Cronos

Cronos: The Dark Side Of The Cannabis Space – Citron

Target Price‐ $3.50

Citron has a hot hand in cannabis lately. First Aurora ($ACB) and then in the last two weeks our trading calls played out to 70% returns. One long and one short (respectively: $TLRY and $CVSI).

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Q2 hedge fund letters, conference, scoops etc

Cronos (NASDAQ:CRON) price target of $3.50.

An Aside to Investors

Citron would like to inform investors of caution on the ongoing and real green rush. Although the hype is big and the prohibition after 100 years is real, it is critical to understand that in the Canadian landscape, there are over 100 licensed producers and there will ultimately be more losers than winners.

Reality Check on Cronos

While Canadian growers get ready for October 17 and the new age of recreational marijuana usage in Canada, Citron believes that there are a few truths that need to come to light with regards to Cronos.

The Great Deception in Process

Cronos management appears to have been deceiving the investing public by purposely not disclosing the size of its distribution agreements with provinces – unlike every other major cannabis player.

Our sources have informed us that it’s because the agreements are so small they could never justify the premium investors are paying for the stock.

Some may argue that US listed cannabis stocks are subject to stricter regulation so companies are much more careful with what they disclose but both Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) are much more forthright.

See below for Cronos’ latest disclosure on its provincial supply agreements. Cronos refers to the size of the market which is quite irrelevant when considering they now have a supply agreement.

Cronos

https://thecronosgroup.com/cronos‐group‐inc‐announces‐provincial‐supply-agreements/

Now compare the above to Canopy Growth and Tilray’s disclosures.

Cronos

https://www.canopygrowth.com/wp‐content/uploads/2018/07/BC‐Supply‐NR‐Final.pdf

Cronos

https://ir.tilray.com/news‐releases/news‐release‐details/high‐park‐companytm-announces‐agreement‐supply‐societe‐des

Cronos is all talk. Last quarter, despite having the first ever license issued by Health Canada in late 2013, Cronos has vastly underperformed every big competitor.

Cronos

This is a total joke!!

Two days ago there was a pot bust in Wyoming with an estimated street value of US$7m. That is more than three times the revenue that Cronos, a $3B CAD company, generated last quarter. For context: this Wyoming bust is an illegal business that was merely transporting a portion of its load.

A clear example of hype vs. reality with Cronos

In October 2017, Cronos issued a grandiose press release noting:

Cronos Group Inc. (TSX‐V: MJN) (OTC – Nasdaq Int’l Designation: PRMCF) (“Cronos” or the “Company”) is pleased to announce that it has entered into a strategic distribution partnership with G. Pohl‐Boskamp GmbH & Co. KG (“Pohl‐Boskamp”). Founded in 1835, Pohl‐Boskamp is an international pharmaceutical manufacturer and supplier, distributing its products to over 12,000 pharmacies in Germany alone.

Leveraging Pohl‐Boskamp’s extensive distribution network, this partnership provides Cronos with unrivaled access to the German market. Cronos will begin shipping product to Pohl this quarter and will terminate all other existing German supply agreements following this announcement. With over 82 million people and federal insurance coverage for cannabis, Germany is currently the largest legal cannabis market in the world.

“We are ecstatic to partner with Pohl‐Boskamp, an established and reputable pharmaceutical leader. This partnership allows us to leverage an existing industry leading pharmaceutical distribution channel to immediately create the world’s largest medical cannabis distribution platform,” said Mike Gorenstein, CEO of Cronos.

Now here’s the reality. There was zero mention of Germany on the Q2’18 earnings call. Cronos last mentioned Germany on the Q1’18 earnings call and noted that “export sales to Germany accounted for 6% of the reported revenue”, meaning Germany accounted for $177k CAD of revenue in Q1’18.

What are you getting when you buy Cronos? Nothing more than fluff and distribution agreements.

Just one big Stock Promo : Immaterial R&D Spend

On the latest earnings call, the CEO noted that “Cronos seeks to build the world most innovative cannabinoid platform using different plant genetic and production methodologies to develop a portfolio of cannabinoid and terpene recipes that deliver differentiated psychoactive effects and therapeutic benefits.”

In reality, Cronos has only spent $1 million in R&D of all the capital it has raised from its bought deals over the last year. They are not even in the universe of any medicinal research anywhere.

Cronos

It Only Gets Better

On what little revenues that Cronos has, the cant even get that right

Cronos has a history of product recalls

In Feb 2015, Cronos (its wholly owned subsidiary Peace Naturals) had its first known recall for wrongful labelling if not worse, wrongful testing.

In May 2017, Cronos once again had a recall, but this time for using what appeared to be pesticides that they ought not to have.

And this is the worst. While Cronos was raising money and touting an international strategy, surprisingly Germany was missing from their Q2 conference call.

What happened?

Without disclosing to investors or to the SEC, their product got recalled in Germany for Microbal contamination

https://www.leafly.com/news/industry/canada‐lp‐german‐partner‐pulls‐cannabis‐batchas‐precaution

Cronos raised $100m just a few days later on Mar 21, 2018, In our opinion that is securities fraud;

Retail investors have piled into Cronos on the hope that Diageo will announce an investment or alliance relating to cannabis‐infused beverages.

As a result, Cronos is now trading almost in‐line with Canopy Growth based on market cap relative, which implies that the market is already pricing in that Cronos gets the coveted “beverage deal”.

Cronos

Yeah right, Diageo would ever do a deal with a company who has a history of contamination and has proven that they cannot even produce a small amount of commercial product. This is a NON EVENT. Citron feels stupid even discussing this, but it had to get mentioned.

So how can we value Cronos?

When looking at Cronos relative to other cannabis stocks that have yet to receive a “beverage deal”, Cronos’ sky high valuation looks completely out of whack with fundamentals.

Cronos

Despite Cronos claiming they are the leader, that is all talk. So we compare them to a public company with most similar financials and we will disregard the history of product recalls.

It’s Real Comp

Cronos

Citron compare Cronos to Organigram despite OGI having

  • More revenues in the last quarter (10% higher),
  • More profit (>3x)
  • Better balance sheet with 50% more cash and inventory that Cronos
  • Better management. With Greg Engel who formerly ran Tilray, they have a winner from a institutional way of thinking.

With all that in consideration we will give Cronos at market valuation of $3.5 a direct comp to Organigram….

Conclusion: Lets take Stock

  • Cronos does not have material International sales
    • Worse: Cronos has worst in class sales of the big Canadian Licensed Producers
  • Cronos trades more expensive than Canopy, the only company in the space to have a beverage deal
  • Cronos has a history of product recalls
  • Cronos is hiding bad information
  • It has no US operations and has limited potential internationally
  • It does not spend money on R&D despite purporting to being a leader

Cronos is a reminder to all investors that what is not released is what you need to pay attention to.

Cautious Investing to All

Article by Citron Research

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