Cronos Group Q1 Revenue Decreases 3% Sequentially to $25 Million

  • Consolidated net revenue increased by 99% year-over-year to $25.0 million in Q1 2022
  • Israel net revenue increased by 263% year-over-year to $9.1 million in Q1 2022
  • Increased market share in Canada and Israel in Q1 2022
  • Mike Gorenstein returned as Chief Executive Officer

TORONTO, May 10, 2022 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announces its 2022 first quarter business results.

“I founded Cronos because of the once-in-a-lifetime opportunity to help build and shape an industry that has the potential to improve countless lives. As CEO, I am committed to re-instilling a start-up culture with a founder’s mentality across all levels of the organization,” said Mike Gorenstein, Chairman, President and CEO, Cronos Group. “The strategic realignment we announced in the first quarter of 2022 reset the organization to this mindset and we are seeing the benefits show through in our performance.”

Our execution in product development, manufacturing, and go to market strategy resulted in strong growth in both net revenue and gross profit in the first quarter of 2022, proving that we are headed in the right direction. Our Spinach® brand is one of the most sought-after brands in the Canadian adult-use market, known for bringing high quality and differentiated products to the consumer. We are also winning with branded products in Israel, with Peace Naturals® driving significant revenue growth in the first quarter of 2022.

Mike Gorenstein, Chairman, President and CEO, Cronos Group

As we execute our strategic realignment, I am encouraged with the progress we are making by increasing our market share in both Canada and Israel, and continuing to bring disruptive branded products to market. In combination with our industry leading balance sheet, our borderless products, such as SOURZ by Spinach™ winning in Canada, is one of the best ways to be prepared for legalization in the U.S.

First Quarter 2022

  • Net revenue of $25.0 million in Q1 2022 increased by $12.4 million from Q1 2021. The increase year-over-year was primarily driven by an increase in net revenue in the Rest of World (“ROW”) segment driven by growth in the Israeli medical market and the Canadian adult-use market.
  • Gross profit of $6.9 million in Q1 2022 improved by $9.9 million from Q1 2021. The improvement year-over-year was primarily driven by increased cannabis flower revenue in the ROW segment, the introduction of additional cannabis extract products in the ROW segment that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Peace Naturals Campus in connection with the impairment taken in Q4 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos Growing Company Inc. (“Cronos GrowCo”).
  • Adjusted EBITDA of $(18.9) million in Q1 2022 improved by $17.7 million from Q1 2021. The improvement year-over-year was primarily driven by the improvement in gross profit and a decrease in sales and marketing and research and development (“R&D”) expenses.
  • Capital expenditures of $0.7 million in Q1 2022 decreased by $6.3 million from Q1 2021. The decrease year-over-year was primarily driven by decreased spending on property, plant and equipment in the ROW segment.

Business Updates

Strategic and Organizational Update

In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). The organizational and cost reduction initiatives undertaken are intended to better position Cronos Group to drive profitable and sustainable growth over time. The program consists of the following:

  1. Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;
  2. Evaluating the Company’s global supply chain and reducing complexity and fixed expenses, which resulted in the announcement of the planned exit of the Peace Naturals Campus in Stayner, Ontario, and the Company’s ongoing review of product, pricing and distribution optimization; and
  3. Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry. The overall strategic realignment initiative is expected to deliver $20 to $25 million in initially identified savings across operating expense categories in 2022, primarily driven by savings in sales and marketing, general and administrative, and research and development.

Brand and Product Portfolio

In April 2022, the Company expanded its SOURZ by Spinach™ gummy portfolio with a new flavor, Cherry Lime, in a five piece per pack format with 2mg of THC per piece. The Company now has five SKUs in the gummy category across its SOURZ by Spinach™ and Spinach FEELZ™ sub-brands.

Spinach® continues to organically grow market share across Canada, most notably, Spinach® held an approximate 13% market share in the edibles category, which expands to approximately 17% within the gummy category during Q1 2022, according to Hifyre data. Furthermore, three out of the four SOURZ by Spinach™ gummies ranked in the top-10 for market share in Canada in Q1 2022, according to Hifyre data. Having launched its first gummy product in July 2021, the consumer adoption of Spinach® gummies speaks to the strong innovation Cronos Group is bringing to market. Furthermore, in April 2022, the Spinach® vape portfolio entered Ontario’s top-10 in market share. The Company will continue to launch new vape products in May, including Cosmic Green Apple and Polar Mint Vortex, across various provinces in an effort to continue to expand market share within the category.

Global Supply Chain

In the first quarter of 2022, the Company began to leverage Cronos GrowCo’s capabilities as part of the Realignment. These activities include, among others, the transfer of certain manufacturing equipment to Cronos GrowCo from the Peace Naturals Campus. In April 2022, the Company began building dedicated space within Cronos GrowCo for various manufacturing and R&D activities.

In the first quarter of 2022, Cronos GrowCo reported preliminary unaudited net revenue of approximately $7.0 million to licensed producers excluding sales to the Company.

Appointments

In March 2022, the Board of Directors appointed Cronos Group’s founder, Mike Gorenstein, as Chairman, President and Chief Executive Officer, in connection with Kurt Schmidt’s retirement. Mr. Gorenstein previously served as Chairman, President and Chief Executive Officer of Cronos Group until September 2020, when he transitioned to the Executive Chairman role.

