Cronos: Cannabis Unicorn With First-Ever Nasdaq Listing

Summary

• Cronos saw share price jump 37% this week after Nasdaq listing.
• Market reached $1.9 billion, closing in on MedReleaf and Aphria.
• Early-stage cannabis company with only $1 million in quarterly revenue, raising concerns over overheated valuation amid Nasdaq listing.

We are excited to introduce our Discover Cannabis series. Every week we will introduce a new cannabis company to our readers. Besides our Weekly Cannabis Report where we provide a weekly review p of key developments and trading updates in the cannabis space, we have been asked by readers to expand our coverage outside the large caps. Although we have repeatedly shared our views that small producers are inherently risky in the cannabis industry given that distribution channels are controlled by the government and market is likely to be oversupplied post-legalization, we still believe in the value of offering a broader coverage to our readers. Cannabis will be a large and diversified market with abundant opportunities for many successful ventures. Besides the large-cap names, we think investors could be well-served to learn about other up-and-coming players. With that, we are excited to start with Cronos Group this week after it made headlines last week.

Situation Overview

Cronos Group (NASDAQ:CRON) shocked the cannabis sector by becoming the first Canadian cannabis company to be listed on the Nasdaq. Cronos started trading on the Nasdaq under "CRON" on Tuesday and ended the week 37% higher. With $1.9 billion in market capitalization, Cronos has become top 5 cannabis companies in Canada by market capitalization. Another giant has been born in the cannabis industry and we think investors should take notice of it.

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Nasdaq Listing

Cronos' listing on the Nasdaq was a first for Canadian cannabis company. Cronos was able to supersede larger players such as Canopy (TWMJF), Aurora (ACBFF), Aphria (APHQF), and MedReleaf (OTCPK:MEDFF) to list on the Nasdaq first and the benefit has been evident in the share price. Cronos ended the week with its share price up 37% lifting its market capitalization to $1.9 billion. The listing has many benefits including better access to U.S. investors and enhanced liquidity. We think the initial pop might dissipate over time as the premium will eventually be taken over by reality. Other companies are also signaling that they will seek their U.S. listing soon. Canopy CEO last week told a group of audience that the company is under preparation to apply for a listing on the Nasdaq. Although no timeline has been given from Canopy we would expect an announcement in Q2 or Q3.

Operations Overview

Despite the recent listing announcement, Cronos has also been executing on its growth and expansion plan. The company operates a 70,000 sq. ft. existing facility with 7,000 kg of capacity annually through its subsidiary, Peace Naturals. Currently, the company is undergoing expansion including a state-of-the-art 286,000 sq. ft. indoor production facility and a 1,200 sq. ft. extraction lab. Cronos expects to reach 40,000 kg annual capacity prior to 2019.

Indoor facility expected to be largest purpose-built indoor cannabis production facility in the world, fully operational by Summer 2018.

(Investor Presentation)

Cronos also has a strategic joint venture with Kibbutz Gan Shmuel, named Cronos Israel. Gan Shmuel is one of the largest and most sophisticated kibbutzim in Israel, which already exports to 35 countries throughout Europe & Asia. Cronos boasted the ideal climate for cannabis production in Israel and Cronos claimed that it will be able to produce high-quality medical cannabis at an expected cost of between $0.40 and $0.50 per gram. Although no details have been given on how it defines cost. For details on how cannabis report cash cost differently, please refer to "The Complete Cannabis Guide #1 - Production Cost". Phase 1 of the JV includes a 45,000 sq. ft. greenhouse with 5,000 kg annual capacity. Phase 2 includes an increase of capacity to 24,000 kg annually. Cronos has in total around 5,000 kg annual capacity and is expecting to reach 40,000 after all planned expansions are completed.

(Financial Statement)

Distribution

As we argued in "5 Predictions For the Cannabis Industry" that capacity is becoming less relevant in today's environment. Health Canada has issued a large number of licenses and is continuing to issue new licenses every week, creating an abundance of supply looming to choke the market once this production comes online. We caution investors to focus on distribution and sales channel as that is where the money will be made in the future. Capacity is easy to replicate given the low barrier to entry in the cannabis space.

