Cronos Group: Still No Reason to Own (NASDAQ:CRON)
As the cannabis market continues to grow despite a disappointing end to 2021, Chronos Group (CRON) still failed to launch. The stock is now trading near its cash value, but the business remains structurally flawed, like other Canadian LPs that have already burned through large cash balances. My investment thesis is more neutral on the stock after the sharp decline due to the cash position, but Cronos Group is still not worth holding.
The stock now trades below $4 as the company has failed to build a material business despite having a global platform. The last quarterly report generated revenue of just $15.6 million and the company did not file the Q3’21 report due to pending impairment charges.
In the last quarterly earnings release, Cronos Group reported an absurd $49.8 million Adjusted EBITDA loss after reporting a massive negative gross margin. The significant gross margin loss was due to a $12 million inventory write-down for a company with slightly higher quarterly revenue.
In reality, investors should probably be encouraged by the fact that Cronos Group still has a substantial cash balance given previous bad investments. The company ended June with a balance of cash and short-term investments of nearly $1.1 billion, with shares now worth just $1.3 billion.
The company spent just $2.1 million in capital expenditures in the quarter, suggesting Cronos Group is not building the facilities needed to grow the business. The company still spends heavily on operating expenses, but the Cronos Group lacks the operations to justify higher revenues down the road to cover the high costs.
Again, the biggest complaint remains the vast global operations that are nearly unmanageable. Cronos Group spends aggressively in all of these locations without building a material business in any geographic location, including Canada.
The company has such wild spending that the G&A category spent $22.4 million in expenses in Q2’21, while net revenue was $6.8 million lower. Cronos Group would still need to cover additional expenses for R&D and S&M in order to make a profit. Of course, the business would actually need gross profit to cover these expenses, given that cost of sales exceeded revenue by $3.8 million. Essentially, Cronos Group has costs on top of costs that don’t produce revenue because the company was building an empire.
Please bear in mind that these are June figures as Cronos Group has still not released September figures due to questions regarding impairment charges. The company considered taking a $220 million charge on goodwill and intangibles. The Cronos Group only had about $250 million in such assets, which shows how bad management’s past investments were.
Even with the large cash balance relative to the value of the shares, investors simply cannot own these shares. The company doesn’t have a lot of business to invest in given the large losses. Cronos Group will need well over $205 million in revenue in 2023 to eliminate large EBITDA losses.
Even if the company produced gross margins of 40%, the annual gross profit would only reach $80 million. The Cronos Group currently spends $160 million a year on operating costs.
The prospects of tripling revenues over 2 years while maintaining the current expenditure base does not look promising. The way forward to eliminate the large EBITDA losses is not obvious. The company has no catalyst to justify this huge leap forward in reducing losses, let alone turning these modified revenues into real profits.
Same Altria (MO) is very unlikely to want the rest of the company with these dismal finances. The tobacco company purchased a large stake in Cronos Group in 2019 and holds warrants to add an additional 10% position for a controlling position with a strike price of up to CA$19.00 per action. The cannabis business is now mostly intangible to Altria, with the large losses effectively making any deal for a controlling position very dilutive and unattractive to make at this stage.
To take with
The main investor to remember is that the Cronos Group only has an electric vehicle of only $200 million. The stock simply can’t be invested in until the company files its quarterly results and executes a corporate restructuring that eliminates the vast majority of pending losses. Unfortunately, other Canadian LPs trying to restructure have failed to maintain revenue while cutting costs, resulting in long periods of low numbers.
Until Cronos Group has a major trading catalyst and a path to earnings, the stock simply cannot be invested.