I’ve only had a cursory glance at Cronos in the past. It’s not because I’m not interested, Mike Gorenstein has given an in depth tour of his facilities to /r/TheCannalysts. I’ve levered off of /u/GoBlueCdn‘s efforts so far, but it’s time to have my own look at the financials, and see what stands out.
Right to it…..
- $90MM in facilities/PP&E, $75MM of that in progress. Huge buildout under way….execution and project delivery critical.
- Intangibles/goodwill at $12MM, mostly HC licenses. Fashionable for earlier in-sector entrants, demonstrates how much resources were required in the early days. Minuscule compared to WEED, who I recall is around $480MM.
- G&A relatively steep, but in-line with sector co’s in expansion mode.
- The warrant overhang is (ahem), significant. 27MM o/s at $0.26 (yep, that’s 26 cents) with tenor deep into 2020. It shows that they began early (financing was more expensive than even a year ago), and that they chose to bracket it over a longer horizon (this is a ‘good thing/bad thing’ sort of thing when finance-ing). $400MM standing there waiting for an income statement to come along and buy it a drink.
- The timing in execution of these will be extremely relevant. Only $2MM has been struck subsequent to financial statements. Would desire to see an orderly execution in them to align with company growth. $1MM in SBC reported in this quarter.
- $144MM in options lying around (SBC), $30MM live atm. As above, timing of SBC pick up (execution) relevant, and indicative of the mind of mgmt when done.
- Income statement orderly. I’ll leave it to Blue to speak to GoB/production costing.
- Disgorged holdings in ABCann. Can’t say I blame them. Amounts immaterial in all respects.
- Israeli and Whistler investments look focused, and deliberate, which, is the feel I get around management in looking at the totality of Cronos.
Good disclosure across financials, down to construction milestones (Note 14), costs of production/inventory (Note 6), prior/post acct treatments comparison (Note 3(c)(iii)), share capital (Note 16), financial instruments (Note 22), and elsewhere. Wish more companies did it this well.
This level of disclosure also permits broader analysis – which leads to more things to opine on.
Cronos looks tightly (and well) managed, inasmuch as they provide good disclosure, and their activities don’t look like the splatter gun approach of others in the space.
Given the market cap of say, TGOD – and their current state of construction/buildout – Cronos is a good delineation to where these companies are actually at in operational capacity. They are literally years ahead.
Where I have concern is in Cronos’ optionality, and the overhang they’re packing in their capital structure. More than $500MM at current share price levels. Almost like being a victim of their own success: those long dated tenors are pricy.
The impact is to hike their internal rate of return, which, can be mitigated by sales and revenue growth. For the investor, it means that the build is there, the capital needed is there, but will the sales that need to be there show up and shine?
Just like almost everyone else out there in sector.
Given the amount Cronos has in optionality, the need for them to execute sales is just that enhanced. And like CGC and ACB (also leveraged) – it’ll also need to be profound. The tenors here allow more runway, which is somewhat paradoxically, a extrinsic offset to total cost if sales materialize.
Despite the provincial supply deals, the B2B wholesale markets, and the varying retail rollouts across the country……the entire sector is waiting for the answer to the sales question. The answer to that happens to be even more pertinent to Cronos though.
Ok, so I completed the above, and have now just read the Citron piece I heard about a couple weeks back.
I’d never read the guy before (many here will know I don’t usually read any other analyst’s stuff. I don’t want any thoughts to pollute my perceptions, and honestly, there’s so much torque and bullshit out there as it is, I simply stick to my own DD. That’s what TheCannalysts do, in case you didn’t know).
I did get a belly laugh at the Namast write up. But…..that company is an extremely large fish in a very small barrel – and an easy target.
The Cronos write up has a couple of valid points, but leaps to histrionics in conclusions.
It seems to centre on:
- the lack of poundage being disclosed in provincial supply deals
- the level of current sales
- lack of R&D spending
There’s a couple more things, right up to ‘gotcha’ claims of ‘hiding bad information’ and ‘history of product recalls’.
I share the concerns over future sales, but I’m not convinced the argument should be extrapolated from current sales levels. If that’s the case, he should be shitting all over the entire sector for this. CGC and ACB should be dead in the water by that reasoning, surely because provincial supply deals don’t equate to sales. They equate to offtake agreements, but subject to returns.
I think he’s making the case of discordance in relative valuations (cool, and fair game), but, the product ‘recalls’ and levels of R&D spending are carnie hand waving to me (waste of time).
The lack of disclosure in provincial supply deals is also relative. That said, this industry desperately seeks information, esp in press releases. Not supplying the numbers is likely fair game for comment. <edit> And by Citron not acknowledging supply agreements like this, it’s why I say the piece appears selective.
And as I’ve gotten to know leadership around the industry, I state fully and frankly – there is no CEO in the sector that I’ve
met <edit> spoken with on the subject that knows more about biology and the science of cannabis than Gorenstein. That’s moot though. As is the Gingko deal – which was announced after Citron published.
To capstone this, my takeaway from the Citron piece is that it’s very thin analytically. And selective in analysis.
He raises valid points about sales and international capabilities for sure.
I don’t think that rises to or supports the conclusions of where he gets to though.
If he’d like, I’ll point him in the direction of some companies that should be taken to the woodshed. Hard. And I’m glad to see he found Namast. Where have you been buddy?
Shoot me a note Andrew. I’ve a dozen more of those for you.