Cronos Group Reports 2023 First Quarter Results
- Industry-leading balance sheet with $836 million in cash and short-term investments
- Targeting positive cash flow in 2024
- Net revenue in Canada increased 6% in Q1 2023 compared to Q1 2022; on a constant currency basis net revenue in Canada increased 14% in Q1 2023 compared to Q1 2022
- Spinach® was top-10 in retail sales in the flower, edible, vape and pre-roll categories in Q1 2023
TORONTO, May 09, 2023 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos” or the “Company”), today announces its 2023 first quarter business results.
I am encouraged by our results across categories in Canada as we are defending our leading position in edibles and climbing market share ranks in other critical product categories.
Mike Gorenstein, Chairman, President and CEO, Cronos
We intend to build off the strength of our number one position in edibles and utilize our borderless gummy platform for new innovative introductions, including additional rare cannabinoids and flavor profiles throughout 2023. The pre-roll category is a top focus for our team this year, and we are pleased by the early results of our infused pre-rolls and the encouraging progression of our base business. What you see on the market today from us in pre-rolls is just the beginning.
“Optimizing the returns of our industry-leading cash balance has also been a priority for us as we are in a great position to take advantage of the higher rate environment, especially given we have no debt,” continued Mr. Gorenstein. “You are now starting to see the higher interest income flow through our income statement, which is an underappreciated component of our company. Additionally, looking forward to the balance of 2023, we are on track to achieve the high end of the projected $10 to $20 million in cash operating expense savings we announced in February and are committed to further improvements as we target to be cash flow positive in 2024.”
Financial Results
(i) Gross margin is defined as gross profit divided by net revenue.
(ii) Net income (loss) of $(19.3) million in Q1 2023 improved by $13.4 million from Q1 2022. The improvement year-over-year was primarily driven by the reduction in operating expenses.
(iii) See “Non-GAAP Measures” for more information, including a reconciliation of adjusted earnings (loss) before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) to net income (loss).
(iv) Dollar amounts are as of the last day of the period indicated.
(v) Capital expenditures represent component information of investing activities and is defined as the sum of purchase of property, plant and equipment, and purchase of intangible assets.
First Quarter 2023
- Net revenue of $20.1 million in Q1 2023 decreased by $4.9 million from Q1 2022. The decrease was primarily due to lower cannabis flower sales in the Rest of World (“ROW”) segment and a decline in revenue in the U.S. segment. ROW segment net revenue was also impacted by the weakened Canadian dollar and Israeli Shekel against the U.S. dollar. Higher cannabis extract sales in Canada partially offset these results.
- Gross profit of $2.4 million in Q1 2023 decreased by $4.5 million from Q1 2022. The decrease was primarily driven by reduced gross profit in the ROW segment due to lower cannabis flower sales in Israel, an adverse price/mix shift in cannabis flower sales in Canada, increased returns, and a reduction in gross profit in the U.S. segment. Higher cannabis extract sales in Canada with a higher margin profile than other product categories and lower cannabis biomass costs partially offset these results.
- Adjusted EBITDA of $(16.8) million in Q1 2023 improved by $2.1 million from Q1 2022. The improvement year-over-year was primarily driven by decreases in general and administrative expenses and research and development expenses due to the Company’s cost savings initiatives.
Business Updates
Guidance and Outlook
Net revenue for full-year 2023 is expected to be between $100 to $110 million. Additionally, the Company is on track to achieve the high-end of the previously identified $10 to $20 million in operating expense savings for 2023, primarily driven by savings in sales and marketing, general and administrative, and research and development.
Cronos anticipates that cash flow, defined as the net change in cash and cash equivalents, excluding the impact of the purchase or proceeds of short-term investments, for the last nine months of fiscal year 2023 will decline less than $25 million. The Company also expects that cash flow will be positive in 2024.
This guidance assumes: (i) the Company will experience relatively consistent foreign exchange and interest rates; (ii) the general economic conditions and regulatory environment in the markets in which Cronos participates will not materially change; (iii) timely receipt of interest and principal payments on the GrowCo senior secured credit facility; (iv) anticipated interest income of approximately $30 million for the last nine months of fiscal year 2023; (v) continued gross margin improvement; and (vi) continued reductions in operating expenses.
These statements are forward-looking and actual results may differ materially. Refer to “Forward-Looking Statements” below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.
Brand and Product Portfolio
The Spinach® brand continued to hold its number one market share position in the edibles category in Canada in Q1 2023. According to Hifyre data, Spinach® products held an approximate 15.3% market share in the edibles category expanding to approximately 21.9% within the gummy category alone across the SOURZ by Spinach® and Spinach FEELZ™ sub-brands.
Cronos bolstered its infused pre-roll portfolio under the Spinach FEELZ™ sub-brand with two new rare cannabinoid infused pre-rolls: (i) the Spinach FEELZ™ Mango Kiwi Haze THC:CBC pre-roll infused with high potency cold filtered extract with 32% THC and 5% CBC for a clean and uplifting high; and (ii) the Spinach FEELZ™ Blackberry Kush THC:CBN (Deep Dreamz) pre-roll, infused with high potency cold filtered extract with 32% THC and 5% CBN for a mellow and dreamy high.
Cronos’ strong breeding program and portfolio of genetics continued to drive growth. In April 2023, Cronos built on the early success of its Sonic Lemon Fuel strain by expanding it into the pre-roll category with a 3×0.5g 20-26% THC offering under the Spinach® brand. In addition to the pre-rolls, Sonic Lemon Fuel is available in 28g and 3.5g flower formats. The Spinach® brand rose to 8th place in the pre-roll category, capturing a 2.5% market share in Q1 2023, up from 16th place and a 1.4% market share in Q4 2022.
Expanding on the success with CBC in edibles and the recent launch in pre-rolls, the Spinach FEELZ™ sub-brand added CBC to its vape portfolio with the introduction of Spinach FEELZ™ Mango Kiwi Haze 7:1 THC:CBC 1-gram vape.
The Israeli medical market has recently been challenged by competitive activity, a slowdown in patient permit authorizations, and geopolitical unrest. Despite these near-term challenges, Cronos remains committed and optimistic about the future in this important cannabis market. While patient permit authorization growth has been relatively stagnant for the last quarter, the Company believes there is a high likelihood for regulatory change that can accelerate the growth of the patient count in Israel. Cronos continues to invest in its operation, distribution, and marketing efforts to deliver the best-in-class genetics and products under the PEACE NATURALS® brand.
Global Supply Chain
In April 2023, Cronos released its first cannabinoid life cycle study highlighting sustainable fermentation practices. The third-party reviewed results showed that the environmental footprint of growing plants indoors is high, and using innovative fermentation processes is a solution that dramatically lowers the environmental impact of cannabinoid production. On average, the carbon footprint savings of using Cronos’ fermentation method is 99.8% compared to traditional extraction methods.
Cronos Growing Company Inc. (“Cronos GrowCo”) reported to the Company preliminary unaudited net revenue to licensed producers, excluding sales to the Company, of approximately $3.2 million in the first quarter of 2023. Cronos previously provided GrowCo with a senior secured credit facility, which currently has approximately $73.2 million outstanding following a principal repayment of $0.7 million by GrowCo in Q1 2023. In addition to principal repayment, Cronos also received $5.5 million in interest payments from GrowCo in Q1 2023, totaling approximately $6.2 million in cash payments to Cronos in Q1 2023.
Rest of World Results
Cronos’ ROW reporting segment includes results of the Company’s operations for all markets outside of the U.S.
First Quarter 2023
- Net revenue of $19.5 million in Q1 2023 decreased by $3.2 million from Q1 2022. The decrease was primarily due to lower cannabis flower sales in Israel due to competitive activity, the slowdown in patient permit authorizations, and geopolitical unrest. Net revenue in Canada was impacted by adverse price/mix in the flower category driving increased excise tax payments as a percent of revenue, and increased returns. The weakened Canadian dollar and Israeli Shekel against the U.S. dollar also impacted ROW net revenue. Higher cannabis extract sales in Canada partially offset these results.
- Gross profit of $2.9 million in Q1 2023 decreased by $3.8 million from Q1 2022. The decrease was primarily due to lower cannabis flower sales in Israel, an adverse price/mix shift in cannabis flower sales in Canada due to the higher mix of 28-gram offerings and increased returns. Increased cannabis extract sales in Canada with a higher margin profile than other product categories and lower cannabis biomass costs partially offset these results.
United States Results
Cronos’ U.S. reporting segment includes results of the Company’s operations for all brands and products in the U.S.
First Quarter 2023
- Net revenue of $0.6 million in Q1 2023 decreased by $1.7 million from Q1 2022. The decrease was primarily driven by a reduction in sales as a result of a decrease in promotional spending and SKU rationalization efforts as the Company implemented the Realignment in the U.S. segment.
- Gross profit of $(0.5) million in Q1 2023 decreased by $0.8 million from Q1 2022. The decrease was primarily due to lower sales volumes and higher inventory reserves.
Conference Call
The Company will host a conference call and live audio webcast on Tuesday, May 9, 2023, at 8:30 a.m. ET to discuss 2023 First Quarter business results. An audio replay of the call will be archived on the Company’s website for replay. Instructions for the live audio webcast are provided on the Company’s website at https://ir.thecronosgroup.com/events-presentations.
About Cronos
Cronos 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 is building an iconic brand portfolio. Cronos’ diverse international brand portfolio includes Spinach®, PEACE NATURALS® and Lord Jones®. For more information about Cronos and its brands, please visit: thecronosgroup.com.
Non-GAAP Measures
Cronos 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 (benefit), depreciation and amortization adjusted for: share of income (loss) from equity method 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 financial statement review costs and reserves related to the restatements of the Company’s 2019 and 2021 interim financial statements (the “Restatements”), including the costs related to the settlement of the SEC’s and the OSC’s investigation of the Restatements 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 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 in Toronto, Ontario, Canada during the first quarter of 2022.
(ii) For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.
(iii) For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of financial instruments related primarily to the Company’s equity securities in Vitura.
(iv) 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.
(v) For the three months ended March 31, 2023 and 2022, other, net related to gain on disposal of assets.
(vi) 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, including the change in nature of operations at our Peace Naturals Campus.
(vii) For the three months ended March 31, 2023 and 2022, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans.
(viii) For the three months ended March 31, 2023 and 2022, financial statement review costs include costs and reserves taken related to the Restatements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to the Restatements and legal costs incurred defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.
Constant Currency
To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented constant currency adjusted financial measures for net revenues, gross profit, gross profit margin, operating expenses, net income (loss) and adjusted EBITDA for the three ended March 31, 2023 as well as cash and cash equivalents and short-term investment balances as of March 31, 2023 compared to December 31, 2022, which are considered non-GAAP financial measures. We present constant currency information to provide a framework for assessing how our underlying operations performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period income statement results in currencies other than U.S. dollars are converted into U.S. dollars using the average exchange rates from the three-month comparative period in 2022 rather than the actual average exchange rates in effect during the respective current periods; constant currency current and prior comparative balance sheet information is translated at the prior year-end spot rate rather than the current period spot rate. All growth comparisons relate to the corresponding period in 2022. We have provided this non-GAAP financial information to aid investors in better understanding the performance of our segments. The non-GAAP financial measures presented in this press release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S. GAAP.
The table below sets forth certain measures of consolidated results from continuing operations on a constant currency basis for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 as well as cash and cash equivalents and short-term investments as of March 31, 2023 and December 31, 2022, both on an as-reported and constant currency basis (in thousands):
For the three months ended March 31, 2023, net revenue on a constant currency basis was $21.7 million, representing a 14% decrease from the three months ended March 31, 2022. The change was primarily due to lower cannabis flower sales in Israel due to competitive activity, the slowdown in patient permit authorizations and political unrest, and a reduction in the U.S. segment. Net revenue in Canada was impacted by an adverse price/mix in the cannabis flower category driving increased excise tax payments as a percent of revenue and increased returns, partially offset by higher cannabis extract sales in the Canadian adult-use market.
Gross profit
For the three months ended March 31, 2023, gross profit on a constant currency basis was $2.7 million, representing a 62% decrease from the three months ended March 31, 2022. The change was primarily due to lower cannabis flower sales in Israel, a reduction in revenue in the U.S. segment, adverse price/mix shift in cannabis flower sales in Canada and increased returns, partially offset by higher cannabis extract sales in Canada that carry a higher margin profile than other product categories and lower cannabis biomass costs.
Operating expenses
For the three months ended March 31, 2023, operating expenses on a constant currency basis were $26.0 million, representing a 39% decrease from the three months ended March 31, 2022. The change was primarily due to decreases in professional fees related to financial statement review costs, restructuring costs associated with the Realignment, impairment loss on long-lived assets and research and development costs.
Net loss
For the three months ended March 31, 2023, net loss on a constant currency basis was $23.4 million, representing a 28% improvement in net loss from the three months ended March 31, 2022.
Adjusted EBITDA
For the three months ended March 31, 2023, Adjusted EBITDA on a constant currency basis was $(18.0) million, representing a 5% improvement from the three months ended March 31, 2022. The change was primarily driven by decreases in general and administrative expenses and research and development expenses as a result of the Company’s strategic Realignment, partially offset by a decrease in gross profit.
Cash and cash equivalents & short-term investments
Cash and cash equivalents and short-term investments on a constant currency basis decreased 5% to $835.2 million as of March 31, 2023 from $877.7 million as of December 31, 2022. The change in cash and cash equivalents and short-term investments is primarily due to cash flows used in operating activities in Q1 2023.
Foreign currency exchange rates
All currency amounts in this press release are stated in U.S. dollars (“USD”), which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” 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, 2023, March 31, 2022 and December 31, 2022. 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$”) and Israeli New Shekels (“ILS”) is shown below:
