Marijuana companies have seen impressive growth in the past few years, and cannabis investors have finally come out of the woodwork to try to take advantage of the businesses that have made the most progress early on. Cronos Group (CRON 1.20%) has been among the handful of cannabis companies that were quick enough on the draw to get listed on major U.S. exchanges early on, and that advantage has earned it a following among marijuana investors trying to get in on the ground floor in identifying future leaders of the space.
Coming into Tuesday's third-quarter financial report, Cronos investors expected modest losses but big gains in revenue and production volume. That's what Cronos delivered, and the company has high hopes that the rollout of recreational cannabis in the Canadian market should help it stay on an upward trajectory for the remainder of 2018 and beyond.
Image source: Cronos Group.
Cronos hits a high
Cronos Group's third-quarter results showed the explosive growth that the marijuana industry has enjoyed this year. Revenue jumped 186% to 3.76 million Canadian dollars, surpassing the CA$3.56 million projections among those following the stock for the top line. Cronos did lose more money than most had anticipated, with red ink of CA$7.27 million, working out to CA$0.04 per share, or double the consensus forecast among investors.
From a fundamental perspective, Cronos managed to achieve a lot of expansion in a short period of time. The marijuana producer managed to sell 514 kilograms of cannabis during the third quarter, up 213% from the 164 kilos of marijuana in the third quarter of 2017. Of that amount, 397 kilos came from dry cannabis sales, which is up 142% from year-ago levels. Cronos also reported cannabis oil sales of 117 kilograms, which brought in CA$1.07 million and represented almost 30% of the company's overall revenue.
However, there were a few numbers that weren't as encouraging. Higher volume brought lower average sales prices, with Cronos' dry cannabis sales bringing in just CA$6.60 per gram, down from more than CA$8 per gram a year ago. That's one reason cannabis oil sales will be so important for Cronos going forward, because average sales prices there topped the CA$9-per-gram mark.
As expected, costs skyrocketed. Overhead expenses more than quadrupled, and sales and marketing costs more than tripled as Cronos worked hard to prepare for the Canadian recreational cannabis market rollout. Much of that effort went toward the launch of Cronos' new brand, Spinach, which it has aimed at the mainstream recreational market. As the company described it, the brand "is geared toward a wide range of consumers that don't take life too seriously and are looking for entertaining, fun ways to enhance activities."
What's ahead for Cronos?
As momentous as the Canadian legalization of recreational pot was, CEO Mike Gorenstein sees it as just the beginning of a long-term effort. "In the quarter," Gorenstein said, "we announced a number of landmark partnerships to expand our reach beyond the flower and beyond Canada and launched our second differentiated recreational cannabis brand." The CEO went on to note that Cronos Group's opportunities are global in scope, and with efforts to launch cannabinoid products across several categories, the company is trying to position itself in the best way possible to serve a worldwide market as it evolves.
In particular, the next phase of growth could come from the recently completed Building 4 facility in Ontario. Cronos projects the 286,000-square-foot indoor production facility to produce its first harvest by the end of 2018, and although it will only become fully operational in phases, Cronos expects the facility to play a meaningful role in boosting overall capacity. At the same time, the partnership with Ginkgo Bioworks could help dramatically boost cannabinoid oil production, supporting the higher-margin products that Cronos hopes to sell.
For now, though, Cronos didn't say much about the biggest thing on marijuana investors' minds: how the rollout in Canada has affected sales in the current quarter. The company said only that it's "actively engaged in this distribution channel" in serving Ontario, British Columbia, Nova Scotia, and Prince Edward Island, with expectations to appear in other provinces as well when production catches up. In Gorenstein's words, the launch was "a watershed moment for our industry," and Cronos is "energized by the opportunities this creates" in the Canadian market.
Cronos investors didn't seem all that impressed with the results, and shares fell 2% to 3% in premarket trading following the announcement. The marijuana market has huge promise for major industry players, and it's critical for Cronos Group to work as hard as it can early on in order to build up and preserve a leadership role in the cannabis industry.
