Organigram released their earnings today.

What were our conclusions last Q??

Plus side

• Back in covenant with their bank but… see minus side
• Rec sales were up 2% net of provisions, Vapes were up 33%.
• Medical sales were up 14%, but that’s $98 thousand
• Aggregate SGA reduced by $4 million

Minus side:

• Bank requires all equity raises post Dec. 31, 2020 be used to pay down loans
• Used full ATM previous Q and used full new ATM by June 2020.
• Sales slid and flower slid
• GM% was bombed by writedowns
• EBITDA got ugly
• Four Q’s in a row where they wrote down the IFRS side of inventory. $70 million and counting
• Inventory, inventory and inventory.

Two Q’s ago we said that they needed to generate sufficient 2.0 sales over the next two Q’s to replace the wholesale revenue of $9 million from the November 2019 Q.  They generated $4.8 million.

And the issue with inventory does not appear to be over. From earnings release:

• The Company expects an improvement to gross margins before fair value changes to biological assets and inventories sold in Q4 2020 due to fewer inventory write-offs and provisions as compared to Q3 2020. A negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs are anticipated to persist as Organigram intends to cultivate at less than the target cultivation capacity for the foreseeable future. Further, as indicated in previous quarters, the Company expects some production inefficiencies to persist in the near term and impact gross margin while it continues to launch new Rec 2.0 products and optimize production.

This 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 ain’t going to be pretty.

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 $2.4 million to $20.4 million all as a result of the $2.5 million increase in International wholesale. 

Here is a fun stat… Excise taxes paid in F2019 were $17.1 million and in F2020 $16.6 million, despite excise taxes on vapes and edibles being higher.  Paying less excise tax YoY is not a good thing.

Adult Recreational Sales: Trend and Peer

Adult Rec sales gave up last Q’s gain and dropped 2% to $15.2 million. As per table above, Rec flower finally saw some life with a 29% increase on the backs of value offerings like their pre-milled Shred which ended up being sold out.  I do note that Aphria put a pre milled product a week ago that is $0.50/gram cheaper than Shred. Rec oil was negative for the last 3 Q’s as they were hit with returns and provisions.

But here is the gut punch…. Vapes and edibles dropped 61% and 76% QoQ or by $2.1 million and $1.0 million, respectively, to an aggregate of $1.7 million. This is the lowest of any reported 2.0 Q.  2.0 will not be saving Organigram any time soon.

Provisions and returns of $2 million, an improvement of $1 million QoQ, are very high as a percentage of sales. Over the last four Q’s they have provisioned $7.1 million. That is 11% of adult use revenue.

Pre provision improvement, Recreational sales fell 7% QoQ. Ouch!

Medical Sales: Trend and Peer

Medical sales (which I include International sales) increased 24% or by $2.2 million to $4.8 million. International sales had a $2.5 million increase against sales declines in Candian medical of $0.2 million.

Wholesale Sales: Trend and Peer

Wholesale was $0.4 million after being nil 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

Gross Margin stayed in the basement this Q at negative $8.7 million an improvement form -$26 million last Q.

Earnings release:  

• Q4 2020 write-offs of excess and unsaleable inventories of $11.1 million, of which $8.3 million related to excess trim and concentrate; and $2.8 million of write-downs and adjustments to net realizable value and
• $3.5 million in unabsorbed fixed overhead as a result of lower production volumes, and $0.2 million related to lump-sum payments paid to temporarily laid-off workers in Q4 2020.

With they year end numbers I was finally able to decipher what the cost-based impairment was last Q.  And it was a doozy at $24 million.   This Q it was $11 million or $36 million for the year.  This is on top of IFRS voodoo impairments of $16 million in the Q and a whopping $73 million in F2020.

What I said last Q:

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.

This 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.

A couple Q’s ago they quit harvesting trim and they removed KGs sold from MDA.  KGs Sold reappeared this Q at 4,859 KGs.  This is lower than November 2019 of 5,501 KGs when they wholesaled a bunch of KGs to Aphria. They did not mention the weight shipped to Israel.

Fair Value increment from inventory sold was $8.7 million up from $7.6 million.  Gain on Biologicals for the Q was $4.8 million a significant decrease from $9.6 million last Q and $33 million in Q2 F2020. They also whacked the IFRS voodoo by $16 million more this Q after $26 million 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. 

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 was flat at $11.5 million.

G&A increased $1.6 million to $7.6 million level with two Q’s ago.  They look to have combined some elements in the Year end versus the last Q.  Combined Wages and Office and General increased $2.2 million (on a line item basis wages and benefits was negative $0.4 million, using a Q3 to Q4 true up for the Q, compared to Q3.  Not sure what is happening there.) Professional fees decreased $0.7 million to $0.6 million.  Expect these to increase next Q with the raise.

