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Why Were Cronos Group’s Q4 Earnings a Shipwreck?


Mar. 31 2020, Published 9:13 a.m. ET

Cronos Group (NASDAQ:CRON) reported its fourth-quarter and fiscal 2019 results on Monday after the market closed. The fourth-quarter results were disappointing. Cronos Group missed analysts’ revenue estimates by a huge margin. The company’s EBITDA losses were higher than analysts’ expectations. Cronos Group stock didn’t have much of an impact. The results were released after the markets closed. The stock closed with a gain of 0.79% yesterday. Let’s take a look at how the company performed.

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Cronos Group missed analysts’ estimates in Q4

Cronos Group reported revenue of 9.6 million Canadian dollars—40.4% below analysts’ estimates. Analysts expected the revenue to be around 16.1 million Canadian dollars. However, the company reported 72.1% growth year-over-year. The increase in the volume of products sold in the Rest of World segment and the Redwood acquisition drove the revenue growth for the quarter. Wholesale product sales and Cannabis 2.0 products also drove the revenue. For the fiscal year, the revenue was around 31.5 million Canadian dollars. The revenue missed the estimates of 47.1 million Canadian dollars.

Cronos Group delayed its earnings. The company had to restate certain 2019 unaudited interim financial statements. In a press release after the adjustments, the company said that it reduced the revenue in the first quarter by 2.5 million Canadian dollars. Meanwhile, the company reduced its revenue in the third quarter by 5.1 million Canadian dollars, respectively.

For the fourth quarter, the EBITDA losses were higher than the estimates. The company reported an EBITDA loss of 83.2 million Canadian dollars, which was higher than analysts’ estimate of 21.2 million Canadian dollars. Sequentially, the EBITDA losses also increased compared to 23.9 million Canadian dollars in the third quarter. For the fiscal year, the losses were around 158.4 million Canadian dollars—higher than the estimates of 72.8 million Canadian dollars.

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Various factors were responsible for the increased operating losses. The company’s SG&A rose and drove its growth strategy. Cronos Group also incurred more sales and marketing expenses to develop its brands along with more R&D costs. The company incurred a $1.9 million one-time charge associated with repurposing certain facilities at the Peace Naturals Campus. There was also an inventory write-down of $24.0 million in the fourth quarter.

Product portfolio update

Cronos Group provided an update on the vape products and devices that it launched in 2019. The company launched cannabis vaporizer devices for the Cannabis 2.0 market under the COVE™ and Spinach™ brands. Cronos Group created new and advanced 510 thread vaporizer product lines for the same brands. The product lines include cartridges that are tamper-resistant and have rechargeable draw batteries to prevent overheating. The company also launched three holiday pop-up shops in Los Angeles and New York City under the Lord Jones brand. Cronos Group added the hemp-derived CBD brand Lord Jones to its brand portfolio in 2019.

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For now, the company decided to pause the distribution of PEACE+ hemp-derived CBD tinctures, which it was doing through Altria’s sales channels. Cronos Group wants to evaluate more product formats after understanding customers’ requirements. CBD products aren’t readily accepted by the FDA. The cannabis industry is still waiting for the FDA to approve CBD products.

Cronos Group ended the quarter with $1.5 billion in cash and short-term investments.

How’s Cronos Group dealing with COVID-19?

Marijuana is an essential item in Canada and some US states. As a result, Cronos Group stated that it will remain operational despite the coronavirus outbreak. The company will following health and safety measures like work-from-home facilities, better hygiene, and sanitation practices as guided by the government. The company will monitor the COVID-19 situation closely.

Recently, Hexo (TSE:HEXO) announced that it will stay operational amid the COVID-19 crisis. There’s demand for marijuana since it’s an essential item. The pandemic caused an uptick in its share price, which was otherwise stooping. Hexo stock took a hit again after its second-quarter results on Monday. Hexo fell 27.5% yesterday. To learn more about the company’s results, read Hexo Stock Tanks after Reporting Its Q2 Earnings.

Marijuana sales continue to rise. However, marijuana legalization is being impacted in some US states. We’ll have to see if rising demand and sales continue to benefit the cannabis sector. Meanwhile, Hexo’s results have dragged down other cannabis stocks. Aurora Cannabis (NYSE:ACB), Aphria (NYSE:APHA), and Canopy Growth fell 13.8%, 6.3%, and 0.89%. Cronos Group has fallen 2.8% today in pre-market trading.


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