Organigram released their earnings today.

I have to say, that Organigram is a company that we have been very accurate on forecasting issues that will be problematic and lasting.  This Q seems to support where we have been saying they were going for the last seven quarters.

They are refreshing their Edison brand and launching new cultivars.  They need a dramatic increase in sales.

What were our conclusions last Q??

Plus Side:

• Sales increased 13% but see Minus Side below
• International sales increased by $2.5 million to $2.6 million. Israel Cannadoc.
• SGA control remains industry leading.
• Cash increased QoQ by $30 million but see Minuses below.

Minus Side:

• Adult rec sales slid 2%
• GM remains negative at -42% because of cost based impairments of $11 million and Unabsorbed Overhead of $3.5 million (I wrote a piece on Unabsorbed Overhead on our subReddit)
• Filled their second ATM of the year
• The post Q raise of $69 million, $55 million is going to repay term debt ahead of schedule. All that dilution (37,375,000) for $14 million or $0.37/share in new money.

This Q:

Plus Side:

Minus Side:

• Q raise of $69 million, $55 million is going to repay term debt ahead of schedule. All that dilution (37,375,000) for $14 million or $0.37/share in new money.

Another nonprogress quarter.

Open the Financials and the MDA and let’s get to it.

Income Statement Drivers and Breakeven Sales:

Sales:

Table 1: Sales Delta’s

Sales decreased by $1.1 million to $19.3 million largely a result of the -$2.4 million in international medical sales this Q.

First Q of adult rec sales were $27 million.  Seven quarters later… they have not repeated that success.

Table 2: Sales by Format

Rec flower is the only bright spot QoQ unless you count less provisions on rec 1.0 oil.

Adult Recreational Sales: Trend and Peer

Adult Rec net of provisions grew 11% QoQ or $1.7 million. As per table above, Rec flower saw another QoQ increase at +8% or $1.1 million.  Looks like pre milled Shred is the driver.   

Aggregate 2.0 formats increased 2% or by $0.04 million and totaled $1.7 million.  Compare that to the two first full Q’s of 2.0 of $3.0 and $4.8 million.  Ouch! Just like 1.0, OGI was prepared with finished goods at onset but could not get sales to stick after more competition was introduced.

What I said last Q: 2.0 will not be saving Organigram any time soon.

I will continue with that theme this Q.

Provisions and returns of $0.9 million, an improvement of $1.1 million QoQ, are very high as a percentage of sales. Over the last four Q’s they have provisioned $6.9million. That is 10% of adult use revenue.

Medical Sales: Trend and Peer

Medical sales (which I include International sales) decreased 50% or by $2.4 million to $2.4 million. International sales had a $2.5 million increase last Q that was not replicated this Q.

Wholesale Sales: Trend and Peer

Wholesale was $0.1 million after being $0.4 million last Q. 

Income Statement Drivers and Breakeven Sales: Peers

OGI is the smallest in sales in the above peer group. 

Gross Margin

Gross Margin % Peer Base

What I said two Qs ago:

That unabsorbed fixed overhead is what yield drops can do to a gross margin.  Sundial’s next Q will be a case study in that.

Gross Margin is going to be in for a rough ride.

What I said last Q:

Unabsorbed Overhead is becoming the excuse that Gain on Biological Assets used to be in the cannabis industry.  This is a HUGE problem for Organigram as they need a MAJOR increase in sales to absorb that overhead.

If we reverse the cost based writedown and the unabsorbed overhead Gross Margin is $6 million or 29% of sales, which is not good. Organigram pulls this Adjusted Gross Margin bullshit in their presser and MDA.   THE UNABSORBED OVERHEAD IS NOT A ONE TIME ITEM!!!! If we just back out the impairment the GM is $2.5 million or 12%.  That is more likely GM% going forward until sales ramp.

This Q:

Gross Margin stayed in the basement this Q, that is three Q’s in a row, at negative $3.8 million an improvement from -$8.6 million last Q.

$3.1 million was cost based inventory impairments and $2.7 million was unabsorbed overhead (depreciation, taxes and insurance) versus last Q of $11 million and $3.5 million, respectively. Until cultivation increases, which needs a sales increase, this is going to remained depressed.  Without these items adjusted GM is 10% which is well below the % they need to be profitable. 

They did sell more KGs than they harvested at 4,820 KGs and 4,023 KGs, respectively.  They have tricky job of trying to keep this in relative balance while increasing sales dramatically.  They have some new cultivars out.  We will see if that helps them accelerate their sales.

Fair Value increment from inventory sold was $4.6 million down from $8.7 million as they have trimmed a lot of FVI on inventories on hand, including an impairment of FVI this Q of $8.1 million.  Gain on Biologicals for the Q was -$0.1 million a significant decrease from +$4.8 million last Q.

What I said last Q:   Each Q in F2020 they wacked IFRS on their inventory.  How they failed to get in front of this is beyond me. IMO they should have whacked this HARD in Q1 and kept the Fair Value Increment on future harvests at a bare minimum. 

This Q: They continue to trim FVI after the fact.  Not a good look. Get ahead of it.

Gross Margin % Larger Cdn Peer

OGI has company in the smoke circle in the basement.  Gads! Quite the peer group.

SGA & SBC Trend Analysis

NOTE: I moved impairment of the Moncton campus to Other Expenses to maintain consistency amongst peers.

Opex has been flat at $11.5 million for three Q’s.

G&A decreased $0.2 million to $7.4 million, level with last Q.  They spit swapped between wages and benefits and office and general during the Q for a -$1.1 million improvement.  Professional fees were up $0.6 million likely from bank deal restructuring.  G&A was 39% of sales versus 37% last Q.

