Cronos Group Reports 2020 Third Quarter Results
- Kurt Schmidt appointed President and CEO; Mike Gorenstein appointed Executive Chairman
- Launched a new hemp-derived CBD brand, Happy Dance™, in the U.S. market in partnership with Kristen Bell
- Cronos Israel received approval to sell PEACE NATURALS™ branded pre-rolls and oils in Israel
- Cronos Device Labs expands its cannabinoid research scope and rebrands to Cronos Research Labs
TORONTO, Nov. 05, 2020 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announces its 2020 third quarter business results.
The opportunities before Cronos Group are more exciting than ever and I am honored to have brought the company to this important inflection point as we bring on Kurt Schmidt to serve as our new President and CEO.
Mike Gorenstein, Executive Chairman of Cronos Group
We look forward to continuing to launch innovative cannabinoid products in Canada and to expand our portfolio of U.S. hemp-derived CBD brands. Internationally, we’re pleased with the progress we have made in Israel and as regulations continue to evolve, we will look to establish ourselves as a leader in the markets in which we operate.
“In such a short period of time, Mike and the Cronos team have achieved several impressive milestones,” said Kurt Schmidt, President and CEO of Cronos Group.
From being the first pure-play cannabis company to list on the NASDAQ, to scaling operations worldwide, Cronos Group is well-positioned to continue to thrive.
Kurt Schmidt, President and CEO of Cronos Group
Joining as President and CEO is a unique opportunity for me to bring my expertise in building outstanding brands, high performance teams and results-driven organizations to Cronos Group. I look forward to helping this Company achieve many more exciting milestones.
Financial Results
Third Quarter 2020
- Net revenue of $11.4 million in Q3 2020 increased by $5.6 million from Q3 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market, the inclusion of the Redwood acquisition in our financial results and growth in the Israeli medical cannabis market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces in Q3 2020.
- Gross loss of $1.5 million in Q3 2020 decreased by $1.6 million from Q3 2019. The decrease in losses year-over-year was primarily driven by an increase in net revenue and the gross profit contribution of the U.S. business segment. Offset by an increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower, and a decline in wholesale sales.
- Reported operating loss of $41.2 million in Q3 2020 increased by $10.5 million from Q3 2019. The increase year-over-year was primarily driven by increased share-based payments related to separation agreements with certain Redwood employees, increased general and administrative expenses inclusive of review costs and costs related to the previously disclosed restatement of the Company’s 2019 interim financial statements, higher sales and marketing costs related to brand development, and R&D spending, partially offset by a decrease in gross loss.
Business Updates
Brand Portfolio
Subsequent to the end of the third quarter of 2020, Cronos Group’s U.S. segment launched a new hemp-derived CBD skincare and personal care brand called Happy Dance™, in partnership with Kristen Bell. Happy Dance™ products are made with CBD from premium full-spectrum hemp extract and provide consumers with high-quality skincare at an accessible price point. Happy Dance™ launched with three product offerings: All-Over Whipped Body Butter +CBD, Head-To-Toe Coconut Melt +CBD and Stress Away Bath Bomb +CBD, all of which are currently available online, with intentions to enter the brick and mortar channel in the future. Through the partnership with Ms. Bell, Cronos Group looks forward to future introductions of innovative products to the hemp-derived CBD market.
In October 2020, the U.S. segment also launched new full-spectrum tinctures under its hemp-derived CBD brand, Lord Jones™. The full-spectrum tinctures are available in two flavors, peppermint and orange. The U.S. segment anticipates launching a Lord Jones™ branded hemp-derived CBD infused Lip Balm in November 2020. The Whole Plant Formula CBD Lip Balm is expected to contain 25mg of U.S. hemp-derived CBD from full-spectrum hemp extract and other premium ingredients, including shea butter, mimosa wax, beeswax, and an oil blend to provide additional hydration.
Global Sales and Distribution
Cronos Israel has now received the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel. Subsequent to the end of the third quarter of 2020, in addition to the PEACE NATURALS™ branded dried flower currently sold in the Israeli medical market, Cronos Israel began selling PEACE NATURALS™ branded oils into the Israeli medical market.
