Cronos Group Financial Results Show Cannabis Investor Impatience

Cronos Group Inc. (TSX:CRON), one of the Canadian marijuana stocks, dropped following a tepid 2019 outlook

SmallCapPower | May 14, 2019: Cronos Group Inc. (TSX:CRON) (NASDAQ:CRON), one of the Canadian cannabis stocks, Thursday announced its financial results and business highlights for Q1 2019, ended March 31, 2019.

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Net revenue increased 120% YoY and 15% QoQ to $6.5 million, driven mainly by the launch of the adult-use recreational market in Canada, increased sales in CBD oil as well as sales of dry flower. Excluding exercise taxes, gross revenue increased 137% YoY to $7.0 million.

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Cronos Group Chief Financial Officer Jerry Barbato stated on the Company’s earnings call that adjusted EBITDA will likely decline over 2019 as the Company continues to invest in its business. But at the same time, he also expects that the investment will position the Company for accelerated growth in 2020. Investors, however, soured on the stock following the announcement, sending its shares down 8% to close at C$19.05 on Thursday.

Kilograms sold increased 122% YoY and 7% QoQ to 1,111kg, attributable primarily to increased cannabis production and the launch of the adult-use recreational market in Canada. Cost of sales before fair value adjustments per gram sold in Q1 2019 was $2.69, a decrease of 14% compared to Q1 2018. This was driven primarily by increased productivity in the Company’s cultivation operations.

Gross profit came in at $13.3 million, representing an increase of 591% with margins at 206%. This was driven mainly by an unrealized change in the fair value of biological assets of $13.6 million in the period.

Total operating expenses, though, increased 238% to $13.9 million, attributable mainly to higher Sales & Marketing ($1.5 million, +156%), Research & Development ($1.6 million), and General & Administrative ($9.6 million, +291%) expenses. These higher expenses led to an operating loss of $0.6 million in Q1 2019, compared with a loss of $2.2 million in Q1 2018.

Net income attributable to Cronos Group was reported at $427.8 million as compared with a loss of $1.1 million in Q1 2018. However, excluding gain on revaluation of derivative liabilities ($436.4 million), its net loss widened to $8.6 million in Q1 2019.

Cronos Group Chief Executive Officer Mike Gorenstein said, “In the first quarter of 2019, the business performed in line with our expectations. We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios.”

On the operational front, in March 2019, Cronos closed a C$2.4 billion strategic investment from Altria Group. This investment from Altria will help the Company to expand its product development and commercialization capabilities.

Cronos Group is a globally diversified and vertically-integrated cannabis company with a presence in five continents. The Company operates two wholly-owned Canadian licensed producers: Peace Naturals Project Inc. and Original BC Ltd. Peace Naturals is a global health and wellness platform, while Original BC is a recreational adult-use Canadian licensed producer based in Okanagan Valley, BC, which owns brands such as Cove and Spinach. Cronos Group intends to continue to rapidly expand its global footprint as it focuses on building an international iconic brand portfolio and developing disruptive intellectual property.

Cronos Group stock currently trades at a market capitalization of C$6.3 billion with a price-to-book multiple of 16.1x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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