Rapid Reaction: Analysts, Investors Remain in the Dark on Cronos’ Recreational Sales

Toronto-based licensed cannabis company Cronos Group (Nasdaq: CRON) had sizable revenue growth in 2018 but still missed the mark for analysts.

The company’s net loss also increased sharply – the company reported a profit the prior year – fueled in large part by a change in financial reporting requirements, the company said in its earnings report.

Here are the top takeaways investors should know:

Earnings Highlights

  • Cronos reported fourth-quarter revenue of 5.6 million Canadian dollars ($4.2 million) for the period ended Dec. 31, 2018, up nearly 250% from the same period in 2017.
  • Full-year 2018 revenue totaled CA$15.7 million, nearly four times revenue reported for 2017.
  • The company’s red ink for the year rang in at CA$19.1 million, or 11 Canadian cents a share, compared with net profit of CA$2.5 million in 2017.
  • The company’s expenses also shot up in the final quarter to CA$12.4 million – which included CA$2.4 million in spending on research and development. For the year, operating expenses totaled $29.4 million – up more than 200% from CA$9.3 million in 2017.

Market Reaction on Wall Street Miss

  • The performance missed Wall Street’s revenue estimates for the quarter and full year. Analyst Vivien Azer, managing director at Cowen Securities, had projected full-year 2018 revenue of CA$19.1 million and earnings per share loss of 9 Canadian cents.
  • Shares of Cronos dropped more than 4% in midday trading Tuesday to $19.63 a share.
  • Investor Intelligence view: Investors and analysts had their work cut out for them as they pored through Cronos’ financial statements. Nowhere in the company’s earnings release to media was a mention of the growing quarterly and full-year losses. Instead, the figures were disclosed more than halfway through the firm’s 33-page quarterly financial filing. As investors and analysts look to size up Canada’s top company, it’s likely the call from shareholders for more concise, discernible financial filings will ramp up in the quarters ahead.

Recreational sales not disclosed

  • Fourth-quarter results have been top of mind for analysts and investors eager for insight into the progress of sales after Canada’s legalization of adult-use cannabis in October. However, Cronos didn’t disclose just how much of its revenue came from recreational marijuana, nor did it break down international exports. Instead, the company reported a spike in kilograms sold of 198% for the quarter, recording more than 1 million kilograms (2.2 million pounds) in the quarter compared with 349,000 in the same quarter last year.
  • Cronos CEO Michael Gorenstein told analysts the company isn’t breaking the sales into those individual channels for now because it’s “still trying to manage how we allocate between medical patients, provinces, private retail partners and national partners and a pretty big shortage situation.”  That will change in the future, Gorenstein said, as sales in each of those channels become “more material.”
  • Investor Intelligence view: Pressure will continue to mount from investors and analysts eager to delineate which lines of business are most robust among Canadian producers. Failure to do so in the near term – especially for companies that produce lackluster results or increased losses – could be cause for concern.

Boosted by Altria

  • Gorenstein also outlined the company’s immediate priorities after the closing of a CA$2.4 billion strategic investment from Altria Group. Gorenstein told analysts the company is using the capital infusion to continue to recruit top talent to the firm, boost product and research development and accelerate expansion.
  • Investor Intelligence view: How Cronos is deploying the capital infusion from Altria will be a key metric to watch in the coming quarters, as investors and analysts look for signs that the company is using the investment to differentiate its position and gain market share.