Over the past month, OrganiGram Holdings (OGI 1.07%) has seen its share price collapse by nearly 33%. Investors' hype about its potential evaporated when the company released its latest quarterly earnings.

While Canada's provincial lockdown measures to contain the coronavirus impacted marijuana stores' bottom line in the first quarter of 2021, OrganiGram had huge problems with its business model before such containment methods even began. Let's look at why marijuana investors should stay well away from this stock.

Man inspecting marijuana plant with a magnifying glass.

Image source: Getty Images.

Dreadful results

During Q2 2021 (ended Feb. 28), OrganiGram's net revenue decreased by 37% year over year to just 14.64 million Canadian dollars. The decline is the result of lower prices for pot, lower wholesale volume, and a lack of brand popularity. Over the past year, the company launched 62 new products, and has an additional 31 ready to go by the end of next quarter. Even that effort wasn't enough to lift its falling sales.

Simultaneously, the company's gross profit amounted to negative CA$17.195 million, compared to a gain of CA$11.288 million in the prior-year's quarter. OrganiGram simply had too much pot in its inventory and had to write it off as losses when it couldn't sell all of it.

In fact, the company sold just 3,688 kilograms of dried cannabis in Q2 2021, a 10% decline compared to the prior-year's quarter. Back in 2019, OrganiGram invested in state-of-the-art facilities that would produce up to 76,000 kg of cannabis per year. The demand needed to fulfill that supply has not materialized.

Right now, Canadian pot growers have stockpiled a total of 1.1 million kilograms of pot -- equivalent to about three years of consumption as the market enters the oversupply phase. In turn, the oversupply is driving down prices and causing huge losses to companies that expanded too quickly, like OrganiGram. The company's net losses increased by as much as 872% year over year in the quarter, to CA$66.389 million, or 4.53 times its revenue.

Can OrganiGram stage a comeback?

OrganiGram eliminated its debt through equity financing rounds and ended up with CA$232 million of cash on its balance sheet as of Feb. 28. On March 11, a British American Tobacco subsidiary purchased a CA$221 million stake in the company in exchange for 20% equity. Theoretically, the two could leverage their partnership and expertise to jointly develop products such as cannabidiol (CBD) hemp cigarettes with the new capital. Although, OrganiGram's focus seems to be elsewhere. Not even a month later, the company paid CA$22 million to acquire The Edibles & Infusion Corp in order to gain exposure to the Canadian edibles market.

The problem with these financing efforts is that they came at a time when OrganiGram's losses are accelerating, and the business doesn't even have profitability in sight. Under such conditions, investors should expect the company's net assets to dwindle over the time. By spending its cash on financing other marijuana firms instead of fixing its operations, any returns from those ventures would likely be years away, if they were to arise at all.

Moreover, acquiring companies in a hyper-saturated market isn't going to propel Organigram's growth forward. At the moment, there's a ton of money to be made in the maverick U.S. marijuana market. Unfortunately, OrganiGram has no exposure to it.

What's the verdict?

With declining sales, huge losses, and no sign of a turnaround, OrganiGram stock is hardly worth the price while trading at 9.8 times revenue. I'd highly recommend checking out U.S. cannabis producer stocks that are growing their sales by over 100%, and trading for better levels.