Over the past 13 months, the marijuana industry has done a 180 -- and not the good kind. Following a first quarter in 2019 that saw more than a dozen pot stocks gain at least 70%, the past 13 months have featured across-the-board declines for North American cannabis stocks of 50% to 95%.

To our north, Canadian licensed producers have been held back by a plethora of regulatory issues. Health Canada was slow to approve cultivation and sales licenses and delayed the launch of high-margin derivatives until mid-December. Additionally, Ontario's previous lottery-based retail licensing system didn't work, with just two dozen dispensaries opening in the first year of adult-use weed being legal.

Meanwhile, in the U.S., high tax rates on legal cannabis have made it virtually impossible for retailers to compete with the black market.

The cherry on top is that most North American pot stocks have also had difficulty accessing nondilutive forms of financing, leaving some pot stocks scrambling for cash. But as marijuana investors have learned, cash isn't everything when it comes to investing in cannabis stocks.

A handful of dried cannabis buds lying atop a messy pile of cash.

Image source: Getty Images.

Cash isn't always king in the cannabis space

Take Cronos Group (NASDAQ:CRON) as a perfect example. This is a company that ended its fiscal year with $1.51 billion in cash and just a few million dollars in debt. Essentially, Cronos Group has $1.5 billion in net cash and a market cap of $1.95 billion.

Cronos came into this cash hoard in March 2019, when tobacco giant Altria Group (NYSE:MO) closed on a $1.8 billion equity investment that gave it a 45% stake in the company. The expectation was that Cronos would be able to use this capital to make acquisitions, push into international markets (including the United States), improve upon its existing infrastructure, and support the launch of derivatives, which happened in late 2019.

Plus, Altria has decades of experience in marketing smokable products to consumers. With a 45% equity stake in Cronos and a U.S. tobacco business that's seen steadily declining cigarette shipments, it was expected that Altria would aid in the development and launch of cannabis-focused vape products in a legalized derivative market. Among the various alternative-consumption options, vapes have been pegged by Wall Street as the biggest growth opportunity.

With a brand-name partnership and a boatload of cash in tow, Cronos Group might look like a no-brainer buy. But even with $1.5 billion in cash, it remains a highly avoidable pot stock.

A bearded man in sunglasses exhaling vape smoke while outside.

Image source: Getty Images.

Cronos Group's growth plans have gone up in smoke

Thus far, Cronos Group has only put its cash to work with one notable transaction. Last year, it acquired Redwood Holdings for $300 million -- $225 million of which was paid in cash. Redwood is the company behind the Lord Jones brand of CBD-based beauty products.

Unfortunately, the cannabidiol (CBD) craze seems to have fizzled out as quickly as it came into being, and the U.S. Food and Drug Administration (FDA) is partly to blame. The FDA has been very clear that it's not going to allow CBD products into food or beverages for the time being and has raised safety concerns about long-term CBD use. That's put a real cap on the near-term potential for the hemp industry and CBD. In other words, Cronos' plans to take the U.S. by storm haven't worked out as planned.

Equally important, Cronos Group's vape ambitions have been thwarted in a number of ways. First of all, the U.S. suffered through the vape-related health scare last spring and summer, leading to thousands of hospitalizations and dozens of deaths. Although researchers were able to peg the likely cause of these mysterious lung illnesses on vitamin E acetate found in illicit-channel product, a small portion of the products tested containing vitamin E acetate came from the legal market.

Another issue is the coronavirus disease 2019 (COVID-19) pandemic, which first manifested in China. During the months that parts of China had implemented mitigation measures designed to thwart the spread of COVID-19, supply issues cropped up for a variety of industries, including cannabis. You see, nearly all vape pens are manufactured in China, putting the North American vape industry at risk of a substantive product shortage in the near term.

Also of concern is that Quebec and Newfoundland & Labrador have banned vape sales, pending further research. Alberta banned vape sales initially, but its ban only lasted for two months. The point here is that the Altria-Cronos tie-up hasn't had a chance to shine due to a variety of issues. 

An assortment of flowering cannabis plants growing in an indoor commercial farm.

Image source: Getty Images.

From a production standpoint, Cronos gets lost in the crowd

Making matters worse for Cronos Group, it's a company that predominantly overlooked production escalation in 2018 and 2019 in favor of calculated moves into the derivatives market. With those derivative products not living up to expectations thus far, Cronos' production capabilities have been exposed as subpar, at least for its size.

What do I mean by subpar? Cronos has one fully operational grow farm that generates a reasonable amount of cannabis on an annual basis. At its peak, Peace Naturals is capable of 40,000 kilos a year. However, Cronos Group repurposed some of this facility to handle processing and research for higher-margin derivative products. By comparison, Aurora Cannabis, Canopy Growth, Aphria, and Tilray are all fully capable of perhaps 100,000 kilos to 300,000 kilos in peak output per year. In fact, you can find publicly traded Canadian licensed producers at sub-$70 million market caps with more output potential than Cronos Group. That's what I mean when I say subpar.

Suffice it to say that Cronos Group's meager harvest hasn't resulted in anything close to operating profitability. To be clear, Cronos Group has been profitable before, but this comes with a huge asterisk. That's because it's relied on fair-value adjustments and revaluing its derivative liabilities (i.e., warrants held by Altria Group tied to its equity investment) to push into the green. Based on no-nonsense accounting, Cronos isn't anywhere near recurring profitability.

What's more, Cronos announced a restatement of its 2019 financials in mid-March, removing approximately $7.6 million Canadian in sales from an already anemic top-line figure.

Put plainly, Cronos Group's cash isn't remotely enough of a dangling carrot to make this stock a buy.