We’ve seen how this sector does deals, and then undoes them.

We’ve seen it with Couche-Tard and Fire & Flower. We’ve seen a stick swung by Constellation at the Canopy Growth piñata. How Canopy passes the behaviour along to the next generation in the Acreage reprice. And these are done by friends, how about the bi-laterals and reprices of $FIRE, $TGIF, $CXXI, $OGI, $EMH/$VFF/$PSF, $ACB, $HARV, $MMEN, $iAN, etcetera, etcetera. Those calls wouldn’t have been as polite I’m sure.

And with Cronos ($CRON) dropping yet another full diaper of financial statements, it begs the question of when Big Daddy Altria will let some air out of $CRON’s tires, and make a withdrawal.

Altria’s investment in $CRON (all $1,809MM of it) has taken a pretty good hit to valuation over the early part of this year. Sure, for $CRON it’s a reduction in the carrying value of the liability, but for Altria, it means their returns are eroding. It’s dropped from $300MM at beginning of year to the current $205MM……….in one quarter:

So, is there a burn rate that’s going to let Altria sleep well at night? Is Gingko’s phone call one of these days just the news that’ll keep Altria’s finger’s off of that mouse? Will the CFO be able to ignore that spreadsheet called ‘$CRON’s Magic Bag’ stored on the company’s servers when they’re looking for spare change in the couch this quarter?

I think the answer to those is a firm ‘nope’.

Altria’s got themselves 45% of $CRON with their cash, and a fairly intricate contract that sees them kept whole – even if the Gingko thing blows out. If Gingko rolls, milestones trigger share issuance and bonus’. The Altria strikes are at $16 & $19 though, and with share price languishing below $9, look for Altria to pull an $STZ on $CRON pretty soon.

Capital structure wise, $CRON has some $18MM warrants at $0.26 expiring in the next 9 months, and another 13MM of $3.00 options (a total of $170MM in overhang). $CRON’s shovelled $6.2MM out to see Robert Rosenheck out of Lord Jones’ offices, and above all, $CRON appears completely uninterested in the fact that the whole conglomerate has a gap to profitability that’s the same size as looking at the night sky. Sure, they’ve got financials and complex deals and accounting and finance and operations and stuff. But they’ve also got a sales rate of $80MM/yr; a negative gross margin; they’re outsourcing product; and, waiting on a biotech operationalizing something that’s never been done economically before. All while paying Altria cost plus 5% to send in their project management teams.

Sigh.

There is no lack of stories in cannabis, but the lack of one here – at least with respect to sales – is the story. And at some point, ‘The Wallet’ (Altria) will want part of its’ deposit back, and will wait until the late days of summer to do so. At least that’s my guess. I also expect a reprice at VWAP flat for initial tranche, and some sort of % VWAP premium (25% will mean Gorenstein’s still got a good pitch deck, any less won’t be so good) on the second tranche. With 350MM shares out in the float now, what’s another 170MM among friends, right?

Cronos is now where they never saw themselves….among the unwashed. The only thing they don’t share with them is the bank account, and I suspect the one who owns it will be girding against another 8 quarters being what the last 8 quarters have been.

I also expect they’ll do it pretty soon.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $CRON