Cronos Group Q3 Revenue Increases 80% to $20.7 Million

Cronos Group Reports 2021 Third Quarter Results
  • Completed Audit Committee evaluation and restated Q2 2021 unaudited interim financial statements
  • Announces strategic realignment to support future growth strategies
  • Consolidated net revenue increased 80% in the third quarter of 2021 compared to the third quarter of 2020
  • Launched Cronos Group’s first cultured cannabinoid gummy and vape products under Spinach FEELZ™ brand
  • Spinach® held a double-digit market share in the gummies category in Canada in the third quarter of 2021

TORONTO, Feb. 18, 2022 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announces its 2021 Third Quarter business results.

The Audit Committee of the Company’s Board of Directors has completed its evaluation of goodwill and indefinite-lived intangible assets in the Company’s U.S. reporting unit for impairment. Following completion of this evaluation, and on the recommendation of the Audit Committee and in consultation with the Company’s independent auditor, KPMG LLP, the Board determined that Cronos Group restate its unaudited interim financial statements for the second quarter of 2021. Accordingly, the Company recorded an impairment charge of $236.1 million on goodwill and indefinite-lived intangible assets and on long-lived assets in its U.S. reporting unit for the three and six months ended June 30, 2021. The impairment charges have no impact on cash and cash equivalents or revenues.

We are pleased that the Audit Committee has completed its evaluation, and that Cronos Group is now current with the filing of our financial reports.

Kurt Schmidt, President and CEO, Cronos Group

As we move forward, we are committed to improving our internal controls and financial reporting practices, maintaining the highest standards of transparency and accountability, and enhancing our capabilities and resources across functions to support our strategy.

“As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, we have determined that now is the right time to realign the business around our brands by centralizing functions under common leadership, managing expenses and prioritizing our investments in innovation. Through this realignment, our goal is to position Cronos Group to be able to successfully assemble a portfolio of best-in-class brands, products and intellectual property, while preserving the financial flexibility to make additional strategic investments in our R&D and brand pipeline as we innovate and evolve with our consumers’ wants and needs,” said Kurt Schmidt, President and CEO, Cronos Group.

“In parallel, we continue to set our sights on additional long-term opportunities in the U.S. cannabis market and believe this realignment will lay important groundwork to support that effort once federally permissible. We remain focused on building long-term value for shareholders by continuing to build Cronos Group into a leading global brand-led, consumer-focused cannabis company.”

Financial Results

Third Quarter 2021

  • Net revenue of $20.4 million in Q3 2021 increased by $9.0 million from Q3 2020. The increase year-over-year was primarily driven by continued growth in the adult-use market in Canada, increased sales in the Israeli medical cannabis market, and increased sales in the U.S. segment.
  • Gross profit of $(0.7) million in Q3 2021 improved by $0.8 million from Q3 2020. The increase in gross profit year-over-year was primarily driven by an increase in sales of cannabis extracts in the Rest of World (“ROW”) segment, which carry a higher gross profit and gross margin than other product categories.
  • Adjusted EBITDA of $(46.8) million in Q3 2021 decreased by $16.7 million from Q3 2020. The decrease year-over-year was primarily driven by an increase in general and administrative expenses primarily due to an increase in the allowance for expected credit losses of $13.2 million, an increase in sales and marketing costs primarily due to brand development in the U.S. segment, and an increase in research and development (“R&D”) costs driven by increased spending on product development and developing cannabinoid intellectual property in the ROW segment.
  • Capital expenditures of $2.5 million in Q3 2021 decreased by $5.8 million from Q3 2020. The decrease year-over-year was primarily driven by a reduction in construction costs in the ROW segment and a decrease in costs related to the implementation of the Company’s enterprise resource planning system.

Business Updates

Strategic and Organizational Update

As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, the Company has determined that now is the right time to realign the business around its brands. The organizational and cost initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time. The program will consist 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 performing product reviews, and pricing and distribution optimization in order to reduce fixed expenses and reduce complexity; 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 the third quarter of 2021, the Company continued to build on the success of its dried flower portfolio with the introduction of new high potency cultivars, Atomic Sour Grapefruit and Cocoa Bomba, in select markets in Canada. These launches, in addition to the launch of Spinach® GMO Cookies earlier in 2021, are further solidifying the Company’s strength in the dried flower category in the Canadian adult-use cannabis market.

In October 2021, Cronos Group launched its first cultured cannabinoid product, SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy. The SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy builds on Cronos Group’s successful SOURZ by Spinach™ gummy platform, utilizing the distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile. In addition, in January 2022, the Company launched a 1-gram vape featuring THC and CBG under the Spinach FEELZ™ brand in the Canadian adult-use cannabis market. The Company, through the SPINACH FEELZ™ brand, plans to produce a variety of cannabis products that will prominently feature rare cannabinoids, designed to deliver unique and enhanced experiences made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids, like THC and CBD.

Global Supply Chain

In the third quarter of 2021, Cronos GrowCo, the Company’s joint venture in Canada, continued to build on success of its first harvest in the first quarter of 2021. With its processing license in hand, Cronos GrowCo has begun selling to Canadian license holders in the wholesale market. In addition, the Company has begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of the Company’s Canadian cannabis supply chain.

Intellectual Property Initiatives

In August 2021, Cronos Group announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”) under its strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) (“Ginkgo”), which supported the launch of the Company’s SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy. In November 2021, Cronos Group achieved the final productivity target for a second cannabinoid, cannabigerovarinic acid (“CBGVA”), which is a crucial step to developing cultured tetrahydrocannabivarin (“THCV”), releasing the second equity milestone to Ginkgo.

Appointments

In January 2022, the Company appointed Jeff Jacobson Senior Vice President, Head of Growth (North America). Mr. Jacobson previously served as the Company’s General Manager of Canada and Europe. Mr. Jacobson has been with Cronos Group since December 2016 and previous to that was a co-founder of Peace Naturals Project Inc. Mr. Jacobson’s expertise and experience in licensing and compliance, new business development, project management and resource management help Cronos Group lead in domestic and international markets.

Also in January 2022, the Company appointed John Griese Senior Vice President, Head of Operations (North America). Mr. Griese joined Cronos Group in August 2021 as the Vice President of Operations. Mr. Griese has worked with several cannabis organizations and was most recently the Chief Operating Officer (“COO”) for The Supreme Cannabis Company, Inc. (“Supreme”). Prior to Supreme, Mr. Griese garnered cannabis experience during California’s adult use implementation as COO for global cannabis company Creso Pharma Limited. Prior to that he spent the majority of his career in supply chain and operations, with PepsiCo, Inc., Nestle and Sofina Foods Inc. Mr. Griese’s experience in building supply chains around the world will help the Company win in the markets we are in today, while staying nimble in order to move fast and pivot as the industry changes over time.

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.

Third Quarter 2021

  • Net revenue of $18.3 million in Q3 2021 increased by $8.6 million from Q3 2020. The increase year-over-year was primarily driven by growth in the adult-use cannabis flower and extracts categories in Canada and sales in the Israeli medical cannabis market.
  • Gross profit of $0.6 million in Q3 2021 increased by $2.8 million from Q3 2020. The increase year-over-year was primarily driven by increased sales of cannabis extracts, which carry higher gross profit and gross margin than other product categories.
  • Adjusted EBITDA of $(29.8) million in Q3 2021 decreased by $15.4 million from Q3 2020. The decrease year-over-year was primarily driven by an increase in general and administrative expenses primarily due to an increase in the allowance for expected credit losses of $13.2 million, an increase in R&D costs driven by increased spending on product development and developing cannabinoid intellectual property, and an increase in sales and marketing expenses.

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.

Third Quarter 2021

  • Net revenue of $2.1 million in Q3 2021 increased by $0.5 million from Q3 2020. The increase year-over-year was primarily driven by the introduction of new U.S. hemp-derived CBD products.
  • Gross profit of $(1.3) million in Q3 2021 decreased by $2.0 million from Q3 2020. The decrease year-over-year was primarily due to increased inventory valuation adjustments and increased production costs.
  • Adjusted EBITDA of $(12.2) million in Q3 2021 decreased by $6.5 million from Q3 2020. The decrease year-over-year was primarily driven by an increase in sales and marketing costs related to brand development and an increase in general and administrative expenses.

Conference Call

The Company will host a conference call and live audio webcast on Friday, February 18, 2022, at 8:30 a.m. EST to discuss 2021 Third 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 with international production and distribution across four continents. Cronos Group is 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.

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 on-going 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 indefinite-lived assets; impairment loss on long-lived assets; loss (gain) on revaluation of derivative liabilities; transaction costs related to strategic projects; other, net; loss from discontinued operations; share-based payments; and review and investigation costs related to the restatements of the Company’s 2021 and 2019 interim financial statements, 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.

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 loss as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated (U.S. dollars in thousands):

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 September 30, 2021, September 30, 2020 and December 31, 2020. 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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