Cronos Group Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited, prepared under U.S. GAAP. Unless otherwise noted, amounts are U.S. dollars. Financial amounts below are in millions.
Business context and key financial metrics
Cronos is a cannabinoid company with two reportable segments: Rest of World (ROW), including cannabis operations in Canada and Israel, and the U.S., focused on hemp-derived products. Its brands include Spinach, PEACE NATURALS, Lord Jones, Happy Dance and PEACE+.
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net revenue, after excise taxes | $25.0 | $12.6; up 99% |
| Gross profit / margin | $6.9 / 28% | $(3.0) / (23%); margin improved 51 percentage points |
| Operating loss | $(36.0) | $(45.2) |
| Net loss attributable to Cronos | $(32.6), or $(0.09) per share | $(161.3), or $(0.44) per share |
| Adjusted EBITDA, non-GAAP | $(18.9) | $(36.6) |
| Cash used in operating activities | $(33.9) | $(46.6) |
| Cash and cash equivalents | $861.5 at March 31 | $887.0 at December 31, 2021 |
| Short-term investments | $119.9 at March 31 | $117.7 at December 31, 2021 |
Gross margin was 28% consolidated. ROW revenue was $22.7 million, up 123%, with a 30% gross margin; U.S. revenue was $2.3 million, down 5%, with a 9% gross margin. ROW growth reflected Israeli medical-market and Canadian adult-use sales, including flower and extracts. U.S. gross profit fell to $0.2 million from $1.2 million, mainly due to higher inventory valuation adjustments, shipping costs and an unfavorable sales mix.
Total assets were $1,371.0 million and total liabilities $49.6 million at quarter-end. The filing reports no conventional borrowings on the balance sheet; lease obligations totaled $9.3 million. Loans receivable were $87.8 million, including the GrowCo facility. Cash, cash equivalents and short-term investments together totaled $981.5 million. Management said these resources were expected to fund operations and capital expenditures for at least the next 12 months. Cash and cash equivalents declined by $25.4 million during the quarter.
Material changes versus the prior comparable period
- Revenue nearly doubled and gross profit improved by $9.9 million, principally from higher ROW flower revenue, new extract products, lower inventory valuation adjustments and lower biomass costs.
- Net loss narrowed substantially, but the comparison is strongly affected by derivative revaluation: Q1 2022 recorded a $10.4 million gain, versus a $116.9 million loss in Q1 2021. The 2022 quarter also included an $11.2 million impairment of the PharmaCann Option.
- Adjusted EBITDA loss improved by $17.7 million. The U.S. segment’s Adjusted EBITDA loss was $7.1 million, ROW’s was $3.4 million, and Corporate’s was $8.4 million.
- Operating cash use decreased by $12.7 million year over year. Capital spending on property, plant and equipment was $0.7 million, versus $6.7 million.
- Operating expenses were $43.0 million, up slightly overall. Lower sales and marketing and R&D costs were offset by restructuring, share-based compensation, depreciation and impairment charges.
Outlook, management commentary, risks and unusual items
- Realignment: Cronos began a plan to centralize functions, focus spending around brands and evaluate its supply chain. It approved the planned exit from the Stayner, Ontario production facility and began leveraging Cronos GrowCo capabilities. The company estimated approximately $5.8 million of Realignment and Stayner exit costs, of which $3.1 million had been incurred by March 31; it expected about $2.7 million of additional Stayner-related charges, primarily in the second half of 2022. It also anticipated approximately $2.5 million of capital expenditures for IT modernization and distribution capabilities. These are estimates, not earnings guidance.
- Profitability and outlook: Management described the initiatives as intended to support profitable, sustainable growth and optimize cash deployment. The filing provides no clear quantitative revenue, margin or earnings guidance.
- Unusual and non-cash items: The quarter included $11.2 million of impairment on the PharmaCann Option and $3.5 million of long-lived-asset impairment related to seeking a sublease for Toronto headquarters. The derivative liability fell to $4.1 million from $14.4 million at year-end, producing a $10.4 million revaluation gain; future valuations may fluctuate with Cronos’s share price. The PharmaCann Option’s fully diluted ownership interest fell to approximately 6.4% following PharmaCann’s LivWell transaction.
- Liquidity and operational risks: Management cited uncertainty from COVID-19, supply-chain challenges, the Russia-Ukraine conflict, foreign exchange movements, competition and evolving cannabis and U.S. hemp regulation. It said the conflict had not materially affected the company as of the filing date, while noting possible disruption and cost pressures.
- Concentration and counterparties: Two ROW customers accounted for 33% of Q1 revenue before excise taxes. Three customers represented 72% of accounts receivable at March 31. Cronos also has substantial exposure to GrowCo through its equity investment and secured lending.
- Controls and proceedings: Management said disclosure controls were not effective because of material weaknesses in the control environment and impairment-testing controls; remediation efforts were ongoing and not yet completed. Regulatory reviews relating to prior financial-statement restatements and shareholder class actions remained matters of uncertainty. A Canadian consumer product case was dismissed as to Cronos in January 2022; the company said it expected litigation and regulatory proceedings over product marketing, distribution and sales to increase.
- Governance: Founder Mike Gorenstein returned as Chairman, President and CEO in March 2022 following Kurt Schmidt’s retirement.
Most important facts for investors to verify
- Whether revenue growth—especially in Israel, Canadian adult-use products and extracts—continues to translate into sustainable gross-margin improvement and reduced operating cash burn.
- Progress, total costs and realized savings from the Realignment and Stayner exit, including supply continuity and dependence on GrowCo and other suppliers.
- Cash and investment balances, cash use, and the collectability and credit-loss assumptions for the $87.8 million of loans receivable.
- Valuation assumptions and further impairment risk for the PharmaCann Option and other investments; the potential impact of derivative revaluations and Altria rights.
- Remediation and testing of the disclosed material weaknesses, and developments in regulatory reviews and shareholder litigation tied to prior restatements.
- Customer and receivables concentration, as well as regulatory, geopolitical and supply-chain developments affecting the U.S., Canada and international markets.