Like many other companies in the cannabis industry, Cronos Group (NASDAQ:CRON) is experiencing some difficulties.
The price of CRON stock has dropped by about 50% since March. In my opinion it may be a while before things turn around. This company has issues and it may continue to be a buzzkill for shareholders.
Highlights From CRON Stock’s Recent Earnings Release
Cronos recently reported its second-quarter 2019 earnings. The company highlighted four things that it believes are positive developments for its long-term prospects.
First, it opened Cronos Device Labs. This is a new research and development center in Israel. Second, it hired Todd Abraham, who previously worked with Mondelez International (NASDAQ:MDLZ), as its new chief innovation officer.
The third thing the company highlighted was an agreement to acquire a state-of-the-art fermentation facility. Fourth, it established a new growth opportunity in the Untied States through the acquisition of Redwood Holding’s hemp-based CBD platform.
Notice how there was no mention of any financials? Whenever earnings and numbers aren’t part of the the highlights, it’s usually a red flag. If they were good you can be darn sure they would be mentioned.
Lowlights From CRON’s Recent Earnings Release
When I read the earnings release, I noticed some things that should concern shareholders.
First of all, the company reported a negative EBITDA of almost $18 million. This metric measures what the earnings were before interest, taxes, depreciation and amortization are deducted. It is a measurement of the cash flow of the company. It shows that Cronos is spending more cash than it is taking in. You make ask if this is the case, then how come the company’s earnings are positive? Well, a close examination of the income statement shows that over $263 million CAD of the company’s earnings were a gain on revaluation of derivative liabilities. This is an incredibly high number. Maybe from an accounting standpoint it makes sense, but it is important to understand that the vast majority of what this company reports as income is not real cash.
The second thing that I noticed was that the cost for Cronos to produce a gram of cannabis has risen from $2.63 CAD to $3.01 CAD over the past year. This was due to higher processing costs. It goes without saying that when production costs increase by 15% it’s probably not a good thing.
The potential share dilution is also very troublesome. Second-quarter basic earnings were 75 cents per share. This is calculated by taking the company’s net income and dividing it by the number of outstanding shares. The diluted earnings per share were just 22 cents a share. This is an enormous difference. Diluted earnings are calculated by taking all the shares that could be created and assuming they have been. For example, suppose a company has one million shares outstanding and it earns $1 million. Earnings per share would be $1. Now suppose this company has bonds outstanding that can be converted into one million shares giving the company two million total shares. Now diluted earnings per share are now 50 cents.
If you are a shareholder, share dilution is bad because it will reduce the percent portion of your share of the company.
Cronos highlights the positives of the relationship it has with Altria (NYSE:MO) but I believe it is very concerning. Let’s face it. Altria, formally known as Phillip Morris, is an evil company that it responsible for millions of deaths. Many investment firms are now focusing on socially responsible investing. The relationship Cronos has with Altria basically makes it a sin stock, and this means that many institutions will not invest in it.
What’s Next for Cronos Stock?
Since CRON stock failed at resistance at the $14 level, it has trended lower. $14 is an important level. If the stock does rally, it will probably run into resistance there again. If it keeps trending lower, it might find support around the $10 level. This is where the low was in December.
As of this writing, Mark Putrino did not hold any of the aforementioned securities.
