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Nov. 13, 2019, 7:48 a.m. EST

Cronos turns lower after kicking off cannabis earnings with revenue miss

Organigram slammed after revenue warning and Tilray earnings on tap after market close

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By Ciara Linnane, MarketWatch


ROBYN BECK/AFP/Getty Images

Cronos Group kicked off the September quarter earnings season for the cannabis sector on Tuesday with a report showing a profit driven by a one-time gain and lower-than-expected revenue.

The stock /zigman2/quotes/206842762/composite CRON -0.27%   /zigman2/quotes/202715342/delayed CA:CRON -0.21%   rose about 4% in early trade, before turning lower and dragging the broader sector down.

MKM said the numbers were disappointing, but not as dramatically as some of its peers. The company’s revenue was boosted by the inclusion of Redwood, owner of the Lord Jones brand, which was acquired in the quarter and entered the profit & loss account on Sept. 5. Per-share earnings surprised on the upside but only due to the revaluation of derivative liabilities.

“We continue to struggle with the profitability expectations for the industry,” MKM analyst Bill Kirk wrote in a note. “In Cronos’ case, 3Q’19 generated C$2.5 million ($1.9 million) more than 2Q’19 in revenue, but EBITDA losses widened by C$6.2mn. With inventory levels too high at the provinces and absolute and relative pricing pressures, we don’t see a near-term industry catalyst for improved profitability.”

Don’t miss: Cannabis earnings: How much worse can it get for underperforming weed companies?

Also: Cronos paid $300 million for a small CBD company, and CEO’s private-equity firm stands to collect $120 million of it

Organigram Holdings’ shares /zigman2/quotes/209289540/lastsale OGI +0.78%  fell 15%, after the company issued a revenue warning late Monday. Moncton, New Brunswick-based Organigram said it now expects fiscal fourth-quarter net revenue of C$16.3 million, a sequential decline from third-quarter revenue of C$24.8 million. Analysts polled by FactSet had expected fourth-quarter revenue of C$27.9 million.

See now: Drake is trying to trademark Canada’s pot warning label, and may be in for a fight

The company said the shortage of retail stores that has hampered the development of the overall sector in Canada was to blame for the miss leading to industry oversupply. The company is also expecting C$3.7 million in provisions relating to product returns and price adjustments for slower selling products sold to the Ontario Cannabis Store.

“We anticipated weaker fiscal fourth-quarter sales compared to expectations but results are much lower than indicated,” said GMP analyst Justin Keywood. “We will be seeking greater clarity on the expense and cash profile at lower sales levels but believe OGI’s capital and cost structure is strong enough to withstand weakness.”

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Illegal at Home but Lucrative Abroad: China Bets Big on CBD

As products made with CBD, or cannabidiol, take off in the U.S., Chinese entrepreneurs are looking cash in. The WSJ visited China’s cannabis heartland to see how they are navigating this highly sensitive industry as they try to turn their country into a CBD superpower. Photo composite: Sharon Shi. Video: Clément Bürge

GW Pharmaceutical shares /zigman2/quotes/209686240/composite GWPH +0.87%  fell 2%, after gaining Monday on the news that a UK agency will recommend its National Health Service reimburse patients of Epidyolex, its cannabis-based treatment for severe forms of childhood epilepsy.

Neptune Wellness /zigman2/quotes/207537677/composite NEPT -2.33% shares were up 2.6%, a day after the company announced an agreement with International Flavors & Fragrances Inc. IFF, -0.21% to develop hemp-derived cannabidiol (CBD) products for the mass retail and health and wellness markets.

See now: Amazon wrongly fired a worker and ‘blacklisted’ him for using medical marijuana, lawsuit alleges

The news came as the company posted a fiscal second-quarter net loss that widened to C$20.78 million ($15.7 million), from a loss of $3.05 million a year ago. The Canada-based cannabis extraction company said the increased loss is due primarily to an increase in stock-based compensation expense, depreciation and amortization and increased expenses on contingent consideration. Revenue fell to C$6.51 million from C$7.07 million.

See now: Short sellers are increasing bets on cannabis stocks even after summer selloff

GMP’s Keywood said that while sales were “minor” in the quarter, “we expect progressive results ahead, highlighting the benefits of significant investments made. We also have confidence in the new CEO in driving brand equity, given his past success in the CPG industry.”

Elsewhere in the sector, market leader Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -2.13%   /zigman2/quotes/202205609/delayed CA:WEED -2.05%  was down 3.7%, Tilray Inc. /zigman2/quotes/209129655/composite TLRY -1.74%  was down 3.6% ahead of its earnings later Tuesday.

Aphria Inc. /zigman2/quotes/207425803/composite APHA +4.36%   /zigman2/quotes/205566616/delayed CA:APHA +4.61%  was down 2.4% and Aurora Cannabis /zigman2/quotes/210559470/composite ACB +1.15%   /zigman2/quotes/203734337/delayed CA:ACB +0.87%  was down 0.3%.

Aleafia Health /zigman2/quotes/203485112/delayed ALEAF +5.00%   /zigman2/quotes/200214885/delayed CA:ALEF +3.13%  was down 5%, Hexo was up 2.6% and Green Organic Dutchman was down 3.4%.

The ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ +0.17%  was down 2.3% with 23 of its 36 constituents trading lower. The Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ +0.32%  was down 2.4%. with 38 lf its 54 member stocks lower.

The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0073%  was up 0.2% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.01%  was up 0.1%.

Cannabis Watch: Click here for all of MarketWatch’s coverage of cannabis companies

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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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