Cronos Group Inc. (TSX:CRON) (NASDAQ:CRON) is sitting on about C$2 billion in cash and short-term investments
SmallCapPower | November 21, 2019: A day of reckoning is likely fast approaching for the Canadian cannabis sector. With investor interest drying up, cash-poor marijuana companies will be facing some tough choices – take on debt (if available), sell out, or shut down. Those cannabis names that were fortunate, or insightful, enough to raise funds when times were good have other options available. One such company is Cronos Group Inc. (TSX:CRON) (NASDAQ:CRON), which the market all too often seems to overlook.
Cronos Group recently reported its third-quarter 2019 financial results, which showed revenue of $12.7 million, representing 238% year-over-year growth and a 24% increase quarter over quarter, a sequential improvement that sets it apart from most Canadian Licensed Producers.
What is perhaps most noteworthy, though, is that Cronos is sitting on about C$2 billion in cash and short-term investments, the result of a US$1.8 billion investment from tobacco giant Altria Group, the maker of Marlboro cigarettes, earlier this year. And, Cronos Group appears to be acting prudently in how it spends that money, as its cash position has fallen by just 17% over the past three quarters. Cronos Group’s quarterly cash burn rate (cash flow from operations minus capex) is approximately ~$43 million per quarter, based on the average of the last four quarters. At this rate, CRON has 11 and a half years of cash to before it needs to generate positive cash flow from operations.
However, Cronos may set aside cash for a potential future acquisition. Mackie Research analyst Greg McLeish reviewed the financials of 50 Canadian cannabis companies and found that 21 of them had less than six months of cash remaining. Most of the 21 companies are smaller, with market capitalizations under C$200 million. As many of these cannabis stocks have seen their share prices slide, they will likely have difficulty in raising additional funds. This could provide an opportunity for a financially-prudent company such as Cronos to acquire assets of companies at a discount, ones that are potentially facing bankruptcy.
Granted, shares of Cronos Group Inc are currently off about 71% from its 52-week high, however this is in line with the stock-price performances of Canopy Growth (down 67%) and Aurora Cannabis (off 76%) over the same time period.
Going forward, Cronos can distinguish itself through its early investments in operations outside of Canada. The Company holds an approximate 31% stake in Cronos Australia, which IPO’d Down Under earlier this month. Aussie CRON holds medicinal cultivation and production, research, manufacturing, and import/export licenses and is expected to be a distribution hub for sales in Australia, New Zealand, and throughout Southeast Asia.
Additionally, Cronos Group is planning on differentiating itself in terms of intellectual property and consumer goods manufacturing instead of cultivation, as it has begun to transition its assets to be less cultivation concentrated by modifying its Peace Naturals facility in Stayner, Ontario, which will be used for R&D, brand development, production and manufacturing.
As well, Cronos Israel’s greenhouse and manufacturing facility is set to become operational in phases in the second half of 2020. Israel’s climate is ideal for a low-cost outdoor growing operation and the country’s proximity to Europe would give Cronos Israel export cost advantages if shipping to EU is permitted.
Cronos Group also has an exclusive five-year supply agreement with Pohl-Boskamp, which has a distribution network of 10,550 German pharmacies, to distribute PEACE NATURALS products to medical patients in Germany. In addition, CRON has an exclusive five-year supply agreement with Delfarma to distribute PEACE NATURALS products to medical patients in Poland, a network that reaches about 40% of the Polish domestic market.
Most recently, Cronos announced the introduction of PEACE+, a new hemp-derived CBD brand in the United States. The new brand comes as a result of the Redwood Holdings acquisition which, closed on September 5 – a U.S. CBD company selling products under the brand name Lord Jones. PEACE+ will sell hemp-derived CBD tincture products through a test market of approximately 1,000 retail stores in the U.S. CRON intends to utilize Altria Group’s sales and distribution network to access the U.S. convenience store retail channel in order to gain consumer insights before expanding distribution more broadly.
Given Altria’s 45% equity interest in Cronos Group, CRON’s future will likely involve a takeover by Big Tobacco. Regardless, Cronos’ sizable cash position as well as its access to Altria Group’s expertise and distribution should allow the Company to thrive while others fight to survive.
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