Selling expenses decreased by $1.1 million to $3.2 million. This is the lowest of the year. Selling expenses were 16% of sales, an improvement from 24% last Q,

SBC was level at $0.7 million and decrease from 13% of sales to 3%. The decline in share price likely the biggest factor.

Opex has been in the $11 million range for three of the four F2020 Q’s.

SGA & SBC Peer Comparison

Aggregate SGA had OGI as #3 in Peer group trailing APHA and TLRY.  In SGA + SBC they trail only Apha.  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 $20 million before IFRS voodoo versus negative $38 million last Q. Decrease in impairments in CoGS QoQ the reason.

Other expenses this Q aggregated Income of $1.7 million versus Expenses last Q of $38 million and include:

• $2 million writedown of PPE following $38 million impairment last Q.
• Financing costs were $1.0 million for the Q a reduction from $2.2 million.  Expect the Q2F21 to decrease as term debt was paid down.
• Covid subsidies were $4.6 million after $3.2 million last Q.

A tax credit in deferred taxes of $10 million last Q heads to $0 this Q.

Leading to a net Income of negative $39 million versus negative $90 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

I was able to revise Q3 F2020 EBITDA with the disclosure provided this Q.  Q3 Adj EBITDA was -$5.8 million.  Adj EBITDA improved to -$3.9 million mostly on the improved GM net of impairments.

Until they get Unabsorbed Overhead fixed… expect this to be negative.

+Adjusted EBITDA Breakeven

With a negative GM% I cannot calculate a breakeven.  If the 12% GM adjusted for writedowns is a proxy, they would need quarterly sales of $92 million to breakeven.

Cash Flow from Operations:

Opex burn was substantial.  A good amount of the difference between Adj EBITDA and Opex burn is the $11 million written off in CoGS impairment.

Balance Sheet Items of note:

• Cash and marketable securities total $75 million up from $45 million QoQ
  • What we said last Q: With their bank restricting any equity raises post Dec 31, 2020 to repay their debt you can pretty well count on another ATM or equity offering this year.
  • Two ATMs were filled this year and (as predicted) they just raised $69 million in equity via a private placement post Q end, of which $55 million is going to paydown their bank group.

• Bio assets remained flat at $5.3 million.  
• Inventory decreased $28 million to $66 million. $11 million would be cost and the balance would be IFRS.
  • What we said two Q’s ago: They have too much resin related inventory at $14 million available for extraction and $50 million in various other forms.
  • And they wrote down that by $12 million in trim and concentrate last Q and another $8.3 million combined this Q.
  • WIP Flower decreased to $4 million or by $22 million.   
  • Flower available for packaging increased by $3 million to $21 million
  • Flower Finished goods totaled $5.7 million an increase of $1.0 million
  • Available for extraction decreased by $1.2 million to $1.9 million.  This is where not harvesting trim and the writedown are evident as well as in…
  • WIP Concentrate for extract decreased $9 million to $19 million. Still very high relative to sales.
  • Bottled oil decreased $1.6 million to $1.3million.  I believe this is their discontinued product.   

Gas in the Tank: Trend Analysis

Positive delta of $2.4 million in Sales and a negative delta of $1.4 million in Finished Goods inventory. 

Gas in the Tank: Peer Comparison

• CGC has the most FG in sector, followed by OGI.

Waterfall – Trend Analysis

OGI pulled reporting KGs sold three Q’s ago.   And it reappears this Q at 4,859 KGs sold.  Below last reported Nov 2019 of 5,501 KGs sold.  This is despite the increase in value product large format skus.

Projected Yield of Bio Assets is 5,096 KGs.  They seem to be nearing a balance in sales versus harvest BUT they need much bigger sales to remove the Unabsorbed Overhead.

Waterfall – Peer Analysis

Inventory to Sales Ratio

With the writedowns both of cost base and IFRS voodoo this ratio drops to 3.25 Q’s of inventory to sales.

• PPE is down $2 million to $247 million. Impairment of PPE by $2 million. Capex is minimal going forward.

Liability and Equity Side:

• Long Term Debt increased to $115 million from $85 million and will reduce by $55 million at Dec 1, 2020 with a pay down of their bank debt. They also require cash balance to be maintained above $20 million versus $8 million previously.
• Share capital is up by $18 million thanks to the ATM.

Sales vs Harvest & Sales vs Inventory

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

In conclusion:

What we said last Q:

Followed by another bad Q.

The story remains the same with Organigram. Lack of brand stickiness.  Flower dropping to an all-time low for recreational sales is stunning but on trend.

Their Gross Margin will be taking a hit for the near term as the previous “industry leading” cash cultivation costs has been shelved because they couldn’t sell it, rendering it meaningless.  They will have to carry unabsorbed overhead and we will see if trim continues to be discontinued. Gross Margin was once a strength.  Not sure about this anymore.

They have very good SGA with a floor of $10-12 million.  The problem is they need a 60% Gross Margin to cover on $20 million in sales.  They fell short of both this Q.

This 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.

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.