Cronos Group Inc. Announces Third Quarter 2019 Results
- Closed Redwood U.S. Hemp-Based Products Platform and Cronos Fermentation Facility Acquisitions
- Announced the launch PEACE+™, A New Hemp-Derived U.S. Brand
- Advanced Operational Readiness of Cronos Israel with Completed Construction of Manufacturing Facility
TORONTO, Nov. 12, 2019 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announced financial results and business highlights for the three- and nine-months ending September 30, 2019.
As demonstrated by our progress in the third quarter, we are making great strides to advance the development and diversity of our portfolio and to expand our manufacturing capabilities.
Mike Gorenstein, CEO of Cronos Group
We are confident that our platform strategy and focus on consumer driven innovation will continue to differentiate Cronos Group and drive growth and value creation over the long-term.
Financial Results Third Quarter 2019
- Net revenue was $12.7 million in Q3 2019, representing a 238% increase from $3.8 million in Q3 2018, primarily driven by the launch of the adult-use market in Canada and the inclusion of Redwood from the date of closing on September 5, 2019 to the end of the quarter. Net revenue increased 24% quarter-over-quarter from $10.2 million in Q2 2019, primarily driven by increased sales in domestic dried cannabis and the inclusion of Redwood.
- 3,142 kilograms were sold in Canada in Q3 2019, representing a 511% increase from 514 kilograms sold in Q3 2018, primarily driven by increased cannabis production and the launch of the adult-use market in Canada. Kilograms sold increased 98% quarter-over-quarter from 1,584 kilograms sold in Q2 2019, primarily driven by increased domestic wholesale sales.
- Cost of sales before fair value adjustments per gram sold for the non-U.S. market was $2.27 in Q3 2019, representing a 31% decrease from $3.28 in Q3 2018 and a 25% decrease from $3.01 in Q2 2019. The decrease quarter-over-quarter was driven by lower production cost on a per gram basis.
Business Highlights
Brand Portfolio
In September 2019, Cronos Group completed the acquisition of four operating subsidiaries of Redwood Holding Group, LLC (collectively, “Redwood”). The acquisition expands Cronos Group’s market reach in the U.S. with an innovative hemp-derived cannabidiol (“CBD”) consumer products portfolio sold under the premier Lord Jones™ brand.
Throughout the third quarter, Lord Jones™ launched several new products within the cosmetics and personal care category. These new launches include: Lord Jones CBD Formula Heavy Duty Chill Balm, a nourishing balm that melts on contact leaving skin with a velveteen finish, Lord Jones CBD Formula Bath Salts, small-batch bath salts made from pink Himalayan salt, arnica, magnesium-rich Epsom salts, calendula petals, and a unique blend of terpenes and essential oils to help support body relaxation and the Lord Jones + Tamara Mellon CBD Formula Stiletto Cream, a specially formulated CBD-infused Stiletto Cream for foot application before and after wearing shoes, in collaboration with luxury shoe brand Tamara Mellon.
Today, Cronos Group announced the introduction of PEACE+™, a new hemp-derived CBD brand in the U.S. PEACE+™ is about more than making a better, high-quality hemp-derived CBD product; it stems from the belief that well-being can lead to a better world, full of positivity and possibility. It’s a belief that extends beyond the products and into everything the brand seeks to do and stand for. PEACE+™ will sell hemp-derived CBD tincture products through a test market of approximately 1,000 retail stores in the U.S. The Company intends to utilize Altria Group, Inc.’s (“Altria”) sales and distribution network to access the U.S. convenience store retail channel in order to gain consumer insights prior to expanding distribution more broadly.
Global Sales and Distribution
Cronos Group recently added the province of Alberta to its Canadian domestic distribution network for adult-use products. The Company currently sells dried flower, pre-rolls and cannabis oils through its adult-use brands, COVE™ and Spinach™, to cannabis control authorities in Ontario, British Columbia, Nova Scotia and Prince Edward Island, as well as to private-sector retailers in Saskatchewan. These six provinces together represent approximately 70% of the Canadian population. As the Company’s distribution and supply chain grows, and as a result of the implementation of new regulations on October 17, 2019, which allows for the sale of additional cannabis derivative products and format factors starting in December 2019, the Company intends to increase penetration within existing markets and expand its distribution into additional provinces and territories in Canada as the industry’s infrastructure and retail channels develop.
On October 25, 2019, Cronos Australia completed the previously announced Cronos Australia IPO. Under the Cronos Australia IPO, Cronos Australia issued approximately 40 million new shares at an offering price of AUD$0.50 per share. Following completion of the Cronos Australia IPO, the Company holds approximately 31% of the issued capital of Cronos Australia. Cronos Australia started trading on the Australian Securities Exchange in early November 2019. The Cronos Australia IPO enables Cronos Group to continue to participate in Cronos Australia’s growth as they work to become the market leader for medicinal cannabis in the Asia-Pacific region.
Established in February 2018 as a joint venture between Cronos Group and NewSouthern Capital Pty Ltd., the launch of Cronos Australia reinforces Cronos Group’s commitment to advancing cannabis research and producing and distributing products and brands on a global scale. Cronos Australia plans to import and distribute PEACE NATURALS™ products to the Australian medical cannabis market while also developing its own branded products, subject to obtaining applicable licenses, permits and other regulatory approvals.
Global Supply Chain
The Cronos Israel facility continues to move closer to operational readiness. Construction of Cronos Israel’s greenhouse was completed in the first half of 2019 and its manufacturing facility was completed in the third quarter of 2019. Cronos Israel is now beginning the GMP certification process for the facility, which is expected to occur in phases throughout 2020 in relation to the manufacturing processes for bottled flower, pre-rolls, and oil.
In August 2019, the Company entered into a credit agreement (the “Credit Agreement”), as administrative agent and lender, with Cronos Growing Company Inc. (“Cronos GrowCo”), as borrower, in respect of a $100 million secured non-revolving term loan credit facility (the “Credit Facility”). Cronos GrowCo, a 50/50 joint venture owned by Cronos Group and a group of investors led by Bert Mucci, intends to use the funds available under the Credit Facility to fund the construction of the previously announced custom-built greenhouse (the “Facility”) and for general operations.
Construction of the Facility has commenced. Cronos Group expects to complete the structure of the Facility in the fourth quarter of 2019 and expects the Facility to become operational in phases in the second half of 2020. The Facility’s construction completion is subject to obtaining the relevant building and occupancy permits along with other customary approvals. Commencement of operations at the Facility will be subject to obtaining the appropriate licenses under applicable law.
Subsequent to the third quarter of 2019, Cronos Group has undertaken certain initiatives to better align with its evolving business and strategic pillars, which aim to create sustainable long-term value in the areas of research and development and marketing innovative branded products. This realignment also comes in consideration of the new Cannabis Regulations, which were announced on October 17, 2019 and amend the Cannabis Act and Cannabis Regulations to, among other things, allow for the production and sale of extracts (including concentrates), edibles and topicals. Certain facilities at the Peace Naturals Campus will be partially repurposed from cultivation to provide for additional R&D activities, production and manufacturing of derivative products, and will allow for increased vault and warehousing capabilities. In addition, certain facilities at the Peace Naturals Campus will transition to R&D areas focused on new technologies for value-added product manufacturing.
Intellectual Property Initiatives
This quarter Cronos Group closed the previously announced acquisition of a GMP compliant fermentation and manufacturing facility in Winnipeg, operating as “Cronos Fermentation”. Cronos Fermentation’s facilities include fully equipped laboratories covering microbiology, organic and analytical chemistry, quality control and method development as well as two large scale microbial fermentation production areas. The Company is in the process of aligning specifications for the equipment and manufacturing required for the production and downstream processing of cannabinoids. To support this work, a team of engineers, scientists, production and quality assurance personnel that previously worked at the facility joined the Company in November 2019.
Commercial production at the facility is subject to completion of the equipment alignment for cannabinoid-based production, the receipt of the appropriate licenses from Health Canada for the production of cultured cannabinoids under the Cannabis Act and the achievement of milestones under the Ginkgo Bioworks Inc. partnership, which aims to bring innovation and biological manufacturing to the cannabis industry and allow for cannabinoid production at large scale and with greater efficiency compared to traditional cultivation and extraction.
Appointments
With the completion of the Redwood acquisition, Robert Rosenheck, the co-founder and CEO of Redwood and the Lord Jones™ brand, will also assume responsibility for Cronos Group’s operations, marketing, and brand strategy in the U.S. hemp-derived CBD market. In addition, Cronos Group has appointed Jeff Jacobson, most recently Head of Sales and Business Development of Cronos Group, as General Manager of Canada and Europe. In this role, Mr. Jacobson will be responsible for the Company’s operations, sales and manufacturing in Canada and Europe. With this shift in resources, David Hsu, Chief Operating Officer, and William Hilson, Chief Commercial Officer, will be transitioning from the Company at the end of the year. The Cronos Group team extends their gratitude to Mr. Hsu and Mr. Hilson for their service and contributions to the Company.
On September 30, 2019, in connection with its investment in the Company, Altria nominated Jody Begley to the Cronos Group board of directors. Mr. Begley is currently Senior Vice President, Tobacco Products for Altria in which he oversees more than $24 billion in net revenues. Altria’s nomination replaces one of its previous director designees, K.C. Crosthwaite, who resigned from the Cronos Group board of directors.
Conference Call
The Company will host a conference call and live audio webcast on Tuesday November 12, 2019 at 8:30 a.m. EST to discuss third quarter 2019 results. The call will last approximately one hour. Instructions for the conference call are provided below:
- Live audio webcast: https://ir.thecronosgroup.com/events/event-details/cronos-group-third-quarter-2019-earnings-conference-call
- Toll Free from the U.S. and Canada dial-in: (866) 795-2258
- International dial-in: (409) 937-8902
- Conference ID: 1678761
An audio replay of the call will be archived on the Company’s website for replay.
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, and two adult-use brands, COVE™ and Spinach™, and Lord Jones™, a hemp-derived cannabidiol (CBD) personal care brand. To learn more about Cronos Group and its brands, please visit: www.thecronosgroup.com; www.peacenaturals.com; www.covecannabis.ca; www.spinachcannabis.com; www.lordjones.com.
Non-IFRS Measures
The Company uses certain measures that are not recognized under International Financial Reporting Standards (“IFRS”), do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. Rather, these measures are provided as a supplement to those IFRS measures to provide additional information regarding the Company’s results of operations from management’s perspective. Accordingly, non-IFRS measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with IFRS. Each non-IFRS measure is reconciled to its most directly comparable IFRS measure.
Adjusted EBIT
Adjusted earnings before interest and tax (“Adjusted EBIT”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis. Adjusted EBIT is defined as net income or loss, excluding interest expense, interest income, deferred income tax expense or recovery, share-based payments, unrealized change in the fair value of biological assets, realized fair value adjustments on inventory sold, financing and transaction costs, gain on revaluation of derivative liabilities, gain on revaluation of financial liability, share of income or loss from investments in equity accounted investees and gain or loss on investments. The Company believes that Adjusted EBIT is useful to compare its operating profitability across periods.
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. Adjusted EBITDA is defined as Adjusted EBIT excluding depreciation and amortization. The Company believes that Adjusted EBITDA is useful to compare its ability to generate cash from operations across periods.
Reconciliation of non-IFRS measures
A reconciliation of Adjusted EBIT and Adjusted EBITDA to net income, the most directly comparable IFRS measure, is presented in the following table.