Global Supply Chain
In the third quarter of 2020, Natuera continued to successfully complete imports of hemp-derived CBD extract to the U.S. for business development and R&D purposes. Natuera also completed its first export of hemp-derived CBD distillate to the United Kingdom for R&D purposes. Moreover, Natuera’s wholly-owned subsidiary in Colombia was awarded four quotas by the Colombian government for psychoactive cannabis R&D production: (i) one cultivation quota to conduct field trials and characterize cultivars; (ii) one cultivation quota to conduct R&D related to the manufacture of derivatives; and (iii) two R&D manufacturing quotas to analyze and characterize THC products.
Intellectual Property Initiatives
In the third quarter of 2020, Cronos Device Labs expanded its scope for cannabinoid research and the R&D center was renamed to Cronos Research Labs. Cronos Group engages in both understanding the fundamental science behind the interactions of cannabinoids with each other and how those interactions can be leveraged to best deliver on the consumer’s needs. Additionally, the Company partners with leading scientific institutions engaged in fundamental cannabis science to augment and accelerate the internal efforts. Cronos Group’s work spans many aspects of cannabis research from strain development to growing conditions to extraction technology to biosynthesis to product development, all supported by advances in analytical sciences.
Enterprise Initiatives
In the third quarter of 2020, the Company implemented a new enterprise resource planning (“ERP”) system across the Canadian business. Cronos Group has also commenced work to broaden the reach of our ERP system to the U.S. business, which is currently expected to be launched in the first half of 2021. The new ERP system will be a meaningful component of the Company’s internal control over financial reporting and is expected to enable us to realize efficiencies throughout our supply chain and operations.
Appointments
On September 9, 2020, Cronos Group expanded its leadership structure to drive its next phase of growth by appointing Kurt Schmidt as President and Chief Executive Officer. This move coincides with Mike Gorenstein’s appointment to Executive Chairman. Mr. Schmidt brings deep experience in consumer products with decades of leadership experience in the U.S. and overseas. Mr. Schmidt previously served as Director and Chief Executive Officer of Blue Buffalo Company, Ltd. from 2012 through 2016. Prior to joining Blue Buffalo, Mr. Schmidt was Deputy Executive Vice President at Nestlé S.A., where he was responsible for Nestlé Nutrition, including several science-oriented and heavily regulated businesses. He also served as a member of Nestlé’s Executive Committee. Mr. Schmidt joined Nestlé in 2007 as part of Nestlé’s acquisition of Gerber Products Company, where he was the President and Chief Executive Officer from 2004 to 2007. Prior to Gerber, Mr. Schmidt held a variety of leadership roles at Kraft Foods, Inc.
In addition, the Company further bolstered its senior leadership team by adding Shannon Buggy as Senior Vice President, Global Head of People. Prior to joining Cronos Group, Ms. Buggy was the Senior Vice President of Global Human Resources for Nielsen where she led HR strategy for Nielsen Media. With over 25 years of experience, Ms. Buggy has a proven track record of leading and managing global human resources teams and driving excellence in talent acquisition, development, retention, employee relations, compensation, benefits, talent management and labor relations.
Additionally during the quarter, as previously disclosed, following the resignation of Robert Rosenheck on July 20, 2020, Summer Frein was named General Manager USA. Ms. Frein joined Cronos Group in January of this year; however, she has worked with Cronos Group in various capacities since 2018. Previously, Ms. Frein was employed with Altria, where she led the Strategy and Business Development team’s due diligence in the cannabis space which culminated in Cronos Group’s strategic investment from Altria. Most recently, she was responsible for leading the Company’s U.S. sales efforts, including managing brand and retail partnerships for Lord Jones™. Under Ms. Frein’s leadership, the Company plans to further expand its U.S. hemp-derived business, including introducing new product formats under both Lord Jones™ and Happy Dance™, that will target different retail channels and consumers.
