Cronos Group Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement figures below are rounded to millions unless stated otherwise.
Business context
Cronos is a global cannabinoid company with two reportable segments: Rest of World (ROW), focused on cannabis products, and the U.S., focused on hemp-derived products. Revenue is principally generated in Canada and Israel. The company is realigning operations around its brands, reducing U.S. costs, and transitioning away from its Stayner, Ontario production facility.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue, after excise taxes | $20.9 | $20.4 | $69.0 | $48.6 |
| Gross profit (loss) | $1.2 | $(0.7) | $12.2 | $(19.5) |
| Gross margin | 6% | (4)% | 18% | (40)% |
| Operating loss | $(31.0) | $(56.4) | $(95.1) | $(398.0) |
| Net income (loss) | $(36.9) | $77.7 | $(89.9) | $(263.3) |
| Adjusted EBITDA (non-GAAP) | $(21.7) | $(46.8) | $(59.4) | $(133.1) |
| Cash used in operating activities | — | — | $(64.6) | $(117.7) |
Q3 net revenue increased 3% year over year; nine-month revenue rose 42%. Growth was led by Israeli medical cannabis flower and Canadian adult-use extracts, partly offset by weaker U.S. sales and adverse Canadian flower price/mix. Management reported that the weaker Canadian dollar also reduced translated revenue.
Gross margin improved, but remained low in Q3. Lower biomass costs, better product mix, and the absence of the prior-year inventory write-down supported the year-to-date comparison. The 2021 nine-month comparison included an $12.0 million inventory write-down. Adjusted EBITDA losses narrowed, mainly as sales and marketing, R&D, and G&A expenses declined.
Q3 2022 results included a $29.0 million non-cash impairment of the PharmaCann option, partly offset by a $17.0 million gain on revaluation of financial instruments and a $7.2 million net interest income contribution. The prior-year Q3 net income included a $132.9 million gain on revaluation of derivative liabilities, making the year-over-year net income comparison unusually volatile. Nine-month 2022 also included a $40.2 million PharmaCann impairment and $19.2 million gain on financial instruments.
Balance sheet, liquidity, and cash flow
- At September 30, 2022, cash and cash equivalents were $633.3 million and short-term investments were $255.5 million, totaling $888.7 million, versus $1,004.7 million at December 31, 2021.
- Total assets were $1.24 billion; total liabilities were $46.2 million. The balance sheet reports no borrowings; liabilities primarily comprise leases, accrued liabilities, and deferred tax. Cronos also held $80.8 million of net loans receivable.
- Current assets were $963.3 million and current liabilities $38.0 million. Management said cash and short-term investments should fund operations and capital expenditures for at least the next 12 months.
- Nine-month operating cash use was $64.6 million. Investing cash use was $160.3 million, primarily reflecting purchases of short-term investments; financing cash use was $2.3 million. Cash fell by $253.7 million, including a $26.5 million adverse foreign-currency translation effect. Cash plus short-term investments declined by $115.9 million on a reported basis.
Material changes, outlook, and risks
- Realignment: The company expects approximately $6.1 million of total realignment costs, of which $4.9 million had been incurred by September 30; about $1.2 million of additional charges were expected. The company moved its anticipated Stayner/Peace Naturals Campus exit to 2023, citing contract-manufacturer transition timing, equipment lead times, and regulatory licensing. It expects most related capital expenditures to begin during the transition.
- Segment trends: ROW revenue rose 11% in Q3 and 55% for nine months. U.S. revenue declined 76% in Q3 and 36% for nine months; U.S. gross profit was negative in both comparisons. U.S. declines reflected reduced promotional spending and SKU rationalization during the realignment.
- Regulatory settlements after quarter-end: On October 24, 2022, the SEC settlement resolved its investigation into prior restatements without a civil penalty, but requires an independent consultant to review specified controls. The order removes well-known seasoned issuer status for three years, limits reliance on certain private-offering exemptions for five years, and removes specified forward-looking-statement safe-harbor protections for three years. The OSC settlement requires a C$1.34 million payment and a similar consultant review.
- Controls and litigation: Management concluded disclosure controls were ineffective at September 30 because material weaknesses remained in the control environment and goodwill/intangible impairment testing. Remediation was ongoing and the weaknesses were not considered remediated. A Canadian shareholder class-action certification matter was revived on appeal and remitted to the lower court; the company said other proceedings could affect quarterly results. The filing also disclosed an Alberta product-content class action had been dismissed as to Cronos.
- Concentration and operating risks: Three ROW customers represented 56% of Q3 revenue before excise taxes and 54% for the nine-month period. Cronos identified dependence on Israeli growth, import approvals, joint ventures, and Cronos GrowCo as a key supply source after the Stayner exit. Other risks include cannabis regulation, competition and pricing, foreign exchange, supply-chain disruption, COVID-19, and geopolitical uncertainty.
- Foreign exchange: Nine-month translation loss in other comprehensive income was $68.8 million. The company said a 10% Canadian-dollar rate change would affect the carrying amount of net assets by approximately $79.9 million and reported that it did not currently plan to hedge foreign-currency exposure.
No numerical revenue, earnings, or cash-flow guidance was provided. Management’s stated near-term outlook was that available cash and short-term investments would cover at least 12 months of operations and capital expenditures, subject to the risks described in the filing.
Important facts for investors to verify
- Whether the 2023 Stayner exit proceeds on schedule, what transition and capital costs result, and whether GrowCo can supply material on acceptable terms and timing.
- Whether revenue growth in Israel and ROW can continue, and whether U.S. sales and segment gross profit recover after strategic changes.
- How quickly operating cash use declines and whether the $888.7 million cash-and-investment balance remains adequate for the business plan.
- Progress and independent-consultant findings on internal controls, and compliance with SEC and OSC settlement terms and restrictions.
- Developments in shareholder litigation, the PharmaCann option valuation, and the concentration of revenue among major ROW customers.
- The effects of Canadian-dollar and other currency movements, which materially affected reported comprehensive income and asset values.