Cronos Group: Still No Reason To Own (NASDAQ:CRON)

As the cannabis market continues to grow despite a disappointing end to 2021, Cronos Group (CRON) has still mostly failed to launch. The stock is now trading close to cash value, but the business remains structurally flawed similar to other Canadian LPs that have already burned large cash balances. My investment thesis is more Neutral on the stock after the large dip due to the cash position, but Cronos Group still isn’t worth owning.

All-Time Lows

The stock is now trading under $4, as the company has failed to build a material business despite a global platform. The last quarterly report produced revenues of only $15.6 million and the company has failed to file the Q3’21 report due to pending impairment charges.

When last reporting quarterly results, Cronos Group an absurd $49.8 million adjusted EBITDA loss after reporting a massive negative gross margin. The large gross margin loss was due to a $12 million inventory write-down for a business with quarterly revenues just slightly larger.

In reality, investors should probably be encouraged that Cronos Group still has a substantial cash balance considering the previous bad investments. The company ended June with a cash and short-term investment balance of nearly $1.1 billion with stock only worth $1.3 billion now.

The company only spent $2.1 million on capital expenditures during the quarter suggesting Cronos Group isn’t building any facilities need to expand the business. The company is spending wildly on operating expenses still, yet Cronos Group doesn’t have the operations warranting higher revenues down the road to cover the high costs.

Again, the biggest complaint remains the vast global operations that are nearly impossible to manage. Cronos Group is spending aggressively in all of these locations without building a material business in any geographic location, including Canada.

The company has such wild spending that the G&A category spent $22.4 million on expenses in Q2’21 while net revenues were $6.8 million lower. Cronos Group would still need to cover additional expenses for R&D and S&M in order to turn a profit. Of course, the company would actually need gross profits to cover these expenses considering cost of sales topped revenues by $3.8 million. In essence, Cronos Group has costs on top of costs that don’t produce revenues because the company was building an empire.

Remember, these are the June numbers because Cronos Group still hasn’t reported the September numbers due to questions regarding impairment charges. The company discussed taking a $220 million charge to goodwill and intangibles. Cronos Group only had ~$250 million in such assets highlighting how bad prior investments were by management.

Can’t Own

Even with the large cash balance relative to the stock value, investors just can’t own this stock. The company doesn’t have much of a business to invest in considering the large losses. Cronos Group will need far more than $205 million in 2023 revenues to eliminate the large EBITDA losses.

Even if the company produced 40% gross margins, the annual gross profit would only reach $80 million. Cronos Group currently spends $160 million annually on operating costs.

The prospects of tripling revenues over 2 years while maintaining the current expense base doesn’t appear promising. The path to eliminating the large EBITDA losses isn’t apparent. The company doesn’t have any catalysts warranting this huge leap forward in cutting losses, much less spin those altered revenues into actual profits.

Even Altria (MO) is highly unlikely to want the rest of the company with these dismal financials. The tobacco company bought a large stake in Cronos Group back in 2019 and holds warrants to add an additional 10% position for a controlling position with an exercise price all the way up at C$19.00 per share. The cannabis business is now mostly immaterial to Altria with the large losses actually making any deal for a controlling position very dilutive and unappealing to close at this point.

Takeaway

The key investor takeaway is that Cronos Group only has an EV of just $200 million. The stock just isn’t investable until the company files quarterly results and executes a business restructuring that eliminates the vast majority of the ongoing losses. Unfortunately, other Canadian LPs attempting restructurings haven’t successfully maintained revenues while cutting costs leading to extended periods of weak numbers.

Until Cronos Group has a major business catalyst and a path to profits, the stock just isn’t investable.