Organigram released their earnings today.

What were our conclusions last Q??

Plus Side:

• Sales increase $1.5 million +5% for fourth Q of increased revenue
• Hash sales +$1.5 million QoQ
• Rec edibles and ingested extracts +$1.1 million QoQ
• International sales +$1.6 million QoQ
• GM improved to 22% from 8% to $6.9 million
• aEBITDA improved but my calculation (does not include acquisition costs and R&D add backs) remains slightly negative at -$1.6 million
• Cash & equivalents adequate at $151 million.

Minus Side:

• Sales increase was wholly dependent on acquisition of Laurentian Organic (hash sales) purchased for $36 million, of which Goodwill & Intangibles was $43 million or 119% of PP. Two months’ worth of sales included this Q.
• Rec flower sales decreased -11% or $2.3 million QoQ
• SGA of $14 million is double GM$ of $6.9 million
• Net Operating Profit, net of IFRS voodoo, improves to -$9.2 million from -$11.9 million
• Impaired another $2 million on chocolate line
• Had a loss on disposal of PPE of $4.2 million… no direct note but appears to be the chocolate line

What to watch:

• OGI has started to ramp cultivation. Inventory levels increased $8.5 million QoQ. They are still impairing cost-based inventory. But they have outsold harvest each of last two Qs.  I have heard they have been looking for 3^rd party sources for several Qs. Inventory control and cultivation leading sales by too large of a margin were issues in the past. Their rec flower sales declined erasing gains in the prior two Qs.  Can CEO Beena keep cultivation and inventory reeled in?

This Q:

Plus Side:

• Sales +20% with Rec at +39% +$9.6 million partially offset by a drop in International -69% -$3.6 million.
• Flower sales drive increase with +$5.9 million, Edibles + $1.4 million and Hash +$0.9 million. All segments in rec increased by +31% or better.
• GM grows as % to 23% and +$2.5 million
• Cash sufficient at $127 million
• Inventory management looks quite good with 1.26:1 Inventory to sales, best in peer base.

Minus Side:

• GM$ of $8.7 million less than SGA of $17.7 million by half,
• SGA increased $3.3 million versus GM increase of $2.5 million
• Net Operating Profit net of IFRS voodoo -$10.9 million versus -$9.8 million QoQ.
• Net Income net of IFRS voodoo -$1.8 million QoQ
• aEBITDA (mine) at -$4.5 million slides QoQ from -$2.2 million
• Cash decrease $23 million

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

Income Statement Drivers and Breakeven Sales:

Sales:

Table 1: Sales Delta’s

New sales record, again. Sales increased by $6.3 million to $38.1 million largely a result of the $9.6 million increase in rec sales. This is their biggest QoQ $ sales increase since November 30, 2019.

Medical reduces nominally to $1.8 million, the second lowest since adult rec launch.

Wholesale was -$0.2 million for the Q. 

International was $1.4 million -$3.1 million QoQ.   International shipments to Israel expected to pick up next Q.

Table 2: Sales by Format

Rec increased +39% +$9.6 million to $34.5 million a new rec record.

Rec flower was the driver QoQ, increasing +$5.9 million to $24.9 million another record. Edibles finally gains traction from acquisition of Winnipeg based company with +$1.4 million QoQ. Rec Hash, on for a full Q after Laurentian acquisition, increases by +$0.9 million to $2.5 million.  Even vapes increased by $0.7 million to $1.5 million, almost doubling.

Medical was $1.8 million and has been between $1.8 -2.0 million for six Qs. Medical is a rounding error.

International sales were -$4.2 million to $0.8 million. Shipments expected in next Q.

Adult Recreational Sales: Trend and Peer

Adult sales are up +39% QoQ reversing prior Q decrease. They have surpassed Hexo.

Medical Sales: Trend and Peer

Medical sales (which I include international sales) decreased -$3.4 million to $3.5 million, mostly accruing to decrease QoQ in international shipments.   

Wholesale Sales: Trend and Peer

Wholesale was $0.4 million, a decrease of $0.2 million,

Income Statement Drivers and Breakeven Sales: Peers

OGI is the fifth in sales, trailing Hexo at $45 million and ahead of CRON at $32 million.

Gross Margin

Gross Margin % Peer Base

After six Qs of negative GM, OGI has three Qs in a row of positive GM, with inventory in good shape relative to this Qs sales.  This Qs GM increases to 23% or +$2.5 million to $8.7 million. Better usage of facilities.

They did have a $0.7 million step up from acquired inventory from Laurentian. Laurentian came on board with $1.8 million in inventory.  They should be through Laurentian’s acquired inventory.

I do note their “Adjusted GM” includes an add back of unabsorbed overhead, which they claim to be largely depreciation related. I am not a fan with “adjusted” in anything.

Last Q we said: Keep an eye on inventory levels as they have ramped the grow to projected yield of 14,506 KGS +727 KGs QoQ, and the highest since 22,735 KGs in February 2020 two years ago.

They increased inventory yet have decreased inventory turnover, a nice feat.  Projected yield shows they expect another increase in production at 20,946 KGs next Q.

Gross Margin % Larger Cdn Peer

23% is good for 3^rd spot on the above peer group.

SGA & SBC Trend Analysis

NOTE: I moved impairment of PPE to Other Expenses to maintain consistency amongst peers.  

Trendline in Aggregate SGA % has been bumping up despite sales increase. In their adjusted EBITDA they reverse ERP and acquisition costs of $2.8 million, so this could be part of the increase.

G&A increased $2.2 million to $12.8 million as Laurentian was on for full Q   Entirety of increase is wages and office and general (ERP mentioned above).

