Why OrganiGram’s Recent Equity Program Is Bad News

On Wednesday, OrganiGram (OGI) (OGI.TO) announced an equity program. Broadly, we think that the program is bad news for investors. Under the program, the company intends to raise up to 55 million Canadian dollars from the public. In other words, the company will raise money through common shares. OrganiGram stated that it will issue shares at the market price. The program is set to run until December 25, 2021.

OrganiGram’s equity program

OrganiGram will issue these new shares from the treasury. Anytime a company issues more common shares from the treasury into the market, it impacts existing investors in several ways. One of those impacts includes diluting the earnings. As a result, the existing investor could lose if the company’s earnings haven’t caught up by the time it decides to issue the shares to the market.

Why is the program bad news?

We’ll provide an example to understand what’s happening in a bit more detail. Let’s say that a company has one common share trading at 1 Canadian dollar in the market. The company earns 2 Canadian dollars this year. The company decides to issue one treasury share, which gives the company 1 Canadian dollar. Now, the company has two shares instead of the initial one share.

If the company’s earnings remain at 2 Canadian dollars, the initial shareholder, who had full entitlement to these earnings, will see his profit share cut in half.

How OrganiGram will use the proceeds?

OrganiGram intends to use the proceeds for capital expenses, debt obligations, and general corporate purposes. Recently, we looked at OrganiGram’s balance sheet after its fourth-quarter earnings. The company already made a significant capital expense. While most industry players are cautious about making capital expenses, OrganiGram’s intended use of proceeds for capital expenses was a surprise.

Market reacts

The cannabis market has been tracking the negative momentum. Most cannabis stocks continued to bleed last month. For OrganiGram, the dilutive impact erodes investor wealth, which explains why the market wasn’t happy. OrganiGram stock lost almost 10% on Wednesday, which was relatively higher than Cronos Group (CRON). Cronos Group lost about 5%, while Aphria (APHA) lost about 1.5%.