Organigram: How a Misunderstood Recall Created a Buying Opportunity
March 6th, 2017
News, Top News
Canada’s cannabis industry is projected to reach $22.6 billion over the coming years, according to Deloitte, which has created a significant opportunity for the 40 or so licensed producers in the space. While the industry has been rapidly growing, there have been some hiccups along the way. Some of these issues may have been large, but others have created opportunities to buy in to the rapidly expanding at attractive prices.
In this article, we will take a closer look at Organigram Holdings Inc. (CSE: OGI) (OTC: OGRMF) recall and what it means for investors moving forward.
Organigram began a voluntary recall of 69 lots of product under a Type II recall and an additional five lots of product under a Type III recall on December 28, 2016. These products included both dried marijuana and cannabis oil produced between February 1, 2016 and December 16, 2016 that tested positive for low levels of myclobutanil and/or bifenazate – two pesticides that aren’t authorized for use on cannabis plants under the Pest Control Products Act.
These two pesticides may not be approved for use on cannabis plants, but they are commonly used in other areas of food production. Myclobutanil is a fungicide that’s considered “slightly hazardous” by the World Health Organization with a “relatively low acute toxicity” by Environmental Protection Agency (EPA) standards. Bifenazate is similarly described as “unlikely to affect your health when used according to label directions” by Health Canada.
The company was unable to identify the source of the contamination, but as an organic producer, it wasn’t required to test for materials found in fungicides or pesticides that aren’t employed in its production processes, which is why it slipped in under the radar. Actual product returns are expected to be low based on dried marijuana and cannabis oil sales, while Health Canada only received a report of one adverse reaction due to the contamination.
Investors will get an idea of the full impact of the voluntary recall during the company’s second quarter financial results coming out in April of this year. In particular, clients will have been given the required month to switch providers if they were concerned and the full impact of the company’s reimbursements will show up. The stock has fallen nearly 30% over the past three months, but the true impact may be less than many investors are expecting.
Addressing the Issue
Organigram has taken several measures designed to ensure that contamination of its products will never happen again, which involves several voluntary measures that exceed federal requirements imposed on the industry. In essence, these changes could make the company one of the safest licensed producers in the future given these new guidelines. New consumers may appreciate these trends and management’s openness in dealing with these issues.
The new measures being implemented include:
- Testing of every product lot for pesticides before they’re made available for sale.
- Testing of all inputs from outside supplies, including seeds, fertilizers, water, etc.
- Updated operating procedures for periodic live plant sampling for pesticides.
- Formal program for receiving, securing, and testing critical inputs on a routine basis.
- New screening process to pre-qualify suppliers before they’re approved.
- New closed-circuit cameras in areas of the facility that aren’t required to be monitored.
- New education and training program for all employees.
“Since the January recall, testing of harvested crops has been more comprehensive and effective – no trace of any contaminant has been detected,” said Organigram’s Dennis Arsenault. “As well, the company is undergoing a recertification process with Ecocert, the organization that validates our organic standards. Ecocert suspended – but did not remove – our certification during the investigation and has been fully supporting of our efforts.”
Finally, the company announced that uninsured clients impacted by the recall with receive full credit for their affected purchases, which will represent around $2.26 million and be reflected in the company’s second quarter financial results coming out in April 2017. By issuing these refunds, the company has proven their commitment to clients and may have created an even more loyal customer base over the long-run.
The company’s handling of the situation demonstrates management’s strength in being open and honest with clients and doing the right thing with compensation. With Greg Engel joining the company as incoming Chief Executive Officer, the company further strengthened its management team given his experience in several senior-level and executive positions in related industries over the past 25 years.
Organigram Holdings Inc. (CSE: OGI) (OTC: OGRMF) may be trading at a compelling discount following its voluntary recall in December/January. While the headlines have been bearish, a look behind the scenes reveals that the pesticides involved were relatively benign and the impact on customers may be very limited. In fact, the company’s efforts to address the issue could make it among the safest licensed producers moving forward.
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