This will be a slimmed down structure – since GoBlue has done a full rundown (which I have yet to look at). We do find areas where we underlap, so here’s my observations for your perusal.

Organigram ($OGI) was an early entrant in the sector, one that built in Moncton – an area with a willing (and ready) workforce, and a hankering to build out commerce in the Atlantic region. Noble to be sure in an area known for government handouts and subsidies more than an entrepreneurial mindset.

When we toured $OGI in May of 2018, we saw a good facility with a slightly different grow modality than in others – that of going ‘vertical’ in growing and maximizing available canopy. The brands seemed fine to my eye (‘Edison’ was just being rolled out), and over the past couple of years, I’ve found their product to be ok, but not ‘premium’. The consumer market alas has not shown much love to the company, with market share declining while overall demand is increasing – a heck of a situation for an early starter to be in. Layoffs have followed, their capital expenditures around planned expansion have been shelved.

Long time readers will know my analogy to cannabis cultivars/products being similar to a ‘hit record’ – in that they’ll come in and go out of fashion over time. Something that I recall clearly from the visit was when I asked about their cultivars – if they had a R&D or testing area dedicated to new genetic lines. They said ‘no’. That they had the next several year’s products in place, and they were locked and loaded.

It struck me odd at the time, a ‘build it and they will come’ sort of mindset. That ‘hit record’ analogy was top of mind for me, and I was interested if/how business was planning to address. Or even if they saw the same thing. $OGI, at that point, didn’t.

To the financials!

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• Cash at some $44MM, which will offer some runway. CEO Greg Engel has decided to sit on his wallet for now, and tack to a defensive position. An action can be prudent even if distasteful for stakeholders.
• Inventory (Note 7) is really where sore spots are revealed: $28MM written off this quarter ($33MM on the fiscal year). Over $5MM of grown product was written off and destroyed due to lack of staff to harvest. This latter item lays bare the challenges the industry is facing: there was a conscious choice to let production die, rather than harvest and complete.
• I think about that hard.
• Of that $28MM, ‘excess and unsaleable’ inventory was trim and bulk extract.
• As mentioned, they stepped on the throat of their planned expansion (Moncton Campus Phase 4C) this quarter, bringing work on the unfinished phase to a complete stop. The phase remains uncompleted though, and with the words “without any foreseeable near-term use” attached to a partially complete operation, management found there was only $1.3MM (Note 8d) in moveable equipment and land value. Thus, $37MM was written off. Ouch.
• There’s 2 pages dedicated to the BMO credit facility and it’s amendments. I’ll leave that to GoBlue.
• Note 11(iii) reveals their at-the-money (ATM) equity program is raising cash by selling shares that will go to pay off debt. Ouch^2
• Still, they were able to raise $31MM during the quarter under the program, and another $18MM subsequent to quarter’s end. Wow. This puts their cash balance (along with another $30MM drawdown on the credit facility) in a far different light. They are in full survival mode.
• Stock options exercised in the quarter has tanked, with only 9k (at $0.61) being struck. There’s still 3MM o/s at or below current prices.
• They actually sublet some space to a tenant. 3,500 sq./ft. No word on who or what is being done with it.
• Their ‘Trauma Healing Centres’ – a medical pathing stream like those at Aleafia and META – is for sale, and largely fallow. Look for the medical model to continue attrition across the sector as recreational access offers selection and less friction to consumers.

Well, in a word, these financials are ‘dismal’.

A company does not defer planned capital spending, shutter existing production, and lay off a whack of their workforce on a whim. Nor reflexively. I suspect Greg Engel has taken a long hard look at the cannabis sector landscape, and it led him to these decisions. Not simply ‘bad’ for $OGI, this type of activity is a sour portent of what’s facing many others. He also struck me as being a notch above others in his position in the space, which makes this all the more serious.

$OGI has announced they no longer are even bothering with retaining trim, that’s how uneconomic this current supply glut (and $OGI’s throughput) is.

That there’s continuing interest in their ATM program is encouraging to some degree, but paying off bank debt with equity sales isn’t. There might be belief that somehow, someway – if they can only get past the flaming wreckage that’s coming onto the field – that their early entrance and ascension of the learning curve will serve them well in the post-rationalization period yet to commence in the sector.

The same day these financials were released, a gracious ‘goodbye’ was given to the SR VP Marketing & Comms. That this person presided over declining sales and market-share (quarter after quarter after quarter), the graciousness was polite. Noting that there was 5 ‘award winning’ products is nice and all, but as a business person, I view the individual as responsible in large part for the lack of brand stickiness and a lack of adaptation of product portfolio to be one of the main drivers of where they are. The hundreds of laid off underline that. Some might be more charitable, and I’m sure that they are a nice person. But.

Their replacement comes from within, elevated into the role of ‘VP-Marketing’. They’ll have their hands full. The caution with which $OGI has approached their business and product rollout has been staid, and steady as she goes. It’s a reflection of professional leadership, yet also a misstep to myself in not reacting to market realities. Could they have re-branded/re-jigged/re-priced offerings sooner, taking risks to gird against sales attrition? Perhaps. That’s the thing about armchair quarterbacking, it’s really easy to do. Myself though, I think that tried and true/steady approach failed them – that they chose not to alter course.

We here at TheCannalysts have alluded to how companies will need to be nimble to succeed. It’s also my belief that given recreational sales expansion…….that there is a market that’s currently under-served in the legal space. It must be thin gruel to know that having $57MM in inventory isn’t helping. This company desperately needs some sort of support and presence in their product portfolio, and their risk-adverse approach so far has come up woefully short. Staying the course has led them to this point. Engel’s demonstrated risk-aversion may have served $OGI well during formation. It hasn’t over the past several quarters.

We’ve also alluded to how being ‘cool’ in the space isn’t necessarily reflective of the mass market wants, and how enticing the consumer’s eye is more than saying these “nugs are really dank dude“.

I wouldn’t be surprised in the slightest if Engel’s gone by the end of the year. And that new VP of Marketing had better be ready to rock n’ roll. Unlike the $5MM of crop they binned, there’s no time to waste. These guys need to find out how to sell what they’re producing…..and they should have started 2 quarters ago. I suspect they already have, and it would explain why an empty seat came up in the boardroom.

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 holds no position in $OGI.