COVID-19The weed wireOrganigram blames weak sales on delayed value product launch

Moncton-based producer says Health Canada axing its Trailer Park Buds bulk product also contributed to a Q3 revenue drop
Jared Gnam Jared GnamJuly 21, 202010 min

Canadians want cheap weed and OrganiGram Holdings, Inc. (TSX: OGI) says the Covid-19 pandemic has delayed its ability to meet that demand.

On Tuesday, the Moncton-based producer reported earnings for the third quarter ending May 31, booking a net loss of $90 million on net sales of $22.2 million.

The company said revenues dropped 27 per cent from Q2 due to pandemic-related layoffs, which led to major product launch delays in the bulk value category.

Organigram noted how significant growth and “intensifying competition” in the dried flower value segment has created a major shifts in Canadian market share.

“Particularly since the onset of the pandemic, value priced product in larger format sizes have become an increasing focus of consumers,” the company said in a statement.

Organigram responded in the quarter by introducing its Trailer Park Buds 28-gram value product, which played off of the Canadian hit TV series The Trailer Park Boys and was reportedly selling out early in seven provinces. But after reducing its workforce by 400, the company said it couldn’t ramp up manufacturing and distribution to capitalize on gaining market share.

Further, the company had to respond to Health Canada ordering a halt on the product due to it violating celebrity promotion rules in the Cannabis Act. It did so by “proactively making some changes to the TPB brand and logo” which reportedly resulted in staff covering up a portion of the offensive celebrity reference with a black marker.

Read more: Organigram lays off 400 workers due to Covid-19

Read more: Corporate cannabis continues value brand pivot as Canada enters recession

Read more: Trailer Park Buds references show elements that could be appealing to youth: Health Canada

Moving forward, Organigram said it has shifted its value offerings to a seven gram and 15 gram option launched under its Trailblazer brand in the middle of this month.

But the company warned that any meaningful incremental sales from the adult-use recreational market won’t be realized until until fiscal Q1 (September–November 2020), which is when it will release its Trailblazer 28-gram option.

“The cannabis industry in Canada remains highly competitive and oversupplied amongst both licensed producers and the still dominant illicit market,” Organigram said.

Organigram aims to ‘right-size’ operations after booking big write offs

After laying off another 220 workers earlier this month, the company said it has “right-sized” its business to match current demand, “but retains significant flexibility to increase production as the necessary company infrastructure is already in place.”

Read more: Organigram lays off 220 workers, warns of declining weed sales

Due to the oversupplied market, Organigram said it had to write off $19.3 million in unsold inventories, including $11.9 million related to excess trim and concentrate. The company also reported a $2.7 million writedown due to declining market prices, and $7.9 million charges related to the reduced workforce.

Way too much weed: Organigram said it had to write off $19.3 million in unsold cannabis inventories in the fiscal third quarter of 2020. Press photo

Those charges combined led to a cost of sales of $44.4 million in the third quarter, compared to $15.8 million in the prior three months, the company noted.

Gross margin before fair value changes to biological assets and inventories was a reported negative $26.4 million due to the higher cost of sales.

The company’s massive $90 million Q3 net loss was also bolstered by $37.7 million in impairment charges for property, plant and equipment.

From an operational standpoint, the company reported an adjusted earnings before taxes, interest, depreciation, and amortization loss of $24.7 million.

While the company has cut around half its workforce, reported selling, general and administrative expenses remained steady at $10.3 million in the third quarter, which Organigram attributed to scaling up operations for the ongoing release of its cannabis 2.0 products. 

The company has four vape brands on the market, including its premium Edison-branded options that it launched in April with the help of major vape maker Pax Labs.

Organigram has also shipped out number of infused chocolate products and will introduce a powdered beverage product later this year that the company says was developed with its proprietary nano-emulsification technology and boasts cannabinoid absorption of 10 to 15 minutes.

Looking ahead, the company said it will start seeing international wholesale revenue in the fourth quarter with its newly minted seven-year supply deal with an Israeli partner.

Read more: Organigram signs 7-year medical cannabis deal with Israeli firm

As of July 17, the producer said it had $78.2 million in cash and short-term investments, excluding an $8 million guaranteed investment certificate.

Shares of Organigram on the Toronto Stock Exchange dropped 9.3 per cent at time time of publication Tuesday.

Top image via Organigram

 

jared@mugglehead.com

@JaredGnam

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