This Is the Best Thing by Far in Marijuana Stock Cronos Group's Q1 Results

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It’s been an up-and-down year for Cronos Group (NASDAQ:CRON) so far. The Canadian marijuana grower had an opportunity to move back up when Cronos announced its first-quarter results before the market opened on Tuesday — but it didn’t happen.

As with Cronos Group’s past several quarters, there was some good news along with bad news in the company’s Q1 update. But there was also one reported item that is the best by far in terms of positioning Cronos Group for the future.

Marijuana buds on top of small Canadian flags.

Image source: Getty Images.

The good

Let’s first look at the good and the bad in Cronos Group’s Q1 report before we get to the best thing. One piece of good news immediately jumped out. Cronos announced a 473% year-over-year jump in sales, with total revenue of $2.9 million Canadian dollars ($2.25 million as of May 15, 2018).

There was also some more good news to be found in the details of how Cronos Group made its money. Nearly 9% of total Q1 sales came from cannabis oils compared to no revenue from cannabis oils in the prior-year period. This is a positive trend for the company since these products are more profitable than dried cannabis.

And while Cronos Group’s bought-deal offering early in the first quarter diluted the value of existing shares, it strengthened the company’s financial position. Cronos ended Q1 with cash totaling nearly CA$32.4 million, compared to a cash position of CA$9.2 million at the end of 2017. The company also raised another CA$100 million through a bought-deal offering in April that wasn’t reflected in its first-quarter results.

The bad

Although Cronos Group’s top line looked better than ever, its bottom line didn’t. The company posted a net loss in Q1 of CA$1.05 million, worse than the loss of CA$844,000 in the prior-year period. However, the issuance of new shares helped keep Cronos Group’s net loss per share steady year over year at CA$0.01.

Cronos Group’s spending grew in nearly every area. Its production costs increased more than sevenfold over the prior-year period to CA$1.7 million. While higher production costs were to be expected with greater production, this rate far exceeded the company’s sales growth rate. In addition, Crono dramatically boosted spending on sales and marketing, general and administrative functions, and stock-based payments to employees.

It’s also important to note that Cronos Group’s big revenue jump stemmed primarily from business-to-business sales of dried cannabis. These sales to other marijuana growers and distributors in Canada and international markets made up 64% of Cronos’ total revenue in the first quarter. The bad news is that the average selling price per gram for these business-to-business sales is less than half that of the company’s direct-to-consumer sales.

The best thing of all

The best thing about Cronos Group’s Q1 update wasn’t found in any of its financial statements. Instead, it was in the company’s production facilities update.

Cronos Group’s existing annual production capacity is around 6,650 kilograms. But Cronos is constructing a fourth building at its Peace Naturals facility that will add another 33,500 kilograms per year to its capacity. And the company is building a greenhouse in Israel and an indoor facility in Australia that will bring its total annual production capacity to more than 47,000 kilograms.

This expanded capacity is important for Cronos Group to capitalize on the anticipated legalization of recreational marijuana in Canada later this year. The Canadian Senate cleared one legislative hurdle in March toward this legalization effort. A final vote is scheduled for June 7, 2018. If all goes as expected, recreational marijuana will be able to be sold throughout the country probably by September.

Cronos Group and MedMen, a well-known U.S. marijuana brand, formed a joint venture in March. The two companies plan to launch retail cannabis stores in Canada pending legalization of recreational marijuana in the country.

Investors appeared to focus more heavily on the bad news in Cronos Group’s Q1 update. The marijuana stock dropped more than 6% in early trading on Tuesday. Most if not all Canadian marijuana stocks are priced at huge premiums, but Cronos is perhaps the most overvalued marijuana grower on the market. When stocks are priced for perfection, anything less than perfection hurts.

However, the company’s increased capacity that is on the way and its retail plans with MedMen could change the dynamics for Cronos Group assuming recreational marijuana is legalized as expected in Canada. I don’t view Cronos as the best of the Canadian marijuana stocks, but I do think the company has a reasonable shot at achieving success in the rapidly expanding market.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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