To its credit, Cronos Group (NASDAQ:CRON) hasn’t yet painted itself into the same fiscal corner rival cannabis names like Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC) have, easing potential downward pressure on CRON stock. That is, Cronos Group isn’t sitting on hundreds of millions of dollars’ worth of goodwill waiting to be written down, and subsequently pulling the rug out from underneath CRON shares.
Simply put, the company hasn’t been as haphazard as other cannabis names have been about making expensive acquisitions, many of which aren’t panning out as hoped.
If you think Cronos Group’s books are completely clean and healthy though, think again. It’s in a position to tack on those same kinds of acquisitions that could lead to the same kind of goodwill debacle. It just hasn’t pulled the trigger yet.
That may have started to change as of last month.
Cronos Isn’t Sitting on a Mountain of Goodwill, But …
It was a warning Bloomberg Intelligence analyst Kenneth Shea dished out in July, before a string of cannabis companies reported their quarterly numbers. He specifically pegged Canopy, Aurora, and Aphria (NYSE:APHA) as names with lots of goodwill — a relatively ambiguous way of accounting for the cost of acquisitions — that could lead to major writedowns after seeing an “aggressive pace of acquisitions at prices above book value” from key players in the business.
Some cannabis names had already done so earlier in the year.
The red flag mostly turned out to be a false one (so far), as most of the major pot companies didn’t take charges to reflect investments that have yet to pan out. The risk, however, is still on the table, with roughly $4 billion in goodwill still collectively on the books of the major names in the industry.
It’s not a risk that seemingly impacts Cronos Group or CRON stock. The Canadian company only reported $1.8 million worth of goodwill on the assets side of its balance sheet … a pittance relative to its $10.2 million worth of revenue last quarter and the $2.4 billion worth of liquid assets it can readily access.
Don’t be too quick to assume Cronos won’t pose a major writedown risk sooner or later though, and probably sooner than later.
Cronos Group Stock Still Faces Big Liabilities
What Cronos lacks in goodwill it makes up for in other categorizations of liabilities. Chief among them is the $1.4 billion worth of derivative liabilities on the company’s balance sheet as of the end of June.
Yes, this liability is a reflection of the $1.8 billion investment Altria Group (NYSE:MO) made in March, completing the purchase of 45% of issued CRON stock. It’s also the same derivative liabilities line that shrank from $1.66 billion as of the end of the first quarter, translating into a non-cash upward adjustment of net income, to the tune of $265 million.
Still, the core reason Cronos has yet to handle any goodwill headaches is that, as of the end of last quarter, it hadn’t made any major acquisitions. That’s finally starting to change.
Case(s) in point: Early this month, Cronos committed $300 million to the purchase of CBD-based beauty brand Lord Jones. In July, after the second quarter had come to a close, it revealed plans to buy a manufacturing facility. Last week it announced it was offering a $100 million credit line to partner and partially-owned outfit Cronos GrowCo to help GrowCo construct a new growth facility. It’s not an acquisition per se, but it does put the company on something of a proverbial, fiscal hook.
Three deals, only two of which are acquisitions, don’t necessarily put Cronos in a dire position where goodwill writedowns become inevitable. It may not lead to writedowns at all, and if all goes well, the derivative liabilities presently on the books could continue to whittle away.
Both are big ‘ifs’ though. It seems unlikely Cronos Group won’t feel pressured to enter the dealmaking race at the same speed its peers are presently running, leading into to the “acquisitions at prices above book value” Bloomberg’s Shea spoke of. And, in the same way the reevaluation of its derivative liabilities helped in the first half of the year, they could still start to move the other direction in the future.
Looking Ahead for CRON Stock
Ideally, keeping its pursestrings mostly closed during the midst of acquisition-mania may prove prudent in the end. At the very least investors and analysts are thinking more critically now, realizing that simply being in the cannabis business is no guarantee of profits.
It’s clear now that some dealmaking was done at outrageous costs, and shareholders are reasonably skeptical.
It remains to be seen, however, if Cronos Group can maintain that discipline and only pay prices for deals that will allow for a respectable ROI. It’s just not made many deals yet. The Lord Jones purchase is the only recent one of an existing, operating company, though the company seems more interested in investments and making deals than it ever has in the past.
Whatever’s in the cards, would-be CRON stock owners can’t afford to think that Cronos has somehow sidestepped the matter. It needs dealmaking now if it wants to compete going forward, unless Altria has something phenomenal up its sleeve.
As of the time of this writing, James Brumley did not hold a position in any of the aforementioned securities. To learn more about James, visit his site at jamesbrumley.com, or follow him on twitter at @jbrumley.
