The parent company of Organigram Inc., Organigram Holdings Inc. (NASDAQ: OGI) (TSX VENTURE: OGI) reported its revenue of $24.8 million for the third quarter ending May 31, 2019, fell sequentially from the second quarter net revenue of $26.9 million. However, it was a 621% increase over last year’s net revenue of $3.4 million.
The company said that the third-quarter net revenue reflected significant sales growth from Alberta and Atlantic Canada offset by the timing of shipments to Quebec that occurred subsequent to quarter-end, a large pipeline fill in Q2 2019 for Ontario in advance of opening retail stores that were not fully matched by reorders in Q3 and fewer reorders from British Columbia in Q3 (as demand for legal products remains generally under indexed in that province). The gross revenue of $30.3 million was a 784% increase over last year’s gross revenue of $3.4 million.
The company also delivered a net loss of $10.2 million or $(0.07) per share. The company said the net loss was largely due to non-cash fair value changes to biological assets in inventory. This was a 429% increase over the net income of $4 million for the same time period last year. Year to date, net income from continuing operations was $12.9 million or $0.09 per share on a diluted basis
“We continued to report strong sales in our third quarter and now have distribution in all ten provinces. In our fiscal year to date, we have generated strong operating and financial results, placing us among the leaders in the Canadian industry. While we saw a temporary reduction in yield per plant in Q3 due to temporary changes in growing protocols, not only have our yields returned to historical levels, but we have seen a meaningful increase in average cannabinoid levels in harvests to date in Q4” said Greg Engel, Chief Executive Officer of Organigram.
Cost To Grow Got More Expensive
The third quarter cash and “all-in” costs of cultivation of $0.95 and $1.29 per gram of dried flower harvested4, respectively, increased from $0.65 and $0.95 per gram in Q2 2019 almost exclusively due to a temporary decrease in yield per plant as a result of a change in growing protocol. The company said it returned to proven growing methods and yield has returned to previous levels toward the end of Q3 and in Q4 (to date).
The change in growing methods also affected the gross margins which decreased to $12.3 million or 50% from the second quarter’s 2019 adjusted gross margin of $16.0 million or 60%5 largely due to production costs, the temporary decrease in yield per plant and write-downs of legacy packaging materials that were replaced with new, more consumer-friendly packaging. Q3 gross margin was negative $0.2 million largely due to fair value changes in biological assets and inventory sold.
Getting Ready For Edibles & Vapes
The company said its production and product development teams have made significant preparations to execute its strategy and plans for the derivatives and edibles launch later in 2019. Organigram has chosen to initially focus on the two most popular product forms based on US state sales data: vaporizer pens and edible products.
Organigram said it expects the construction of additional in-house extraction capacity to be completed by the end of calendar 2019. However, it said it has the capacity to fill vaporizer pens in its existing facility ahead of the licensing of Phase 5 in order to be ready to sell the products as soon as authorized for sale in December 2019. During the quarter, Organigram announced a $15 million investment commitment in a high speed, high capacity, fully automated production line with the ability to produce up to 4 million kilograms of chocolate edibles. The investment will provide the company with a state-of-the-art chocolate molding line and a fully integrated packaging line that includes advanced engineering, robotics, high-speed labeling, and automated carton packing. Organigram expects to take delivery of the equipment in the fall of 2019 and complete installation and commissioning in time for initial sales shipments in early calendar 2020
“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. 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..”