Organigram Holdings Inc. (NASDAQ: OGI) (TSX: OGI) reported that its second-quarter 2020 net revenues were $23.2 million a drop from the $26.9 million delivered in 2019 for the same time period. The company attributed the decline to lower recreational flower and oil sales volumes compared to the second quarter in 2019 when there were large pipeline fill orders to Alberta and Ontario. That occurred when there were supply shortages following the legalization of adult-use recreational cannabis sales.

The stock was falling over 11% on news of the decline in revenue and the detail that it was not in compliance with its debt covenants. It was selling at $1.60 in early trading, down from $1.81.

Other reasons for the revenue decline were lower average net selling prices from the increased competition and “evolving consumer preferences, for which a provision for returns and price adjustments was recorded in Q2 2020, mostly related to cannabis oil.” Organigram did note that the decreases were partially offset by the launch of Rec 2.0 products (vape products and cannabis-infused chocolates), and higher medical revenues as well as wholesale and international revenues, which had not occurred in the prior comparative quarter.

The net losses didn’t rise too much. The company said that the quarter had a net loss of $6.8 million, or $(0.041) per share on a diluted basis versus last year’s net loss of $6.4 million, or $(0.049) per share. This was largely due to higher SG&A expenses. The company spent $14 million versus last year’s $5.7 million to market and promote its product portfolio while also scaling its operations for the launch of its Rec 2.0 line of products.

“Our second-quarter results reflect continued execution despite ongoing industry challenges,” said Greg Engel, CEO. “We introduced new products such as our Edison Bytes chocolates, Edison Limelight dried flower and Trailblazer vape pens and continue to elevate the Canadian consumer’s cannabis experience. These products have been well received with strong customer demand to date and we look forward to further roll-outs in the space.”

Covenant Issues

Organigram reported that it had $41.2 million in cash and cash equivalents at the end of the quarter. The working capital was $96.8 million compared to $152.4 million on August 31, 2019 and was largely due to an IFRS requirement to classify the long-term portion of the BMO term loan ($76.4 million) to current liabilities as the company was in non-compliance with one of its financial covenants.

The company said it received a covenant waiver from its lenders that waives compliance with the financial covenant in question until May 30, 2020 and is currently negotiating an amendment to its credit facility agreement in an effort to address this matter. “While the Company believes it will be successful in negotiating the amendment, there can be no guarantee that an amendment will be secured on terms favorable to the Company or at all.” Organigram did say that $30 million remains undrawn on the term loan in its credit facility.

Production Costs Controlled

The company noted that its second-quarter cash and “all-in” costs of cultivation of $0.53 and $0.75 per gram of dried flower harvested, respectively, decreased from $0.61 and $0.87 per gram in Q1 2020, respectively, as more economies of scale were realized with expanded cultivation capacity and as the yield per plant increased from 150 grams in Q1 2020 to 155 grams in Q2 2020.

The quarter’s cost of sales remained flat at $15.8 million from the first quarter due to higher post-harvest costs due to: a lower percentage of less costly wholesale product sold (as wholesale is packaged in bulk without any specific labeling and excise stamps); and the launch of Rec 2.0 products in the second quarter, as the company scales and optimizes production and packaging.

Looking Ahead

Like everyone, the COVID-19 virus has affected Organigram. The had to temporarily lay-off of employees and so it expects reductions to cultivation, harvest, production and packaging capacity but plans to supplement with inventories on hand to meet anticipated demand. Specifically, Organigram said it will be focused on leveraging the automated and the most efficient lines of production and will deprioritize products with lower margins and/or that require higher manual labor.

The company said it believes it has sufficient inventory levels to supplement reduced harvest plans and enough contingency staff to keep packaging capacity intact in order to meet anticipated demand in the short-term. The company said it also remains comfortable with its current inventory levels from external suppliers (e.g. vape product hardware, packaging materials) and has not experienced any significant disruptions to date.