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Tuesday, Dec 5, 2023
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.


Cronos Group Stock Falls After Q1 Results Fail to Impress Investors

Photo courtesy of Cronos Group LTD.

Cronos Group Inc. (TSX:CRON)(NASDAQ:CRON) sold $6.47 million in the first quarter of 2019, which is up 15 per cent from the last quarter of 2018. The company released its Q1 results May 9 showing promising growth with sales more than doubling (120 per cent) last year’s results.

The amount of cannabis sold was also up by a similar amount with Cronos selling 1,111 kg during the quarter. There was little change in the net revenue per gram sold from a year ago, with the Toronto-based company generating an average of $5.73 this quarter compared to $5.67 last year. What’s encouraging is that cost of sales (prior to fair value adjustments) per gram came down 14% from last year and 11% from Q4.

That cost reduction helped more incremental sales flow through to gross profit and help cover rising expenses. In total, gross profit of $13.3 million was well up from the $1.9 million Cronos generated a year ago. However, those numbers were given a $9.8 million boost from fair value adjustments and were just $550,000 a year ago. These adjustments were negated, however, as expenses during the quarter were up 238 per cent, with general and administrative expenses climbing the most (291 per cent). The result was an operating loss of $558,000 that came close to breakeven.

Large gains further down the income statement catapulted the company into the black, with net income totalling $427.7 million thanks to a revaluation of derivative liabilities which added back $436.4 million. The gain was related to the Altria investment and Cronos also benefited from another $21 million in gains from other investments, including the disposal of Whistler Medical Marijuana Corporation.

Key takeaways for investors

There was plenty of distortion with Cronos’ financials in Q1. Although sales were up, it still fell short of what analysts were expecting for Cronos, which is part of the reason why the stock ended up falling on earnings day.

Profits were also heavily influenced by fair value, investment and revaluation gains. If we take out those items and look at the company’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA), we arrive at a loss of $8.9 million. That’s up 12.6 per cent from Q4 when Cronos recorded a loss of $7.9 million and it’s about six times the $1.5 million loss that Cronos recorded a year ago.

What was more concerning for investors is the warning that things are not going to get any better any time soon:

As we continue to invest in our business, our brands and R&D initiatives, our adjusted Ebitda will likely decline over 2019 but position the company for accelerated growth in 2020

– Jerry Barbato, CFO of Cronos

Looking ahead, Cronos has a lot of growth planned for the future. Now that the deal with Altria is closed, it can focus on moving forward and developing its capabilities. Among those is Cronos Device Labs, which is an R&D initiative that has been started by the company to develop state-of-the-art vaporizers. Recognizing their popularity, Cronos sees it as a great way to grow its sales.

Overall, investors weren’t impressed by the results although Cronos is still up 44 per cent year to date. But that is largely due to a big spike in January when pot stocks as a whole saw a lot of buying. In the past three months, however, Cronos’ stock price has fallen by more than 20%.

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