Germany

Cronos has an exclusive supply agreement with Pohl-Boskamp, an international pharmaceutical manufacturer, and supplier founded in 1835. Pohl has distribution into 12,000 German pharmacies and the opening of medical marijuana market in Germany has created a shortage of supply. Cronos exports its products through Peace Naturals.

(Investor Presentation)

Australia

Cronos announced the formation of its Australian joint venture in February 2018. Cronos Australia is a 50/50 joint venture between the Cronos and NewSouthern Capital. Cronos Australia will serve as the hub for its Australia, New Zealand, and South East Asia expansions. According to the company, Cronos Australia's first production campus will be located on 120 acres and will commence construction on the initial phase of its production platform with a 20,000 sq. ft. the purpose-built facility, with an expected annual production capacity of 2,000 kg. Further expansions are also contemplated.

IP Portfolio

Cronos prides itself on its portfolio of IP assets including over 150 unique cultivars. Custom has its own CO2 extraction equipment that removes the need for post-processing and maintaining the natural balance in its plants. Cronos also has a partnership for research projects with experts from Cornell University, University of Toronto, Hebrew University, Volcani Center, Fluence Bioengineering and P.L. Light Systems on a variety of topics. We think the genetics assets will become important if Cronos can establish itself as the industry standard which will lead to other upcoming LPs sourcing seeds from one of the 150 cultivars available at Cronos.

Financials

In the latest quarter (Q3 2017), Cronos achieved $1.3 million in revenue. The disclosure at Cronos is poor compared to others. The company does not disclose cash cost which is a key metric in the cannabis industry. Without cost information, it becomes extremely difficult to assess the competitiveness of its operations. IFRS rules obscure reported financials and investors won't have a clear picture of the operational performance based on current exposure.

There is really nothing surprising from these financials besides that Cronos is still a very early stage LP with an ambitious expansion but limited track record. It operates in a competitive environment and it has not secured any supply agreement. One could argue that there are certain risks to its current valuation given the lack of medical market presence and low sales.

(Financial Statement)

Management

We think the management is capable and has the right mix of skills and past experiences. CEO, Michael Gorestein, has a background in venture capital and corporate law. We think Michael's U.S. background helped him to steer Cronos to become the first pot company listed on Nasdaq. Going forward, we hope Cronos will focus on improving its periodical disclosure, securing distribution channel for its products and further derisking expansion projects.

(Investor Presentation)

Overvalued?

Cronos is at best called a start-up at the moment, compared to more established industry players. The $1.9 billion market capitalization seems hefty to us, as Cronos lacks the scale and supply agreements compared to larger players Canopy, Aurora, and Aphria. In the latest quarter, Canopy generated $21 million in revenue and Aurora booked $12 million while Cronos had $1 million. However, Cronos has $1.9 billion in market capitalization whereas Canopy has $5.5 billion and Aurora has $4.9 billion (excluding CanniMed). Cronos seems to trade at a lofty valuation based on its current revenue.

However, we think the Nasdaq listing which created over $500 million in market value for Cronos over a few days might have overheated the stock. We think as investors return to calm or other Canadian companies announced listings in the U.S., the listing premium in Cronos share price could dissipate.

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Summary

Cronos has an entrepreneurial and experienced management team with deep knowledge of the U.S. capital markets. We aren't surprised by the first-ever Nasdaq listing from Cronos, but the spectacular run on its share price make us worried about an overheated stock. We would suggest investors remain on the sidelines on this stock given the valuations, especially comparing to other industry giants who have many times the revenue, capacity and track record. We think Cronos still has much to prove for itself in order to live up to the $1.9 billion valuations it has gathered so far. However, the significant interest from U.S. investors could very well continue to push the stock price higher. We think Cronos has done a commendable job in terms of garnering investor interest and media attention, but execution and results will eventually dictate long-term performance and the young company just haven't proved itself both operationally and financially. We are excited to see what it can do once legalization happens this summer.

Additional Resources

"Follow us" to receive our latest articles and investment ideas in the sector. We also publish a widely read Weekly Cannabis Report which is your best way to stay informed on the cannabis sector.

