The Cronos Group (CRON) had investors worried as it delayed Q2-2021 earnings report. The company released the report last week, citing an audit and adjustment. The change amounted to a $235.1 million impairment charge on intangible assets and did not affect revenue or cash positions. The company’s report showed improvements YoY and included revenues from synthetic cannabinoid products. The company is estimated to release its Q4-2021 report this week Friday Feb 25 BMO. Cannabis stocks have been on the downtrend over the last twelve months. I rate Cronos Group as a hold and recommend investors watch for a new cannabis rally.
Cronos Group Q3-2021 earnings show improvement
The company reported revenue of $20.407 million, representing a $9 million increase or 80% compared to last year’s same quarter. Cronos cites increased sales in the adult-use Canadian market, the Israeli market, and US market. The company saw growth in Canada due to the introduction of new cannabis strains and the increase of cannabis extract products, which have higher profit margins.
In non-US markets, Dried flower sales were $15.306 million, representing a 92% increase YoY. Extract sales were $2.786 million, representing an 85% increase YoY. In the US CBD market, the company reported $2.1 million in revenue, representing a 28% increase YoY. Profit and margin are down for US sales and performance.
Cronos reported total assets of $1.535 million and total liabilities of $78.774 million. Cash and cash equivalents were $842.567 million versus $1.097 billion during last year’s same quarter. The company reported an operating loss of $56.414 million and a net income of $77.666. The EPS was $0.21.
The net income is due to other income, i.e. gains on revaluation of derivative liabilities ($132.916 million) and income from interest ($2.064 million). The revaluation of derivative liabilities fluctuates a lot from quarter to quarter and often puts the company at a net loss or net income. Derivative liabilities consist of the Altria Warrant, milestone payments, Pre-emptive Rights, and Top-up Rights. Here is a breakdown from the company’s Q3-2021 financial report:
The company has a strategic plan for bringing operational savings and for providing long term growth. Cronos expects $20-$25 million in operational savings over 2022. The consensus revenue estimate on the company’s upcoming Q4-2021 earnings report is $24 million and EPS is -$0.11.
Cronos Group – Revenue Synergies from Q3-2021
The company introduced new high-THC strains for its dried flower brands. These new strains include Atomic Sour Grapefruit, Cocoa Bomba, and Spinach GMO Cookies. The new strains have helped the company compete in the over saturated and price compressed Canadian adult use market. Cronos has a joint venture with a cannabis farm (the venture is called Cronos GrowCo), which is growing flower and selling it wholesale to Cronos and to the Canadian markets.
Cronos Group is focused on new products, which contain rare cannabinoids. The company is selling a cultured cannabinoid product called SPINACH FEELZ chill bliss, which is a 2:1 THC/CBG gummy. Under the same brand, the company has introduced a 1-gram cannabis vape cartridge with THC and CBG. The CBG (Cannabigerol) is a rare cannabinoid and is made from yeast fermentation, thus synthetic.
SPINACH FEELZ Chill Bliss is made possible through Cronos’ strategic partnership with Ginko Bioworks Holdings, who is producing a variety synthetic rare cannabinoid. Cronos plans more products using synthetic rare cannabinoids.
Ginko has also produced synthetic CBGA (cannabigerolic acid) and soon will produce CBGVA (cannabigerovarinic acid). Included on the list of rare cannabinoids is THCV (tetrahydrocannabivarin). Each rare cannabinoid has its own effect on the body. Cronos will pair CBD or THC with the rare cannabinoids to enhance the experience in the mind and/or body.
CRON stock price is on a one-year downtrend
Source: 1-year price performance chart from www.StockCharts.com
As with all cannabis stocks, Cronos Group is one a one-year downtrend, having lost 69.88%. It began a new uptrend, after hitting its 52-week low of $3.12 per share. The micro rally occurred with the other cannabis stocks and lasted about a month (off-and-on). Current market volatility concerning inflation, rate hikes, and war will likely stall this rally out, as it did last week. It is possible that cannabis stocks have hit their bottoms and will now begin new uptrends, seeking out higher price channels. There may be more bottoming before this trend renews again.
Risk and Investment Strategy
Cronos Group has many risks, including ongoing issues with the Canadian adult-usage markets, the global emerging markets, and the US market. The company has plenty of assets to navigate changing market conditions and continue operations. The company’s financials need improvement, for instance consistent profit, operating income, and net income. A positive EBITDA would be a good sign. Altria (MO) has a 42% stake in the company via direct placement and warrants. The sponsorship is good for Cronos Group, but it also makes for inconsistent financial results, i.e. positive and negative net income. It is hoped that the company will continue to experience revenue expansion and higher margins so that it can overgrow these fluctuations.
The cannabis market is suffering from larger volatility. There is no guarantee that cannabis companies have hit their bottoms. The current volatility may produce more downtrend. I rate Cronos Group as a hold and recommend that investors watch all cannabis companies in anticipation of a new rally. Consideration should be given to what signals, both fundamental and technical, will be present to indicate an extended uptrend for cannabis stocks.
Cronos finally released its Q3-2021 financial reports and there are many improvements. The company increased its revenue by expanding its product offerings in Canada and globally. The company introduced new high THC strains and sold more cannabis extracts. Cronos brought to market new THC gummies and vapes, which contain rare, synthesized, cannabinoids. The company promises more products with a mixture of rare cannabinoids. Cronos is estimated to release its Q4-2021 reports next week. The overall market conditions on cannabis stocks have been bearish. I rate the Cronos Group as a hold and recommend investors watch the market for signs of a new rally.