Cronos released their first quarter results today.

We are SEVEN quarters of negative gross margin in a row, and we are still waiting on biosynthesis or for Cronos to do something with Altria’s money.  Groundhog Day.

In F2019 Cronos does a biomass boomerang.  Gets caught, as a whistleblower tells their auditor.  Ends up spending USD $12 million in fees (+USD 2.0 million this Q) to deal with the restatements (lawsuit still pending), which was more than the fluffed sales of CAD $7 million.  And… impairs a good chunk of inventory they repurchased.

And as it pertains to biosynthesis… even IF they get minor cannabinoids at a lower price, how will they market them with current Health Canada and FDA regulations?  They will not know what the minor cannabinoids do without ten years of scientific testing and validation.  Do they just slap a catchy brand or product names on them that suggest the possible effect? I just do not know how they move the product IF they can overcome the patent and other hurdles.

And when they flip the switch on the fermenter what sales volumes will they need to break even on their biosynthesis play?  The negative gross margins could go on for a while longer.

What I said at Fiscal 2019 YE:

• If you are investing in Cronos for biosynthesis “September 2021” should be the date you have circled.  That is a long time to wait on any meaningful development.

Two more quarters.

Last Quarter:

• Net sales increase of 50% was very good
• Flower sales increase of 45%, 2.0 sale decreased, USA Sales increase 114%
• GM negative for 6^th Q in a row.  And looks to be under pressure until they sell higher priced inventory in vault.
• SGA 194% of sales
• Net Loss of USD 61 million which was bolstered by $51 million gain in f/x translation offset by a gain on revaluation of derivative of $53 million, and
• Adj EBITDA decreases further to USD -39 million (Note: CRON, to their credit, does not back out inventory writedowns.  I did thus my number is better than theirs.)
• Lots of cash still

This Quarter

• Net sales decrease of 26%
• Flower sales decrease of 18%, USA Sales decrease 30%
• GM negative for 7^th Q in a row.  And looks to be under pressure until they sell higher priced inventory in vault. Maybe Mucci JV brings in a lower priced CoGS.
• SGA 255% of sales, highest since March 31, 2020.
• Net Loss of USD 162 million of which $116 million was loss on derivative liability (Altria options)
• Adj EBITDA decreases further to USD -39.1 million
• Lots of cash still

Now, let us open up the financials and the Management Discussion and Analysis and get to the Q at hand.

Where needed for peer comparison purposes, I have applied an f/x rate of 1.2665:1 CAD/USD.

Income Statement Drivers and Implied Breakeven: Trend Analysis

To set the table….

Sales:

Sales Table:

Sales decreased 26% -$4.4 million to USD 12.6 million (CAD 16 million) from USD 17 million last Q.

• They reinstated disclosure on Canadian sales this Q.  No comparable exists to last Q.
• USA sales decrease 30% or -USD 1.1 million giving back the majority of last Q’s increase.
• Flower sales decrease of 18% giving back USD 2.1 million of last Q’s +USD 3.6 million
• Extract sales decrease 42% or USD 2.3 million, giving back the entirety of last Q’s increase

They indicate that Grow Co JV with Mucci in Kingsville completed first harvest in Q1 F21.  Originally this was to complete 1^st half 2019 and product 2^nd half 2019, then it was to open in phases in 2020. So, it is two years late.  We will see if the harvest helps improve cost of goods sold next Q.

What I said last few Qs: “Iconic” brands still be determined.

We will go with that again.

Income Statement Drivers and Breakeven Sales: Peers

In this peer set Cronos is third, behind FIRE and XLY.

Gross Margin:

Gross Margin: Peer and Trend

Gross Margin is negative for 7th consecutive Q.  I cannot recall ever seeing that before.  They finally did not have an inventory impairment, yet was still negative.

USA generated $1.2 million in GM or 48%, a slide from $1.8 million and 52% last Q.  Rest of World generated -$4.1 million GM in the Q, an improvement from -$14 million last Q.  CoGS in ROW was 141% of its sales.

Total GM was -$3 million versus -$15 million last Q, the lack of impairment this Q the reason for improvement.

Larger LP Peer Group: Gross Margin

Cronos is dwelling in the basement in the GM% peer group.

Operating Expenses:

SGA & SBC: Trend Analysis

They have stopped providing a table of SG&A expenses and MDA has no QoQ narrative.

