Little To Love About Organigram’s Earnings Report (OGI)

Organigram (NASDAQ:OGI) reported earnings this morning and sent shares of its stock down as much as 7.0% in early trading. While there are many positive aspects to the report, it and the outlook for 2020 leave little for investors to love. The producer of fine, organic cannabis reported stellar growth in revenue but there are fundamental problems impacting profitability. Those fundamental problems are not expected to be resolved until well into 2020.

Highlights from the Q4 Report

• Q4 Net Revenue (minus excise taxes) up 411%, 2019 Net Revenue up 547%
• Marketshare grows to an estimated 10% of Canadian adult-use sales.
• Q4 Adjusted EBITDA is 25% of net revenue compared to a small loss in 2018.
• Cost of sales up 880%, more than doubling the pace of revenue growth.
• Fair value changes to inventory and biological assets are a loss of C$11.80 million.

At the headline level, Organigram increased net-revenue by more than 410.0% over Q4 2018, that’s good. The bad part is that growth is marred by a lack of profitability. The company boasted an adjusted-EBITDA of $19.9 million, up from an adjusted loss in the comparable quarter last year, but actual profits are elusive and not expected until 2020 at the earliest. Among the many issues for Organigram are aggressive expansion within the broad cannabis market and a mounting oversupply issue.

Over-supply Looms Large

The problem for Organigram is not unique. The Canadian cannabis producers got off to a rip-roaring start with the legalization of adult-use and, frankly, Canada’s retail-distribution network is not keeping up. The slow roll-out of new retail locations is leading to massive amounts of oversupply, smaller than expected orders, returns to producers, expiring products, and writedowns of valuation for inventory and biological assets. And that doesn’t take into account declining realized sales prices for Canada’s cannabis producers.

“The lack of a sufficient retail network and slower than expected store openings in Ontario continued to impact revenue growth in Q4 2019 and were further exacerbated by increased industry supply … Q4 cost of sales and indirect production increased to $15.5 million from $12.5 million in Q3 2019 largely due to higher-cost products sold in Q4 and $1.6 million in inventory adjustments and write-offs related to legacy packaging and product that did not meet quality standards or expired.”

Organigram Curbs Expansion Plans

The promise of Canada’s cannabis scene is in its potential for growth. The potential for growth is still there but severely hampered by the slow expansion of retail facilities and public accessibility. Adding to the issue is uncertainty over Legalization 2.0, Canada’s second wave of Cannabis legalization that will bring consumer products to the market. Because of this, Organigram has decided to halt the construction of Phase 4C of its Moncton Campus. Phase 4C is estimated to be 70% complete and integral to the company’s growth outlook.

The Technical Outlook Isn’t Pretty

The technical outlook for Organigram is not pretty. The stock got a boost in the previous month but those gains were short-lived. Since then, shares of OGI have fallen below previous support and confirmed that support as new resistance. This set-up is a recipe for lower prices and will be exacerbated by the company’s plans to raise capital through a share-offering. The base shelf-prospectus says Organigram would raise up to $175 million through share issuance, warrants, or debt securities, none of which bode well for current investors.

At last look, bargain-hunters were scooping up shares of OGI but resistance still looms. Resistance is just above the $3.00 level and likely to be strong. Investors are cautioned not to enter this stock too early as 4th quarter results are not expected to be much better. Organigram cautions revenue growth is likely to be erratic in the current environment due to uncertainty of the timing of large pipeline orders and an inability to forecast future retail outlet openings.