Tilray, Cronos report major declines in price realized per gram of cannabis
Canadian licensed cannabis producer Tilray Inc. on Tuesday reported that its third-quarter loss had doubled despite rising sales, an outcome driven by a sharp increase in operating expenses related to the company’s international businesses and an expansion into the hemp industry.
The Nanaimo, B.C.-based company posted a net loss of US$35.7 million for the quarter ending Sept. 30, up from US$18.7 million a year ago. Revenue increased by approximately $12 million to $67.8 million for the quarter, boosted primarily by sales in the medical market and revenue from its acquisition of Manitoba Harvest earlier this year.
Sales to the domestic adult-use market represented just 30 per cent of Tilray’s total revenue for the quarter, a decline of two per cent from the second quarter.
The company sold 10,848 kilogram-equivalent of cannabis, almost double the amount it sold in the prior quarter but took a hit on average net selling price per gram, which plummeted 30 per cent to just $3.25.
“Our performance in the third quarter, including solid revenue growth and sequential gross margin expansion, reflects the positive business trends we have underway,” said Brendan Kennedy, Tilray’s president and CEO, in a statement released Tuesday after markets closed.
Tilray is not the only licensed producer struggling to tap the Canadian recreational market.
Cronos Group Inc. sold over 3,000 kilograms of cannabis and posted revenue of $12.7 million in the same period, but the bulk of those sales came from wholesaling to other licensed producers as opposed to provincial and private retailers.
The company’s stock was down slightly Tuesday.
Cronos’ net revenue was 25 per cent higher than the previous quarter, but the company’s per gram price on the wholesale market was just $3.75, 42 per cent lower than three months ago.
Cronos recorded an overall profit of $788 million for the quarter, but that was mostly due to a one-time $835 million gain on the revaluation of derivative liabilities.
Cronos posted adjusted gross margins of 41.5 per cent, roughly 12 per cent lower than the quarter ending June 30. The company’s adjusted EBITDA loss increased by 35 per cent, which management attributed to higher operating costs from sales, marketing and R&D.
“Now that we have opened relationships with provinces, it makes sense for us to continue expanding among the provinces. Our focus is on satisfying those channels and being able to deliver product,” said company CEO Mike Gorenstein in a conference call with analysts Tuesday morning.
Our performance … reflects the positive business trends we have underway
Cronos appears to be formulating a long-term strategy that moves away from the recreational cannabis market in Canada, focusing instead on the potential of the CBD market south of the border. In September — flush with cash from Altria’s $2.4 billion investment in the company earlier this year — Cronos completed a $300 million acquisition for CBD company Lord Jones, which sells its branded CBD products in over 800 locations across the U.S. including Sephora and high-end fitness company SoulCycle.
In Tuesday’s earnings’ release, Cronos announced the launch of a new hemp-derived CBD brand PEACE+ which will sell CBD tinctures in a test market of 1,000 U.S. stores using Altria’s sales and distribution network.
Revenue from the Lord Jones acquisition earned the company just $0.9 million for the quarter ending Sept. 30. On a conference call with analysts, Gorenstein noted that the figure did not accurately represent the overall revenue run-rate for Lord Jones, given that it reflected just three weeks of sales. “I wouldn’t read too much into the partial revenue…. Lord Jones is a premium brand, so we’re going to see higher margins and lower volumes. We think it is a strong opportunity for us,” he said.
When pressed by analysts on how he sees the company’s bottom line evolving over the next year, given weak penetration into the domestic recreational market, Gorenstein declined to provide any kind of guidance.
“We don’t know if it is appropriate at this time. Considering we are about a month away from the first derivative product launch, I think we need to wait and see how things will play out over the next few months. It is difficult to assess right now,” he said.
Given Cronos’ healthy cash balance of $1.9 billion, PI Financial cannabis analyst Jason Zandberg believes that the company is one of just a few that will “have the war chest to fund its operations and capital projects.”
“We also believe that Cronos is geared up for success in legalization 2.0 due to Altria’s expertise in vaping as well as consumer insights,” he wrote in a note to clients.
On Monday evening, Organigram Holdings Inc., put out a surprise earnings preview which showed the company facing headwinds — its net revenue for the quarter ending Sept. 30 is anticipated to be $16.3 million, a decline of 34 per cent from the previous period. Organigram also forecast a write-down of $3.7 million related to “product returns and pricing adjustments” on a number of its lower-THC products.
The company’s stock plunged almost 20 per cent following the release of the figures.
“We believe this represents further indication that LPs are starting to see more pronounced pricing pressure from provincial buyers as industry inventory levels continue to rise,” said Canaccord Genuity Corp. cannabis analyst Matt Bottomley in a note.
A number of other cannabis companies including Canopy Growth Corp. and Aurora Cannabis Inc. are due to report earnings later this week.