Update on COVID-19
Cronos Group’s manufacturing sites have adjusted in order to comply with the current COVID-19 guidelines provided by governmental authorities. During the third quarter of 2020, because of the effects from COVID-19 in the U.S. a significant number of the Company’s retail customers continued to be challenged by permanent and temporary store closings. Those stores that are open are faced with operating at reduced staff levels, reduced opening hours and lower consumer foot traffic, which has continued in the third quarter to negatively impact sales and demand for our products in the U.S. segment. Revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the three or nine months ended September 30, 2020.
Rest of World Results
Cronos Group’s Rest of World reporting segment includes results of the Company’s operations for all markets outside of the U.S.
Third Quarter 2020
- Net revenue of $9.7 million in Q3 2020 increased by $4.6 million from Q3 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market and growth in the Israeli medical cannabis market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces.
- Gross loss of $2.2 million in Q3 2020 decreased by $1.4 million from Q3 2019. The decrease in losses year-over-year was primarily driven by an increase in net revenue, offset by an increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower and a decline in wholesale sales. The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.
- Reported operating loss of $18.0 million in Q3 2020 decreased by $3.2 million from Q3 2019. The decrease in losses year-over-year was primarily driven by a decrease in general and administrative costs driven by a reclassification of $4.6 million to corporate expenses in Q3 2020, which had no effect on the Company’s consolidated statement of net income (loss) and a decrease in gross loss, partially offset by an increase in R&D spending.
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 2020
- Net revenue of $1.6 million in Q3 2020 increased by $1.0 million from Q3 2019. The increase year-over-year was primarily driven by a full quarter of results in Q3 2020 as opposed to 25 days in Q3 2019.
- Gross profit of $0.7 million in Q3 2020 increased by $0.2 million from Q3 2019. The increase year-over-year was primarily driven by an increase in net revenue, partially offset by increased discounts, sales and promotions and new product introductions.
- Reported operating loss of $12.2 million in Q3 2020 increased by $11.4 million. The increase year-over-year was primarily driven by an increase in share-based payments related to separation agreements with certain Redwood employees, increased sales and marketing costs incurred in relation to the launch of new U.S. hemp-derived CBD products under the Lord Jones™ and Happy Dance™ brands and increased general and administrative expenses driven by salaries and wages to support the Company’s growth strategy across a variety of functions, partially offset by an increase in gross profit.
Conference Call
The Company will host a conference call and live audio webcast on Thursday, November 5, 2020, at 8:30 a.m. EST to discuss 2020 third quarter business results and outlook. The call will last approximately one hour. An audio replay of the call will be archived on the Company’s website for replay. Instructions for the conference call are provided below:
- Live audio webcast: https://ir.thecronosgroup.com/events-presentations
- Toll-Free from the U.S. and Canada dial-in: (866) 795-2258
- International dial-in: (409) 937-8902
- Conference ID: 5159205
About Cronos Group
Cronos Group is an innovative global cannabinoid company with international production and distribution across five 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 portfolio includes PEACE NATURALS™, a global health and wellness platform, two adult-use brands, COVE™ and Spinach™, and three hemp-derived CBD brands, Lord Jones™, Happy Dance™ and PEACE+™. For more information about Cronos Group and its brands, please visit: www.thecronosgroup.com.
Non-GAAP Measures
In addition to its financial results reported in accordance with accounting principles generally recognized in the U.S. (“GAAP”), the Company uses certain measures that are not recognized under GAAP such as adjusted operating loss, adjusted operating loss by business segment and adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”). These financial measures do not have a standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as a supplement to those GAAP measures to provide additional information regarding our 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 GAAP. All non-GAAP measures presented in this press release are reconciled to their closest reported GAAP measure. Reconciliations of historical adjusted financial measures to corresponding GAAP measures are provided below.
Adjusted operating loss
Management reviews operating loss on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations. These items typically include non-recurring charges such as our review costs related to the restatement of our 2019 interim financial statements. Management does not view these items to be part of underlying results as they may be highly variable, may be infrequent, are difficult to predict and can distort underlying business trends and results.
