Cronos Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited U.S. GAAP financial statements. Amounts are in U.S. dollars unless noted. Financial figures below are in millions, except per-share amounts.
Business context and results
Cronos is a cannabinoid company with two reportable segments: Rest of World (ROW), principally Canada and Israel, and the U.S., which sells U.S. hemp-derived products. Its brands include Spinach, PEACE NATURALS and Lord Jones.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue before excise taxes | $27.2 | $29.4 |
| Excise taxes | $7.1 | $4.4 |
| Net revenue | $20.1 | $25.0 |
| Gross profit / margin | $2.4 / 12% | $6.9 / 28% |
| Operating loss | $(22.0) | $(36.0) |
| Net loss attributable to Cronos | $(19.2) | $(32.6) |
| Basic and diluted loss per share | $(0.05) | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $(16.8) | $(18.9) |
Liquidity, cash flow and balance sheet
- At March 31, cash and cash equivalents were $413.7 million and short-term investments were $422.8 million, totaling $836.4 million. Combined balances declined $41.3 million from year-end 2022.
- Operating activities used $47.7 million of cash, versus $33.9 million used in Q1 2022. Investing activities used $303.8 million, primarily reflecting purchases of short-term investments; financing activities used $0.7 million.
- Total assets were $1.160 billion and total liabilities were $33.2 million. The balance sheet lists no conventional borrowings; liabilities included lease obligations, amounts due to non-controlling interests, and a deferred tax liability.
- Inventory was $44.3 million, up from $37.6 million at year-end. Accounts receivable was $14.9 million, down from $23.1 million.
- Management said existing cash and short-term investments were expected to fund operations and capital expenditures for the next 12 months.
Changes versus the prior-year quarter
- Net revenue fell 20%; on the company’s non-GAAP constant-currency basis, it fell 14%. Gross profit fell 66% and gross margin contracted 16 percentage points.
- ROW revenue declined 14% to $19.5 million. Flower revenue fell 30%, while extract revenue increased 58%. U.S. revenue fell 72% to $0.6 million, and the U.S. segment recorded a $0.5 million gross loss.
- Management attributed weaker results primarily to lower Israeli flower sales amid competition, slower patient permit authorizations and geopolitical unrest; Canadian flower price/mix and increased returns; and lower U.S. sales following promotional reductions and SKU rationalization. Higher Canadian extract sales partly offset these pressures.
- Operating expenses fell 43% to $24.4 million, principally due to lower financial statement review and personnel costs, lower R&D costs, and the absence of prior-year restructuring and impairment charges. Sales and marketing expense increased 17%.
- Net loss narrowed, aided by lower operating expenses and $11.2 million of net interest income, compared with $2.0 million in Q1 2022. However, other income included a $7.8 million loss on revaluation of financial instruments, mainly related to Vitura.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. The company’s forward-looking discussion identifies execution of its realignment, supply-chain costs and availability, consumer demand, competition, regulation and licensing, and the success of partnerships and investments as uncertainties.
- Cronos revised its plans for the Peace Naturals Campus: it expects to retain selected distribution, R&D and manufacturing activities while seeking to sell and lease back some or all of the campus, or lease portions to third parties.
- Operating cash use included a $32.8 million reduction in income taxes payable following a tax payment connected with Altria’s previously disclosed relinquishment of its warrant.
- The SEC settlement concerning prior restatements required a qualified independent consultant and imposed restrictions, including loss of well-known seasoned issuer status for three years and inability to rely on certain private offering exemptions for five years. The SEC settlement required no civil penalty. The OSC settlement required payment of C$1.34 million.
- A shareholder class action in Ontario returned for further certification proceedings after an appellate ruling. Separately, an Israeli proposed class action filed in April 2023 against 26 cannabis-related parties, including three Cronos Israel entities, seeks ILS 420 million; the filing states the outcome cannot be predicted with certainty.
- Management reported a material weakness in IT general controls over user-access management, including privileged access; remediation initiatives were in progress and not yet tested or completed. Management concluded disclosure controls and procedures were not effective as of quarter-end.
- Customer concentration is notable: two ROW customers accounted for 56% of revenue before excise taxes. The company also identified foreign-currency exposure and said it did not currently contemplate hedging.
Important facts for investors to verify
- Whether revenue, gross margin and U.S. segment performance improve, particularly in Israeli flower sales and U.S. hemp products.
- Whether the realignment and Peace Naturals Campus plans deliver expected cost savings without disrupting supply or increasing costs.
- Whether cash usage stabilizes and management’s stated 12-month liquidity assessment remains supported by operating performance and investment balances.
- Progress, testing and formal remediation of the IT access-control material weakness, and compliance with SEC and OSC settlement undertakings.
- Developments and potential financial exposure in the Ontario and Israeli litigation, and changes in major-customer concentration or receivable collectability.