It seems like we just finished discussing a 2020 full-year revenue blowout for many of the top U.S. cannabis operators, such as Green Thumb Industries, Curaleaf, and Cresco Labs. Here we are already at the midway point of 2021, and fortunately for investors, the sector's sales numbers continue to climb. Recent better-than-expected revenue for Canadian grower OrganiGram (NASDAQ: OGI) in particular demonstrates some signs of life for a company whose stock has been less than spirited lately.
A positive quarterly sales surprise 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?
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The positives
Driven by stronger adult recreational-use sales resulting in 40% sequential quarterly growth (10% year over year), OrganiGram's total gross revenue was up 51% sequentially and 31% year over year to a total 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 improvement on the 2020 same-quarter loss of $89 million.
OrganiGram also made an acquisition during the fiscal third quarter, and management is counting on it to be 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 products available to consumers in early August.
The new offerings will add to the growing number of SKUs (individual products) that are 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 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 management expects will save $2.7 million of annual interest expense.
The challenges
Cutting costs and expenses could ultimately be the determining factor in how successfully, and for how long, OrganiGram can compete in the growing cannabis market. But the challenges to be 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 Q4. This is because of 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 increased 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 Q3 2020 to a less-than-stellar -4% in this year's Q3. Fortunately, the factors necessary to achieve a higher margin may already be in place. At the end of the most recent 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 products, could be the answer. Wwe have identified a number of additional cost efficiency opportunities focused on enhancing our gross margin profile," West said. "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, all that 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, looking for a few more quarters of solid growth before I'll be convinced it's time to add to my holdings. For new, long-term investors looking toward the cannabis industry with $1,000 to spend, I can think of a few other companies that provide a better opportunity.
