Weak Results For Organigram In Fiscal Q4

There was more disappointing earnings news from the major Canadian LP’s on Monday. Organigram Holdings (US:OGI / CAN:OGI) released weak numbers in its results for fiscal Q4 2019.

There were several points of concern for shareholders/investors.
 

• Margins on cultivation plummeted to near-zero in Q4. Gross margin (before “changes to biological assets and inventory”) was only 5%, versus a 50% gross margin in Q3.
• Net revenue dropped in Q4 to CAD$16.3 million from CAD$24.8 million in Q3.
• Adjusted EBITDA flipped from CAD$7.7 million in Q3 to negative adjusted EBITDA of CAD$7.9 million in Q4.

What makes the topline and bottom-line deterioration even more troubling is that Organigram made significant progress in its cultivation efficiency in Q4. Cultivation cash costs declined from CAD$0.95 per gram to CAD$0.66 per gram. All-in cultivation costs decline from CAD$1.29 per gram to CAD$0.94 per gram.

For Organigram (and many of Canada’s major LP’s), Cannabis 2.0 hasn’t arrived a moment too soon. Organigram’s initial focus in Phase 2 of legalization will be vape pens and cannabis edibles, the most popular cannabis derivative products in legal U.S. markets.

The Company has already submitted product notifications to Health Canada for a “portfolio” of vape pens and cannabis-infused chocolates. Organigram expects to begin shipping vape pens in December.

As a result of lower-than-expected cannabis sales (and rising Canadian cannabis inventories), Organigram is postponing completion of its “Phase 4C expansion” on its Moncton Campus (New Brunswick). The expansion is currently 70% complete. Organigram will move forward here “if and when” Canada’s retail network expands sufficiently.

The disappointing quarter is also impacting the Company’s finances. Organigram ended the quarter with CAD$47.9 million in cash and short-term investments.

Year over year, results were somewhat more encouraging:
 

• Revenues grew from CAD$12.4 million (fiscal 2018) to CAD$80.4 million (fiscal 2019), an increase of 547%
• Q4 2019 net revenue was up from $3.2 million (Q4 2018) to CAD$16.29 million, an increase of 411%

Organigram’s cultivation woes are being experienced across most Canadian cultivation operations at present. But OGI’s fiscal Q4 results are weaker than several of Canada’s other leading LP’s.

Organigram is based in Atlantic Canada and with primarily an Eastern Canada distribution focus. For this reason, it has been particularly hard hit by the failure of Canada’s eastern provinces to open up retail access more effectively.

While cannabis sales in Western Canada provinces rose (again) in September, sales actually fell in eastern provinces. This took overall Canadian cannabis retail store sales lower in September for the first time this year.

The center of retail sales weakness remains Ontario – and the Doug Ford Conservative government. But Quebec’s provincial government has also negatively impacted the legal market. This is through both a lack of stores (Quebec has no more stores at present than Ontario) and Quebec’s regressive decision to raise the legal age for cannabis consumption.

Over the short term, rising inventories and weak September sales can be expected to continue to depress OGI’s cannabis revenues and margins. Longer term, the situation looks brighter, with several potential major catalysts.
 

1. Ontario
2. Cannabis 2.0
3. International markets

Ontario is supposed to be in the process of licensing dozens of new cannabis stores via its latest cannabis license “lottery”. But the provincial government has gone completely silent on the status of those new licenses. Now we’re hearing the province may scrap its (ludicrous) lottery system altogether, in favor of an “open allocation” process.

Either way, relief from Ontario for Canadian cannabis cultivators is not coming overnight. But it is coming.

Phase 2 of cannabis legalization offers more immediate prospects for cannabis cultivators – and the Canadian industry as a whole. A multitude of new cannabis derivative products are expected to generate a 50% increase in the number of consumers of legal cannabis products.

Longer term, but perhaps the biggest investment driver for Canadian cannabis cultivation, is the opening up of international markets. As cannabis goes global, the expertise and scale of the Canadian cannabis industry will provide many opportunities to service the international market.

Alternately, Canadian cannabis cultivators may choose (or need) to follow the example of Aleafia Health (CAN:ALEF / US:ALEAF / GER:ARAH) – and move to outdoor cultivation.

Aleafia just reported its first outdoor harvest: 10,300 kilograms of dried cannabis flower at a cash cost of CAD$.0.08 per gram. That’s one way to instantly re-establish margins on cultivation operations.

Canadian cannabis cultivators are hurting as 2019 draws to a close. But with better days ahead in 2020, glass half-full investors will see this as a longer-term buying opportunity.