Most Canadian marijuana stocks have been beaten down so far this year. Cronos Group (NASDAQ:CRON) is no exception, with its shares tumbling 27%.
Cronos announced its first-quarter results before the market opened on Friday. Did the company report any surprises big enough to spark a rebound? Here are the four most important things to know about Cronos Group's Q1 update.
1. Why revenue skyrocketed year over year
The most impressive number in Cronos Group's Q1 results was its 181% year-over-year revenue jump. Cronos reported first-quarter net revenue of $8.4 million compared to sales of $3 million in the prior-year period. That's the good news. The bad news is that the Q1 revenue total fell far below the $10.77 million average analysts' estimate.
Cronos' net revenue from its rest-of-the-world operating segment (which includes cannabis operations in Canada and other markets outside of the U.S.) more than doubled year over year to $6.3 million. The company attributed this growth primarily to greater sales in the Canadian adult-use recreational cannabis market, including sales from its launch of cannabis vaporizers after the opening of the country's cannabis derivatives market. However, the rest of the world revenue total reflects a decline from the segment's Q4 revenue of $4.6 million.
The company's United States reporting segment includes the Redwood brands that it acquired in September 2019. Net revenue for the segment totaled nearly $2.2 million in the first quarter. This total reflects a 19% decline from the fourth quarter of 2019. Many of the physical retail locations in the U.S. that distribute Lord Jones products have closed due to the COVID-19 pandemic. Although Lord Jones continues to sell online directly to consumers, the coronavirus outbreak has hurt sales.
2. What caused the surprise profit
Cronos Group posted a surprise profit of $75.7 million, or $0.20 per diluted share. This result trounced the consensus analysts' estimate of a net loss of $0.07 per share in the first quarter. But don't get too excited.
The company's Q1 operating loss of $45 million was a lot worse than the $10.1 million operating loss in the prior-year period. Even though Cronos' revenue increased a lot year over year, its spending increased at an even faster rate. It also hurt that the company recorded an inventory writedown of nearly $8 million in the first quarter due to oversupply in the Canadian cannabis market.
So how did Cronos manage to make a profit? It's only a paper profit. The company "benefited" from a gain on revaluation of derivative liabilities of $113.4 million in Q1. I use quotes around the word "benefited" because this gain stemmed from changes in the value of warrants owned by Altria (NYSE:MO). And the change in the value of the tobacco giant's warrants came as a result of Cronos Group stock sinking in the first quarter.
3. How much cash Cronos still has
Thanks to Altria's big investment in Cronos last year, though, the cannabis company still has a solid cash position. Cronos Group reported cash, cash equivalents, and short-term investments of more than $1.3 billion as of March 31, 2020.
The company used around $170 million of its cash in the first quarter. At its current cash burn rate, Cronos could have to raise additional capital by late 2021.
4. What's on the way for Cronos
Cronos Group's future is intertwined with the prospects for the entire cannabis industry. The company's financial position should improve as the economy recovers from the COVID-19 pandemic. Cronos should benefit from growth in the Canadian cannabis derivatives market. However, another major wave of coronavirus infections in the fall could cause even more problems for Cronos and other marijuana stocks.
At least over the short term, expect some headwinds for Cronos. The company expects to make more inventory writedowns, in large part because of pricing pressures in the cannabis market. On the other hand, Cronos should also see new opportunities. For example, its Cronos Israel facility could begin generating revenue in the second half of this year.
There could also be some breakthroughs with Cronos' partnership with Ginkgo Bioworks that's focused on producing high-quality cannabinoids through fermentation processes. After the end of the first quarter, Cronos Group's fermentation business unit successfully fermented targeted cannabinoid CBGA.
Cronos Group CEO Mike Gorenstein thinks brighter days will be ahead. He said, "We remain well-positioned and committed to generating sustainable, long-term value for shareholders and are confident 2020 will be a successful building year for Cronos Group." The next couple of quarters will likely reveal whether his optimism is warranted.