Should You Buy OGI?

Organigram Holdings Inc. (NASDAQ: OGI) (TSX: OGI), the parent company of Organigram Inc. a leading licensed producer of cannabis, announced its results for the second quarter ended February 28, 2021 (“Q2 2021”).

— Launched 62 new stock-keeping units (SKUs) since July 2020 as part of the Company’s product portfolio revitalization; up to 31 more SKUs expected to launch by the end of Q3 2021 — SHRED was the #1 most-searched brand on the Ontario Cannabis Store website for the last 5 consecutive months1 and Edison was among the most-searched brands in November 2020, January and February 2021 — On March 11, 2021, announced a product development collaboration with BAT and a strategic investment of $221 million from a BAT subsidiary for 19.9% equity interest in Organigram — On April 1, 2021, repaid all outstanding balances under the credit facility agreement for annual interest savings of $2.7 million2 and has a current balance of $232 million in cash and short-term investments — On April 6, 2021, announced the acquisition of all the issued and outstanding shares of The Edibles and Infusions Corporation which positions the Company to earn near term revenue and a growth platform from soft chews, the largest edible category

“Although Q2 2021 results were challenged by industry dynamics, COVID-19 and staffing limitations at our facility, we believe there are excellent prospects ahead for the industry, Organigram and our shareholders,” said Greg Engel, Chief Executive Officer of Organigram. “Nearer term, we are currently tracking to generate higher revenue in Q3 2021 as our new product portfolio continues to gain traction and we become better staffed to fulfill demand. Our recent acquisition of The Edibles and Infusions Corporation positions us to generate revenue from the largest single category of edibles, soft chews or gummies. We also see the potential for meaningful gross margin improvement over time as we revitalize our dried flower portfolio with new Edison and Indi strains and execute on a number of opportunities including the refinement of our cultivation, post harvesting and packaging processes. Longer term, we are extremely excited about developing innovative and appealing products to consumers in collaboration with BAT. All of this is made possible and supported by strong liquidity and a balance sheet that is largely debt-free.”

Select Key Financial Metrics (in $000s) unless
otherwise indicated Q2 2021 Q2 2020 % Change
———————————————— ——– ——– ——–
Gross revenue 19,292 27,309 -29%
———————————————— ——– ——– ——–
Excise taxes (4,649) (4,088) 14%
———————————————— ——– ——– ——–
Net revenue 14,643 23,221 -37%
———————————————— ——– ——– ——–
Cost of sales 31,146 15,811 97%
———————————————— ——– ——– ——–
Gross margin before fair value changes to
biological assets, inventories sold, and other
charges (16,503) 7,410 -323%
———————————————— ——– ——– ——–
Fair value changes to biological assets,
inventories sold, and other charges (692) 3,878 -118%
———————————————— ——– ——– ——–
Gross margin (17,195) 11,288 -252%
———————————————— ——– ——– ——–
Adjusted gross margin* (680) 8,449 -108%
———————————————— ——– ——– ——–
Adjusted gross margin %* -5% 36% -41%
———————————————— ——– ——– ——–
SG&A** 11,131 14,018 -21%
———————————————— ——– ——– ——–
Adjusted EBITDA* (8,642) (59) nm
———————————————— ——– ——– ——–
Net loss (66,389) (6,833) 872%
———————————————— ——– ——– ——–
Net cash provided used in operating activities (10,430) (10,894) -4%
———————————————— ——– ——– ——–

nm — not meaningful

* Adjusted gross margin, adjusted gross margin % and adjusted EBITDA are
non-IFRS financial measures not defined by and do not have any standardized
meaning under IFRS; please refer to the Company’s Q2 2021 MD&A for definitions
and a reconciliation to IFRS.
** Sales and marketing and general and administrative expenses (“SG&A”)
excluding non-cash share-based compensation.

