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3 Surprises in Cronos Group's Delayed Q4 Earnings Update

By Keith Speights - Updated Mar 31, 2020 at 3:32PM

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Many investors probably didn't see these things coming for the Canadian cannabis producer.

Cronos Group (CRON -5.29%) was originally scheduled to report its Q4 results on Feb. 27, 2020. However, the company delayed this update because of a review by the Audit Committee of its board of directors into the recognition of revenue related to wholesale bulk resin purchases and sales.

It took a while, but Cronos Group finally joined its peers in reporting its results for the quarter ending Dec. 31, 2019. The Canadian cannabis producer announced its 2019 fourth-quarter and full-year results after the market closed on Monday. 

Unsurprisingly, Cronos said that it would need to restate its financial results for the first, second, and third quarters of 2019 based on the committee's findings. But there were several surprises in Cronos' Q4 update, including these three, in particular.

Three cannabis leaves

Image source: Getty Images.

1. Major revenue shortfall

Analysts surveyed by Zacks expected Cronos to report Q4 net revenue of $12.5 million. The company announced actual Q4 net revenue of only $7.3 million -- well below what analysts were looking for. 

Cronos Group's Q4 net revenue reflected a 71% year-over-year jump. However, its revenue was lower than the $7.64 million recorded in the previous quarter (after its restatement of revenue).

The company reported $2.7 million in revenue during the fourth quarter from its U.S. segment, which consists of the Redwood business acquired last year. Cronos' rest of world segment, which includes its core business in the Canadian cannabis market, generated Q4 net revenue of $4.6 million.

2. A tidy profit (but don't get excited about it)

While Cronos Group's top line disappointed, the company reported a profit of $61.6 million, or $0.16 per diluted share. The consensus analysts' estimate was for a loss of $0.04 per share. But don't get too excited about this surprise.

The only reason behind Cronos' positive bottom line was that the company recorded a gain of $118.8 million on the revaluation of derivative liabilities associated with Altria's (MO -0.58%) investment. This accounting gain stemmed from Cronos Group stock sinking during the fourth quarter.

A better number to look at to determine how Cronos fared in Q4 is its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company posted an adjusted EBITDA loss in Q4 of $51.9 million, a significant deterioration from the adjusted EBITDA losses of $5.8 million in the prior-year period.

3. CBD pause

In November, Cronos Group CEO Michael Gorenstein spoke excitedly in the company's Q3 conference call about the launch of its new PEACE+ hemp-derived CBD tinctures in the U.S. market. He said that Cronos would use Altria's sales and distribution network to build sales for its hemp CBD products.

That was then. On Monday, Cronos stated that it decided to "pause" the distribution of PEACE+ CBD tinctures through Altria's sales and distribution network. The company said that it "will continue to evaluate other product formats and categories that we believe may be more suitable for the PEACE+ brand in the evolving environment."

Looking ahead

The main issue for Cronos Group right now is the same one that impacts nearly every company in North America and across the world: the novel coronavirus pandemic. All of Cronos' facilities remain in operation, though. Cannabis has been designated as an essential business in areas where the company operates. However, Cronos acknowledged that it could be impacted by the COVID-19 crisis.

This viral outbreak will likely dampen the anticipated growth in Canada's Cannabis 2.0 market for cannabis derivatives products over the short term. As a result, Cronos' revenue growth in 2020 could be a lot lower than hoped.

But the company claims something that most marijuana stocks don't, namely a strong balance sheet. Thanks to Altria's investment, Cronos' cash stockpile totaled $1.5 billion at the end of 2019. That should be more than enough for the company to weather the storm caused by COVID-19.

Editor's note: A previous version of this article incorrectly referenced Cronos Group's financial results in Canadian dollars instead of U.S. dollars. The Fool regrets the error.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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