The cannabis market, which has been witnessing issues like low demand and the vaping crisis, is probably headed for a slowdown this year, with most pot producers facing the risk of write-downs due to pricing pressure. Last week, Cronos Group Inc. (NASDAQ: CRON) surprised everyone by reporting profit for the first quarter contrary to expectations for a loss, benefiting from one-time gains.
The Canada-based company is quite bullish about the recent expansion to Israel through a joint venture partnership, which is expected to be a key growth driver in the second half of the year and beyond. Like all businesses affected by the Covid-19 outbreak, Cronos’ future prospects depend on how the pandemic scenario evolves.
An ‘Essential’ Item
Curiously, the management claims the authorities have assigned cannabis the status of ‘essential commodity‘ during the shutdown, allowing unrestricted production. When it comes to sales, the prevalence of online sales in the adult-use market and the designation of recreational marijuana as ‘essential’ item bodes well for the company.
While Cronos is set to roll out a slew of new products this quarter, after expanding the portfolio with successful launches in the last quarter, there is no doubt the macroeconomic headwinds would weigh on the business, at least in the near future. In a sign that the management is expecting near term challenges, it has constituted a risk committee and laid down a remediation plan.
“I would like to provide you an update on our remediation efforts in relation to the material weaknesses that we disclosed last quarter. We as a company are committed to instituting best practices for financial reporting. Our management with oversight from the audit committee, has initiated a plan, which we are working diligently to phase in over the course of 2020.”Jerry Barbato , CFO of Cronos Group
The management expects to have all the cannabinoids transferred in the different strains by December 2021. And, the retooling activities currently progressing at Cronos’ Canadian facilities – for launching the new generation of products – might add to cost pressure this quarter. That is bad news as far as margin is concerned, which is already under stress due to pricing issues.
Prices in Israel will be lesser than those in Germany, where the company enjoys a decent market share. “We do expect the cost of production to be lower in Israel and I think we’ve highlighted that in previous calls just given the climate. So we expect that there’s still a good margin opportunity. But over time, we would expect to see similar trends as far as product mix is what we’ve seen in Canada,” said CEO Mike Gorenstein while addressing analysts at the first-quarter conference call.
Cronos’ shares had mostly underperformed the market last year. They plunged to a record low last month and have been hovering near the $5-mark since then, which is down 65% from last year. Obviously, this is not the right time to invest in the company, given the sluggish share performance and deepening uncertainty in the market. Most analysts recommend holding the stock.
Ending a losing-spree, Cronos reported profit of $0.20 per share for the first quarter when revenues more than doubled to $8.43 million, with most of the sales coming from markets outside the Americas. Though earnings declined year-over-year, they beat the market’s prediction. But the company is unlikely to sustain the recovery as supply chains remain strained due to disruptions caused by the pandemic.
Ever since medical cannabis was legalized in Canada about two years ago, several countries in the western world followed suit, allowing the companies to expand their market share. With the number of pot producers growing steadily, especially after Arab nations like Lebanon legalized production, there are concerns of a major demand-supply imbalance.
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