Organigram Holdings Inc. (Nasdaq: OGI) (TSX: OGI.TO) announced its results for the third quarter ended May 31, 2020. This article, however, highlights, rather than disguises, the company's abysmal Q3 performance.

Whenever you see a company's quarterly report dwell on its financial performance compared to the same quarter a year ago with next to no, if any, mention of its sequential performance (i.e. compared to the previous quarter) you know the company has not much of anything positive to report about its current operations. 

This article ignores the hype and spin and resultant misleading presentation by Organigram management in its latest financial report and takes a look between the lines to reveal some very distressing numbers that shed a revealing and enlightening insight into the health of Organigram's operation. 

Q3 Key Financial Highlights (All amounts are expressed in Canadian dollars unless otherwise noted, and are compared to the results achieved in Q2 of 2020)

• Net Revenue: decreased 22% to $18M from $23M
  • primarily do to:
    • lower flower sales volumes and a lower average net selling price driven by increased competition and
    • sales returns and price adjustments on slow-moving aged product as a result of evolving consumer preferences.
• Cost of Sales: increased 181% to $44.4M from $15.8M 
  • primarily due to:
    • write-offs of excess and unsaleable inventories,
    • inventory write-downs to net realizable value to reflect declining prices and
    •  charges related to:
      • a reduced workforce due to COVID-19,
      • unabsorbed fixed overhead as a result of lower production volumes and
      • lump-sum payments paid to temporarily laid-off workers. 
• Adj. Gross Margin: decreased to ($50.2M) from $11.3 
  • largely due to:
    • negative Q3 2020 gross margin before fair value changes to biological assets and inventories sold as well as
    • greater net non-cash negative fair value changes to biological assets and inventories sold
• Adj. EBITDA: increased to ($24.7) from ($1.1M)
  • due to:
    • lower gross margin before fair value adjustments to biological assets and inventories sold in Q3 2020.
• SG&A: decreased 26% to $10.3M from $14.0M
  • due to:
    • increase in costs for the ongoing launch of Rec 2.0 products
    • offset, in part, by the current quarter’s reduced spending during COVID-19.
• Profit (Loss): Loss increased 1222% to ($89.9M) from ($6.8M)
  • due to:
    • a greater negative gross margin in Q3 2020 and
    • impairment charges for property, plant and equipment in Q3 2020.
• Loss/Share: increased 1175% to ($0.51) from ($0.04)

Outlook

According to today's Q3 financial report the company:

• believes it has right-sized the business to better match the current demand and competitive dynamics while maintaining significant flexibility to increase production as required,
• believes it is well-positioned to capture incremental market share and sales over time given its considerable new product launches in Q3 and those underway presently (Q4).
• 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. 
• expects a negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs to persist as Organigram intends to cultivate at less than the target cultivation capacity for the foreseeable future.
• 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.

Stock Performance

The stock price had declined by 8% by mid-day in reaction to the Q3 Financial Report.

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