Earnings season has started to heat up and marijuana stock investors have a lot to catch up on this morning.
After the market closed yesterday, licensed medical marijuana producers Cronos Group and Emblem Corp. reported earnings and we have provided a recap on these results. We have also provided an update on CannTrust after the company reported strong numbers yesterday.
Cronos Group: Revenue Grew 25% Over the Prior Quarter
Cronos Group Inc. (MJN.V) released its second quarter financial results for the period that ended on June 30th.
Financial and Liquidity Highlights
- During the quarter, Cronos recorded $174,879 in net income off $643,701 in revenue. The company incurred $2.6+ million in expenses and recorded a $1.3 million gain on the revaluation of biological assets.
- Production costs were $175,121 and the company expensed $644,429 of the inventory to the cost of sales.
- Cronos earned $313,390 in income from its equity investment in Whistler.
- During the quarter, Cronos recorded a 25% increase in sales when compared to the prior quarter and realized a $1.3 million gain in net income from non-core investments.
- Domestic sales contributed 77% to the topline in the quarter (average selling price of $9.50 per gram) and international sales grew by 27% when compared to the prior quarter. Cronos continues to see increased demand in Germany, which has led to a product shortage. As one of two Canadian companies currently supplying product to this market, Cronos sees this as competitive advantage moving forward.
- Cost of goods sold fell to $2.18 per gram after multiple operational upgrades were made during the quarter. Management expects these costs to continue to decline with scale as its other two facilities ramp up production.
- As of June 30th, Cronos had more than $55 million in assets and $4.1 million in liabilities. The company had $4,406,271 in cash and $10,496,268 of working capital.
- Cronos has been focused on operating In the Zone and Peace and establishing international distribution channels, and optimizing production.
- Earlier this year, In the Zone obtained a license to sell medicinal marijuana from Health Canada. The products produced at In the Zone are sold to Peace Naturals and is then packaged and sold to patients by Peace.
- During the quarter, Company repaid a $4 million mortgage to Romspen. Last week, Romspen agreed to provide a $40 million senior secured facility that will fund ongoing expansion at Peace.
- Since acquiring Peace Naturals, Cronos has significantly upgraded the facility and is starting to realize the results of those efforts. The company has seen a significant improvement in yields and is offering more product. Cronos has also seen its margins increase by reducing costs of goods sold and introducing premium products.
- Exports to Germany have grown, and Cronos will continue to strategically allocate supply to establish international distribution channels.
- Completion of the first harvest in building three is on track to be fully operational before the end of the third quarter.
- Completed a commercial oil production lab which will be fully functional following final approval from Health Canada in September. The laboratory will capitalize on efficiency upgrades to produce cannabis oils utilizing existing extract-grade inventory.
- Construction of the 315,000-square foot expansion is progressing well and is on schedule and the 28,000-square foot greenhouse is expected to be operational in the fourth quarter.
Investments (as of June 30th)
- Whistler Medical Marijuana Corporation ($4,058,154 book equity and $17,200,000 estimated fair value). Whistler is a licensed producer and seller of medical marijuana with operations in Whistler, British Columbia. Cronos invested an additional $1,075,800 in Whistler this year to maintain its 21.5% equity position. Based on the most recent equity financing, which was done at a post money valuation of $80,000,000, management believes the market value of its equity position is approximately $17,200,000.
- Canopy Growth Corp. ($235,099 equity). Canopy is the largest licensed producer and seller of medical marijuana in Canada. During the year, Cronos sold $87,653 worth of stock and the remaining shares are held in escrow and may be released upon certain conditions related to Vert Medical.
- Evergreen Medicinal Supply ($300,000 equity, and $314,089 loan receivable). Earlier this year, Cronos filed a claim in the Supreme Court of British Columbia against Evergreen and its directors, seeking, among other things, declarations that it has equity in Evergreen and that the agreement regarding its equity is a valid and binding contract.
- AbCann Global Corporation ($3,184,548 equity and $1,201,104 in warrants). During the quarter, Cronos subscribed for additional shares of AbCann of $1,016,000 and sold some of its shares for proceeds of $1,682,548.
- The Hydropothecary Corporation ($726,003 equity).
CannTrust: An Undervalued Opportunity
CannTrust Holdings Inc. (TRST.CN) announced financial and operating results for the quarter that ended on June 30th.
- During the quarter, CannTrust recorded a $754,864 in net income on $4,541,378 in revenue. Last year, CannTrust recorded a $1.5 million net loss on $798,403 in revenue.
- Cannabis extracts increased to over 50% of sales in the quarter (accounted for $2.3+ million of revenue)
- During the quarter, CannTrust recorded positive net Income, cash flow from operations and adjusted EBITDA.
