Cronos Group Inc. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; U.S. dollars unless otherwise noted. This is an annual report, not a standalone fourth-quarter report. Cronos operates in U.S. hemp-derived cannabinoid products and cannabis markets in Canada, Israel and other international markets.
Financial performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue before excise taxes | $114.5 million | $89.5 million |
| Excise taxes | $22.6 million | $15.1 million |
| Net revenue | $91.9 million | $74.4 million |
| Gross profit (margin) | $12.0 million (13%) | $(17.5) million ((24)%) |
| Operating loss | $(124.8) million | $(560.6) million |
| Net loss | $(168.7) million | $(397.2) million |
| Adjusted EBITDA (non-GAAP) | $(80.6) million | $(160.5) million |
| Net cash used in operations | $(88.9) million | $(153.6) million |
- Net revenue rose 23% year over year (28% on the company’s constant-currency basis). Growth came mainly from Canadian adult-use extracts and Israeli medical flower sales; U.S. revenue fell 48% to $5.2 million.
- Gross profit improved by $29.5 million. Drivers included better product mix, higher Israeli sales, lower biomass costs and no inventory write-down, versus a $12.0 million write-down in 2021. The U.S. segment recorded a gross loss of $3.5 million.
- Operating expenses were $136.8 million, down 75%, largely because 2021 included $236.1 million of goodwill and intangible impairment and $127.6 million of long-lived-asset impairment. 2022 included $5.3 million of restructuring costs and $3.5 million of long-lived-asset impairment.
- Net loss included $61.4 million of impairment on the PharmaCann option and $34.2 million of income tax expense. Interest income was $22.5 million; gains from revaluation of derivatives and financial instruments were $14.1 million and $14.7 million, respectively.
- Cash and cash equivalents were $764.6 million and short-term investments $113.1 million at year-end, down a combined $126.9 million from 2021. Operating cash outflow improved by $64.7 million. Investing and financing activities used $1.8 million and $2.9 million, respectively.
- Total assets were $1.213 billion, total liabilities $72.0 million and shareholders’ equity $1.141 billion. The company reported no external financing or material conventional debt; lease obligations totaled $3.9 million, and no amounts were outstanding under external financing arrangements.
Changes, strategy and outlook
- The Rest of World segment generated $86.7 million of 2022 revenue, up 34%; U.S. revenue declined to $5.2 million. Three Canadian provincial customers represented approximately 55% of revenue before excise taxes, indicating customer concentration.
- Cronos’s 2022 Realignment targeted lower costs and a more efficient supply chain, including winding down cultivation and certain production at the Peace Naturals Campus. In February 2023, the company revised the plan to retain selected distribution, warehousing, R&D and proprietary-product manufacturing activities there, while seeking to lease remaining space.
- Management said available cash and short-term investments should fund operations and capital expenditures for at least the next 12 months. The filing provides no specific revenue, profit or cash-flow guidance. Management cautions that profitability is not assured and that operating cash flow has been negative for five consecutive fiscal years.
- Altria irrevocably relinquished its warrant in December 2022 for no consideration. The associated tax treatment generated a reported $479.8 million capital gain for tax purposes and $34.2 million of income tax expense. Altria continued to own about 41% of Cronos and retained specified governance and share-purchase rights.
- The PharmaCann option was impaired by $61.4 million to a year-end carrying value of $49.0 million; Cronos’s fully diluted ownership interest had fallen to approximately 6.3%. Exercise remains contingent on factors including U.S. federal legalization and regulatory approvals.
Risks, contingencies and controls
- Financial reporting controls: KPMG gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness remained in IT access controls, including privileged-access provisioning and monitoring; the weakness did not result in identified financial-statement misstatements. Disclosure controls were deemed ineffective.
- Regulatory and legal: The SEC settlement over prior restatements imposed a three-year loss of well-known-seasoned-issuer status and forward-looking-statement safe-harbor protections, and a five-year loss of reliance on Regulation A and D private-offering exemptions. The OSC settlement required C$1.34 million. A Canadian shareholder case related to prior restatements proceeded after an appellate ruling; outcomes and potential costs remain uncertain.
- Business and market: Key risks include changing cannabis and U.S. hemp regulation, price compression and competition, uncertain consumer demand, product liability and recalls, and reliance on third-party suppliers and partners. Cronos expects greater reliance on Cronos GrowCo for raw materials as Peace Naturals activities change.
- Other exposures: Foreign-exchange movements reduced comprehensive income by $50.6 million in 2022; the company does not currently hedge currency risk. The PharmaCann valuation depends on judgment-sensitive assumptions, including cash-flow forecasts and the timing of U.S. federal legalization. Litigation and regulatory proceedings could affect results in a particular period.
Investor verification priorities
- Track cash burn against the $877.7 million year-end cash and short-term-investment balance, and assess whether operations can reach sustainable cash generation.
- Confirm progress, costs and supply-chain effects of the revised Peace Naturals plan, including Cronos GrowCo’s capacity, licensing and ability to supply the business.
- Review remediation and testing of the IT access-control material weakness, the independent consultant’s recommendations and any further control findings.
- Validate the assumptions behind the $49.0 million PharmaCann option valuation and monitor dilution, ownership and the conditions for exercising the option.
- Assess the U.S. segment’s revenue and gross-margin trajectory, and the effect of evolving FDA and state rules on hemp-derived products.
- Monitor customer concentration, Canadian pricing and product mix, the outstanding shareholder litigation, and tax effects related to the Altria warrant relinquishment.