Select Balance Sheet Metrics (in $000s) 28-Feb-21 31-Aug-20 % Change
Cash & short-term investments 71,123 74,728 -5%
—————————————- ——— ——— ——–
Biological assets & inventories 43,374 71,759 -40%
—————————————- ——— ——— ——–
Other current assets 17,757 23,717 -25%
—————————————- ——— ——— ——–
Accounts payable & accrued liabilities 13,808 17,486 -21%
—————————————- ——— ——— ——–
Current portion of long-term debt 6,048 11,595 -48%
—————————————- ——— ——— ——–
Working capital 112,398 141,123 -26%
—————————————- ——— ——— ——–
Property, plant & equipment 240,253 247,420 -3%
—————————————- ——— ——— ——–
Long-term debt 52,759 103,671 -49%
—————————————- ——— ——— ——–
Total assets 392,764 435,127 -10%
—————————————- ——— ——— ——–
Total liabilities 125,535 135,600 -7%
—————————————- ——— ——— ——–
Shareholders’ equity 267,229 299,527 -11%
—————————————- ——— ——— ——–

Key Financial Results for the Second Quarter Fiscal 2021
— Net revenue:

— Q2 2021 net revenue decreased from Q2 2020 primarily due to
significantly lower wholesale revenue and a lower average selling
price in Q2 2021. The higher wholesale revenues during Q2 2020
were opportunistic in nature, primarily sales to a single licensed

— Q2 2021 net revenue was also lower due to missed sales
opportunities, as certain employees tested positive for COVID-19
which resulted in a significant number of facility staff having to

— The Company was unable to fulfill certain demand for its products
totaling approximately $7 million in Q2 2021 due to production and
processing constraints.

— Q2 2021 revenue was also negatively impacted by certain provincial
boards aiming to manage lower levels of inventory such as Alberta.

— Gross revenue:

— Q2 2021 gross revenue decreased from Q2 2020 largely due to
similar factors impacting net revenue described above.

— Cost of sales:

— Higher cost of sales in Q2 2021 was primarily due to higher Q2
2021 inventory provisions, a higher cost of production, and a
charge related to unabsorbed fixed overhead as a result of lower
production volumes in Q2 2021.

— Gross margin before fair value changes to biological assets, inventories
sold, and other charges:

— Negative and lower gross margin in Q2 2021 was largely due to
lower net revenue and higher cost of sales as described above.

— Gross margin:

— Q2 2021 gross margin was negative compared to positive Q2 2020
gross margin largely due to negative Q2 2021 gross margin before
fair value changes to biological assets, inventories sold, and
other charges as described above as well as net non-cash negative
fair value changes to biological assets and inventories sold in Q2
2021 versus positive changes in Q2 2020.

— Adjusted gross margin3:

— Q2 2021 adjusted gross margin was negative compared to positive Q2
2020 gross margin primarily due to lower net revenue as described
above and value segment offerings comprising a larger proportion
of total revenue in Q2 2021.

— Selling, general & administrative (SG&A) expenses:

— Q2 2021 SG&A decreased from Q2 2020 largely due to higher
professional and consulting fees in Q2 2020 related to project
specific work, including the launch of Rec 2.0 products.

— Adjusted EBITDA4:

— Q2 2021 negative adjusted EBITDA declined from positive adjusted
EBITDA in Q2 2020 largely due to lower adjusted gross margin in Q2
2021-04-13 10:00:00 GMT Organigram Reports Second Quarter Fiscal 2021 -2-
2021 as discussed above.

— Net loss:

— Q2 2021 net loss was greater than the Q2 2020 net loss largely due
to the negative change in the fair value of the derivative warrant
liabilities and the negative gross margin in Q2 2021.

— Net cash used in operating activities:

— Q2 2021 net cash used in operating activities remained stable
relative to Q2 2020, despite lower gross margin in Q2 2021,
largely due to the prior period’s increase in working capital
assets as the Company continued to scale operations ahead of Rec
2.0 launches.
Canadian Adult-Use Recreational Market

Rec 1.0

Higher Margin Edison and Indi Dried Flower Strains
— In late December 2020, the Company launched three new Edison Indica
strains namely Black Cherry Punch, Ice Cream Cake (I.C.C.) and
Slurricane. The Company expects to launch additional high THC strains
under the Edison brand in Q3 2021.

