Organizational Charts (NASDAQ:OGI) is just one of the many Canadian cannabis companies struggling to become profitable. As a result, OGI stock is down 26% from its high of $ 6 on February 10th. Good luck this company turns out to be profitable enough to justify that price tag again.

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In fact, OGI stock is up 208% over the past year, and in fact it’s up 233% since the start of the year. I’ve gotten to the point with Canadian cannabis stocks that I’m not going to consider investing unless they have produced some form of profitability. So I don’t mind the staggering rise in the stock this year despite the recent decline. Show me the meat!

Organizational chart pursuit of profitability

Organigramm recorded continuously falling sales in the past year (with the exception of the quarter up to August 2020). In the quarter ended November 2020, gross sales were down 11% year over year and net sales were down 23%.

In addition, adjusted gross margin was even down 30% year over year in the first quarter through November 2020. This is not a good thing. It is almost impossible for the company to have positive growth with negative margin growth.

In fact, the company had negative EBITDA (earnings before interest, taxes, depreciation and amortization) of $ 6.38 million for the quarter. This is a negative 33% of net sales of $ 19.33 million for the quarter. That’s a cruel EBITDA margin.

However, the company made a big point regarding this next reporting item. Cash flow from operating activities (CFFO) was slightly positive in the November quarter at CAD 296,000.

Much of this resulted from changes in working capital that provided cash, such as withholding payments to suppliers. In addition, certain non-cash costs are credited back to the result.

Most of the setbacks in non-cash fees, however, related to the costs associated with the rise in the share price. GAAP requires warrants to be recognized as an expense when the stock rises and they’re in the money. This lowers net income, but is put back in the cash flow statement.

Hence, most of the underlying surge in the CFFO really had nothing to do with the underlying operations and profitability of the company’s cannabis operations. So I’m not impressed with the barely profitable cash flow this quarter.

What analysts think

In general, analysts are not impressed with OGI stock. For example, TipRanks reports that the average target price of eight analysts who wrote on OGI stock in the past three months is only $ 2.34. This equates to a potential 47% decrease from today’s price.

Seeking Alpha reports that 16 analysts have an average price target of $ 2.76. However, Marketbeat states that the survey of 12 analysts has a consensus target of $ 2.93.

The fundamental problem is that the company has to prove to the market that it has a sustainable and profitable business model.

For example, the average sales price last quarter was $ 3.31 per gram, according to the SEC’s most recent quarterly financial filing (page 8). Frankly, this is a headwind to his profit-seeking.

However, the company hopes to sell more food and cannabis drinks. This is because more people “are not interested in smoking or vaping cannabis”. The problem is that “other” and international sales only make up about 1% of total gross sales. The sad fact is that it makes most of its money selling cannabis products.

What to do with OGI Stock

I suspect margins will be meager until the company can get into cannabinoid (CBD) or related item sales to diversify from cannabis only.

There is some light at the end of the tunnel. On its income statement, Organigram said it was reducing manual labor costs through automation equipment. As a result, it was said about possible future profits:

“… A number of ways to reduce costs have been identified that can benefit margins from the fourth quarter of fiscal year 2021.”

However, there are no earnings forecasts, no margin targets, and no forecasts for the continuation of CFFO earnings. Until the organization chart can create these forecasts or substantiate them with actual figures, the OGI share will get into trouble. Most investors will want to avoid it until there is a real chance of becoming profitable in some form.

At the time of publication, Mark R. Hake was not long or short in any of the securities in this article.

Mark Hake writes on personal finance on mrhake.medium.com and runs the Guide to Total Yield Value what you can check out here.