Cronos released their second quarter results today.
SEVEN EIGHT 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, again.
In F2019 Cronos does a biomass boomerang. Gets caught, as a whistleblower tells their auditor. Ends up spending USD $14 million in fees (+USD 1.9 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.
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 One more quarter.
- Net sales decrease of 26%
- Flower sales decrease of 18%, USA Sales decrease 30%
- GM negative for 7th 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
- Net sales increase of 24%, still below two Q’s ago $17 million
- Flower sales increase +23%, USA sales decline -9%, Israel declines -9%
- GM negative for 8th Q in a row and is 101% of sales, even removing impairment it is still negative.
- SGA 228% of sales
- Adj EBITDA decreases more and is now -USD 44 million.
- Net profit of USD 70 million of which USD 115 million was gain on revaluation of derivative liability
- 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 1.2293:1 CAD/USD.
Income Statement Drivers and Implied Breakeven: Trend Analysis
To set the table….
Sales increased 24% +$3.0 million to USD 15.6 million (CAD 19 million) from USD 12.6 million last Q. Remains below two Q’s ago.
- Canada increased +41% to $10.7 million, flower the driver.
- USA sales decrease 9% or -USD 0.2 million, remains below high of $3.5 million three Q’s ago.
- Israel slid 8% or $0.2 million.
- Flower sales increase of 23% squeaking past their previous record in Dec 2020.
- Extract sales disclosure changed, and they removed USA from results. Thus, the decrease QoQ above.
Last Q: They indicated that Grow Co JV with Mucci in Kingsville completed first harvest in Q1 F21. Originally this was to complete 1st half 2019 and product 2nd 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.
Hoo boy… no improvement in GM and Mucci is not even mentioned in MDA anymore nor is Grow Co.
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 first in sales.
Gross Margin: Peer and Trend
Gross Margin is negative for 8th consecutive Q. I cannot recall ever seeing that before. Inventory impairment comes back at -USD 12 million, after a quarter’s absence. Even reversing that the GM is negative $3.8 million or -24% of sales.
USA generated $0.6 million in GM or 29%, a slide from $1.2 million and 48% last Q. Two Q’s in a row of sliding.
Rest of World generated -$16 million GM in the Q, a slide from -$4 million last Q. CoGS in ROW was 148% of its sales.
Total GM was -$15.8 million versus -$3 million last Q. Sales were $15.6 million. Ouch.
Larger LP Peer Group: Gross Margin
Cronos is dwelling in the basement in the GM% peer group.
SGA & SBC: Trend Analysis
They have stopped providing a table of SG&A expenses and MDA has no QoQ narrative.
Selling expense increased by USD 3.0 million to $13.2 million, reversing entire improvement last Q. In the Dec/2020 Q they launched the Kristen Bell products. The air went out of that balloon quickly as sales dropped after the channel fill.
G&A increased from $21.9 million to $22.4 million QoQ with
- Internal review costs related to 2019 revenue restatement decreasing minimally to $1.9 million from $2.0 million. The aggregate of the restatement expenses of USD $14 million exceeds the CAD $7.5 million restatement of revenue. Class action lawsuit has been settled/dismissed.
SBC was USD 2.6 million, flat QoQ.
R&D was USD 5.2 million a minimal increase QoQ. 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 44 million a decrease from USD 40 million last Q, reversing entire improvement from last Q. That is 284% of sales a decrease from 321% 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 $60 million, a slide from negative USD 44 million last Q. The slide in GM of $12 million and decrease in Opex by $4 million the reasons.
Other Expenses and Income of note:
- Interest income of USD 2.3 million flat QoQ.
- A $115 million gain on derivative liability versus -$117 million last Q as the stock price slide decreased the value of Altria options.
Total Other Income was $118 million versus last Q of expenses of $118 million.
FX translation gain was $13 million versus $16 million last Q.
Cronos records a Comprehensive Net Income of $70 million a slide from -USD 161 million last Q. The entirety of the improvement is the $232 million swing in derivative liabilities.
Implied Breakeven Sales divided by Current Sales:
With a Negative Gross Margin, we cannot determine breakeven sales levels.
Adjusted EBITDA slid to negative CAD 52 million from negative CAD 49 million last Q. The increase in cash Opex and decrease in unimpaired GM the reason.
They have reported adj EBITDA of USD 50 million but they do not add back the inventory impairment, and they add back some transaction costs that are not defined and the $1.9 million in lawsuit over the boomerang. I have them at USD $42 million or CAD 52 million.
Cronos is only C$1 million ahead of Canopy’s adj EBITDA. Is next quarter the “crossening”? is there a trophy CGC gets to hand over?
+EBITDA Large Peer Group
With a Negative Gross Margin, we cannot determine breakeven sales levels.
Opex burn of negative USD $54 million and investment in non-cash working capital of positive USD 13 million. OPEX Burn is on a deteriorating trend.
Balance Sheet Items of Note:
- Cash is King and they have lots of it at USD 1.1 billion down USD 142 million QoQ.
- Inventory was USD 36 million a decrease of USD 10 million QoQ largely due to impairment
- WIP was $17 million or -$4 million QoQ.
- Raw Materials was $10 million an increase of $5 million QoQ… Mucci driven???
- Finished Goods was $10 million +$5 million 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 is not very encouraging.
Cronos has 1.8 Q’s of inventory on hand, an improvement from last Q’s 3.0 turns on hand due to the writedown.
- Their $110 million option to buy PharmaCann is new this Q.
- They derivative liability on Altria options reduced $102 million to $170 million.
What I said past Qs:
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.
The sales improved but remains below the record from two Q’s ago. The US market seems to have kicked into reverse after channel fill on Kristen bell CBD products in Dec 2020.
The gross margin saga is getting tiresome. Even without impairment they cannot generate a positive GM. When they flip the switch on the fermenter it will get worse. The fermenter will be fixed overhead with minimal sales.
They still have lots of Altria’s cash. I think they are reserving that for US market opening.
I feel like someone needs to poke them with a stick.
That’s all I have.
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.