Here Are 3 Key Takeaways As Cannabis Earnings Season Gets Kicked Into High Gear

Earnings season has been kicking into high gear for the cannabis sector and we have been highly focused on earnings from large-scale and craft Canadian Licensed Producers (LPs).

During the last week, a few large-scale Canadian LPs have reported quarterly earnings and the response from the market has been mixed. Today, we highlighted 3 Canadian LPs that stand out for a certain reason (which we discuss in each section) as well as some of the most important pieces of data from the earnings report.

Will Cronos go Boom or Bust?

Earlier this week, Cronos Group Inc. (CRON.TO) (CRON) released fourth quarter financial and operational results. A few years ago, the Canadian LP received a $1+ billion investment from Altria Inc. (NYSE: MO) which is why we have remained focused on the business.

When compared to the prior year, Cronos reported significant improvements in revenue, gross profit, and adjusted EBITDA. Below we highlighted the metrics we considered to be the most significant from the earnings report.

Revenue, gross profit and adjusted EBITDA, improved by $8.7 million, $16.8 million, and $25.8 million, respectively, on a year-over-year basis. With that said, Cronos only generated $1.9 million of gross profit and negative $27.4 million of adjusted EBITDA. Although we are impressed with the growth of the business, we still believe the business has weak fundamentals
The reasons for the higher revenue, gross profit and adjusted EBITDA, are related to the recreational market in Canada, the medical market in Israel, a decline in inventory write-downs, lower sales, marketing, R&D expenses, and construction costs.
In the earnings report, Cronos has a segment for the Canadian business and a segment for the rest of the world (ROW). Going forward, the management team expects costs to continue to decrease due to the implementation of its enterprise resource planning (ERP) system. In future quarters, Cronos plans to lower construction costs in the ROW segment and see further benefits from the ERP system.
Although Cronos reported plans to exit its Peace Naturals campus in Ontario, the management team announced that it would do so through a phased reduction and transition of activities strategy (expects to complete the exit by the end of 2022). The planned exit led to the company incurring a $119.9 million non-cash impairment charge on long-lived assets in the fourth quarter of 2021. In future quarters, we will monitor how the leadership team is able to execute on its cost cutting strategy without negatively impacting sales.
From a research and development standpoint, Cronos is executing on several exciting projects. Some of the initiatives the management team is focused on are cannabinoid formulation, product development, tissue culture and micropropagation across multiple facilities
Going forward, Cronos continues to be highly focused on optimizing and maintaining an agile supply chain. We are monitoring how the joint venture with GrowCo benefits the business in future quarters. As part of its growth strategy, the company plans to leverage GrowCo’s capabilities in premium flower cultivation and efficient downstream processing to improve profitability

As of December 31st, Cronos reported to have approx. $886 million of cash. This is below the $1+ billion of cash the company had as of December 31, 2020, and will continue to monitor this metric. We are cautiously optimistic with the company and will see how the management team is able to execute on a strategy to become profitable.

Village Farms is a Turnaround Story to be Aware of

Village Farms International, Inc. (VFF.TO) (VFF) reported fourth quarter financial results on the same day that Cronos did and we want to highlight some of the most important developments from its earnings report.

From a business structure standpoint, Village Farms has evolved after acquiring Balanced Health and Rose LifeScience in 2021. The company’s operating segments are now classified as Canadian Cannabis (Pure Sunfarms; Rose LifeScience); US Cannabis (Balanced Health and VF Hemp); Village Farms Fresh (Produce) and VF Clean Energy.
During the quarter, cannabis sales (both in Canada and the US) accounted for 47% of total consolidated sales (up from 27% on a year-over-year basis. Village Farms generated $34.4 million of revenue from cannabis sales which is 168% than the same quarter last year.
The period marked the 13th consecutive quarter of reporting positive adjusted EBITDA. When compared to the same period last year, adjusted EBITDA increased by 99% to $6.8 million
Through acquisitions and organic growth initiatives, Village Farms expanded its product portfolio with the launch of the Synergy Collection which was developed to enhance the multitude of benefits from the hemp plant and other ingredients outside of CBD
For the entire fiscal year, 64% of Village Farms’ revenue was generated from branded flower and pre-roll sales. 10% of sales came from branded cannabis derivative products, which Pure Sunfarms launched in September 2020, and we are favorable on the improvement in performance on a year-over-year basis where 54% of revenue was = from branded flower and pre-roll sales
Although Village Farms cost of sales increased by 58%, the business recorded an 109% increase in the amount of branded flower and pre-rolls that were sold. We find this metric to be significant and will monitor how it changes as the previously acquired businesses continue to enhance performance on a comparative basis.

During the last six-months, Village Farms has been under pressure and the stock has dropped by more than 40% over the period. While we are favorable on the improved fundamentals, we continue to be cautiously optimistic due to the recent trend and will monitor how the business can advance from here.

Canopy Growth Trades Lower After Earnings

Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) was one of the first Canadian LPs to report quarterly financial results. The stock has dropped by more than 20% since the release and we find the decline to be significant.

After conducting analysis on Canopy Growth’s earnings report, we want to highlight key data points that our readers should be aware of.

During the quarter, Canopy Growth reported $141 million of revenue, a $67 million adjusted EBITDA loss, and a $115 million net loss. When compared to the same period last year, Canopy Growth generated less revenue but its adjusted EBITDA loss and net loss improved by $1 million and $714 million, respectively. The improvement is related to the management team’s cost cutting strategy as well as less non-cash asset impairment and restructuring charges
As of December 31st, Canopy Growth reported to have $1.4 billion of cash and short-term investments. This amount is approx. $900 million lower than what was reported as of March 31, 2021. The management attributed the decline to EBITDA losses, capital investments, and the upfront payment for the option to acquire Wana Brands
From a geographic standpoint, Canopy Growth benefited from being levered to multiple markets. Although the company recorded higher consumer product sales, the increase was offset by lower Canadian cannabis sales. During the quarter, BioSteel and Storz & Bickel (S&B) achieved record quarterly revenue which was driven by expanded distribution of BioSteel and new products launches for S&B.
The opportunity for Canopy Growth to capitalize on the US cannabis industry (when federally legal) improved by acquiring an option to purchase Wana Brands and by Acreage acquiring an licensed cannabis operator in Ohio. We consider the US market to be the most significant long-term growth opportunity for Canopy Growth and will monitor how the management team continues to focus on improving its leverage to it
During the last year, Canopy Growth’s management team has been executing on a strategy to reduce operating expenses and capital investments. The leadership team is laser focused on becoming profitable in Canada by simplifying operations and optimizing expenses. The company remains committed to making strategic investments and capitalizing on emerging growth verticals. Going forward, we expect the management team to continue to find synergies between the assets it owns and believe this will play a key role in how the business achieves profitability
Canopy Growth has dedicated internal resources and human capital to find synergies between the assets it owns (both CBD and THC) and to establish a scalable footprint and national distribution networks to be positioned to capture market share in the US. We are favorable on the management team’s strategy to capitalize on the US and consider this to be the most significant long-term growth driver for the entire business

Following the earnings report, several broker-dealers lowered its price target on Canopy Growth and we continue to monitor this trend. We believe the company will benefit from having a strong balance sheet and will monitor how the story evolves from here.

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