— Subsequent to quarter-end in late March, Organigram launched the Black
Cherry Punch, I.C.C. and Slurricane strains in a package of three 0.5g
pre-rolls. Also, in late March, the Company introduced Indi, one of
Canada’s only cannabis brands dedicated exclusively to indica cultivars.
Skyway Kush is the first strain in the Company’s Indi portfolio and
currently offers THC in the range of 20% to 23%.
Value segment offerings
— In Q1 2021, Organigram expanded its strong value portfolio with the
launch of SHRED, a high quality, high potency and affordable dried flower
that is pre-shredded for consumer convenience. SHRED offers three
pre-milled varieties, all with THC of 18% or more. It is made from whole
flower, does not contain any shake or trim and is milled to the same
specifications as the Company’s pre-roll products. SHRED is currently
Organigram’s most affordable option (on a per gram basis).

— In March 2021, the Company announced that it expanded the successful
SHRED brand with the introduction of a Jar of Joints, a convenient jar of
14 x 0.5g pre-rolls in SHRED’s Tropic Thunder.
Rec 2.0

Cannabis-Infused Chocolates
— The Company’s chocolate portfolio consists of Trailblazer SNAX, a
value-priced chocolate bar and Edison Bytes truffles. Organigram’s
investment in state-of-the art chocolate equipment means that each
section of the SNAX bar is filled separately, allowing for higher
accuracy of infusion. In Q2 2021, the Company launched milk chocolate, a
new flavour of Trailblazer SNAX, and the Company has plans to introduce
further Edison Bytes products in the next few quarters.
— Organigram expects to launch new vape products with higher THC
concentrations in Q3 2021, including an Edison + Feather disposable vape
pen at a competitive price point as well as a 1g Edison cartridge for the
510 vaporizer, both of which will be based on the Company’s popular
Limelight strain.
Research and Product Development
— Organigram continues to focus on innovation and research and product
development. Examples of this hallmark of the Company include its
nanoemulsification technology (described above) as well as its investment
in biosynthesis through Hyasynth (see Hyasynth section of the Q2 2021
MD&A) and most significantly, its recent March 11, 2021 announcement of
the Product Development Collaboration (“PDC”) with BAT.

— The R&D laboratory at The Edibles and Infusions Corporation’s (“EIC”)
Winnipeg facility, coupled with EIC’s Research License, will also
complement the Company’s focus on innovation.

— Per the PDC agreement with BAT, a “Center of Excellence” (or “CoE”) is
being established at the Company’s Moncton facility to focus on
developing the next generation of cannabis products with an initial focus
on CBD. Both companies will contribute scientists, researchers, and
product developers to the CoE which is governed by a steering committee
consisting of an equal number of senior members from both companies.

— Both Organigram and BAT have access to certain of each other’s
intellectual property (“IP”) and, subject to certain limitations, have
the right to independently, globally commercialize the products,
technologies and IP created by the CoE.

— Approximately $30 million of BAT’s investment in the Company has been
reserved for its portion of its funding obligations under a mutually
agreed initial budget for the CoE. CoE costs will be funded equally by
Organigram and BAT. Currently, the CoE is hiring staff as part of its
ramp up.

Net Revenue
— Organigram expects Q3 2021 revenue to be higher than Q2 2021 as the
Company is improving demand fulfillment with increased staffing. As noted
above, the Company’s Moncton facility was shut down during the quarter
for deep cleaning after identifying positive COVID-19 cases and a
significant number of employees had to isolate. The lost production time
resulted in missed revenue opportunities as the Company was unable to
fulfill certain demand. Although the Company expects higher net revenue
in Q3 2021 due to greater fulfilment rates with increased cultivation and
packaging staff, there is the risk that net revenue could be negatively
impacted again if there positive cases are identified in the future and
the Company needs to take similar measures.. In addition, the COVID-19
restrictions for cannabis retail stores, particularly in the most
populous province of Ontario, could suppress demand and negatively impact
net revenue in Q3 2021.