You will also benefit by reading our recent publications:

• Which Marijuana ETF Is Best For You?
• 5 Predictions For the Cannabis Industry
• Best Way to Play the Cannabis Industry
• The Complete Cannabis Guide #1 - Production Cost
• The Complete Cannabis Guide #2 - Production Capacity
• The Complete Cannabis Guide #3 - Consumption

We also publish a Discover Cannabis series where we introduce one new cannabis company to our readers every week:

• Emerald Health: West Coast Cannabis Player With Biotech Focus

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[WWG1_WGA_Q]

CRON getting cheaper as the trade spat with China continues. Lets see how low it goes before bottoming out. Thinking it could still drop some more if the bs in D.C. continues. On my watch list, gets any cheaper & I'll seriously think about accumulating a few shrs & start a long term position.

[mykie]

Great conversation on Medmen/Cronos and how regulation plays a part in their lives.

Very elucidating and I've gained valuable knowledge from you two guys, (Gregoriou and Cornerstone.)

Thanks much,
m
Long Cronos and will get longer on next dip

[Gregoriou]

author what do u make of the medmen news out today? medmen has been looking to ipo thru a Canadian company, does this mean it's probably going to end up being Cronos?

[Cornerstone Investments]

They formed a JV with Cronos so it is unlikely they will expand in Canada outside of the JV. The listing is more to provide avenues for Canadian investors to access the stocks. The listing through a shell company is a common practice here and fundamentally different from Cronos listing on Nasdaq. Nasdaq to Cronos means access to the massive American investor base. Medmen listing on Canada's CSE will result in limited liquidity as many investors only invest on the TSX.

[Gregoriou]

thanks, im in agreement. i dont see how they can list through another shell company in canada.

One thing i think you're missing though is that Medmen has publicly stated that they want to ipo through a canadian shell so that they can avoid the confusion of US regulations at this time. I don't agree that investors are confining themselves to TSX.
Some companies like Aurora, and namaste technologies built up massive market caps despite their CSE listing, and many americans were buying into them.
my admittedly novice prediction: Medmen doesn't IPO but eventually just merges into Cronos and cronos adds 75 million shares or so.
medmen's estimated market cap is to be north of a billion stateside, and cronos is about 2 billion give or take so the merger seems viable for both sides simply by adding 75 million outstanding shares. This will also be necessary for cronos and medmen if they want to take Canopy head on. Cronos is also the ideal merge partner because they're already on the nasdaq, giving them full access to US investment.

Long story short I think you have to be long Cronos now more than ever. Maybe not a full position, but at least initiate something. The prospects look very bright for both companies based on this news.

[Cornerstone Investments]

Cronos can list on the Nasdaq because it only does business in Canada. The reason why MedMen can't list on Nasdaq is because cannabis is still illegal on federal level. So Cronos cannot acquire MedMen as they would lose Nasdaq listing.

[Leonardo_Pisano]

@CI: thanks for the article.
I don't like that the management team doesn't seem to have people who know the cannabis business, at least from a plant growing/production viewpoint. So I pass this one.

FWIW, there is another cannabis company listed on the NASDAQ, but admittedly not a pure grower. I am long Innovative Industrial Properties, Inc. (IIPR) which is in the sale-and-lease-back business for cannabis producers.

[mykie]

Hi Beery1,

Have you figured out which dilutions are overdone and which are done such that they can be digested successfully at some later date and produce a more reasonable P/E ratio?

m

[mykie]

I sold some Cron yesterday at $12.51 with the intent of taking some profits and buying back later.

I can't see how the present valuations can hold and at some point (as they did on February 5th) they'll come back to earth. I don't think this will be a straight line for any of the MJ stocks and this one got a bump only due to listing on NASDAQ. Besides, when did stocks start going up in a straight line? And these are not AMZN like companies, with profits being plowed back into cap ex, these are examples of more debt being piled on, more dilution and all on spec which means one straw too many and down they come.

As the others list up to NASDAQ and get their price bumps, I'll sell into those catalysts also, looking to buy back at a later date with most.

This is just my take and everyone should do what they think is right for them. I'm not leaving the field, just pruning the buds and looking for more buds to grow back in the future.
m

[Beery1]

Glad for your last sentence, cuz the biggest catalysts are still ahead.

[ELaPia]

I wonder how HIGH it will go?

