OrganiGram Holdings Inc (TSX-V:OGI) released its Q2 results on Monday. Net revenues of $26.9 million were about eight times the sales that The Company generated a year ago, which totalled just $3.4 million. However, despite the incredible sales growth, OrganiGram’s bottom line finished in the red with a loss of $6.4 million compared to a profit of $1.2 million in the prior year.
Why Did OrganiGram Fail to Stay in the Black?
The problem for OrganiGram is found in the gross margin section as The Company added less than $2 million after cost of sales and fair value adjustments. The good news is that its gross margin before fair value adjustments was over $16 million and represented 60% of net revenues, which is a much stronger percentage than the 52% margin it netted last year.
The bad news is that fair value changes chipped away at that improvement as a loss of $8 million cut the margin in half, leaving only $8 million to cover operating expenses. Last year, fair value adjustments gave the company’s gross margin a boost. In total, the $4 million increase to gross margin in 2018 combined with the decrease this quarter resulted in a total swing of $12 million.
Despite the narrow improvement in gross margin, OrganiGram’s loss was not as big as it could have been, with The Company posting an operating loss of $1.8 million compared to a profit of $2.3 million last year. The largest increase in operating expense came from sales and marketing, where costs of under $1 million came in at over $3.1 million this past quarter. Share-based compensation of $4 million was also much higher than the $1.1 million that OrganiGram incurred in 2018.
And with another $4.3 million in cost coming from financing expenses, the loss was destined to be even bigger.
Is Cash a Problem?
Given the challenges in the industry, it’s always important to consider a company’s cash position as well.
Over the last six months, OrganiGram burned through $22.4 million in cash from its operating activities, which is well up from the $5.9 million that it used up a year ago. The Company has been tying up a lot of money in inventory, with that resulting in a net change of $50 million during the first half of the year and being the difference between The Company generating cash flow and using it up.
OrganiGram has also been busier on the investing side of things, with about $49 million spent on purchasing plant, property and equipment since August. However, last year it purchased more than $124 million of short-term investments that resulted in investing activities being significantly higher in 2018.
Nonetheless, cash on hand decreased from $55 million since August to just $12 million as of the end of February. The problem for investors is that unless OrganiGram improves its cash position, it’ll be inevitable that it’ll have to take one more debt or issues shares. And with more than $4 million in financing charges this past quarter, issuing shares seems like the better option.
Overall, investors were not impressed with OrganiGram’s results as the stock was down more than 7% in trading during trading on Monday. However, the share price is still more than double where it was a year ago.