Cronos released their third quarter fiscal 2020 results today.

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.

They reiterate guidance to September 30, 2021.

Last Quarter:

• Net sales had a good +22% increase QoQ
• Flower sales increased dramatically, vape sales plunged, US Market treaded water.
• Gross Margin is negative for the fourth Q in a row, and they have guided that more inventory impairments might continue pressure on Gross Margin.
• The restatement of C$7.6 million in sales last Fiscal has now cost USD 7.9 million in expenses. I am not sure we have heard the last on this matter.
• Impaired $40 million on Lord Jones goodwill and intangibles

This Quarter

• Net sales increase of 15% was good
• Flower sales increase of 40%, 2.0 sale decrease of 22% 2^nd QoQ decline since launch, USA Sales down 25%
• GM negative for 5^th Q in a row.  And looks to be under pressure until they sell higher priced inventory in vault.
• SGA 230% of sales
• Net Income of USD 69 million of which $105 million was gain on derivatives
• Adj EBITDA decreases further to USD -31 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 1.3856:1 CAD/USD.

Income Statement Drivers and Implied Breakeven: Trend Analysis

To set the table….

Sales:

Sales Table:

Sales increased 15% to USD 11.4 million (CAD 16 million) from USD 9.9 million last Q.

• Flower sales increase of 40% is good to see with steady increase this fiscal period
• 2.0 sale decrease of 22%, 2^nd QoQ decline since launch
• USA Sales down 25% to $1.6 million as covid is restricting Lord Jones retailers
• Looks like they exported USD 0.5 million to Israel, doubling last Q.

Canada accounted for the entirety of the increase with $1.8 million of the $1.5 million increase. 

Improvement in Flower sales is encouraging.  They no longer even mention how much flower they grow anymore.  So not sure if this is their flower or sleeved flower.

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 behind Hexo on sales.

Gross Margin:

Gross Margin: Peer and Trend

This Q:

Gross Margin is negative for 5^th consecutive Q.  For the Q, and without any impairment this Q, GM was -14%. On CC they indicate they need to sell some more of their expensive historic inventory before this improves and becomes consistently positive. 

GM was negative $1.5 million an improvement from last Q -$3 million.  What is not an improvement is that without impairment last Q GM would have been +$1 million versus the -$1.5 million this Q.

USA generated $0.7 million in GM a 41% an improvement from $0.6 million and 27% last Q.  Rest of World generated -$2.2 million GM in the Q a slide from -$1.6 million last Q.

Larger LP Peer Group: Gross Margin

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

Operating Expenses:

SGA & SBC: Trend Analysis

What I said last Q:

When OPEX is over 3 times sales that is not good.  When GM is negative, it is worse.

This Q:

Same as above.

Selling expense increased to USD 7.2 million from USD 6.5 million as they launch new Kristen Bell CBD products in USA.  Selling expense is 64% of sales.   That is large.

G&A increased from $18.4 million to $18.9 million QoQ with

• Internal review costs related to 2019 revenue restatement decreasing by $2.5 million to $1.0 million.  The aggregate of the restatement expenses of USD $8.9 million exceeds the CAD $7.5 million restatement of revenue
• professional fees increased by $1.0 million to $4.3 million
• salaries and wages decreasing by $1.7 million to $4.6 million the second QoQ decrease in a row
• G&A increased $0.9 million to $4.4 million the highest of the fiscal period.

SBC was USD 7.9 million up from USD 2.5 million last Q as they paid some severances. 

R&D was USD 4.7 million up from USD 3.6 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 an increase from USD 32 million last Q. That is 349% of sales. 

SGA & SBC: Peer Comparison

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

Net Operating Profit was negative USD $41 million, a slide from negative USD 32 million last Q.  The improvement in GM was offset by increase in Opex.

Other Expenses and Income of note:

• Interest income of USD 3.8 million an increase from last Q of USD 3.7 million.
• A $105 million gain on derivative liability, a significant reversal of the -$35 million last Q as their stock price declined
• Gain on disposal of investments of $4 million.  This is a sale of Aurora shares from last milestone on Whistler divestment.
• There is $9 loss on assets held for sale.  I cannot find a comment on same in financials of MDA.

Total Other Income were $111 million versus income last Q of -$73 million.

Cronos records a Net Income of $69 million an improvement from -USD 108 million last Q.

Implied Breakeven Sales divided by Current Sales:

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

Adjusted EBITDA:

After last Q when Cronos removed the mention of EBITDA from their MDA and earnings release, it has now re-entered.  My EBITDA is lower than theirs by $1.0 million as they deduct the legal expenses from the restatement of revenue in F2019.  Cute, as this was self inflicted.

Adjusted EBITDA slid to negative CAD 43 million from negative CAD 41 million last Q despite a strengthening of CAD/USD.  The improvement in GM was offset by G&A and R&D increases, mentioned above, are the drivers.  This is only “surpassed” (in a bad way) by Canopy at negative $93 million.  Aurora has a better adj EBITDA at negative $31 million.

+EBITDA Large Peer Group

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

Opex Burn:

Opex burn of negative USD $28 million and investment in non-cash working capital of positive USD 1.4 million.

Balance Sheet Items of Note:

• Cash is King and they have lots of it at USD 1.3 billion down only USD 23 million QoQ.
• Inventory was USD 56 million an increase of USD 3 million QoQ.
  • Raw materials was the biggest increase at $4.7 million to $10 million
  • WIP flower was the second biggest increase at $4 million to $26 million
  • WIP oil decreased 5.8 million to $13 million

Sold v Inventory and CoGS vs Inventory

We modified the graph to a US GAAP model.  The lines (from top to bottom) are inventory, Sales and CoGS (excluding writedown).  Cronos has 4.4 Q’s of inventory on hand an improvement from last Q’s 5.4 turns on hand.  This has been a steady improvement as they try to right size inventory.

What I said last Q:

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.

I cannot recall anyone even asking about the status of the Mucci JV in Kingsville. But it’s not like they need any more inventory.

It is frustrating that they are providing such weak disclosure, but until they put some of the Altria money in play this is a wait and see operation, with lots of waiting and a money burning cannabis operation.

Sales did increase +17% which is good in my books.  It would be nice to see that type of increase start stacking QoQ.

Gross Margin remains negative and under pressure going forward. SGA$’s should dwarf GM$’s for the foreseeable future.

GrowCo was mentioned once in MDA as it related to increase in the Loan Receivable that Cronos made to Mucci to finance his portion of GrowCo. It will be interesting to see how they insert GrowCo into their operations.

They seem bullish on Israel growth but are not providing any guidance on revenue or gross margins for the entire operation. Given how they performed in Canada and are performing in USA with Lord Jones, I will take a wait and see approach with them in Israel.

This company reminds me of where they were pre legalization.  Progress has been scant and slow.

This Q:

Much of the above remains the same. 

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.

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.