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 eight quarters.
What were our conclusions last Q??
- Adult Rec Sales increased +11% but see Minus Side below
- SGA control remains industry leading.
- Cash increased QoQ by $59 million but see Minuses below.
- KGs sold were greater than KGs harvested.
- Total sales drop -5% as International sales do not repeat this Q.
- GM remains negative at -20% (three Q’s in a row now in the basement) because of cost based impairments of $3.1 million and Unabsorbed Overhead of $2.7 million: depreciation, insurance and taxes (eg Fixed expenses that do not change with cultivation). Without these items adjusted GM is 10%.
- The 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.
- No provisions for returns of adult rec.
- Sales dropped 24% QoQ and the drop is almost entirely adult rec
- 2.0 sales drop to all time low
- Gross Margin negative and still negative after reversing more write-offs and unabsorbed overhead
- Cost based inventory write downs in SIX consecutive Q’s
- IFRS voodoo based adjustments to inventory in SEVEN consecutive Q’s
- SGA went up nominally in absolute terms and more so as % of sales
- Adj EBITDA set a record low
Another nonprogress quarter. Absolute tire fire!
If I was Chairman of the Board, I would be on the phone to see if Beena from Supreme will be a free agent after Canopy acquisition.
Open the Financials and the MDA and let’s get to it.
Income Statement Drivers and Breakeven Sales:
Table 1: Sales Delta’s
NOTE: I usually only run five Q’s of trailing data. But this is something to see. From first full Q of rec.
Sales decreased by $4.7 million to $14.6 million largely a result of the -$4.8 million drop in rec sales offset by lack of provisions.
First Q of adult rec sales were $27 million.
Seven Eight quarters later… they have not repeated that success.
Table 2: Sales by Format
No bright spots. None. Absolutely, none.
Rec and Medical flower lowest since rec launch. 2.0 sales are at lowest point since launch.
They did say that because of covid they had to isolate workers and they left $7.0 million in sales unfulfilled. If they do not show a boots of that much next Q…. hand Greg a cigarette and blindfold.
Adult Recreational Sales: Trend and Peer
What I said last two Q: 2.0 will not be saving Organigram any time soon.
I will continue with that theme this Q. Worst Q on record for Adult Flower sales and 2.0.
Hey, no provisions though. That’s a win, right?
Medical Sales: Trend and Peer
Medical sales (which I include International sales) decreased $0.3 million. Medical sales lowest since rec launch.
Wholesale Sales: Trend and Peer
Wholesale was $0.4 million after being $0.1 million last Q. Biggest increase across segments.
Income Statement Drivers and Breakeven Sales: Peers
OGI is the smallest in sales in the above peer group.
Gross Margin % Peer Base
What I said
two three 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 two Q’s ago:
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.
What I said last 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.
Make it stop! GM dips to -113% to -$17 million. Unabsorbed overhead was $2.3 million (vs $2.7 million last Q) and cost based write offs were $13.5 million (vs $3.1 million last Q). Cost based write-offs have persisted over SIX quarters and aggregate $54 million. Unabsorbed overhead is on a four quarter streak and totals $10 million.
From their MDA:
- A negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs in Q2 Fiscal 2021 is anticipated to persist as a result of the Company’s plans to cultivate less than its cultivation capacity. However, the magnitude of the charge is expected to continue to decline in Q3 Fiscal 2021 from Q2 Fiscal 2021 as the Company begins to ramp up cultivation. As indicated in previous quarters, some production inefficiencies are anticipated to persist in the near to medium term and impact gross margins while Organigram continues to launch new products and optimizes production and staffing.
What I said two Q’s ago: 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.
Last Q: They continue to trim FVI after the fact. Not a good look. Get ahead of it.
Fair Value increment from inventory sold was $2.4 million down from $4.6 million as they have trimmed a lot of FVI on inventories on hand, including an impairment of FVI this Q of $4.8 million. FVI impairment is on a seven Q streak and totals $99 million.
Gain on Biologicals for the Q was $6.5 million a significant swing from -$0.1 million last Q.
