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Organigram Holdings Inc. (NASDAQ: OGI) (TSX: OGI) received a boost after it released third quarter results and the shares recorded a double-digit percentage gain after the announcement.
Broker-dealers responded favorably to the Canadian Licensed Producer’s (LP) quarterly financial report and two firms raised their price target on it. The two changes were:
- CIBC raised its price target to C$4 from C$3.75
- ATB Capital Markets raised its price target to C$4.25 from C$3.75
Reports Higher Revenues and Lower Expenses
When compared to the prior quarter, Organigram reported a more than 50% increase in gross revenue as well as a 39% increase in net revenue and we find this jump to be significant. When compared to the same period last year, gross revenue grew by more than 30% while net revenue increased by 13% and the business seems to be back on track.
On a year-over-year comparative basis, Organigram recorded higher gross margins and we consider this to be a key metric in the earnings report. When compared to the same period last year, the company lowered its cost of sales decreased and this was primarily due to approx. $30 million of inventory write-offs and provisions as well as charges that were related to a reduced workforce due to COVID-19.
These cost changes were all incurred in the third quarter of last year and we will monitor how Organigram’s expenses change in future quarters. Third quarter gross margins were positively impacted by higher net revenues and lower cost of sales and this is a trend that we will be closely following on a going forward basis.
In the current quarter, Organigram expects to start to see a sequential improvement in adjusted gross margins and the management attributes this largely to lower product cultivation costs (from higher plant yields) and other economies of scale as it continues to ramp up cultivation and realizes the benefit of ongoing cost efficiency improvements.
A Gross Margin Improvement Story in the Making
Following the current quarter, the management team reported to have identified opportunities which have the potential to further improve adjusted gross margins over time. We will monitor how the management team is able to execute on these opportunities and look forward to learning more about what these initiatives are.
From a liquidity standpoint, Organigram is well positioned and reported to have $222 million of cash and short-term investments. A few months ago, the company repaid all outstanding balances from its credit agreement with BMO and a syndicate of lenders (approximately $58.5 million), which will result in annual interest savings of $2.7 million.
Organigram believes that it has sufficient cash and short-term investments to support its current growth strategy while being able to maintain sufficient liquidity and financial flexibility. We will monitor how the management team is able to drive the story forward and will provide updates as needed.
During the last quarter, Organigram has been under considerable pressure and has come almost 10% off its early June highs. We will monitor the trend following the strong earnings report and will provide updates as needed.
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