Cronos Group Reports 2020 First Quarter Results
- Fermented target cannabinoid, CBGA, using cannabinoid strains at Cronos Fermentation R&D labs
- Successfully completed first dried flower shipment to Israel, as Cronos Israel moves closer to entering the medical cannabis market with PEACE NATURALS™ branded products
- Natuera completes key operational milestones and begins test exports to the U.S. hemp-derived market
TORONTO, May 08, 2020 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announces its 2020 first quarter business results.
“Cronos Group started 2020 energized and determined to continue to see through our core strategic initiatives to drive long-term and sustainable growth. This quarter, we moved closer to officially entering the Israeli medical cannabis market with our Cronos Israel operations preparing to sell PEACE NATURALS™ branded dried flower products to medical patients. The Israeli medical market is a growing channel, and we look forward to serving this market in 2020 and beyond,” said Mike Gorenstein, CEO of Cronos Group.
Despite the challenges and uncertainty posed by the COVID-19 pandemic, we remain agile and focused as a business. Our brand portfolio continues to launch innovative products to consumers as we adapt to an online-first distribution model in both the U.S. and Canada. We continue to reach our stakeholders and consumers through creative digital marketing.
Mike Gorenstein, CEO of Cronos Group
And our product innovation and R&D projects continue to progress. We believe the mission of our Company, to improve lives through cannabinoid innovation, resonates especially well during these times. We remain well-positioned and committed to generating sustainable, long-term value for shareholders and are confident 2020 will be a successful building year for Cronos Group.
Financial Results
First Quarter 2020
- Net revenue of $8.4 million in Q1 2020 increased by $5.4 million from Q1 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market, sales resulting from the launch of cannabis vaporizers to the Canadian market, including both adult-use and direct-to-consumer, and the inclusion of the Redwood acquisition in our financial results.
- Gross profit (loss) of $(6.5) million in Q1 2020 decreased by $8.0 million from Q1 2019. The decrease year-over-year was primarily driven by an inventory write-down of $8.0 million on dried cannabis and cannabis extracts, as well as an increase in the marginal production cost at our Peace Naturals Campus, as we continue working towards operating at full capacity after the repurposing of the facility in the fourth quarter of 2019.
- The Company incurred an inventory write-down of $8.0 million, on dried cannabis and cannabis extracts, primarily driven by fixed-price contracts negotiated prior to cannabis product price compression due to broader trends of oversupply in the Canadian market. If we were to adjust for the effects of the inventory write-downs, gross profit in Q1 2020, would have been $1.5 million, representing a gross margin of 18%. We anticipate further inventory write-downs in the short-term due to pricing pressures in the marketplace and the impact of the Company’s operational repurposing of the Peace Naturals Campus.
- Reported operating loss of $45.1 million in Q1 2020 increased by $34.9 million from Q1 2019. The reduction year-over-year was primarily driven by an increase in general and administrative expenses as a result of increased headcount, internal review costs of $4.4 million related to the restatement of our 2019 interim financial statements, higher sales and marketing costs related to brand development, and research and development costs related to our Ginkgo partnership, activities at Cronos Fermentation, and spending on vaporizer innovation at the Cronos Device Labs research and development center.
Business Updates
Brand Portfolio
Throughout the first quarter of 2020, Cronos Group continued to roll-out cannabis vaporizer devices for the Canadian adult-use market under the COVE™ and Spinach™ brands. In addition, in March 2020 the Company launched PEACE NATURALS™ branded cannabis vaporizer devices for the direct-to-consumer market in Canada.
In the first quarter, the Lord Jones™ brand continued to launch innovative products with the introduction of Lord Jones™ Acid Mantle Repair CBD Moisturizer to the U.S. market. The Acid Mantle Repair Moisturizer is a soothing facial moisturizer specifically formulated to help maintain the skin’s acid mantle and rebalance the appearance of stressed skin. The new product is currently being sold at Sephora, Beautylish, C.O. Bigelow and online through the Lord Jones™ website directly.
