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This Canadian Marijuana Stock's Gross Profit Soared 466% in Q2

By Keith Speights - Updated Aug 27, 2018 at 5:22PM

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But there are even more important things you'll want to know about Cronos Group's Q2 results.

Investors love impressive growth numbers. Cronos Group (CRON 0.90%) certainly had several of them to report in its second-quarter update announced before the market opened on Tuesday. The Canadian marijuana grower's Q1 results in May were mixed, but this time around Cronos had mainly good news.

The most spectacular growth reported by Cronos Group in Q2 was its fantastic 466% year-over-year increase in gross profit. But as great as its gross profit improvement was, there were five more important things you'll want to know from the company's Q2 update. 

Marijuana growing in greenhouse

Image source: Getty Images.

1. Revenue skyrocketed for three great reasons

Cronos announced that its Q2 revenue skyrocketed 428% higher than the prior-year period to 3.39 million Canadian dollars. There were three really good reasons behind this strong growth.

First, Cronos Group lined up more medical marijuana patients in Canada. The company said that bringing additional patients on board helped increase domestic medical cannabis sales by 234% year over year.

Second, the company had a higher production capacity than it did in the prior-year period. Cronos sold 477 kilograms of cannabis products in the second quarter, up 489% from the same period in 2017. 

Third, and perhaps most encouraging, Cronos reported that 40% of its domestic medical revenue in Q2 stemmed from the sale of cannabis oils. This is important because cannabis oils generate more money for the company than dried cannabis does. Lower prices for dried cannabis helped pull Cronos Group's average selling price down to CA$7.12 per gram in Q2 from CA$7.99 in the prior-year period. Increased cannabis oil sales, though, softened the blow for the company.

2. Net income more than quadrupled -- but with a catch

In the first quarter, Cronos Group's bottom line was one of the worst aspects of its performance. The good news for the company was that Q2 looked much better. Cronos reported net income of CA$723,000, a 316% year-over-year jump. 

But there's one catch with this huge increase: A large positive change in income tax recovery accounted for roughly one-third of the net income improvement. Cronos stated that it benefited in the second quarter of 2018 from tax deductions related to property, plant and equipment, share and debt issuance costs, and losses carried forward.  

3. Improved liquidity

Cronos Group's liquidity at the end of the second quarter totaled CA$118.3 million compared to CA$61.1 million at the end of Q1. The company reported CA$89.6 million in cash on hand as of June 30, 2018, supplemented by CA$28.7 million available in additional borrowings under its existing construction loan.

The liquidity number increased in Q2 thanks to Cronos Group's bought-deal financing in April that generated gross proceeds of CA$100 million. In the past, these bought-deal financing transactions were the primary means available to Canadian marijuana growers to raise cash. With the passage of bill C-45 (also known as the Cannabis Act) in June, though, banks can provide services to cannabis companies without worries about being penalized.

4. Weaker cash flow

There was one glaring number in Cronos Group's Q2 results that showed deterioration rather than improvement. Cronos reported a negative operating cash flow of CA$6.87 million. In the second quarter of 2017, the company posted a negative operating cash flow of CA$3.33 million.

In addition, Cronos used a lot more cash in investing activities -- CA$30.2 million in Q2 versus using CA$3.9 million in the prior-year period. Without its bought-deal financing transaction, Cronos would have ended the second quarter in a much weaker cash position than it began the quarter. 

5. Expansion on schedule

As important as all of the previous numbers are, probably the single most critical update in Cronos Group's Q2 report was that its expansion effort is on schedule. Cronos stated that the construction of its Peace Naturals Building 4 "remains on schedule and cultivation is expected to commence in the second half of 2018."

Currently, Cronos only has an annual production capacity of around 6,650 kilograms. Its Peace Naturals Building 4, however, is a 286,000-square-foot facility that will boost the company's total annual capacity to more than 40,000 kilograms.

Cronos also recently announced that it's starting a joint venture, Cronos Growing Company, with a group of investors led by greenhouse expert Bert Mucci. This new company plans to construct an 850,000-square-foot greenhouse in Ontario with an annual production capacity of 70,000 kilograms. 

Some encouraging math from Q2

Overall, Cronos Group's Q2 performance was quite good. It also hints at why Cronos stock is up 250% over the last 12 months. 

The average selling price of CA$7.12 per gram that Cronos achieved in the second quarter and the company's projected annual capacity of around 40,000 kilograms after Building 4 is ready to go implies revenue capacity of CA$285 million. If demand in the Canadian recreational marijuana market is as great as some think it will be, Cronos could see its revenue jump exponentially next year. 

Editor's note: A previous version of this article misstated Cronos' net income as CA$723 million. The Fool regrets the error.

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