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Lower-than-expected third-quarter revenues and a surprise net loss from Organigram early Monday failed to dent investor confidence in the licenced cannabis producer.

Shares of the New Brunswick-based LP closed 4.2 per cent higher Monday on the Toronto Stock Exchange. In New York, Organigram’s Nasdaq-listed shares briefly fell as much as 11 per cent in pre-market trading before rapidly recovering to close up 4.6 per cent.

Cannabis stocks were broadly higher Monday after the sector suffered widespread losses last week. However, Organigram also outperformed the Horizons Marijuana Life Sciences Index, an exchange-traded fund (ETF) that seeks to replicate the performance of the North American cannabis industry overall, which gained 1.6 per cent on Monday.

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The company joins other major growers such as Canopy Growth, Cronos Group and Supreme Cannabis in falling below market expectations in their latest financial reports. Unlike the market reaction to results from its peers, however, Organigram investors and analysts seem willing to accept the company’s explanation: lower crop yields in Q3 were “an anomaly” caused by a failed cultivation experiment and the finessing process involved with growing new strains.

According to the company’s management discussion and analysis (MD&A) document, the experiment revolved around harvesting clones (clippings from larger cannabis plants used for replanting) from “later stage” mother plants.

“While initial sample results using this technique increased cost efficiency, the yields were significantly lower than historical results when the process was rolled out on a broader basis,” an excerpt from page 15 of the MD&A explained, adding Organigram “reverted to its proven methodology of creating clones and during Q4 of Fiscal 2019 actual yields have returned to previous levels.”

“During this period, the Company also trialed a number of new strains,” the MD&A said. “The optimization process with these new strains impacted a number of production rooms with lower than projected harvest results as well. The Company believes it has now optimized the conditions for these new strains and has consistently seen production levels return to management’s targeted yields.”

Organigram now believes it “has identified what it views as an optimal balance of high yields and high cannabinoid content,” the document said.

Revenue of less than $25-million for the three-month period was below average analyst expectations of $30-million, though the figure still represented dramatic growth from the $3.4-million in revenue Organigram generated during the same time last year. The net loss of $0.07 per share compared to a net profit of $0.02 per share in Q3 of 2018 and analyst expectations of three cents in per-share profits for its latest quarter.

Eight Capital analyst Graeme Kreindler dismissed the results as “an isolated event” in a midday Monday note to clients. Douglas Miehm of RBC Securities was more critical, telling clients “this quarter’s results reaffirm our view that OGI could face difficulties in delivering strong [revenue] and margin growth over the next quarter or two.”

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Despite those near-term concerns, Mr. Miehn nonetheless commended Organigram as being “one of the best-managed LPs in Canada,” adding he “would become more positive on the shares if margins bounce considerably.” Gross Margins shrank to 50 per cent in Organigram’s third quarter, compared to 60 per cent in the previous quarter and analyst expectations for margins to remain largely the same.

Margins should bounce back along with crop yields in Q4, the company said

Paradigm Capital managing director Corey Hammill was similarly unfazed in his own Monday note to clients.

“The market never likes a miss,” he said, “[but] we continue to believe that in the evolving cannabis industry, Organigram has the right combination of size, scope and scale to be a long-term winner.”


The Globe and Mail

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