Canadian cannabis producers have been shell-shocked by problem after problem. OrganiGram Holdings (OGI 2.78%), though, ranks as one of the strongest in the industry and has had fewer issues than most of its rivals. The company hit a home run with its fiscal 2020 first-quarter results announced in January. It's also avoided the turnover at the top that several of its peers have experienced.
But OrganiGram isn't bulletproof. The company reported disappointing fiscal 2020 Q2 results before the market opened on Tuesday. Here are three glaring problems in OrganiGram's update.
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1. Falling revenue
Just three months ago, OrganiGram posted 55% quarter-over-quarter revenue growth. The company's situation has changed dramatically since then. It reported Q2 net revenue of 23.2 million Canadian dollars ($16.6 million), down 8% from the previous quarter and falling 14% year over year.
There were several culprits for the revenue decline. For one thing, competition has increased and caused average selling prices to fall. Customers have changed their preferences as well, leading to OrganiGram writing down revenue in Q2 for returns and price adjustments -- primarily for cannabis oil products. In addition, year-over-year comparisons were skewed because of significant order volume in Alberta and Ontario in the prior-year period to address supply shortages during the early days of the adult-use recreational market in Canada.
It's important to note that OrganiGram's revenue fell even with a solid contribution from sales of new cannabis derivatives products. The company reported that its new cannabis-infused chocolates and vape pens generated 13% of net revenue in the second quarter. In other words, the Q2 results could have been even worse.
2. Negative adjusted EBITDA again
OrganiGram has been one of only a handful of Canadian cannabis companies to deliver positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Its streak of reporting positive adjusted EBITDA was interrupted in fiscal 2019 Q4, but OrganiGram returned to positive EBITDA in fiscal 2020 Q1.
This new streak didn't last long. OrganiGram posted negative adjusted EBITDA of CA$1.1 million in Q2, down from positive adjusted EBITDA of CA$4.9 million in fiscal 2020 Q1 and CA$13.3 million in fiscal 2019 Q2.
What happened? OrganiGram's cost of sales was higher in Q2 in part due to production inefficiencies stemming from its launch of chocolates and vapes. The company's selling, general, and administrative costs also rose significantly in part as a result of increased spending related to the launch of its derivative products.
3. More problems ahead
CEO Greg Engel said that his company's Q2 results "reflect continued execution despite ongoing industry challenges." The operative word in that statement is "ongoing." The challenges for the Canadian cannabis industry will no doubt mean more problems for OrganiGram.
In particular, the COVID-19 pandemic has thrown a wrench into the company's operations in a major way. OrganiGram laid off around 45% of its workforce in early April because of the viral outbreak. It's slowed down cannabis production and is relying more heavily on existing inventories. The company initially planned to launch powdered beverage products by the end of June, but now isn't able to say when these products will launch because of the uncertainty created by COVID-19.
OrganiGram's fiscal 2020 Q2 ended on Feb. 29. That was before the most stringent measures to curb the spread of the coronavirus went into effect. It's very likely that its Q3 results will be even worse than its Q2 results.
Looking for bright spots
Despite these glaring problems, it wasn't all bad news for OrganiGram in the second quarter. There were some bright spots.
OrganiGram's chocolates and vape products have enjoyed strong customer demand so far. The company expects to begin shipping its Edison PAX ERA vape distillate cartridges soon. Its medical cannabis, wholesale, and international sales have increased.
Perhaps most importantly over the short term, OrganiGram's cash position remains relatively strong. The company reported cash and short-term investments totaling CA$41.2 million at the end of fiscal 2020 Q2. It also has CA$30 million undrawn on a term loan plus a CA$25-million revolver that is undrawn. OrganiGram expects to be able to fund operations for the foreseeable future.
In addition, its long-term prospects still look good. Once the COVID-19 crisis passes and business returns to normal, the company should be able to again deliver strong revenue growth and move toward consistent profitability. For now, though, marijuana stocks (including OrganiGram) are likely to remain highly volatile.
