Cronos Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Unless stated otherwise, amounts are U.S. dollars. Financial-statement figures below are in millions; comparisons are with Q1 2020.
Business context and results
Cronos is a global cannabinoid company with U.S. hemp-derived CBD products and cannabis operations in Canada, Israel and other markets. It reports two segments: United States and Rest of World (ROW).
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue before excise taxes | $14.7 million | $9.3 million |
| Net revenue | $12.6 million | $8.4 million |
| Gross profit (loss) | $(3.0) million | $(6.5) million |
| Gross margin | (23)% | (77)% |
| Operating loss | $(43.5) million | $(45.1) million |
| Net income (loss) | $(161.6) million | $75.7 million |
| Adjusted EBITDA loss | $(37.1) million | $(37.1) million |
| Cash used in operating activities | $(46.0) million | $(38.9) million |
Financial position and liquidity
- At March 31, cash and cash equivalents were $1,024.5 million and short-term investments were $214.9 million, together approximately $1.24 billion. Cash declined by $53.6 million during the quarter.
- Current assets were $1,320.3 million versus current liabilities of $302.6 million. Total assets were $1,881.3 million; total liabilities were $313.0 million.
- The balance sheet included $272.3 million of current derivative liabilities, up from $163.4 million at year-end. These relate principally to Altria warrant and share-purchase rights, rather than conventional borrowing.
- Total lease obligations were $9.4 million. The filing reports no material change in commitments; it does not identify material funded corporate debt.
- Investing activities used $9.7 million, including $6.7 million for property and equipment. Financing activities used $9.3 million, principally reflecting taxes withheld on share-based awards.
Changes versus Q1 2020
- Net revenue rose 50%, primarily from Canadian adult-use flower growth, Israeli medical-market sales and higher U.S. CBD product sales. Flower revenue increased to $9.4 million from $2.7 million, while extracts revenue fell to $3.1 million from $5.6 million.
- Gross loss narrowed by $3.5 million, and gross margin improved 54 percentage points. Q1 2020 included a $8.0 million inventory write-down; there was no inventory write-down in Q1 2021. Cronos nevertheless continued to report a gross loss.
- Adjusted EBITDA loss was essentially unchanged. ROW’s adjusted EBITDA loss improved to $22.2 million from $29.0 million; the U.S. loss widened to $9.5 million from $5.8 million, primarily with increased brand-development marketing costs.
- Net results swung to a loss, principally because of a $116.9 million non-cash loss on revaluation of derivative liabilities, compared with a $113.4 million gain in Q1 2020. The share-price-sensitive valuation drove this substantial period-to-period volatility.
- Net interest income declined to $2.3 million from $7.8 million. Foreign-currency translation contributed a $16.3 million gain in Q1 2021, versus a $113.7 million loss in Q1 2020.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management said cash and short-term investments should fund operations and capital expenditures for at least the next twelve months.
- Management noted that Canadian pandemic restrictions and retail closures could weigh on near-term revenue growth; the ultimate COVID-19 impact could not be reasonably estimated. U.S. restrictions were easing, while Israeli restrictions were not expected to materially affect near-term revenue growth.
- Management highlighted product and operational developments: Spinach edibles were planned for launch in Canada; Cronos GrowCo completed its first harvest and received a processing license; and Cronos Fermentation received a processing license in April 2021. Natuera exported THC derivatives from Colombia to the U.S. for R&D under a DEA permit and received Colombian commercial-export quotas.
- A $1.7 million impairment was recorded for unused Los Angeles leasehold improvements and the associated right-of-use asset. The company also classified Winnipeg land and office premises as held for sale, with a sale expected within twelve months.
- Material weakness in inventory verification controls remained outstanding. Management said remediation had begun but was not expected to be complete until year-end 2021; disclosure controls were therefore deemed ineffective as of March 31.
- Legal and regulatory matters include U.S. and Canadian shareholder actions related to the 2019 financial-statement restatement, regulatory information requests, and an Alberta consumer class action seeking C$500 million plus C$5 million in punitive damages against each defendant. The company said outcomes cannot be predicted; it expects litigation and regulatory proceedings concerning product marketing, distribution and sales to increase.
- Other watch items include concentration among major ROW customers, currency exposure without hedging, and the Altria warrant, exercisable through March 2023, which could affect future dilution and derivative valuations. The share count was 371.7 million at March 31, up from 360.3 million at year-end.
Key facts for investors to verify
- Whether revenue growth translates into positive gross profit, and the effect of product mix, pricing and excise taxes on margins.
- Cash burn, capital spending and the assumptions supporting management’s stated twelve-month liquidity outlook.
- Progress and testing of inventory-control remediation, including whether the material weakness is resolved by year-end 2021.
- Potential financial, dilution and timing effects of Altria’s derivative rights, and the related share-price-driven earnings volatility.
- Developments in the restatement-related proceedings and product-marketing litigation, including the Alberta claim and regulatory reviews.
- Execution and commercial contribution from new products, Israeli operations, joint ventures and planned asset sales.