It seems like we just finished discussing a 2020 full-year revenue blowout in the cannabis market for many of the top U.S. operators. Here we are already at the midway point of 2021 and, fortunately for investors, the revenue numbers continue to climb. For Canadian grower OrganiGram (NASDAQ: OGI), its recent better-than-expected revenue shows some signs of life for a company whose stock has been doing the opposite lately.
Better-than-expected revenue for the 2021 fiscal third quarter is a good sign, but it may not be representative of the bigger picture for the company. Is it enough to put OrganiGram in the green for the long haul?
Image source: Getty Images.
The positives
Driven by stronger adult recreational-use sales resulting in 40% sequential quarterly growth, and a 10% year-over-year quarterly growth, OrganiGram experienced total gross revenue up 51% sequentially, and 31% year over year for the same period, resulting in gross revenue of $29 million. This number topped analyst estimates of $22.2 million by 31%. On top of that, the company posted a net loss of $4 million, a colossal decline from the 2020 same-quarter loss of $89 million.
OrganiGram also made an acquisition during the fiscal third quarter, which it is counting on as a new and growing revenue stream for years to come. The acquisition of The Edibles and Infusions Corporation, a licensed manufacturer of soft chews and candy, is expected to result in new product offerings available to consumers in early August.
The new product offerings will add to the growing number of new SKUs as part of the company's product portfolio revitalization program, currently at 84 since July 2020. An expected 20 more are to come during the current fiscal fourth quarter.
In addition to revenue-generating moves to improve the company's health, OrganiGram is also taking steps toward cutting costs and other related expenses. The company is undergoing design improvements directed toward higher-quality flower and reduced production costs at its Moncton facility in Canada. It is also implementing new automation features, such as a new pre-roll machine that will speed up production while cutting costs associated with manual labor.
And in an effort to reduce expenses unrelated to product offerings, the company repaid $58.7 million toward outstanding credit balances, which is expected to save $2.7 million of annual interest expense.
The challenges
Cutting costs and expenses could ultimately be the determining factor in how long and how successfully OrganiGram can compete in the growing cannabis market. But the challenges to overcome are not easy.
As gross revenue grew from $22 million to $29 million on a year-over-year basis for the quarter, excise taxes -- taxes imposed on products and goods at the point of manufacturing -- rose by over 108%, to $8.7 million. Sales, general, and administrative expenses also saw an increase of 32% year over year for the quarter, and are expected to climb once again during fiscal fourth quarter. This is due to increased research and development expenses as well as marketing and sales related to retail expansion. And as the company continues with plans for design improvements and increased production capacity, the expenses related to those changes are expected to start during the current quarter and carry through to fiscal 2023.
In order to offset growing expenses, OrganiGram will need to find a way to sell more of its higher-margin products. During the fiscal third quarter, adjusted gross margin declined from 27% in the same quarter of 2020, to a less-than-stellar -4% in this year's fiscal third quarter. Fortunately, the action to gain higher margin may already be in place. At the end of the last quarter, the company announced new dried flower strain products in its higher-margin Edison and Indi brands.
CFO Derrick West said the strategic changes combined with a push for new higher-margin product could be the answer, stating: "we have identified a number of additional cost efficiency opportunities focused on enhancing our gross margin profile. We anticipate starting to see the benefits from these cost reductions during Q4 fiscal 2021."
The outlook
OrganiGram seems to have a plan in place to curb its expenses, though it may take a while -- possibly until the end of 2022 -- before we see the full results of cost-cutting measures and revenue generation from new product lines. If sales from its new revenue stream in soft chews and new products in its Edison and Indi brands can show strength when combined with strategic facility improvements, it will go a long way toward putting OrganiGram back on the radar for investors.
So far, for the current quarter, signals from revenue numbers and customer purchase orders support the expectation that revenue growth will do its part. Now it's up to the management of expenses. For now, I'm in a hold pattern with my current OrganiGram shares while looking for a few more quarters of solid growth before I'd be convinced to add to my holdings. For new investors looking long term in the cannabis industry with $1,000 to spend, I can think of a few other companies that provide a better opportunity.
