Organigram released their earnings today.

What were our conclusions last Q??

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.

Plus Side:

• No provisions for returns of adult rec.
• Inventory turnover continues to improve.  They sold more than they harvested.

Minus Side:

• 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

This Q:

Until Gross Margin gets fixed… Organigram is going to have a hard time.

Plus Side:

• Sales increased $5.7 million +39% QoQ
• Flower powered the sales increase… up 81%
• Cash increased to $196 million
• Paid down debt from equity from BAT… as they had to based on BMO terms and conditions of loan agreement.

Minus Side:

• Sales have rebounded to three Q’s ago level … August 31, 2020
• 2.0 sales dropped to under $0.8 million -53%
• Wholesale flower was $1.1 million of increase.
• Increase in flower sales seems to be largely value option Shred… which does not help GM
• GM negative five quarters in a row and was -15% this Q
• SGA increased by $2.4 million, which is not good when you are carrying a negative GM
• Adj EBITDA continues to drill to find bottom with another record low
• Cash increased via dilution

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 increased by $5.7 million to $20.3 million largely a result of the $4.9 million increase in rec sales. Rec sales are second lowest of the five Q’s under review and well below first Q of adult rec sales of $27 million.  Seven Eight Nine quarters later… they have not repeated that success.

The other increase in sales was wholesale, which was +$1.1 million.

Medical remains flat at $2.0 million.

Table 2: Sales by Format

I could not balance to their figures because their pie chart in their MDA…

… has eleven segments and only ten data labels.  Pretty sure that $1,465 is wholesale but I could not tally their $2,015 in medical sales, as I could only segment $1,890.

Flower increased in a wasteland of decreases. Rec Vapes are $0.5 million down from the record $3.4 million in the second Q of 2.0 rollout. Edibles are down -45% QoQ.

Last Q: 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 boost of that much next Q…. hand Greg a cigarette and blindfold.

This Q: Well, Greg got handed that cigarette and blindfold and sales did not increase by $7.0 million.

Adult Recreational Sales: Trend and Peer

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

Adult sales are up nicely QoQ.

Medical Sales: Trend and Peer

Medical sales (which I include international sales) decreased nominally and are $2.0 million lowest since rec launch.

Wholesale Sales: Trend and Peer

Wholesale was $1.5 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 three four 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 three 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 two Q’s ago:  

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.

Last Q:

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 three 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. 

This Q: I belabor the above, because along with sales, these are the two biggest issues OGI faces.

Five Q’s in a row of negative GM at -$3.1 million or -15%.  Two items are flagged as contributing: Unabsorbed Overhead $1.7 million and inventory impairment of $0.6 million.  Even if reversed GM remains negative. 

Shred might be helping them move product, but it is not turning the dial on GM%.  They indicate they are bringing some higher yielding strains to market, yet their projected yield drops from 6,893 KGs last Q to 5,629 KGs this Q.  That is break from management narrative. Plus, they are now building out the balance of Moncton facility that was on hold.  Are they trying to find a dance partner to buy them?  Weird strategy, if so.

They indicate that investors should not expect any improvement in GM next Q.

This Q: They continue to trim FVI after the fact.  EIGHT Quarters in a row.  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.

Last Q: Opex has been relatively flat at $12.1 million for four Q’s.

This Q: Opex increases by $2.3 million, as they incorporate and edible company they acquired to go with their edible line that is in Moncton, and edibles generated under $0.2 million in revenue in the Q. I would love to see the GM contribution from that edible line.

G&A increased $1.5 million to $9.4 million.  Professional fees were $1.3 million of increase. Increased Audit requirements and acquisition likely the culprits.

Selling expenses increased by $1.0 million to $4.1 million. Selling expenses were 20% of sales, an improvement from 22% last Q. They got a sales increase… so selling expenses increasing $1.0 million is OK…assuming they would have had a positive GM.

SBC decreased to $0.8 million from $1.0 million last Q.

Opex is at its highest since Feb 29, 2020 at $14.3 million.

SGA & SBC Peer Comparison

With the increase in sales SGA as % has dropped.  OGI is now third best in the peer group.

Net Operating Profit before IFRS voodoo:

NOP was negative $17 million before IFRS voodoo versus negative $29 million last Q. Inventory impairments decreasing by $13 million QoQ is the driver.

Other expenses this Q aggregated Income of $8.2 million versus expenses last Q of $37 million and include:

• Financing costs were $0.4 million for the Q as they paid down BMO
• Covid subsidies were $2.7 million same as last Q.
• Warrant liability costs associated with latest raises were -$38 million last versus +$7 million this Q as the stock price reversed.

Leading to a net Income of negative $8.2 million versus negative $66 million last Q. The swing in inventory impairment and the shift in derivative liability being the big contributing items.

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 -$10 million. The slide from -$8.7 million is due to increased SGA expenses.

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 decreased to $5 million as last Q they wrote off inventory.

Cash used in Operating activities: -$11 million

Cash provided in financing activities: +$162 million as they paid down Long-Term Debt by $58 million and they receive $220 million in private placement

Cash provided by investing activities: -$154 million as cash went into Short Term Investments (versus to cash) and restricted funds (funding the research facility with BAT) versus into cash alone.

Balance Sheet Items of note:

• Cash and marketable securities total $196 million up from $71 million QoQ. 

With no debt, debt service is no longer an issue.

Gas in the Tank: Trend Analysis

• Bio assets increased by $4.0 million to $10.2 million.  They better keep selling product or this will stack up again in inventory. Less projected harvest KGs with higher $ Bio Assets.  Let us see how this works out.
• Inventory decreased $1 million to $36 million. The impairment of cost and IFRS of $3 million contributed to capping same.
• FG of $23 million remains adequate for sales level.

Gas in the Tank: Peer Comparison

• OGI has a small balance relative to peers.

Waterfall – Trend Analysis

OGI pulled reporting KGs sold five Q’s ago.   And it reappears three Q’s ago. 

They outsold harvest by 130 KGs.

KGs sold increased considerably due to Shred sales and wholesale.

Projected Yield of Bio Assets is 5,629 KGs which is less than they sold in the Q of 8,509 KGs.  They need much bigger sales to remove the Unabsorbed Overhead.

Waterfall – Peer Analysis

Their KGs sold are 4^th highest in peer group.

Inventory to Sales Ratio

Inventory turnover is now peer leading.  But can they make money selling their inventory?

Sales vs Harvest & Sales vs Inventory

Wow…. That inventory slope and it’s driven by impairments.  $3 million more this Q.

Other Balance Sheet items of note:

• Restricted investment +$23 million to $31 million as part of agreement with BAT to fund research facility.
• Goodwill & Intangibles increase $17 million to $19 million with the acquisition of the Winnipeg edibles company. PP was $27 million, and G/I was $15 million.
• PPE increases by $7.4 million to $247 million with $11 million incoming against edible company.

In conclusion:

What we said last Q:

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.

This Q:

Kudos to them for increasing sales. But sales without a positive GM is not good.  A record negative EBITDA ten quarters into Rec is not healthy.

They cleaned up their balance sheet with BAT investment and paydown of debt.  They have a cash runaway.

I do not get building out more capacity.  On the conference call they said the ones standing will be the companies that can produce quality at a low cost, but until they get their production costs to sales rectified the ice will build. And who is in the market for more production capacity?

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.