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OGO: Strong Q1 Financial Results, Gross Margin Tracking Higher

What you need to know:
• Organto reported Q1 financials that were slightly ahead of our expectations and its pre-announced Q1 metrics. Revenue came in at $7.5M which represented 7% YoY and 37% QoQ growth.
• Gross margin came in at 9.7% compared to 4.0% last quarter, illustrating that global supply chain and political issues are dissipating.
• We are expecting further revenue growth in Q2 as the NFG acquisition is integrated and global macro issues improve.

Organto Foods (OGO:TSXV) reported Q1/23 financial results yesterday evening that came in slightly ahead of our expectations. This was largely expected since Q1 financials were pre-announced on May 10th, but the quarter does reaffirm our confidence in the investment thesis outlined in our initiation report. We are maintaining our BUY rating and $0.20/share target price on Organto.

Key Highlights
• OGO reported $7.5M in revenue in Q1, compared to our estimate of $7.4M and $7.0M in Q1 last year. This represents 7% YoY and 37% QoQ growth, led by the acquisition of NFG. We remind readers that Organto pre-announced Q1 revenue at $7.4-7.5M. This represented OGO’s largest quarterly revenue in its history and its 15th consecutive quarter of positive revenue growth (currency adjusted). OGO recently reiterated its 2023 revenue guidance of $50M, which will scale upwards through the year as the NFG acquisition is integrated.
• Gross margin for the quarter came in at 9.7% compared to our estimate of 9.4% and 4.0% last quarter. Adjusting for hedges, gross margin was 9.8% vs. the guided 9.4-9.6% range. We view the sequential improvement in gross margin as an indicator that the supply chain and political headwinds are dissipating. This compares to the peak gross margin of 12.3% posted in Q3/21.
• Adj. EBITDA for the quarter came in at ($1.3M) vs. our estimate of ($1.1M) due to OGO expanding its workforce and building internal infrastructure to support growth. The Company plans to be adj. EBITDA positive in the back half of 2023.
• Organto ended the quarter with $2.2M in cash and $9.4M in debt (not including its recent $1.0M convertible debenture financing).

Subsequent Events
Subsequent to the quarter, OGO completed the final tranche of its convertible debenture financing, raising a total of $1M in gross proceeds. The convertible debentures bear a 10% interest rate and convert into common shares at $0.30/share. The funds are expected to be used for growth initiatives and general working capital.

Valuation
Organto currently trades at 0.5x 2024E sales compared to its peers that trade at 0.9x 2024E sales on average. We remind readers that OGO has the highest sales CAGR in the group, but is being punished for its gross margin compression over the last year. Q1 illustrated that gross margins are on track to recover to past levels and EBITDA profitability should happen in the next year, thus providing an opportunity for OGO stock to significantly re-rate. We are maintaining our BUY rating and $0.20/share target on Organto based on 1.0x 2024E sales.