Cronos Group Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless stated otherwise. Cronos operates in two segments: United States (U.S. hemp-derived consumer products) and Rest of World (ROW; cannabis products, principally in Canada and Israel).
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net revenue, after excise taxes | $74.4 million | $46.7 million |
| Gross profit (loss) | $(17.5) million | $(25.8) million |
| Gross margin | (24)% | (55)% |
| Operating loss | $(560.6) million | $(219.4) million |
| Net loss attributable to Cronos Group | $(396.1) million | $(73.1) million |
| Adjusted EBITDA, non-GAAP | $(160.5) million | $(147.3) million |
| Cash used in operating activities | $(153.6) million | $(144.9) million |
- Revenue grew 59%, mainly from Canadian adult-use flower sales and higher Israeli medical-market sales; strategic price reductions in Canada partly offset growth.
- ROW revenue was $64.6 million, up 73%. U.S. revenue was $9.9 million, up 4%; U.S. gross profit fell to $0.1 million from $4.2 million, with margin down to 1% from 44%.
- Gross loss improved by $8.3 million, chiefly due to lower inventory write-downs and a more favorable ROW product mix. FY 2021 inventory write-downs were $12.0 million versus $26.1 million.
- Net loss widened substantially, principally reflecting $236.1 million of goodwill and indefinite-lived intangible impairments and $127.6 million of long-lived asset impairments. The company also recorded a $151.4 million non-cash gain from revaluing derivative liabilities, largely tied to the share price.
- Cash and cash equivalents were $887.0 million and short-term investments $117.7 million at year-end, down from $1.08 billion and $211.8 million, respectively, in 2020. Management said available cash and investments were expected to fund operations and capital expenditures for at least 12 months.
- The company reported no external financing at year-end. Lease obligations totaled $9.8 million on the balance sheet; future minimum lease payments were $10.7 million. Operating cash burn and investment needs remain relevant despite substantial liquidity.
Material changes and notable items
- Revenue increased, but operating performance remained loss-making. Adjusted EBITDA loss widened to $160.5 million from $147.3 million.
- U.S. reporting-unit goodwill was fully impaired ($178.4 million); the Lord Jones brand incurred $57.5 million of impairment charges, leaving a $1.5 million carrying value at year-end. The filing cites slower growth, pricing pressure and competition.
- A $119.9 million non-cash impairment was recorded on long-lived assets associated with the planned exit from the Stayner, Ontario facility. The company also impaired Health Canada licenses and certain Ginkgo-related licenses.
- Cash used in investing activities was $28.9 million, including the $110.4 million PharmaCann option investment, partly offset by movements in short-term investments. The PharmaCann option had not been exercised by year-end.
- Major Canadian provincial customers represented significant concentration: three customers accounted for approximately 56% of net revenue before excise taxes. The filing also identifies significant customer concentration in receivables.
Outlook, risks and contingencies
- Outlook: The filing provides no quantified revenue or earnings guidance. In early 2022, Cronos announced a realignment to centralize functions, review products and pricing, reduce complexity and optimize operating expenses. It planned to exit Stayner by the end of 2022, expecting about $4.5 million in related charges and $2.5 million of capital spending for IT modernization and distribution capabilities. These are estimates, not guarantees.
- Supply chain: After the Stayner exit, Cronos GrowCo and third-party suppliers become more important sources of biomass. The company intends to seek a Health Canada sales license for GrowCo’s facility to maintain Canadian customer supply.
- U.S. strategy: The PharmaCann option was intended to acquire an approximately 10.5% fully diluted stake for about $110.4 million, subject to conditions including U.S. federal legalization and regulatory approvals. PharmaCann’s February 2022 LivWell transaction reduced Cronos’s estimated fully diluted interest to about 6.7%; further dilution could affect governance rights.
- Regulatory and market risk: U.S. hemp product rules remain uncertain, including FDA restrictions and potential enforcement concerning CBD in foods and supplements. Cannabis remains illegal under U.S. federal law. Canadian pricing pressure, competition, provincial purchasing discretion and possible changes to cannabis regulation also pose risks.
- COVID-19: Store restrictions and supply-chain disruption adversely affected demand and revenue growth, particularly in the U.S. and certain Canadian markets; future effects were uncertain.
- Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2021. Two material weaknesses remained: an ineffective control environment, including insufficient U.S. GAAP expertise in accounting, and ineffective controls over goodwill and indefinite-lived asset impairment testing. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements.
- Legal and other contingencies: Regulatory authorities were seeking information concerning prior 2019 and second-quarter 2021 restatements; outcomes were uncertain. Shareholder litigation relating to the 2019 restatement remained, including an appeal in Canada. A separate Alberta product-content class action was dismissed as to Cronos on January 31, 2022. The company reported no belief that proceedings would materially adversely affect consolidated financial condition, while acknowledging possible period-specific effects.
Most important facts for investors to verify
- Whether the company reduces operating cash burn and improves gross margins, especially in the U.S. segment.
- Execution, timing and actual costs of the Stayner exit and realignment, and whether replacement supply through GrowCo and other suppliers is reliable and appropriately licensed.
- Whether remaining internal-control weaknesses are remediated and whether reporting quality improves following prior restatements and accounting-team turnover.
- Actual customer concentration, receivable collectability and the status of the $14.6 million allowance for credit losses on long-term financial assets.
- Developments in FDA and other regulatory treatment of U.S. hemp-derived products, as well as the conditions, dilution and potential value associated with the PharmaCann option.
- Future impairment assumptions and derivative revaluations, which materially affected reported earnings and may fluctuate independently of operating performance.