impact in terms of adjusted gross margin [since] the packaging costs, because they are single units, has an overall higher cost for sure,” he said. Organigram is looking at the pre-roll side of its business more as a marketing tool, Mr. Engel added, “since the more product you can get into customers’ hands, not that we are selling it as a loss leader or anything, but we are willing to take a smaller margin on it because it is getting product into consumers hands to expose them to your brand.”

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