— The Company expects to generate more revenue growth from the production
of soft chews and other confectionary products with the specialized
equipment in the Winnipeg EIC facility. The Company is targeting first
sales of soft chews in Q4 2021 subject to certain achievements, including,
but not limited to, the timing of receipt and commissioning of certain
ancillary equipment, completion of quality assurance documentation, the
hiring of requisite staff and obtaining product listings from the
provincial boards.
Adjusted Gross Margins
— The yield per plant increased in Q2 2021 from Q1 2021 as a result of
optimizing the density of plants per room and decreasing the time spent
in vegetation. The higher yield per plant in Q2 2021 drove a lower
average cost of cultivation per gram (compared to Q1 2021) such that when
this inventory is sold starting in Q3 2021, it will positively impact Q3
2021 adjusted gross margins. However, the overall level of Q3 2021
adjusted gross margins versus Q2 2021 will depend on other factors
including, but not limited to, product category and brand sales mix.

— In addition, the Company has identified the following opportunities which
it believes have the potential to further improve adjusted gross margins
over time:

— The Company expects to gain economies of scale and efficiencies as
it continues to scale up cultivation.

— The recent launches of new higher margin dried flower strains
under the Edison and Indi brands with more to come in the near
term have the potential to positively impact gross margins over
time as these products gain traction in the market and comprise a
greater proportion of the Company’s overall revenue.

— International sales have historically attracted higher margins and
are expected to comprise a greater proportion of the Company’s
revenues once the Company resumes shipments to Canndoc (currently
expected in Q4 2021 — see International section below).

— The Company is launching more multi-pack pre-rolls and 1g vape
cartridges and these higher volume SKUs attract higher margins.

— The Company continues to invest in automation to drive cost
efficiencies and reduce dependence on manual labour. For example,
the new pre-roll machine was commissioned and began operating in
March 2021 which has significantly reduced the Company’s reliance
on manual labour.

— As a result of a packaging task force project, a number of cost
reduction opportunities have been identified for implementation
starting in Q4 2021.
Selling, general and administrative (SG&A) expenses
— Q3 2021 SG&A is expected to be higher than Q2 2021 largely due to
increasing staffing related to the BAT and EIC transactions.
— The Company continues to serve international markets (including Israel
and Australia) from Canada via export permits. The Company is looking to
augment sales channels internationally over time. In early Q1 Fiscal
2021, the Israeli Ministry of Health amended its quality standards for
imported medical cannabis. The Company is seeking Good Agricultural
Practice certification by the Control Union Medical Cannabis Standard and
is making progress. Subject to successful completion of a required
inspection that is likely to be conducted remotely, the Company currently
expects to be certified as early as the end of Q3 2021. Shipments to
Canndoc are expected to resume in Q4 2021 contingent upon regulatory
approval from Health Canada, including obtaining an export permit, and
the availability of the desired product mix.
2021-04-13 10:00:00 GMT Organigram Reports Second Quarter Fiscal 2021 -3- Liquidity and Capital Resources
— On April 1, 2021, the Company repaid all outstanding balances
(approximately $58.5 million) under its credit agreement (the “Credit
Agreement”) with BMO and a syndicate of lenders which will result in
annual interest savings of $2.7 million (based on the outstanding balance
at the time of repayment).

— Currently, the Company has $232 million in cash and short-term

— Organigram currently intends to terminate the Credit Agreement and
discharge the related security.
Capital Structure

in $000s 28-Feb-21 31-Aug-20
———————————— ——— ———
Current and long-term debt 58,807 115,266
———————————— ——— ———
Shareholders’ equity 267,229 299,527
———————————— ——— ———
Total debt and shareholders’ equity 326,036 414,793
———————————— ——— ———
in 000s
———————————— ——— ———
Outstanding common shares 234,811 194,511
———————————— ——— ———
Options 7,981 9,029
———————————— ——— ———
Warrants 16,989 –
———————————— ——— ———
Restricted share units 1,192 893
———————————— ——— ———
Performance share units 481 127
———————————— ——— ———
Total fully-diluted shares 261,454 204,560
———————————— ——— ———

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