Selling expenses increased by $1.3 million to $4.7 million. At least they are getting increased sales from the selling expense increase, many are not.  Selling expenses were 12% of sales an increase from 11% last Q.  

R&D was $1.3 million an increase of $0.1 million QoQ. I note they back R&D out of aEBITDA. Likely because they are pulling the funds for R&D from their BAT reserve in Long Term Assets. I am not OK with the backout as R&D is still a cash-based expense.

SBC was down minimally to $0.7 million.

Opex was $20 million an increase from $16 million in prior Q.  Largely Laurentian acquisition related and ERP.  

SGA & SBC Peer Comparison

OGI at 46% is now tied for fourth best in the peer group in SGA.   

Net Operating Profit before IFRS voodoo:

NOP was negative $10.9 million before IFRS voodoo versus negative $9.8 million last Q. The $2.5 million improvement in GM was offset by SGA cash increases.

Other Income (Expenses) this Q aggregated Income of $9.5 million versus Income last Q of $2.8 million and include:

• Chocolate line impairment and loss on disposal of PPE of $6.9 million last Q versus this Q $0.6 million
• Change in Fair Value of derivative warrant liability of a gain $5.9 million, as OGI stock price fell.  This is compared to a gain $10.6 million last Q
• Change in contingent consideration gain of $3.4 million versus a loss last Q of $0.7 million.  This is the Laurentian payout… the direction it moved seems to indicate Laurentian might not be performing as to expectations.

Minor taxes paid in the Q.

Leading to a net Income of negative $2.7 million versus negative $4.7 million last Q.  Improved GM$, offset by Opex increase, share price related impacts to fair values on derivatives and contingent consideration (as share price falls), and lesser impairment and loss on disposal of PPE this Q the reasons.

Net Operating Profit Breakeven divided by Current Q Sales

At current GM% and Opex, OGI would require an incremental sales increase of 126% to reach +NOP. Still a long ways out.

Adj EBITDA: Trend and Peer

OGI backs out R&D from their aEBITDA.  I do not, as it is a cash expense even though they are pulling it from the BAT reserve. I also did not back out $2.8 million in transaction costs and ERP as it was buried in the SGA.

aEBITDA slides by $2.3 million and rings in at -$4.5 million.  The improvement in GM$ was offset by the increase in cash OPEX is the reason.

+Adjusted EBITDA Breakeven

At current GM% and Opex, OGI would require an incremental sales increase of 52% to reach +NOP.

Cash Flow from Operations:

Opex burn decreased further to -$4.0 million.

Cash used in Operating activities: -$6.4 million… $5 million is increased inventory.

Cash provided in financing activities: nominal.

Cash used by investing activities: $52 million mostly a result from Short Term Investments (GICs) flipping to cash of $68 million with $17 million in PPE purchased in the Q.

Balance Sheet Items of note:

• Cash and marketable securities total $127 million a decrease of $23 million QoQ.  Sufficient for present needs.

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

Gas in the Tank: Trend Analysis

• Bio assets -$0.7 million to $12.5 million.  They better keep selling product or this will stack up again in inventory.
• Inventory increased QoQ by $5.2 million to $48 million.
• FG of $34 million remains more than adequate for sales level.

Waterfall – Trend Analysis

They outsold harvest by 639 KGs. Third Q in a row outselling harvest. But we do not know the extent of any purchased inventory from third parties.

KGs sold increased by 1,995 KGs QoQ.

Projected Yield of Bio Assets is 20,946 KGs which is 6,440KGs more than they sold this Q. How they handle the re ramp will be key in getting OGI back to reasonable operational footing.

Inventory to Sales Ratio

Inventory turnover is peer leading at 1.26:1 inventory to quarterly sales.   

Sales vs Harvest & Sales vs Inventory

OGI has the tightest inventory to sales than all peers.  Three Qs in a row outselling harvest.  They have capacity of 55,000 KGs as is and are expanding that.  The inventory line took a meaningful step upwards for the first time since February 2020.

Other Balance Sheet items of note:

• A/R increase $11 million to $34 million which is simialr to 100% of quarterly revenue.  Sales ramp could be back loaded in Q.
• PPE up a net $9.5 million QoQ.
• A.P and accrued increased $10 million to $36 million. 
• -$2.2 million decreases in contingent consideration to $7.0 million. 

In conclusion:

What we said last Q:

Sales velocity slows to +$1.5 million from an average of $5 million each of the last two Qs, as Laurentian and increase in international sales are slightly stronger than the reduction in adult use flower. Full Q of Laurentian next Q versus 2 months this Q.

GM stays positive for two consecutive Qs as Unabsorbed Overhead has finally been absorbed.  But GM of $6.9 million is less than half of SGA for the quarter.

They impair the chocolate line again.  This is looking like a cleanup.  Is Beena looking to improve and flip like she did with Supreme to Canopy?

aEBITDA has almost climbed out of the ditch.

Cash is adequate.

All eyes should be focused on their ability to move the increased flower cultivation.

This Q:

Sales increase was impressive, especially since it was all recreational.  LPs have had issues on repeating good sales increases QoQ.  Is it because the novelty of the new product launches or is it because of lack of sell through?  That will be determined if they can continue to hold their increased levels.

GM is creeping in the right direction.  Hopefully that SGA increase subsides with ERP and acquisition costs behind them. Next Q this would be the item I would keep an eye on.

Cash is sufficient.

Beena is following her playbook for turning around Supreme at OGI. Last time she got it turned around she sold it.  This time….

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.