Organigram blames $22.5M loss on Ontario, predicts 'volatile' sales

Cannabis buds in production at an Organigram facility. (Provided)

Organigram (OGI.TO)(OGI) is banking on stronger sales in 2020 as the company reworks its selection of strains, rolls out vapes and infused chocolates, and hopes to benefit from more pot shop openings.

The Moncton, N.B.-based company capped off fiscal 2019 with a quarterly net loss of $22.5 million. The Canadian cannabis producer blamed the drop on a “lack of sufficient retail network and slower-than-expected store openings in Ontario” at a time when industry-wide supply is rising.  

Speaking on a post-earnings conference call with analysts, chief executive officer Greg Engel said the latest quarterly result “does not align with overall performance for the year” and is not indicative of the company’s future.

“In the quarter we’re in right now, it’s really been a more consistent demand-driven sell through rather than filling up warehouses. That’s been a real change from a market perspective where there has been this crazy lumpiness,” he told Yahoo Finance Canada in a phone interview.

The $22.5 million net loss amounts to $0.14 per share on a diluted basis. Organigram booked $16.3 million in sales for the period ended Aug. 31, down from $24.8 million in the previous quarter. It reported an adjusted EBITDA of negative $7.9 million versus a positive $7.7 million profitability figure in Q3.

Asked to estimate the break-even revenue level required for positive quarterly adjusted EBITDA, chief financial officer Paolo De Luca projected $30 million. Engel declined to give a timeline, but said the company’s soon-to-be launched line of infused chocolates and vapes will improve near-term profitability.

Organigram’s latest results are largely in line with guidance issued in a corporate update earlier this month.

The company said it shipped more product as of Nov. 11 compared to the same point in Q4 2019. It also expects Ontario will triple its store count from the current 25 authorized locations. That expansion could mean unpredictable sales in the coming months.

“Quarter-to-quarter revenue is expected to continue to be volatile due to the timing of large pipeline order for Ontario, in particular, where there is a centralized distribution model and where store additions are difficult to forecast,” Engel wrote in a news release.

He said the company has decided to delay final construction on the Phase 4C cultivation area of its Moncton campus “until there is more clarity on the timing and magnitude of the retail expansion network.”

“All in” costs of cultivation fell to $0.94 per gram of dried flower harvested from $1.29 per gram in the previous quarter. The fourth-quarter harvest increased to 7,434 kilograms from 6,052 kilograms in Q3. Gross margin before fair value changes to biological assets decreased to $0.7 million, down five per cent quarter-over-quarter. Production costs increased to $15.5 million in the fourth quarter, versus $12.5 in the previous period.

Full-year net revenue grew 547 per cent to $80.4 million versus $12.4 million in 2018, largely due to recreational legalization in Canada.

The company said it remains on track to launch vape pens in December, and submitted new product notifications to Health Canada for vape and infused chocolate products last month. 

Early warning

Organigram prepared investors for a weaker quarterly result in a Nov. 11 corporate update. Engle said the period ended Aug. 31 “did not meet our overall expectations,” citing slow store openings in Ontario and increased industry-wide supply. 

The company said it expected net revenue of $16.3 million after excise taxes, a drop from $24.8 in the previous quarter, due in part to a $3.7 million charge for product returns and pricing adjustments. That charge, plus $1.6 million in packaging and inventory adjustments, factored into the company’s expectations for negative EBITDA in the quarter. 

Organigram said the returns and pricing adjustments were related to two slower-selling items sold to the Ontario Cannabis Store, a lower-THC dried flower intended to shore up supply earlier this year, and a THC oil that saw weak demand. 

“The product returns noted in Q4 were disappointing,” Engel said, adding that product will be used for extraction. “We do not believe these two SKUs change the overall appeal of our brands and products today.”

Engel said consumer data guided product changes beginning in the first half of 2019. He said sales of pre-roll joints, because they’re an easy way for people to sample new strains, have been especially informative in determining higher-demand products.

Organigram said its product mix alignment to better match demand is “well underway.” The company estimates it has a 10 per cent share of the Canadian recreational market.

While a number of analysts cut their price targets on Organigram shares following the pessimistic guidance for the quarter, many remain optimistic as the company copes with challenges shared across the sector. 

“While the Q4 performance may have logically dented investor confidence, we continue to think the valuation discount is unwarranted,” Cantor Fitzgerald analyst Pablo Zuanic wrote in a research note Monday morning. 

Oppenheimer analyst Rupesh Parikh is similarly constructive in the long-term. 

“Although Q4 ended on a weaker note, OGI’s 2019 performance was a standout in the cannabis sector with positive adjusted EBITDA delivery of about $19.9 million well ahead of all peers,” he wrote in a note to clients on Monday. “We continue to believe OGI could emerge as a winner longer-term, but shorter-term industry headwinds keep us sidelined.”

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