Is Cronos Group (CRON) a Buy After Yesterday’s Earnings?

On Tuesday, November 12th, Cronos Group (CRON) reported third-quarter earnings for the period ending September 30th. The company sold over 3,000 kilograms of cannabis and posted revenues of $12.7 million, which represented a 238% increase in revenues from the same quarter a year ago. The majority of those sales came from wholesaling to other licensed producers, as opposed to provincial and private retailers. 

This leads us to believe that the market is either bottlenecked, or oversupplied, and Canadian licensed producers are still waiting on the government to allow retail and cannabis 2.0 revenues to materialize. 

Net revenue increased 24% quarter-over-quarter from $10.2 million in Q2 2019, this was mainly driven by increased sales for domestic dried cannabis and the inclusion of their Redwood Holdings Acquisition.

Cronos Group’s CEO Mike Gorenstein said, “As demonstrated by our progress in the third quarter, we are making great strides to advance the development and diversity of our portfolio and to expand our manufacturing capabilities…. We are confident that our platform strategy and focus on consumer-driven innovation will continue to differentiate Cronos Group and drive growth and value creation over the long-term.”

One very important piece of information investors may be missing in this report concerns their Redwood Holdings Acquisition of premium CBD brand, Lord Jones. Goodwill – a relatively ambiguous way of accounting for the cost of acquisitions – in the cannabis sector is widely known and Cronos Group has added a substantial amount of goodwill to their balance sheet after this transaction. 

Cronos Group paid a whopping $84.9 Million for just the brand name alone, along with adding $282.9 million in goodwill on top of that. Of the $375 million transaction, over 98% of that was goodwill, intangible assets and “right of use” assets with goodwill accounting for the majority. 

This leads us to believe that Cronos Group dramatically overpaid for these assets, not to mention that the Redwood operations added $431,000 in net losses for the quarter.

Cronos is not the only company with a large amount of goodwill on their balance sheet.  In fact, Aurora Cannabis has a much larger number, but it all comes down to how fast those assets they paid a premium for will start to generate real revenues. 

However, what’s even more questionable about this Cronos transaction is that the Cronos Group CEO’s private equity firm stands to collect $120 million from this! We feel that investigating needs to be done into this transaction and this could be a classic case of management abusing shareholder equity for their own personal benefit. 

Until Cronos Group management can provide an update as to how they will allocate their capital in a more useful way and not overpay for companies with very little revenues, we will stay far away from this stock. 

Cronos Group Inc. (CRON) was trading at $7.26 per share on Wednesday afternoon, down $0.57 (-7.28%). Year-to-date, CRON has declined -6.07%, versus a 16.26% rise in the benchmark S&P 500 index during the same period.