- Adjusted EBITDA came in at $1,416,116 for the quarter.
- The average net selling price per gram increased to $8.86, up 75% when compared to the prior year period. The cash cost per gram fell to $1.49 from $1.96 in the prior quarter.
- CannTrust said that current sales are exceeding $1.9 million per month and the number of active patients is above 25,000.
- The number of active patients increased to more than 20,000 compared to 4,000 in the comparable prior year period
- Increased oil production capacity with the addition of new extraction equipment
- Received approval for increase in Langstaff Facility Vault storage capacity from $6.25 million to $25 million
- Began Phase 1 development of the 430,000 square foot Niagara Greenhouse which is scheduled to be online in the fall of 2017. Together with Phase 2, which is expected to be completed in 2018, this facility should provide up to 40,000 additional kilograms of annual growing capacity
- Patents for our single serve Brew Budz pods were granted in both the U.S. and Canada with patents pending in the E.U., China and Australia
- CannTrust and Apotex (its Global pharma partner) began the development of new dose forms aimed at making it easier for patients to use medical cannabis
Emblem: Focused on Increasing Production Capacity
Emblem Corp. (EMC.V) (EMMBF) reported its second quarter fiscal 2017 financial results for the period that ended on June 30th.
Financial and Liquidity Highlights
- During the quarter, Emblem reported a $2,954,340 net loss on $538,475 in revenue. When compared to the prior quarter, revenue declined by almost 50% and the net loss also increased.
- During the quarter, Emblem sold almost $400,000 worth of cannabis to registered patients (53.9 kilograms sold at an average selling price of $7.39 per gram). GrowWise education fee revenue from other licensed producers totaled $116,373.
- Gross margin for the quarter was $146 and this number was impacted by the net change in fair value of biological assets, inventory expensed and production costs. Biological assets consist of cannabis plants at various pre-harvest stages of growth which are recorded at fair value less costs to sell at the point of harvest.
- General and administrative expenses were $1,330,228 which was considerably higher than the prior year. The increase is primarily due to an increase in headcount at the Paris facility and the head office as well as increased costs for investor relations, consulting, professional fees, audit and legal services.
- As of June 30th, Emblem had $23,664,422 in cash on hand and $48,617,919 of total assets
- Emblem is fully funded with respect to the following estimated capital expenditures and forecast cash required for operating activities: 1) $5 million remaining capital expenditure on its Phase 2 Grow Room capacity increase; 2) $12 million planned capital expenditure to build a 25,600 square foot building to house a 10,000 square foot derivatives laboratory and cannabis oils and pharmaceutical production facility; and 3) cash used in operating activities of approximately $3 million for the remaining six months of 2017.
Land Acquisition and Expansion Update
- During the quarter, Emblem continued its expansion efforts to increase its dried flower production capacity from 650 kgs per year to more than 1,650 kgs per year by the end of 2017. With three out of four of the Phase 2 Grow Rooms now substantially complete, the incremental capacity is expected to contribute to the numbers starting in the fourth quarter. The three rooms provided an additional 5,200 sq. ft. of grow space and Emblem expects the first harvest to be in November
- Production capacity is expected to increase to 2,000 kgs per year in spring 2018 once the fourth Phase 2 Grow Room1 is operational.
- In an effort to increase production capacity prior to the recreational market opening, Emblem acquired 2 contiguous parcels of land aggregating about 80 acres that is near its current facility. The acquired properties will house Emblem’s production for the anticipated adult recreational market. Emblem expects to break ground on the newly acquired lands before year end and be in production by spring, 2019.
- As of June 30th, Emblem had 1,170 plants growing (most were harvested after the quarter) and these plants are expected to produce approximately 90 kilograms of dried cannabis flower. In addition to its finished goods and work in progress inventories, the company has approximately 70 kilograms of dried cannabis flower on hand which has been designated for cannabis oil production. Emblem has not received a license from Health Canada for the sale of cannabis oil and all the cannabis designated for oil production was not provided any value.
- Emblem owns 50% of its GrowWise healthcare division which operates medical cannabis education centers to provide guidance to patients who have been prescribed medical cannabis and help them register and order from a licensed producer. As of June 30th, GrowWise was operating out of 12 clinics and the healthcare division registered over 1,000 new patients with licensed producers during the quarter.
- One of the major developments for GrowWise in the second quarter was the signing of a lease
- with The Oshawa Clinic to establish an education center in the clinic’s main building. The Oshawa Clinic is Canada’s largest medical clinic with over 130 doctors and 100,000 patients. GrowWise expects to see patient count growth continue to accelerate based on its plans to be operating out of up to an additional five clinics by the end of 2017.
Source: Technical 420