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Organigram Holdings Inc.’s results were largely in line with the guidance the company released earlier in the month: revenue dropped sharply quarter-over-quarter and gross margin was eaten away by higher costs.

The company reported $16.3-million in Q4 sales, down from $24.8-million in Q3, and an adjusted EBITDA loss of $7.9-million, amid product returns and inventory writedowns. Organigram also said it is delaying the completion of phase 4C of its Moncton facility to save cash.

Over all, Organigram’s management was optimistic on the company’s Monday morning earnings call, describing the poor quarter as a temporary stumble due to a lack or retail stores across the country.

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Here are some takeaways from the call:

Higher sales needed for positive EBITDA

Organigram’s CFO Paolo De Luca said the company needs to nearly double its sales to become EBITDA positive again.

"We’ve been EBITDA positive with $25-million to $28-million net revenue in the quarter. Our costs have gone up on the SG&A side a little bit, just because we're a completely different company now we're on the Nasdaq ... So I think in that $30-million to $35-millon range is where we're comfortably EBITDA positive, but we can take measures if we needed to to get even more efficient,” Mr. De Luca said.

Gross margin compression

Organigram saw gross margin decline to 5 per cent from around 50 per cent. This was driven by a “confluence of events” that are unlikely to happen again, Mr. De Luca said.

“You had some return product from the OCS that affected our revenue. Some of the formulated oil had to be destroyed because it can't be reused; we also had some formulated 5:5 oil that we had to destroy just because we had too much of it…We launched with a lot of white jars, and now we're using the blue jars, so some of that had to be written off,” he said.

“In general you’re looking at $3-million just from year-end adjustments; things we had to write off or obsolete packaging that affected margin. And then I would say the other big impact is we had higher cost of cultivation in Q3 that spilled over into our sales in Q4.”

Higher post-production costs also had to do with overstaffing in the expectation of higher sales.

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“The company ramped up staffing during the year, without being able to realize the benefit of full efficiencies from scale. The company expected significantly more throughput for orders, and in order to be prepared for growth, it had to ensure sufficient staffing, especially with large provinces that often provide large pipe-line fill orders in anticipation of increases in retail store count," Mr. De Luca said.

A growing room at the Organigram Manufacturing Facility in Moncton, New Brunswick. Oct. 12, 2019.

John Morris/The Globe and Mail

Cannabis 2.0 products

Organigram’s Cannabis 2.0 strategy will be led by several vape products and a line of chocolates, which will be produced in Phase 5 of the company’s Moncton facility. The company is also planning to roll out a powdered beverage product in the first half of calendar 2020.

Construction on Phase 5 is approaching completion, and the company has finished installing a $15-million chocolate making line, which will allow “high-volume, high throughput” chocolate production, said CEO Greg Engel.

“As we look at Cannabis 2.0 products, the critical part of producing the majority of these products is going to not be the cost of cannabinoids that go into the product, it's actually going to be your cost efficiency of producing end products," Mr. Engel said.

The chocolate production line will initially make chocolate for in-house brands, but Organigram is open to using it for white-label manufacturing.

Price compression

Mr. Engel said that Organigram has experienced less price compression than other Canadian producers thanks to a pivot towards higher THC strains over the past six months.

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“What we know from U.S. state data is… there was and continues to be price compression on low and mid-end product. But it's really on that upper end product that there has been price sustainability,” he said.

“Our focus to shift towards higher velocity, high-demand products has been able to ensure the core production capability of our facility is focused on the in-demand products.”

OCS orders

The details of how the Ontario Cannabis Store will handle Cannabis 2.0 orders is still unclear, said Mr. Engel. However, the proposed changes in the distribution system are positive.

Mr. Engel said the OCS will likely retain their centralized warehouse, but companies will be able to “do allocations on a weekly basis to OCS based on throughput. So it’s not going to be the lumpy big infills we saw after the first orders in 2.0. For Ontario in the future it’s going to be more demand driven as we’re seeing in other parts of the country."

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