MMPR Producer Health Check, Organigram

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OrganiGram

How successful are current licensed producers under Canada’s Medical Marijuana Program? Health Canada seems to have a growing concern under its Marijuana programs and how viable these companies actually are. While it is not my intention to report negative findings of any particular company, I believe it’s important to understand or at least shed some light on Health Canada’s robust licensed producers.

OgraniGram is a licensed producer under the MMPR program. OGI has a market cap of roughly 25.2 million. Year-to-date the stock is trading lower from a high of $.63 price per share to $.48 price per share as of today. While the trading action of the stock is pretty dismal from an investor standpoint with a loss of -24.60% year-to-date.

For many investors who are searching for a stock to invest in the emerging Medical Marijuana industry, they often choose those that are already licensed by the Canadian government, giving many prospective buyers a sense of security and reliability.

As of April 13th, 2015 OgraniGram is allowed to produce and sell up to 600kg of medical marijauna within the next 12 months. This is inherently promising news for OGI, as it allows the company to sell 1,322 pounds of medical marijauna for a potential revenue  of  $4,197,543.70 yearly (given it can sell every pound of MMJ that it is legally allowed to grow).

Unfortunately, harsher realities follow OGI’s optimism. Actual revenues as of February 28th generated sales of $81,093 for the six month period of August 31st in 2014 to 2015. Taking a closer look at the company’s revenues reveals $13,515.50 product was sold monthly; at this rate of sales the company looks to make approximately $162,186 by year end. The company has serious revenue problems in the face of its growing expenses. Year-to-Date the company has total expenses of $1,604,256 for the same period ending last year. Likewise, the company’s total expenses yielded an overall net loss (1,453,475) for the year.

This is a very common story for many companies that are publicly traded under the MMPR program. Most of these company’s are not generating the revenue needed to monetize and profit from the business operations.  In fact, investors should note that  all MMPR licensed companies have growing operating expenses and very limited revenues. (NEED A RANGE HERE)

I think that it’s important as well to get a clearer picture of the company’s direction in an unbiased fashion. One way that investors can obtain this picture is from Horizontal analysis. In an attempt to reveal the underlying factors, lets take a look at the company’s balance sheet.

Current Assets February 28th, 2015 August 31st, 2014 Change Percent Change
Cash 724,000 5,726,674 (5,002,674) -87.35%
Short Term Investments 1,500,000 1,500,000 100%
Accounts Receivable 469,013 245,201 223,812 91.27%
Biological Assets 564,787 115,768 449,019 387.86%
Inventories 110,734 36,152 74,582 206.30%
Other Current Assets 166,558 64,298 102,260 159.04%
Property, plant and equipment 8,511,234 2,477,486 6,033,748 243.54%
Total Current Assets 12,046,326 8,665,579 3,380,747 39.01%
Liabilities Current Liabilities
Accounts payable and accrued liabilities 2,001,800 1,091,956 909,844 83.32%
Current portion of long term debt 193,500 193,500 100%
Long term Debt
Secured Indebtedness 2,254,134 2,254,134 100%
Shareholders’ Equity
Share capital 16,753,777 15,477,518 1,276,259 8.24%
Reserve for options and warrants 720,286 530,923 189,363 35.66%
Accumulated deficit (9,877,171) (8,434,818) (1,442,353) 17.09%
Total Liabilities and stockholders’ equity 12,046,326 8,665,579 3,380,747 39.01%

While we could go into great detail with horizontal analysis, there are several notable changes within the company’s balance sheets which I’ll touch upon. For example the company has used up a great deal of its cash assets by 87.35%. In many instances when a company starts burning through cash, investors should show some concern, but the company actually has made some remarkable headway. Another notable positive change from the company has been its accounts receivable which has increased by 91.27%, which is what customers or debtors owe to the company. This is really a significant increase.

With the company being approved to sell considerably more product, we would expect that its biological assets would increase as well. This is exactly the case here. The company’s biological assets had a massive increase by 387.86% This is very notable in my opinion because it shows the company is going to have a considerable amount more potential product to sell to its customer base. This is backed up by the fact that its inventories have also increased by 206.30%. Property, plant and equipment also increased by a notable amount by 243.54% While overall the company’s total current assets increased by 39.01% which is pretty notable for a start up company in an emerging MMJ industry.

OGI has essentially been able to increase its production capacity and business assets, but it has come at a cost. We all know that it costs money to make money. In the case of OGI it has cost a good deal of money. The company has racked up its accounts payable and accrued liabilities by 83.32%. It has also secured an interesting indebtedness at the expense of increasing its liability positions by 100% at the cost of $2,254,134. OGI accrued many of these expenses to finish the construction of several grow rooms for an inspection by Health Canada.

Shareholders’ in many startups tend to be on the receiving end of a company’s financing activities through the sell and further dilution of its shareholder value. OGI is no different in this case unfortunately. A potential cost of investment that should be considered with any startup. Much of their financing activities have come through dilution. The company increased its share capital by 8.24% and also increased its accumulated deficit by 17.09%. When it’s all said and done, OGI had large total liabilities and stockholders’ equity increases by a pretty large amount (39.01%). This increases risk to debtors and shareholders.

In conclusion, OrganiGram seems poised to make all the right moves into profitability, and has been aggressive in expanding capabilities, although  there is a major disconnect between revenues, what they are allowed to sell, and their increasing long term liabilities. One of the issues OGI may have going forward is finding the customer base to support its allowable MMJ sales. This also seems to be a common theme for most of the MMPR producers in Health Canada’s program at the moment.

Taylor Christofferson

 

Disclaimer: This article does not constitute a recommendation to buy or sell securities. If you have any doubts as to the merits of an investment, you should seek advice from an independent financial adviser. Investment in the securities of smaller companies can involve greater risk than is generally associated with investment in larger, more established companies that can result in significant capital losses that may have a detrimental effect on the value of the fund. You should not buy securities unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.