Company Reports

Shares of Canadian-licensed producers and US multistate operators rallied massively on news that the US Drug Enforcement Administration will proceed with rescheduling cannabis to Schedule III from Schedule I. Schedule I indicates it is considered to have a high potential for abuse and no medical value. In comparison, Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. We view the April 30 news as the next step in a long process by the Biden administration to relax the current federal prohibition. We view the market reaction as a reflection of how much pressure these stocks have faced rather than any new development.

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.

No-moat Cronos reported disappointing fourth-quarter results, with net revenue of $24 million, 4% lower sequentially. Moreover, gross margin more than halved from the third quarter to 8% due to disruptions from the Israel-Hamas war; continued oversupply in Canada pressuring prices; and unfavorable mix shift. After revisiting our assumptions, we've lowered our top-line forecast to 6% per year over the next decade, down from 8%, as we see increased competition not only in Cronos' Canadian home market but also its export markets. Additionally, we've reduced our long-term gross assumption to the high-20% range from the high-30% range. Partially offsetting these changes, Cronos has made good progress on its operating expense savings programs. We've cut our fair value estimates to $2 and CAD 2.80 per share, down from $2.50 and CAD 3.50. Shares are fairly valued, and we think US multistate operators Curaleaf and Green Thumb offer more attractive upside.

Cronos Group cultivates and sells cannabis predominantly in Canada and Israel. With net sales below CAD 100 million, it is the smallest Canadian licensed producer we cover by far. This hurts its ability to reach scale on overhead expenses, leading us to forecast the company will not reach breakeven adjusted EBITDA profitability within our 10-year forecast.

No-moat Cronos reported decent third-quarter results, with net revenue of USD 25 million representing a 22% and 30% increase over the third quarter of last year and the preceding quarter, respectively. Results would have been even stronger had it not been for a stronger U.S. dollar. We expect minimal adjustments to our top-line forecast but plan to slash our longer-term gross margin assumption, which currently assumes 38% by 2032, as the price compression among far too many licensed producers will weigh on expansion potential. As a result, we’ll likely cut our fair value estimates of USD 2.50 and CAD 3.50 per share by 10% to 15%. We think there’s better risk-adjusted upside in cannabis among U.S. multistate operators.

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.

No-moat Cronos reported disappointing second-quarter results, with year-to-date net revenue trending well below both management’s full-year guidance of $100 million-$110 million and our previous $102 million full-year forecast. With the target looking out of reach, management retracted full-year guidance, and we’ve cut our 2023 revenue forecast to $81 million. Partially offsetting a smaller top line, we’ve reduced our forecast for full-year overhead expenses by roughly $12 million to $80 million, as cost-cutting efforts have progressed better than we expected. The net effect is that we have lowered our fair value estimate to $2.50 and CAD 3.50 per share, down from $3 and CAD 4, respectively. Shares look undervalued, but we see better risk-adjusted upside in cannabis among U.S. multistate operators.

Cronos Group cultivates and sells cannabis predominantly in Canada and Israel. With sales below CAD 100 million, it is the smallest Canadian licensed producer we cover by far. This hurts its ability to reach scale on overhead expenses, leading us to forecast the company will not reach breakeven adjusted EBITDA profitability until the end of the decade.

No-moat Cronos reported first-quarter 2023 results, highlighted by slow top line growth and continued losses. Revenue declined 20% to $20 million, made worse by the currency effect of a stronger U.S. dollar. Adjusted EBITDA losses narrowed $2 million to $17 million. Although the company made better progress than we expected on overhead costs, sluggish sales growth and gross margins that have been slower to recover than we expected weigh on our forecast. We’ve cut our fair value estimates to $3 and CAD 4 per share, down from $4 and CAD 5.50, respectively.

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market.

Cronos’ full-year 2022 net revenue after excise taxes and adjusted EBITDA loss of $92 million and $81 million, respectively, weren’t far from our forecast revenue of $93 million and adjusted EBITDA loss of 77 million. With few surprises during the quarter, we’ve largely maintained our long-term forecasts and hold our fair value estimates of $4 and CAD 5.50 for no-moat Cronos. The stock looks undervalued in 4-star territory, but we see 5-star opportunities elsewhere among American multistate operators and Canadian licensed producers.

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market.

Cronos’ top- and bottom-line performance declined in the third quarter from the second quarter. Net revenue of $21 million and adjusted EBITDA loss of $22 million were both worse than the previous quarter’s $23 million and $19 million, respectively. Nonetheless, the revenue decline can be partially explained by currency effects from the strong U.S. dollar as well as the strategic repivot of the U.S. business away from CBD beauty products. And while adjusted EBITDA loss was wider sequentially, it’s still dramatically improved from same quarter a year ago. Cronos is still on track to halve its adjusted EBITDA losses this year. We forecast a loss of $77 million compared with $160 million in 2021.

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market.

President Joe Biden’s comments on cannabis legalization spurred a rally in the cannabis sector on Oct. 6. His major announcement was that all prior federal offenses of simple marijuana possession will be pardoned. The act is expected to affect approximately 6,500 people convicted from 1992 to 2021. Additionally, Biden called upon governors to take similar action toward pardoning possession offenses. More importantly for the legal cannabis industry, he plans to direct the Department of Health and Human Services and attorney general to review the product’s status as a Schedule 1 controlled substance, which places it among heroin and LSD and higher than methamphetamine and fentanyl.

Cronos’ second-quarter fiscal-year 2022 results slowed from the first quarter. Net revenue declined 8% and adjusted EBITDA was roughly flat at a loss of CAD 19 million, quarter over quarter. While Cronos continues to dominate the Israeli medical market, the Canadian market continues to be hindered by regulatory delays, competitive pressures from too many licensed producers, or LPs, and consistent strength of the black market. Separately, Cronos is repositioning its Lord Jones brand in the U.S. to adult-use products and away from beauty.

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market.

Cronos showed a refreshing turnaround in its first quarter. Prior quarters exhibited frustrating repetition of revenue growth that failed to turn into profits and instead were matched with wider losses. Instead, first-quarter revenue nearly doubled over the prior year to $25 million, while gross margin flipped to a gain of 28% from a loss of 23% in last year’s quarter. Adjusted EBITDA losses were half that of last year, as a result.

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market.

In a surprise announcement, Cronos revealed that former CEO and current executive chairman Mike Gorenstein will once again return to helm the company as CEO, president, and chairman effective immediately. CEO Kurt Schmidt will retire as of March 21. With no warning of his pending retirement and the immediate effectiveness of the change, we suspect that the change stems from Cronos’ ongoing disappointing financial performance.