Selling expense decreased by USD 3.3 million to $10.2 million. In the previous Q they launched the Kristen Bell products.  The air went out of that balloon quickly as sales dropped after the channel fill.

G&A decreased from $17 million to $13 million QoQ with

• Internal review costs related to 2019 revenue restatement increasing to $2.0 million from $0.9 million.  The aggregate of the restatement expenses of USD $12 million exceeds the CAD $7.5 million restatement of revenue. Class action lawsuit still pending.

SBC was USD 2.5million flat QoQ.

R&D was USD 5.1 million a decrease from USD 7.4 million last Q. Much of the R&D is for the new fermentation facility.  You will have to wait until September 2021 to see if that bet pays off.

Operational Expenses total USD 40 million a decrease from USD 44 million last Q. That is 321% of sales an increase from 255% last Q. 

SGA & SBC: Peer Comparison

Cronos is the leader in Aggregate SGA and SBC.  Not in a good way.

Net Operating Profit was negative USD $43 million, an improvement from negative USD 58 million last Q.  The improved in GM of $12 million and decrease in Opex by $3 million the reasons.

Other Expenses and Income of note:

• Interest income of USD 2.3 million a decrease from last Q of USD 3.1 million.
• A $116 million loss on derivative liability versus -$53 million last Q as the stock price surge increased the value of Altria options. This will relax next Q based on present stock price.
• Impairment of PPE of $1.7 million versus nil last Q related to leasehold improvements and right of use assets in their Los Angeles office.

Total Other Expense were $118 million versus last Q of $53 million.

FX translation gain was $16 million.

Cronos records a Comprehensive Net Income of -$145 million a slide from -USD 112 million last Q.

Implied Breakeven Sales divided by Current Sales:

With a Negative Gross Margin, we cannot determine breakeven sales levels.

Adjusted EBITDA:

Adjusted EBITDA slid to negative CAD 49 million from negative CAD 51 million last Q.  The improvement is largely stemming from improvement in CAD USD fx rate.  In USD, the Adj EBITDA this Q was -$39 million versus -USD 39 million the prior Q. This is only “surpassed” (in a bad way) by Canopy at negative CAD $68 million.  These might cross over in the next Q or two.

+EBITDA Large Peer Group

With a Negative Gross Margin, we cannot determine breakeven sales levels.

Opex Burn:

Opex burn of negative USD $36 million and investment in non-cash working capital of negative USD 9.8 million. OPEX Burn is on a deteriorating trend.

Balance Sheet Items of Note:

• Cash is King and they have lots of it at USD 1.2 billion down USD 50 million QoQ.
• Inventory was USD 46 million an increase of USD 2 million QoQ
  • WIP flower was $22 million or +$1 million QoQ.
  • Raw Materials was $11 million flat QoQ

Sold v Inventory and CoGS vs Inventory

We modified the graph to a US GAAP model.  The lines (from top to bottom) are inventory, CoGS (excluding writedown), and Sales.  Sales below CoGS with no writedowns is not very encouraging.

Cronos has 3.0 Q’s of inventory on hand, a slide from last Q’s 2.6 turns on hand.

What I said past Qs:

Cronos is a term deposit with a cannabis side business.  Until they make a move with the Altria investment, they are likely to remain that way.

The big operational bet remains biosynthesis, which must navigate several patents in order to work.  If it does not Cronos will have a big white elephant in the fermentation asset and plenty of money invested in R&D that will be spent.

Without substantial sales growth with a positive gross margin the SGA and R&D expenses will continue to depress operating profitability and EBITDA.

The cost structure of the company resembles a pre revenue company.

Good thing they have plenty of cash as the business is far from profitability, potentially further out than Canopy.

This Q:

The sales improvement in the previous Q was largely given back.  GM remains more than troublesome. 

We are two Q’s from their biosynthesis commercialization deadline.  When they flip the switch on the fermenter, they are going to have a whole new CoGS issue as they will need a certain level of throughput to get to +GM on the fermenter.  And I do not see where sales will be generated from in the near term to get them there.

Thankfully, they are sitting on a pile of Altria cash which will likely be deployed in the US once permissible. Hopefully, it is deployed in a more useful fashion than present investments.

That’s all I have.

GoBlue

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 does not have a position in Cronos and will not initiate one in the next 5 days.