Cronos Group Is Getting Price Cuts Slashed Across The Board By Major Broker Dealers

Last week, Cronos Group Inc. (TSX: CRON) (Nasdaq: CRON) traded lower after reporting third quarter financial results and we believe the market had negative feeling about the report. After the earnings report, five broker dealers lowered its respective price target on the Canadian Licensed Producer (LP) which we highlighted below:

• Piper Sandler lowered its price target to $4 from $7 (USD)
• Canaccord Genuity lowered its price target to C$4.25 from C$7
• CIBC lowered its price target to $4.50 from $5 (USD)
• Stifel lowered its price target to $4 from $6.50 (USD)
• Raymond James lowered its price target to $5 from $11 (USD)

7  Key Developments From Cronos’ Earnings Report

Cronos is trading below the newly issued price targets and we will monitor how banks continued to respond to the business from a rating and price target perspective. Today, we highlighted 7 key developments from the quarterly earnings report and believe our readers should be aware of this:

1. Recorded an impairment charge of $236.1 million on goodwill and indefinite-lived intangible assets and on long-lived assets from the US reporting unit (the charges have no impact on cash and cash equivalents or revenues)
2. The Canadian cannabis company reported strong growth from Canada’s recreational cannabis industry, Israel’s medical cannabis market, and sales from the US segment. When compared to the same period last year, Cronos recorded a smaller gross profit loss which the management team attributed to higher cannabis extracts sales from in the Rest of World (ROW) segment, which has a higher gross profit and gross margin than other product categories.
3. Cronos reported a more than $45 million adjusted EBITDA loss which came in lower than what was reported in the third quarter of 2021. The smaller loss was attributed to higher general and administrative expenses, higher sales and marketing costs, and higher research and development (R&D) 
4. During the quarter, Cronos reported $2.5 million of capital expenditures which is almost $6 million lower when compared to the same period last year. The management team attributed the decrease to lower construction costs and costs related to the implementation of an enterprise resource planning system
5. Cronos GrowCo (a joint venture in Canada) built on its success from the first harvest and was granted a processing license. The joint venture has started to capitalize on the Canadian wholesale market, marking a milestone in the evolution of the business’ Canadian cannabis supply chain, and we will monitor how this aspect of the business evolves
6. In August 2021, Cronos achieved the final productivity target of cannabigerolic acid (CBGA) from its strategic partnership with Ginkgo Bioworks Holdings, Inc. (NYSE: DNA). A few months later, the company achieved the final productivity target for cannabigerovarinic acid (CBGVA), which is a major milestone for the development of cultured tetrahydrocannabivarin (THCV), which is the second equity milestone to Ginkgo
7. Earlier this year, Cronos launched a 1-gram vape (THC and CBG) under the Spinach FEELZ™ brand in the Canadian recreational market. Through the SPINACH FEELZ™ brand, the company plans to produce a variety of cannabis products that will feature rare cannabinoids which are designed to deliver unique and enhanced experiences 

A Turnaround Story in the Making?

A key aspect of the Cronos story is related to the work that is being conducted to build disruptive intellectual property (IP) by realigning the business to be profitable and record sustainable growth over the long-term. By realigning the business around its brands, the management team expects to lower operating expenses by approx. $20 to $25 million in 2022.  

The management team expects to accomplish this by centralizing functions to increase efficient distribution of resources, by improving strategic alignment, eliminating duplicative costs; evaluating its global supply chain and performing product reviews; reducing fixed expenses and complexity; and optimizing cash deployment for activities such as margin accretive innovation and entering the US recreational cannabis market.

Going forward, Cronos plans to execute on its strategy to develop disruptive intellectual property (IP) by advancing cannabis research, technology, and product development. The organizational and cost cutting initiatives are expected to put Cronos in the position to become profitable and record sustainable growth over the long term. 

We continue to be cautiously optimistic with Cronos and will monitor how the management team is able to execute on its goals in 2022 and beyond. If you are interested in learning more about Cronos’ quarterly earnings report, please send an email to support@technical420.com with the subject “Cronos’ Earnings report” to be added to our distribution list. 

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Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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