[User 47645631]

what is a reasonable entry point for a newbie? looking to buy 500 shares.

[WWG1_WGA_Q]

iamkk77 $5-$6 ??

[Long Horns]

If you're confident in the weed sector, buy at around ~$7.50 or $8.00 - the point at which I'm guessing it will drop down and intersect with the 50 day MA. Just my 2 cents.
Personally, I'm planning to invest directly in both Canopy and Aurora before they are listed on the US exchanges - but after I've heard some additional reassurance on the Canadian political front.

[oatsuzn]

That would be a great price but highly unlikely unfortunately. Their recent $40+mill raise was done by selling shares around $7 - 8.

[Nick Cox]

I agree the price is very frothy,this might be a Buy but only after the price comes down somewhat.
I'm rather intrgued about their Australian operations, especially about exporting tp S-E Asia.Don't hold your breath on that one.In general,S-E Asian countries have the strongest anti-cannabis laws of any area of the world.

[Dan in Mexico]

I'm going to provide a link to a Bloomberg story that isn't particularly relevant to this article, but IS most relevant to the medical marijuana issue.

Bloomberg: AMERICA IS GIVING AWAY THE $30 BILLION MEDICAL MARIJUANA INDUSTRY

https://bloom.bg/2G119Sx

[mykie]

Dan in Mexico,

Muchas gracias for the article. Great read, informative and intriguing.

Isn't it counter intuitive that we have the highest drug cost per capita in the USA, that marijuana is an inexpensive replacement for opiods and yet we can't get it into the use cycle? I find that astounding though, probably it is just one of the astounding and dumb things that cause our health care system to be so out of touch.

mykie
PS I also find it surprising that our business man President doesn't do something about our falling behind in what will be an enormous business and hence, don't think he will stand for that for long. Once he comes around, we'll have a nice catalyst for any MJ stocks we own.
PSPS
I own 15 MJ stocks, Cronos being one along with the big 4 etc....

[Dan in Mexico]

Mykie,

De nada. One of the other benefits of living in Mexico is that the cost of Rx meds is much lower than in the states. Sometimes though we can't get the newest med for awhile. My wife and I are lucky that all of the meds that we require are generic.

When I still lived in the US my health care insurance wouldn't cover acupuncture, which cost much less than a doctor's office visit. Cannabis isn't covered as you mentioned. The US has real problems thinking "outside the box". If there was ever an issue where politics gets in the way of progress, this must surely be the poster child for it.

The federal government blindness on cannabis is truly astounding. That will change though, with 29 states having legally approved medical marijuana, those states federal representatives and senators will change the law. In my reading the best guesses by knowledgeable people is in 3 to 5 years. In the meantime the US is ceding the medical research to foreigners, along with the possible patentable medicines to be derived.

The US has and will always have cannabis businesses, however, the Canadian cannabis businesses are busy establishing sales and distribution channels, both across Canada and internationally. They are also growing domestic cannabis medical clinics! Speaking about outside the box thinking...

I only own one cannabis stock, Canopy, which is 5% of my portfolio. When the US comes up with a cannabis ETF without tobacco companies, I'll buy it. I can't buy the Canadian ETF at TD Ameritrade. At 70, I'm cutting way back on having to follow individual stocks. I want to make it easy for my daughter who will eventually manage my portfolio.

Ten un buen día.

Dan

[verdegemwim]