In April 2022, the Company appointed Terry Doucet as Senior Vice President, Legal, Regulatory Affairs and Corporate Secretary, after serving in an interim capacity since December 2021. Mr. Doucet has been with Cronos Group since 2018 and has guided Cronos Group through significant growth over the last few years, including the build-out of the Company’s Legal and Regulatory Affairs teams, our strategic investment from Altria Group Inc., our R&D partnership with Ginkgo Bioworks Holdings Inc. (the “Ginkgo Strategic Partnership”), the PharmaCann Option (as defined below) and various product commercialization initiatives.

Rest of World Results

Cronos Group’s ROW reporting segment includes results of the Company’s operations for all markets outside of the U.S.

First Quarter 2022

  • Net revenue of $22.7 million in Q1 2022 increased by $12.5 million from Q1 2021. The increase year-over-year was primarily driven by an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extracts used in edibles and vaporizers.
  • Gross profit of $6.7 million in Q1 2022 improved by $10.8 million from Q1 2021. The improvement year-over-year was primarily driven by increased cannabis flower revenue, the introduction of additional cannabis extract products that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Peace Naturals Campus in connection with the impairment taken in Q4 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

United States Results

Cronos Group’s U.S. reporting segment includes results of the Company’s operations for all brands and products in the U.S.

First Quarter 2022

  • Net revenue of $2.3 million in Q1 2022 decreased by $0.1 million from Q1 2021. The decrease year-over-year was primarily driven by a reduction in volume as a result of a decrease in promotional spend as the Company works through its review of the U.S. business as part of the Realignment.
  • Gross profit of $0.2 million in Q1 2022 decreased by $1.0 million from Q1 2021. The decrease year-over-year was primarily due to increased inventory valuation adjustments, higher shipping costs and unfavorable sales mix.

Conference Call

The Company will host a conference call and live audio webcast on Tuesday, May 10, 2022, at 8:30 a.m. ET to discuss 2022 First Quarter business results. An audio replay of the call will be archived on the Company’s website for replay. Instructions for the conference call are provided below:

About Cronos Group

Cronos Group is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach®, PEACE NATURALS®, Lord Jones®, Happy Dance® and PEACE+™. For more information about Cronos Group and its brands, please visit: thecronosgroup.com.

Cronos Group Inc.
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)

Non-GAAP Measures

Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This press release refers to measures not recognized under U.S. GAAP (“non-GAAP measures”). These non-GAAP measures do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these non-GAAP measures are provided as a supplement to corresponding U.S. GAAP measures to provide additional information regarding the results of operations from management’s perspective. Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. All non-GAAP measures presented in this press release are reconciled to their closest reported U.S. GAAP measure. Reconciliations of historical adjusted financial measures to corresponding U.S. GAAP measures are provided below.

Adjusted EBITDA

Management reviews Adjusted EBITDA, a non-GAAP measure, which excludes non-cash items and items that do not reflect management’s assessment of ongoing business performance of our operating segments. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and intangible assets; impairment loss on long-lived assets; (gain) loss on revaluation of derivative liabilities; (gain) loss on revaluation of financial instruments; transaction costs related to strategic projects; impairment loss on other investments; foreign currency transaction loss; other, net; loss from discontinued operations; restructuring costs; share-based compensation; and review costs related to the restatements of the Company’s 2019 and 2021 interim financial statements, including the costs related to the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement. Impairment loss on other investments has been included as an adjustment to Adjusted EBITDA due to the PharmaCann Option impairment analysis. Foreign currency transaction loss has been included as an adjustment to Adjusted EBITDA for the anticipated settlement of intercompany loans. Additionally, restructuring costs have been included as an adjustment to Adjusted EBITDA in light of the Realignment and exit from the Stayner Facility.

Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of period-over-period results. Management uses Adjusted EBITDA for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

The following tables set forth a reconciliation of Net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated:

(i) For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space located in Toronto, Ontario, Canada. For the three months ended March 31, 2021, impairment loss on long-lived assets related to an impairment on leased premises in the U.S. segment.
(ii) For the three months ended March 31, 2022 and 2021, (gain) loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.
(iii) For the three months ended March 31, 2021, transaction costs represent legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
(iv) For the three months ended March 31, 2022, gain on revaluation of financial instruments related primarily to the Company’s equity securities in Cronos Australia Limited. For the three months ended March 31, 2021, loss on revaluation of financial instruments related primarily to revaluations of financial liabilities resulting from Deferred Share Units.
(v) For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount.
(vi) For the three months ended March 31, 2022 and 2021, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets.
(vii) For the three months ended March 31, 2021, loss from discontinued operations related to the discontinuance of Original B.C. Ltd.
(viii) For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment and the exit of the Stayner Facility.
(ix) For the three months ended March 31, 2022 and 2021, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans.
(x) For the three months ended March 31, 2022 and 2021, financial statement review costs include costs related to the restatements of the Company’s 2019 and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.

Foreign currency exchange rates

All currency amounts in this press release are stated in U.S. dollars (“USD”), which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to USD. The assets and liabilities of the Company’s foreign operations are translated into USD at the exchange rate in effect as of March 31, 2022, March 31, 2021 and December 31, 2021. Transactions affecting shareholders’ equity are translated at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and the consolidated statements of cash flows of the Company’s foreign operations are translated into USD by applying the average foreign exchange rate in effect for the reporting period using Bloomberg.

The exchange rates used to translate from USD to Canadian dollars (“C$”) is shown below:

Original press release

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