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 relatively flat at $12.1 million for four Q’s.
G&A increased $0.5 million to $8.0 million, level with last Q. Wages and office and general increased $0.7 million and professional fees fell $0.4 million. G&A was 55% of sales versus 39% last Q.
Selling expenses decreased by $0.5 million to $3.1 million. Selling expenses were 22% of sales, a slide from 19% last Q,
SBC increased to $1.2 million an increase from 1% of sales to 8%. Share price increase.
Opex has been in the $11-12 million range for four of the last six Q’s.
SGA & SBC Peer Comparison
Aggregate SGA had OGI as #7 in Peer group trailing no one. In SGA + SBC they are also last.
Net Operating Profit before IFRS voodoo:
NOP was negative $29 million before IFRS voodoo versus negative $15 million last Q. Impairments increasing was the reason.
Other expenses this Q aggregated Expenses of $37 million versus expenses last Q of $6 million and include:
- Financing costs were $0.8 million for the Q this will zero out with debt fully paid post Q.
- Covid subsidies were $2.7 million after $1.8 million last Q.
- Warrant liability costs associated with latest raises were $38 million versus $5 million last Q.
- Legal provision resurfaced at $0.5 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 $66 million versus negative $34 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 -$8.7 million (Note: I add back some SBC that was not captured on income statement) versus their number of -$8.6 million. The slide from -$3.9 million is due to Adjusted GM sliding to -1% from 10% QoQ.
This was their lowest EBITDA on record.
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.
Cash Flow from Operations:
Opex burn increased to $27 million as they wrote off inventory and working capital source of income increased as they wrote off inventory.
Cash used in Operating activities: -$10 million
Cash used in financing activities: -$50 million as they paid down Long Term Debt (and they do that again in upcoming Q)
Cash provided by investing activities: +$34 million largely from raise.
Balance Sheet Items of note:
- Cash and marketable securities total $71 million down from $63 million QoQ. The $55 million in bank debt repayment and loss from operations being the reasons. Cash will go up with British American Tobacco investment net of the rest of term debt payment.
Gas in the Tank: Trend Analysis
- Bio assets increased by $1.4 million to $6.2 million.
- Inventory decreased $12 million to $37 million. The impairment of cost and IFRS of $18.3 million was the big factor.
- FG of $21 million remains more than adequate should sales materialize.
Gas in the Tank: Peer Comparison
- OGI has a small balance relative to peers.
Waterfall – Trend Analysis
OGI pulled reporting KGs sold four Q’s ago. And it reappears two Q’s ago. They undersold harvest by 1,340 KGs for the Q.
Projected Yield of Bio Assets is 6,863 KGs almost two times this Q’s sales. They need much bigger sales to remove the Unabsorbed Overhead.
Waterfall – Peer Analysis
Their KGs sold are lowest in peer group.
Inventory to Sales Ratio
With the writedowns both of cost base and IFRS voodoo this ratio stays stable at 2.54 Q’s of inventory to sales. Comparable to Hexo and Cronos, the latter has also chopped inventory considerably.
- They loaned $3 million to a hemp company against future purchase in July 2019. $2.2 was the balance in Q1 and they took another $0.5 million bite out of the likely recovery. They demanded payment in Q1. That doesn’t bode well.
Sales vs Harvest & Sales vs Inventory
Wow…. That inventory slope and its driven by impairments.
Liability and Equity Side:
- Loans paid down $58 million this Q and paid out in upcoming Q. Bank term and condition that they raise equity after Dec 31, 2020 and the bank gets the funds.
- Derivative Warrant liability of $48 million during the Q attached to their last raise.
- Share capital is up by $16 million thanks to the latest raise and warrants.
What we said last 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.
BMO took care of itself off the BAT $220 million investment. I really would like to know what BAT see in OGI. Operationally it is a mess. That mess could be fixed by increasing sales. But the evidence to support a sales increase is lost in all the previous promises of sales increases.
The ice is off the wings with the cash infusion, but this plane is not airworthy.
That’s all I got.
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.