ASX ANNOUNCEMENT
6 MARCH 2018
RECEIPT OF IMPORT PERMITS FOR GENETICS AND CANNABIS OIL
• Tissue culture to be imported from partners Aurora Cannabis & Anandia Labs
• Broadens Cann’s bank of genetics & cultivation capability
• Four cannabis oil products developed by Aurora Cannabis to be imported for use
by Australian patients
6 March 2018 – Cann Group Limited (ASX: CAN) has been granted import permits by the
drug control section of the Therapeutic Goods Administration (TGA) that enables the
company to commence the import of genetics and cannabis oils from its Canadian partners.
The receipt of the genetics import permits will see Cann begin importing tissue culture from
Aurora Cannabis and Anandia Labs, which will be used to develop mother plants for Cann’s
cultivation activities.
The importation of these genetics will allow Cann to establish a bank of various genetics,
therefore facilitating research into the suitability of each genetic strain for certain
therapeutic applications.
In addition, by fostering a plant breeding program Cann will establish surety around the
supply of material moving forward and broaden this supply beyond locally available gene
banks.
Cann Group has immediately commenced the process to import the tissue culture, which
will be received in the coming weeks pending a quarantine screening process conducted by
the Department of Agriculture and Water Resources.
The import permits for cannabis oil will allow Cann to bring four products developed by
Aurora Cannabis to Australia, which will be made available to medical practitioners seeking
to provide medicinal cannabis to patients under the Special Access Scheme or Authorised
Prescriber Scheme.
In respect of both sets of permits, the corresponding export permits from Health Canada
have also been secured.
Cann Group CEO Peter Crock said working closely with quality Canadian partners enables
the Company to more quickly advance its own development.
“With these genetics we will broaden our genetic base and improve our ability to cultivate
various strains of medicinal cannabis,” he said

2
“In addition to this, we are serious about providing access to product for Australian patients
as quickly and easily as is possible, and the importation of oils fast-tracks this while we
develop our own capabilities and products within Australia.”

[23447113]

some of Canadian growers have usa subsidiary activity.

[WWG1_WGA_Q]

CRON will also benefit from as a safe haven investment whenever the market goes up in smoke.

[Cornerstone Investments]

Interesting point. We too have noticed the lack of correlation between cannabis stocks and the general equity market in recent months. Hoping to write up a piece on this at some point.

[Long Horns]

On the other hand, I'm wondering if this might cause some of the Canadian weed stocks to have a bit more sensitivity than before to US market fluctuations (noticing the drops in prices across the sector today..)?

[ken_hornbuckle]

In your article, you mentioned they lack distribution, then you stated they have exclusive contract with 12000 pharma industry in Germany (Phohl) that seems like excellent distribution to me! One of the largest legal countries in the world...

[Cornerstone Investments]

Was referring their lack of involvement so far in domestic Canadian market, which will be largest near-term opportunity

[youarealltoosureofyourselves]

Serious question as someone still new to buying ADRs - what happens to the OTC securities when a company lists on NASDAQ?

[JCurse]

I am also curious about this. Will the OTC shares get automatically converted to the new NASDAQ one?

[gobirds]

yes. you don't have to do anything. they just change over. that's been my experience anyway.

[oatsuzn]

All my PRMCF shares that I've been holding since 2016 transferred over fine. Went to sleep as PRMCF on the OTC, woke up as CRON on the Naz.

[fonuajohn801]

Just wait till the Canada's big 4 hit Nasdaq. Go Canada Go!

[HibiscusAnole]

They've been turning a profit before the others have.

[newfruit]

I recently bought shares of Cronos, they're one of the quality LPs I missed on the way up. Their management has navigated international trade deals and licensing, not to mention Nasdaq listing... they are in full compliance with applicable laws and stand to benefit greatly as this industry expands.

[Cornerstone Investments]

Cronos has done shareholder well for sure!

[Moats and Income]

Definitely got a boost to its share price - like the January boost for the TSX cannabis stocks...

Also have to consider Cronos has always been a significant part of all the Cannabis Funds...so, they are not a nobody...probably a #6 in the industry and worth owning - but not overweight

[Cornerstone Investments]

Yep market of $2 billion is very heavy given the current production plan. Would not overweight at this point given the inflated price.

[NeoHippie87]

I really like your piece. I would like to add that some of their share price can be attributed to their investments in other medical cannabis companies. So there's that.

[Cornerstone Investments]

Thanks, agreed.

[Bay Area Kid]

Wow, they are pretty bad at growing pot. At less than 140 grams/sq ft, they are below the industry average. All these companies building these horribly inefficient growing operations, when a company like Abcann Global is doubling their yields.

[damawa]

Quality > Quantity

[Bay Area Kid]

Abcann Global is also the industry leader in consistency and purity. They grow the highest quality marijuana at the highest yields. Trying to figure out why they haven't been bought out for their tech

[oatsuzn]

LOL read filings. ABcann was one of Cronos' minority holdings lol. Their management routinely share ideas and workflow. Cronos still owns millions of equity in ABcann...again, read filings!!