Cronos Group Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are U.S. dollars; financial statement amounts are unaudited. Cronos is a cannabinoid company with U.S. hemp-derived consumer products and cannabis operations in Canada, Israel and other markets.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue, before excise taxes | $18.8m | $11.4m | $33.5m | $20.8m |
| Net revenue, after excise taxes | $15.6m | $9.9m | $28.2m | $18.3m |
| Gross loss | $(15.8)m | $(2.9)m | $(18.7)m | $(9.4)m |
| Operating loss | $(60.2)m | $(34.7)m | $(103.7)m | $(79.8)m |
| Net income (loss) attributable to Cronos | $57.1m | $(107.0)m | $(104.3)m | $(30.9)m |
| Adjusted EBITDA (non-GAAP) | $(49.8)m | $(27.0)m | $(86.3)m | $(64.0)m |
- Q2 net revenue increased 58% year over year, primarily from Canadian adult-use cannabis and Israeli medical-market sales. First-half net revenue increased 54%.
- Q2 gross margin was negative 101%, versus negative 30% a year earlier. The $12.0m Q2 inventory write-down, Canadian price reductions and new-product start-up costs contributed to the deterioration. The write-down related mainly to strains and potency levels no longer aligned with consumer preferences and obsolete Canadian inventory.
- Q2 reported net income was substantially affected by a $115.2m gain on revaluation of derivative liabilities. The filing attributes valuation changes chiefly to Cronos’s share price; the gain is not an indicator of operating profitability. First-half derivative revaluation was a $1.6m loss.
- Cash and cash equivalents were $895.2m and short-term investments $201.7m at June 30, 2021, together $1.097bn, down from $1.290bn at December 31, 2020. Total assets were $1.839bn; total liabilities $208.7m.
- For the first six months, operating cash use was $86.2m (versus $78.4m in 2020); investing cash use was $106.6m (versus $39.8m provided in 2020); financing cash use was $8.9m. Cash declined by $182.8m, partly offset by $18.8m of currency translation effects.
- The balance sheet reports lease obligations of $7.5m in total. No material conventional borrowing balance is identified in the provided filing text. Accounts payable concentration was notable: 32% was due to one vendor.
Changes, strategy and outlook
- U.S. revenue was $2.2m in Q2, approximately unchanged year over year; Rest of World revenue was $13.4m, up 74%. Rest of World gross loss widened to $16.4m, while U.S. gross profit was $0.6m.
- In June, Cronos paid approximately $110.4m for an option to acquire about 10.5% of U.S. cannabis operator PharmaCann on a fully diluted basis. Exercise depends on factors including U.S. federal cannabis legalization and regulatory approvals; commercial arrangements are contemplated if exercised.
- Cronos launched Canadian Spinach-branded gummies and concentrates and relaunched its U.S. hemp-derived PEACE+ line. Commercial-scale CBG production began in June following receipt of required licenses; management expected to reach its final CBG productivity target before September 2021.
- Management said cash and short-term investments should fund operations and capital expenditures for at least the next 12 months. No specific revenue, earnings or margin guidance is provided in the filing text.
- Management reported that COVID-19 restrictions in Canada had weighed on near-term revenue growth; provincial reopening could partly mitigate the effect. The duration and ultimate business impact of the pandemic remained uncertain. U.S. supply-chain delays were being monitored.
Risks, contingencies and unusual items
- Disclosure controls were deemed ineffective because of an unremediated material weakness in inventory verification. Remediation steps were underway, but management did not expect full remediation before year-end 2021.
- The company continued to respond to regulatory requests related to its 2019 financial-statement restatement. U.S. and Canadian shareholder litigation relating to the restatement remained relevant; the Ontario court dismissed the plaintiff’s leave and certification motions, and the plaintiff appealed. The outcome of regulatory reviews cannot be predicted.
- A Canadian proposed class action alleges issues with advertised cannabinoid content and seeks C$500m plus punitive damages of C$5m against each defendant, including Cronos. The company also warned that product marketing, distribution and sales litigation could increase.
- Q2 included an $11.3m out-of-period adjustment related to Top-up Rights accounting; management deemed the error immaterial. A separate immaterial out-of-period correction related to share-option withholding taxes was recorded in Q1.
- Other notable items included a $1.7m first-half impairment of U.S. leased-premise assets, a $1.3m gain on the sale of the Winnipeg facility, and a $0.6m Q2 loss on discontinued operations related to OGBC.
- Foreign-exchange exposure is unhedged; management estimated that a 10% change in Canadian-dollar exchange rates would affect the carrying value of net assets by approximately $163.0m at June 30. Derivative-liability valuations also use Level 3 inputs and may fluctuate significantly.
Key facts for investors to verify
- Whether revenue growth can translate into improved gross margins, given inventory write-downs, price reductions and start-up costs.
- How much of quarterly net income reflects operating performance versus non-cash derivative revaluation; track adjusted EBITDA alongside GAAP results.
- Cash burn and the effect of the PharmaCann option investment on liquidity, including whether and when the option can be exercised.
- Progress and testing evidence for remediation of the inventory-verification material weakness, and developments in the regulatory reviews and related litigation.
- Execution of the CBG productivity plan and the commercial contribution of new products and markets.