OrganiGram Holdings Inc. (NASDAQ:OGI)(TSXV:OGI) reported third-quarter losses and an eight per cent drop in sales over its previous quarter as recreational cannabis reorders in Ontario and British Colombia also waned in the three-month period that ended May 31.
The Moncton N.B.-based company reported Monday a loss of $10.2 million in its third quarter compared to a profit of $4.1 million in the prior year.
OrganiGram’s net revenues of $24.8 million were more than seven times the $3.4 million in sales from last year, but a drop from its $26.9 million in its second quarter.
The financial data firm FactSet expected the company to generate revenues just under $30 million, while Douglas Miehm, an analyst with RBC Capital Markets, said OrganiGram’s latest revenues were lower than its estimate of $28.2 million.
The company was the first major Canadian pot producer to report earnings this season and its results are considered to be a gauge for investors of what may come of cannabis heavyweights Aurora Cannabis Inc. (NYSE: ACB)(TSX: ACB) and Canopy Growth Corp. (TSX:WEED)(NYSE:CGC).
What happened?
OrganiGram sold close to 4,600 kilograms of raw cannabis in its latest quarter, which was down from 4,990 kgs from last quarter — and quite a bit lower than the 6,500 kgs analysts expected the company to sell.
While sales in Alberta and Atlantic Canada grew, shipments decreased in B.C., and particularly in Ontario, Canada’s largest market for pot, as the province made a larger number of orders in the previous quarter in anticipation of the first set of 25 retail stores opening.
“Not having that replenishment in Q3 had an impact,” said Organigram’s chief executive Greg Engel on a conference call. The CEO added the B.C. market has presented challenges and shipments to Quebec had occurred just after the quarter ended.
Other notable figures
(Source: OrganiGram)
OrganiGram’s gross margin declined to 50 per cent compared to 60 per cent from last quarter, but it kept its production costs low compared to its Canadian rivals with each gram costing the company $2.70 to produce.
Also, the company generated a positive cash flow for a fourth consecutive quarter with a total of $8 million.
Operating expenses of $11.1 million were more than double last year’s tally of $3.9 million but the increase wouldn’t have been enough to put the company into the red had it not been for the changes in fair value. A year ago OrganiGram got a boost of more than $10 million thanks to changes in fair value. But this year it saw the reverse effect with a loss in value of approximately $12.5 million.
While expenses were up, it’s an encouraging sign for investors they didn’t outpace the rate of sales growth.
As long as OrganiGram doesn’t see big swings in fair value in future quarters, profitability shouldn’t be out of the question for the company. That’s refreshing for industry investors that have seen primarily red ink when it comes to reporting earnings.
Growth expected
OrganiGram CEO Engel said another factor playing into lower-than-expected revenues was the company’s cultivation experiment that led to growing struggles in its third quarter. But he said the problems have been fixed and next quarter its yield per plant should improve, whiles all-in production costs per gram should decrease.
Engel is also optimistic that with more stores coming online in Canada, and when the country allows the sale of next-generation cannabis products at year-end — including vape pens, chocolates and beverages — there will be more growth for OgraniGram and the industry as a whole:
“We have seen adult recreational cannabis sales highly correlate to the presence of physical retail stores based on a comparison of the provinces in Canada,” Engel said in the release.
The Canadian market is positioned to grow significantly with more retail stores opening – particularly in the two most populous provinces of Ontario and Quebec – and the upcoming legalization and availability of edibles and derivative products.
Sales have surged in Canada when consumers have more retail store options rather than ordering cannabis online.
OrganiGram said it will be ready for the growing demand with its Phase 4 production expansion being on schedule for completion by the end of 2019. Once the new growing rooms are licensed and operational, it will increase its capacity to 113,000 kgs per year. It has already received approval for some of the rooms and it is currently licensed to produce up to 61,000 kg of cannabis.
The company also outlined its strategy for next-generation of cannabis products, which will focus on chocolates and vape pens.
Recently partnering with PAX Labs, OrganiGram expects its line of vape products to boost revenues and margins just like they have in U.S. states with legal markets. And with OrganiGram recently investing in a chocolate cannabis product line, it has its sights on taking advantage of the edibles market as well. The company expects to have edibles ready for sale early next year while vape pens will be available this December.
OrganiGram’s stock was up over four per cent Monday to $7.92 per share on the TSX Venture Exchange following a conference call in which the company expressed optimism about its coming new products and highlighted its positive cash flows.