Global Sales and Distribution
Subsequent to this quarter in April 2020, Cronos Group completed its first export of bulk dried flower to Cronos Israel in order to sell PEACE NATURALS™ branded cannabis products for distribution in the Israeli medical market. Cronos Israel will begin to build its distribution network and brand presence in this rapidly growing medical market.
Global Supply Chain
During the first quarter of 2020, Natuera, Cronos Group’s contract manufacturing joint venture in Latin America, a fully licensed operation in Colombia for hemp- and cannabis-derived bulk, consumer, and medicinal cannabinoid products, achieved significant operational milestones. Natuera, completed construction of its state-of-the-art, GMP-standard extraction facility. In addition, Natuera gained preferential access to four cultivars registered with the Colombian Agricultural Institute and planting of one of the hemp strains took place in mid-February, with its first harvest having taken place at the end of April.
With its extraction and processing facility also coming online, Natuera’s R&D department has developed its first commercially available, hemp-derived CBD distillate, which was granted a non-controlled substance ruling by Colombia’s Narcotics Control Board, streamlining an efficient process for export. Natuera successfully completed its first test export to the United States in early March 2020. Natuera is focused on accessing new markets and product expansion, including developing additional bulk offerings of hemp-derived CBD distillate and water-soluble hemp-derived CBD solutions.
The Cronos Israel facility continues to move closer to operational readiness and is expected to become a growth driver for the Company in the back half of 2020 and onward. The Company has received the necessary regulatory approvals to produce, manufacture and sell dried cannabis flower products and is awaiting approvals for pre-rolls and oil products, which are expected to be received throughout 2020.
Intellectual Property Initiatives
Subsequent to this quarter in April 2020, Cronos Israel entered into a collaboration agreement with Cannasoul Analytics Ltd. (“Cannasoul”), a cannabis research company dedicated to developing scientific intellectual property, medical products, and technologies, to develop a commercial cannabis analytical testing laboratory onsite at Cronos Israel.
Led by established cannabis researcher, Professor Dedi Meiri from the Technion Israel Institute of Technology, Cannasoul intends to operate the laboratory and conduct in-house commercial analytical testing for Cronos Israel and third-party clients. It is anticipated that the laboratory, once operational, will address the current need in the Israeli market for accurate, end-to-end cannabis analytical testing for purposes of domestic sale and export to certain international markets.
In the first quarter of 2020, Cronos Fermentation received an R&D license from Health Canada and received initial cannabinoid producing strains from Ginkgo Bioworks. Subsequent to the quarter end, Cronos Fermentation successfully fermented one of our target cannabinoids, CBGA, using the cannabinoid strains in our Winnipeg R&D labs. Cronos Fermentation will continue using these strains to optimize downstream processing and scale up procedures in advance of receiving the final strains and commercial processing license, both of which are required for commercialization.
Update on COVID-19
Cronos Group’s manufacturing sites have adjusted in order to comply with the current COVID-19 guidelines provided by local and federal governments. The Company has reduced the number of personnel working on-site at its production facilities in the U.S., Canada, and Israel to essential employees, implemented work-from-home policies where appropriate, and implemented additional health and safety measures, including enhanced hygiene and sanitation procedures, modified work schedules and social distancing protocols at its production facilities. The Company will continue to act in accordance with guidance from local, federal, and international health and governmental authorities, and is prepared to make additional operational adjustments, as necessary. Although the Company’s production facilities currently remain operational, exemptions for essential businesses and workforces continue to evolve as governmental and health authorities respond to the spread of the virus.
The Company currently has sufficient inventory and supply of materials to meet current demand, although closures or other restrictions may impact business operations for third-party manufacturers, suppliers or vendors, which may in turn disrupt the Company’s supply chain.
Cronos Group’s distribution channels continue to see disruptions globally due to the COVID-19 pandemic. Many brick-and-mortar retailers in the U.S., where Lord Jones™ products are distributed, have closed, although some retail partners continue to operate through their online sites. Lord Jones™ continues to sell directly to consumers through its website. In Canada, brick-and-mortar cannabis retailers in certain provinces have mandated curbside click-and-collect models, reduced store opening hours, or have closed retail entirely. Provincial purchasers and private retailers have also reduced staff on-site, which has led to a decrease in delivery availability and a reduction in the frequency and/or size of purchase orders. Online cannabis stores throughout Canada have remained operational.
