Cronos Group’s Derivative Liability Explained

Below is a chart showing the depreciation of the fair value (mark-to-market) of Cronos Group’s warrant liability owed to Altria. It is marked to market at the time of each earnings report to reflect what it would technically be worth based upon Cronos Groups share price during that particular moment in time

As you can see, the lower the share price goes, the less the derivative liability is worth

Based upon their PPS (price per share) on September 30th, the value of the liability is $569 577 000, down from $999 257 000. What might surprise you is the fact that this change is included as income on their statement of operations

Three Months Ended March 31,

Three Months Ended, June 30

Aphria reported a similar fair value adjustment, but what was puzzling about this situation was that they failed to mention this fact in their highly adjusted 4th quarter earnings report. What was even more unusual was when the news media just blindly reported this as the industry’s first profitable quarter.

Below is a screenshot from their annual report. It is here that they mention the derivative liability. In this case it is referred to as a convertible debenture, which is just a loan that the lender can convert into the company’s stock. There doesn’t seem to be any mention of this in their quarterly report though, but I could be wrong. Again, it was highly adjusted, and they admit this fact in the report. For more detail, New Cannabis Ventures wrote a more detailed article on how this works.

The price skyrocketed as much as 40% from this news nonetheless. Nobody saw this coming, and it seemed to just come out of nowhere.

Don’t get me wrong, Aphria is an amazing company with tremendous potential for growth; I just think maybe they were under a lot of pressure to please investors — who knows.

If you refer to the image above, this figure might not look so bad beside the $100 million loss they booked in the prior quarter, but this loss was also due to a non-cash expense similar to the Aphria derivative liability. In this case, they were forced to write down the value of some of their past acquisitions.

Many companies were aggressively expanding at that time, so you can’t put the blame completely on Aphria for paying too much for these acquisitions. Hindsight is 20/20 as they say. It was just an interesting observation to see the mainstream media refer to this earnings report as the cannabis industry’s first profitable quarter, especially considering the fact that Cronos Group continuously reports net income based upon non-cash items.

Aphria is a highly diversified marijuana conglomerate at this point, so it’s going to take more than a few impairments to take them down. Just take a look at some of their other amazing acquisitions. Click on the image below for the full visualization.

DISCLAIMER: This is all my opinion, and I am not a financial adviser. You should consult a financial adviser before making any decision with regard to publicly traded securities, or any security for that matter. I make no assurances as to the accuracy of the information contained herein. You should not use this article as the basis of an investment decision. You should consider this information as similar to personal insight from a peer/friend/acquaintance, and thus it should obviously not be the primary source material you use for basing an investment decision because similar to any opinion from a peer/friend/acquaintance, it could be completely and utterly incorrect!

all chart images courtesy tradingview

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