Management believes that adjusted operating loss provides useful insight into underlying business trends and results and provides a more meaningful comparison of year-over-year results. Management uses adjusted operating loss for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.
Adjusted operating loss by business segment
Management reviews operating loss by business segment, which excludes corporate expenses, and adjusted operating loss by business segment, which further excludes certain income and expense items that management believes are not part of the underlying segment’s operations. Corporate expenses are expenses that relate to the consolidated business and not to an individual operating segment while the income and expense items typically include non-recurring charges such as our review costs related to the restatement of our 2019 interim financial statements. Management does not view the income and expense items above to be part of underlying results of the segment as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.
Management believes that adjusted operating loss by business segment provides useful insight into underlying segment trends and results and will provide a more meaningful comparison of year-over-year results, going forward. Management uses adjusted operating loss by business segment for planning, forecasting and evaluating segment performance, including allocating resources and evaluating results relative to employee compensation.
Adjusted EBITDA
Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis with the rest of the industry, although our measure of Adjusted EBITDA may not be directly comparable to similar measures used by other companies.
Management reviews EBITDA on an adjusted basis, which excludes net income attributable to non-controlling interests, and special items. Special items consist of income tax recovery (expense), financing and transaction costs, other non-cash gains (losses), including share-based payments as it is a non-cash item, and other unforeseeable, non-recurring charges which management has described below.
Special Items
Management does not view any of the following special items to be part of the underlying results as they may be highly variable, may be infrequent, may be unpredictable and may distort underlying business results and trends.
Impairment loss on goodwill and intangible assets
- During the nine months ended September 30, 2020, the Company recorded $35.0 million of impairment charges on the U.S. reporting unit and $5.0 million of impairment charges on the Lord Jones™ brand. The carrying values of both the U.S. reporting segment goodwill and the Lord Jones™ brand were deemed to be greater than their fair value after an impairment test was performed because results in the U.S. operating segment were negatively impacted by the effects of COVID-19.
- During the three and nine months ended September 30, 2019, the Company recorded no impairment charges on goodwill or intangible assets.
Financing and transaction costs
- During the three and nine months ended September 30, 2020, there were financing or transaction costs of $0.04 million.
- During the three and nine months ended September 30, 2019, the Company recorded pre-tax charges of $6.1 million and $31.7 million, respectively, primarily related to the Altria Investment.
Gain (loss) on revaluation of derivative liabilities
- During the three and nine months ended September 30, 2020, Cronos Group recorded unrealized gains of $105.3 million and $182.8 million, respectively, primarily resulting from the non-cash change in the fair value of financial derivative liabilities associated with the investment by Altria.
- During the three and nine months ended September 30, 2019, the unrealized gain resulting from the non-cash change in the fair value of the financial derivative liabilities was $632.5 million and $1,158.0 million, respectively.
Review costs related to restatement of 2019 interim financial statements
- During the three and nine months ended September 30, 2020, the Company incurred $1.0 million and $8.8 million, respectively, in review costs related to the restatement of the Company’s 2019 interim financial statements and costs related to the Company’s responses to reviews of such restatement by various regulatory authorities.
- During the three and nine months ended September 30, 2019, the Company recorded no costs related to the restatement of previously issued financial statements.
Gain on disposal of other investments
- During the three and nine months ended September 30, 2020, the Company recognized gains of $4.0 million and $4.7 million, respectively, in connection with the receipt of Aurora Cannabis shares after the achievement of milestones related to the Company’s sale of Whistler Medical Marijuana Company in March 2019.
- During the nine months ended September 30, 2019, the Company recorded a gain on disposal of other investments of $16.2 million related to the sale of Aurora Cannabis shares in connection with the sale of Whistler Medical Marijuana Company as well as the sale of common shares of Canopy Growth Corporation.
Foreign currency exchange rates
All currency amounts in this Press Release are stated in U.S. dollars (“USD”), which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” 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, 2020 and December 31, 2019. 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:
