Cronos Group CEO: Analysts Don’t Understand Our Growth

Cronos Group Inc. (TSX:CRON), one of the Canadian marijuana stocks, reported financial results that disappointed investors

SmallCapPower| March 29, 2019: Cronos Group Inc. (TSX:CRON) (NASDAQ:CRON), one of the Canadian cannabis stocks, Tuesday reported its financial results for Q4 2018 and FY 2018, ended December 31, 2018. For FY 2018, net revenue increased by 285% to $15.7 million on YoY basis, driven primarily by the commencement of adult-use sales and increased medical client base. Segment-wise, Dried Cannabis grew 225% to $12.7 million while Cannabis Oil jumped 1,917% to $3.0 million. Kilograms sold for Dried Cannabis grew 236% to 2,072 at an average net selling price per gram sold of $6.15 (-3%), and Kilograms sold for Cannabis Oil increased by 3,594% to 665 at an average net selling price per gram sold of $4.46 (-45%). Adjusting for excise taxes ($1.4 million), gross revenue was $17.1 million in FY2018, reflecting growth of 320% compared to FY2017.

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Gross profit before fair value adjustments was up by 294% to $8.0 million, mainly attributable to growth in kilograms sold and a lower unit cost of sales realized from start of new production facilities, partially offset by a lower average selling price in the period.

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Operating expenses surged 215% to $29.4 million, due primarily to an increase in professional and consulting fees for services pertaining to various strategic initiatives; expenditures related to the Company’s listing on NASDAQ; Altria investment and other internal expenses on governance and internal controls improvement. Consequently, operating loss widened to $18.1 million, compared to a loss of $2.1 million in FY2017.

Net loss attributable to Cronos Group was $19.0 million in FY2018 as compared to net income of $2.5 million in FY2017. Adjusted EBITDA loss widened to $14.6 million in FY2018, compared to loss of $4.4 million in FY2017, mainly impacted by higher net loss, and unrealized change in fair value of biological assets (negative $11.6 million) in the period.

Cronos Group CEO Mike Gorenstein said, “We are proud of all we have accomplished in 2018 and in the fourth quarter. Over the past year, Cronos Group has diligently focused on our strategic objectives, which culminated in our transformative partnership with Altria Group, Inc. We’ve expanded our production footprint domestically and internationally, developed our distribution with global partnerships, launched iconic brands for the Canadian adult-use market and grown our IP portfolio with landmark research and development initiatives.”

Investment bank Jefferies LLC, however, reiterated its “underperformance” rating on Cronos’ stock, saying it expects results over the next year “will disappoint.”

In an interview with BNN Bloomberg recently, CEO Gorenstein said, “We’re trying to allocate resources and we think about where the value is. … We’re really focused on the product development side more than the cultivation ramp side,” adding that the Company also plans to develop more “disruptive intellectual property” to make cannabis far cheaper to produce than with traditional cultivation.

Shares of Cronos Group slipped 1% Tuesday followed by a nearly 9% decline on Wednesday.

In FY2018, Cronos achieved various key milestones, including the Company’s listing on NASDAQ Global Market (February 2018), up-listing of common shares to the Toronto Stock Exchange (May 2018), and the closing of a $2.4 billion equity investment in the Company by Altria Group.

Cronos Group is a global cannabis company with a presence across five continents. Cronos Group stock currently trades at a market capitalization of C$8.3 billion with a price-to-book multiple of 21.8x.

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

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