5 Things About Marijuana Stock CannaRoyalty's Second-Quarter Report That Stand Out

With less than seven weeks to go till the big day, all eyes are on Canada. Following the passage of the Cannabis Act, Prime Minister Justin Trudeau set a date of Oct. 17 as the official launch of recreational marijuana sales. With this launch, Canada will become the first industrialized country in the world to have legalized adult-use weed.

As you might imagine, giving the green light to recreational marijuana is expected to generate a lot of revenue for Canadian growers. Though estimates vary wildly, Canadian pot stocks could see up to $5 billion a year flowing into the industry, atop what they're already generating from medical weed sales and via exports to medically legal countries.

Californian weed distributor CannaRoyalty dishes on its Q2 results

But what investors may not realize is that there's much more to the cannabis movement than simply growers -- or even the Canadian market. Take CannaRoyalty (NASDAQOTH: CNNRF) as an example. It's a Canadian-based marijuana stock that's looking to become a niche player in California's burgeoning cannabis market. With thousands of brands and hundreds of dispensaries competing for consumers, yet only a handful of distributors, CannaRoyalty could be one of those indispensable marijuana middlemen.

It also happens that this up-and-coming small-cap reported its second-quarter operating results a week ago today, turning a few heads in the process. Here are five things that really stood out in CannaRoyalty's Q2 report.

1. It's serious about divesting noncore assets

While most investors were probably focused on CannaRoyalty's 446% increase in sales over the sequential first quarter to 3.51 million Canadian dollars ($2.71 million), or perhaps its CA$0.18-per-share quarterly profit, it's the company's divesting of noncore assets that really steals the show.

Subsequent to the end of the quarter, CannaRoyalty announced the sale of its Canadian preroll technology to Aurora Cannabis for CA$7 million in Aurora's common stock. It also generated an estimated CA$26.4 million from the sale of Anandia to Aurora Cannabis for CA$115 million in common shares and warrants. CannaRoyalty initially took a 20% stake in Anandia Labs in January 2017. And then, just days ago, CannaRoyalty completed the sale of its equity stake and royalty in AltMed to Tidal Royalty for CA$8 million.

Said CEO Marc Lustig, "The company generated earnings per share of $0.18 primarily by delivering on its stated objective of rationalizing early passive investments."

2. Distribution acquisitions are on the plate

Though CannaRoyalty is busy monetizing its passive investments, it's also aggressively looking to bolster its distribution infrastructure in California organically and through acquisitions. Three days after the quarter ended (July 3), CannaRoyalty closed on its acquisition of FloraCal Farms for $1 million in cash and 35,088 CannaRoyalty Class A shares, as well as possible future cash and share considerations.

Three days following the closing of this deal, on July 6, CannaRoyalty announced the purchase of a licensed distribution and manufacturing facility in Cotati, Calif., for $2.4 million.

Lastly, its purchase of RVR Distribution, announced in March, should close sometime during the current quarter.

All of these acquisitions should help to solidify CannaRoyalty as a leading middleman in California's distribution market.

3. A healthier cash position

With the understanding that it'll have to spend to secure a niche position as a major distributor of cannabis in California, CannaRoyalty has been busy solidifying its cash position in recent months.

The company ended the second quarter with CA$15.7 million in cash, a 248% increase from where it ended fiscal 2017. However, this doesn't include the gross proceeds of nearly CA$33 million raised from a convertible debenture sale on July 12. And, as noted, the company's monetization of passive early investment could yield an increase in cash as well. It looks to have more than enough capital for the time being to execute its infrastructure expansion.

4. Share buybacks are a possibility

Interestingly, while most marijuana stocks are busy diluting shareholders into oblivion with bought-deal offerings -- and even CannaRoyalty has been guilty of this -- CannaRoyalty is doing what it can to reduce the pain of dilution with the possibility of share buybacks.

As announced on Aug. 9, CannaRoyalty may use some of its proceeds from noncore divestitures to repurchase up to 5% of the company's outstanding shares over a 12-month period. Its divestments in Anandia, its preroll technology, and AltMed have raised in excess of CA$40 million, some of which may be used to repurchase shares of common stock. That's a good thing for shareholders, and it could actually improve earnings per share as CannaRoyalty pushes toward recurring profitability.

5. A big profit, with a bigger asterisk

Lastly, investors should understand that while CannaRoyalty wowed with a CA$0.18 quarterly profit, this is based on a number of one-time gains from asset divestments. If we look closer at the company's core operations, CannaRoyalty generated CA$3.51 million in revenue, just CA$0.32 million in gross margin, and produced a loss from operations of CA$6.47 million. Depending on how quickly the California cannabis market ramps up, as well as how successful CannaRoyalty is in infiltrating California's marijuana distribution network, it could be many quarters still before this company has any shot at recurring profitability from operations.

For the time being, CannaRoyalty remains an intriguing stock to watch given its unique position within California's cannabis market, but it's not quite ready for investors' portfolios. Until we see a push toward recurring profitability, this is a stock best left on your watchlist.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.