Selling expenses increased by $0.5 million to $3.7 million. Selling expenses were 19% of sales, a slide from 16% last Q,

SBC decreased to $0.2 million and decrease from 3% of sales to 1%. The decline in share price likely the biggest factor.

Opex has been in the $11 million range for four of the last five Q’s.

SGA & SBC Peer Comparison

Aggregate SGA had OGI as #4 in Peer group trailing APHA, TLRY and HEXO.  In SGA + SBC they trail only Apha and Hexo.  Aphria does have a large Distribution business that improves these figures against a pure cannabis company like OGI.

Net Operating Profit before IFRS voodoo:

NOP was negative $15 million before IFRS voodoo versus negative $20 million last Q. Decrease in impairments in CoGS QoQ the reason.

Other expenses this Q aggregated Expenses of $6.1 million versus Income last Q of $1.7 million and include:

• $2 million writedown of PPE last Q. Nil this Q.
• Financing costs were $1.6 million for the Q an increase from $1.0 million. With debt repaid in the upcoming Q this should improve.
• Covid subsidies were $1.8 million after $4.6 million last Q.
• Warrant liability costs associated with latest raise were $5.5 million.
• Legal provision surfaced at $0.7 million.  This is the expected non-insurance covered portion of the claim against OGI regarding pesticide use several years back.

Leading to a net Income of negative $34 million versus negative $39 million last Q.

Net Operating Profit Breakeven divided by Current Q Sales

With a negative GM% I cannot calculate a breakeven.

Adj EBITDA: Trend and Peer

EBITDA slid backwards to -$6.2 million (Note: I add back some SBC that was not captured on income statement) versus their number of -$6.8 million. The slide from -$3.9 million is due to Adjusted GM sliding to 10% from 12% QoQ.

Until they get Unabsorbed Overhead fixed and cultivation growing with sales growth… expect this to be negative.

+Adjusted EBITDA Breakeven

With a negative GM% I cannot calculate a breakeven.  If the 10% GM adjusted for writedowns is a proxy, they would need quarterly sales of $111 million to breakeven.  At a 40% GM they would need $27.5 million in sales. Both of these items look to be elusive for OGI.

Cash Flow from Operations:

Opex burn decreased but remains at -$7.0 million.   

Balance Sheet Items of note:

• Cash and marketable securities total $134 million up from $30 million QoQ.  The $55 million in bank debt repayment in the upcoming Q will cut that to $79 million. 

• Bio assets remained flat at $4.8 million.  
• Inventory decreased $17 million to $49 million. $3 million would be cost and $8 million was IFRS impairment with the rest being sales exceeding harvest.

Gas in the Tank: Trend Analysis

Negative delta of $1.1 million in Sales and a negative delta of $7.9 million in Finished Goods inventory. 

Gas in the Tank: Peer Comparison

• CGC has the most FG in sector, followed by ACB and OGI. CGC is US GAAP.

Waterfall – Trend Analysis

OGI pulled reporting KGs sold four Q’s ago.   And it reappears last Q.  They outsold harvest by 797 KGs for the Q.

Projected Yield of Bio Assets is 4,969 KGs.  They need much bigger sales to remove the Unabsorbed Overhead.

Waterfall – Peer Analysis

Their KGs sold are in the Tilray and Sundial range.

Inventory to Sales Ratio

With the writedowns both of cost base and IFRS voodoo this ratio drops to 2.54 Q’s of inventory to sales. Comparable to Hexo, who has also chopped inventory considerably.

• They loaned $3 million to a hemp company against future purchase in July 2019.  $2.2 is the balance.  They have now demanded payment.  That doesn’t bode well.

Sales vs Harvest & Sales vs Inventory

With the writedown in inventory in the Q and an additional $109 million over F2020 Inventory levels have finally started to decrease.  Unfortunately, sales are stagnant.   

Liability and Equity Side:

From perusing their amended Credit Agreement: Looks like proceeds from any raise other than a permitted unsecured convertible debentures (which would slide behind the bank in priority) would go to the bank, after the bank approves the debenture.

• From loan agreement “Permitted  Convertible Notes” means  unsecured  convertible  promissory  notes  or  debentures  issued by the Borrower pursuant to a trust indenture in form and substance satisfactory to the  Required Lenders, having an aggregate principal amount as hereinafter provided, maturing not  earlier than six (6) months later than the Maturity Date, and under which no principal payments  are required prior to such maturity except upon the occurrence of an event of default (as defined  in such trust indenture). 

• Derivative Warrant liability of $18 million during the Q attached to their latest equity raise.
• Share capital is up by $53 million thanks to the latest raise.

In conclusion:

What we said last Q:

This was a brutal Q.  Rec flower sales rebounded but they ran out of Shred and now it faces more competition at a lower price. Vapes and edibles are going backwards.  The loan bright spot is sales to Israel.  We will see if that can be increased.  It would be nice to know what they are selling it for.

With the $55 million Dec 1, 2020 paydown of their bank they get the EBITDA covenant kicked out to November 30, 2021.  I will be interested to read the new bank deal and see if equity raises still go to bank.

This company is stagnant when sales increases are very much needed.  Expect a slow bleed going forward until they can do something to increase repeatable sales.

This Q:

At current sales level OGI is not viable. And their sales stagnation does not bode well.  They need to increase sales dramatically to increase cultivation and to drive down costs. 

They are a plane with ice on their wings with a decent altitude (Cash balance) and are losing altitude at $6 million per Q on an operational basis.  If they do not de-ice soon, they will need to raise more money that will firstly go to their bank before going into their coffers.  See what BMO did to ACB.  They will act the same way here.  Permitted convertible debentures is all that is presently allowed, and they will be expensive with the bank in priority and having to approve the debt instrument.

That’s all I got.

GoBlue

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in Organigram and will not start one in the next five days.