The slowdown and disruption faced by retail partners, in addition to quarantine measures and travel restrictions, impacts our customers’ ability to access our products in the U.S., Canada and other jurisdictions in which the Company operates. COVID-19 restrictions differ across jurisdictions, which has resulted in increased uncertainty in forecasting customer demand and sales velocity.
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 United States of America.
First Quarter 2020
- Net revenue of $6.3 million in Q1 2020 increased by $3.3 million from Q1 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market, sales resulting from the launch of cannabis vaporizers to the Canadian market, including both adult-use and direct-to-consumer.
- Gross profit (loss) of $(7.6) million in Q1 2020 decreased by $9.1 million from Q1 2019. The decrease year-over-year was primarily driven by an inventory write-down of $8.0 million on dried cannabis and cannabis extracts, as well as increased marginal production costs at the Peace Naturals Campus as we continue towards operating at full capacity after the repurposing efforts in the fourth quarter of 2019.
- The Company incurred an inventory write-down of $8.0 million, on dried cannabis and cannabis extracts, primarily driven by fixed-price contracts negotiated prior to cannabis product price compression due to broader trends of oversupply in the Canadian market. If we were to adjust for the effects of the inventory write-downs, gross profit in Q1 2020, would have been $0.4 million, representing a gross margin of 6%. We anticipate further inventory write-downs in the short-term due to pricing pressures in the marketplace and the impact of the Company’s operational repurposing of the Peace Naturals Campus.
- Reported operating loss of $31.9 million in Q1 2020 increased by $21.7 million from Q1 2019. The reduction year-over-year was primarily driven by increased general and administrative expenses as a result of increased headcount, higher sales and marketing expenses related to brand development, and research and development costs related to our Ginkgo partnership, activities at Cronos Fermentation, and spending on vaporizer innovation at the Cronos Device Labs research and development center.
United States Results
Cronos Group’s United States reporting segment includes results of the Company’s operations for all brands and products in the United States of America.
First Quarter 2020
- Net revenue was $2.2 million in Q1 2020, of which the primary contributors to revenue in the quarter were the continued distribution of products in both e-commerce and physical retail channels and the introduction of Lord Jones™ Acid Mantle Repair CBD Moisturizer.
- Gross profit was $1.1 million in Q1 2020, representing a gross margin of 50%.
- Reported operating loss was $6.5 million in Q1 2020. The loss was driven by increased sales and marketing costs incurred in relation to the launch of new products and increased general and administrative expenses driven by increased headcount to support our growth strategy.
Conference Call
The Company will host a conference call and live audio webcast on Friday, May 8, 2020, at 8:30 a.m. EDT to discuss 2020 first quarter business results. 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: 9069454
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 two hemp-derived CBD brands, Lord Jones™ 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 internal 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 internal 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 financing and transaction costs, other non-cash gains (losses) 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.
Financing and transaction costs
- During the three months ended March 31, 2020, there were no financing or transaction costs.
- During the three months ended March 31, 2019, the Company recorded pre-tax charges of $22.2 million primarily related to the Altria Investment.
Gain on revaluation of derivative liabilities
- During the three months ended March 31, 2020, Cronos Group recorded a pre-tax unrealized gain of $113.4 million primarily resulting from the non-cash change in the fair value of financial derivative liabilities associated with the investment by Altria.
- During the three months ended March 31, 2019, the unrealized gain resulting from the non-cash change in the fair value of the financial derivative liabilities was $328.2 million.
Internal Review Costs
- During the three months ended March 31, 2020, the Company incurred $4.4 million in internal review cost associated with the restatement of the Company’s interim financial statements in 2019.
Foreign currency exchange rates
All currency amounts in this Press Release are stated in U.S. dollars (“USD”), which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” 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, 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.
The exchange rates used to translate from USD to Canadian dollars (“C$”) is shown below:
