Cronos Group Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 8, 2023. Unaudited U.S. GAAP results are in U.S. dollars. Amounts below are rounded to millions unless otherwise noted.
Business context
Cronos is a cannabinoid company operating primarily in Canada and Israel, with brands including Spinach, PEACE NATURALS and Lord Jones. After exiting its U.S. hemp-derived cannabinoid operations in Q2 2023, the company reports one segment comprising Canada and Israel; prior periods were reclassified. It completed its first cannabis shipment to Germany in September through Cansativa and planned shipments to Australia through Vitura.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue before excise taxes | $33.9m | $26.1m | $86.3m | $80.2m |
| Net revenue, after excise taxes | $24.8m | $20.4m | $63.3m | $64.7m |
| Gross profit / margin | $4.0m / 16% | $3.1m / 15% | $10.0m / 16% | $14.2m / 22% |
| Operating loss | $(21.8)m | $(27.3)m | $(63.2)m | $(84.4)m |
| Net loss | $(1.8)m | $(36.9)m | $(29.5)m | $(89.9)m |
| Adjusted EBITDA, non-GAAP | $(15.4)m | $(21.7)m | $(49.0)m | $(59.4)m |
Q3 net revenue grew 22%, led by Canadian adult-use flower and extracts, while Israel sales declined. Nine-month reported net revenue slipped 2%; on a constant-currency basis it rose 4%. Nine-month gross margin fell six percentage points, reflecting weaker Israeli flower sales, unfavorable Canadian flower price/mix and higher excise taxes as a share of revenue, plus a $0.7m inventory write-down tied to the planned Winnipeg facility wind-down. Operating expenses fell 26% year over year for the nine-month period, principally due to lower general and administrative and research and development costs.
Net losses narrowed substantially, but Q3 and nine-month results benefited from higher interest income and other non-operating items. Q3 included $13.4m net interest income and an $8.8m foreign-currency transaction gain, partly offset by a $5.3m loss on revaluation of financial instruments. Nine-month interest income was $37.0m; the financial-instrument revaluation loss was $7.9m. Adjusted EBITDA remained negative.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $571.7m and short-term investments were $267.9m, totaling $839.6m, down $38.2m from December 31, 2022.
- Nine-month operating cash flow was $(59.7)m, investing cash flow $(141.4)m, and financing cash flow $(0.8)m. Investing outflows largely reflect purchases of short-term investments, partly offset by maturities and loan repayments. Cash taxes paid were $33.0m.
- Total liabilities were $33.3m, including $2.7m of lease obligations. The filing reports no material funded borrowings; Cronos instead has $73.5m of loans receivable, largely associated with its GrowCo relationship.
- Management stated existing cash and short-term investments should fund operations and capital expenditures for the next 12 months. The filing provides no specific revenue, earnings or margin guidance.
Material developments, risks and contingencies
- Restructuring: Cronos approved a wind-down of Winnipeg operations, plans to list the facility for sale and is pursuing broader cost reductions. It also revised plans for the Peace Naturals Campus, retaining selected activities while considering a sale-and-leaseback or third-party leases. Q3 continuing-operations restructuring costs were $1.4m; the Winnipeg inventory write-down was $0.7m.
- Israel exposure: The Israel-Hamas war presents risks to personnel, facilities, imports and sales; company insurance does not cover war- or terrorism-related losses. The company said the potential effect on Israeli operations and related asset and liability values remained uncertain. The Israeli shekel weakened after quarter-end, and Cronos reported an adverse operational impact.
- Controls: Management concluded disclosure controls were ineffective due to an unremediated material weakness in IT general controls over user access, including privileged access. Remediation initiatives were underway, but not yet complete.
- Legal matters: An Ontario court certified a shareholder class action in October 2023 concerning prior financial-statement restatements. Cronos also disclosed an Israeli consumer class action seeking ILS 420m; the company’s Israeli entities moved to dismiss. The SEC investigation was settled without a civil penalty; a separate OSC settlement required C$1.34m.
- Customer concentration: Three major customers represented 67% of nine-month revenue before excise taxes. Two customers accounted for 43% of accounts receivable at quarter-end.
- Other volatility: Foreign exchange, changes in the value of the Vitura investment, and interest rates can materially affect reported results. The company said it had not historically hedged and did not then plan to hedge currency exposure.
Important facts for investors to verify
- Whether Canadian sales growth and new Germany/Australia distribution can offset persistent weakness in Israel and improve gross margins.
- Whether operating cash burn and restructuring costs decline, and whether the stated 12-month liquidity assessment remains appropriate.
- Progress and costs of the Winnipeg wind-down, facility sale plans and Peace Naturals Campus changes.
- Developments in Israel, including operational continuity, currency impacts and potential changes in recorded asset and liability values.
- Completion and testing of IT access-control remediation, and developments in the shareholder and Israeli consumer litigation.
- How much reported earnings improvement reflects sustainable operations versus interest income, currency movements and investment revaluations; Adjusted EBITDA is a non-GAAP measure.