Cronos Group Inc. quarterly report, Q2 FY2022

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Cronos Group Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.

Business context

Cronos is a global cannabinoid company with U.S. hemp-derived products and cannabis operations in its Rest of World (ROW) segment, principally Canada and Israel. Its brands include Spinach, PEACE NATURALS, Lord Jones, Happy Dance and PEACE+.

Financial performance and liquidity

  • Q2 revenue: $28.6 million before excise taxes and $23.1 million net of excise taxes, up 51% and 48%, respectively, year over year. Six-month net revenue was $48.1 million, up 70%.
  • Revenue mix: Q2 ROW net revenue rose 61% to $21.6 million; U.S. revenue fell 34% to $1.5 million. Growth was driven by Israeli medical cannabis and Canadian adult-use sales. ROW represented $44.3 million of first-half revenue.
  • Gross profit and margin: Q2 gross profit was $4.1 million, with an 18% margin, versus a $15.8 million gross loss and negative 101% margin in Q2 2021. First-half gross profit was $11.0 million, with a 23% margin, versus a $18.7 million gross loss and negative 66% margin.
  • Operating results: Q2 operating loss was $28.1 million and net loss was $20.3 million; net loss attributable to Cronos was $20.2 million, or $0.05 per share. First-half operating loss was $64.1 million and net loss was $53.0 million, or $0.14 per share.
  • Adjusted EBITDA (non-GAAP): Loss was $18.8 million in Q2 versus $49.8 million a year earlier; first-half loss was $37.7 million versus $86.3 million. Q2 losses included U.S. ($3.9 million), ROW ($9.0 million) and corporate ($5.9 million).
  • Cash flow: First-half operating cash outflow was $51.2 million, compared with $86.2 million in 2021. Investing cash outflow was $40.3 million and financing cash outflow was $2.0 million. Cash and cash equivalents declined $97.4 million during the half.
  • Liquidity and obligations: At June 30, cash and equivalents were $789.5 million and short-term investments were $155.4 million. Current assets were $1,026.1 million versus current liabilities of $39.2 million. Total liabilities were $47.3 million, including $8.9 million of lease obligations. The balance sheet lists no conventional borrowings; Cronos also has $86.0 million of loans receivable.

Material changes versus prior comparable periods

  • Revenue growth and improved gross results reflected higher ROW sales, a more favorable product mix and lower biomass costs. The comparison also benefited from no inventory write-down in 2022, versus $12.0 million in 2021.
  • Operating expenses were substantially lower than in 2021, which included $234.9 million of goodwill and indefinite-lived intangible impairment. 2022 included $4.4 million of restructuring costs and $3.5 million of long-lived asset impairment for the first half.
  • The Q2 derivative-liability revaluation gain was $3.4 million, far below the $115.2 million gain in Q2 2021. First-half 2022 included a $13.8 million gain, compared with a $1.6 million loss in 2021. These non-cash fair-value changes are sensitive to Cronos’s share price and other assumptions.
  • Cash and equivalents fell from $887.0 million at year-end 2021 to $789.5 million at June 30, 2022. Short-term investments rose from $117.7 million to $155.4 million.

Outlook, management commentary and risks

  • Management said cash and short-term investments should fund operations and capital expenditures for at least the next 12 months. The filing provides no quantified revenue or earnings guidance.
  • The Realignment is intended to focus the business around brands, centralize functions and improve supply-chain efficiency. Cronos plans to exit its Stayner, Ontario facility and rely more on strategic partners, including Cronos GrowCo. Expected Realignment expenses are approximately $6.4 million, of which $4.4 million had been incurred by June 30; approximately $2.2 million of related capital expenditures were anticipated, with $0.3 million incurred by quarter-end.
  • In Q2, Cronos began a phased exit from the U.S. wholesale beauty category, aiming to focus on adult-use formats in direct-to-consumer channels. U.S. revenue and gross profit declined, and the segment reported a Q2 gross loss of $0.2 million.
  • Subsequent to quarter-end, Cronos launched CBN products in select Canadian markets. In June it achieved the final THCV productivity target under its Ginkgo collaboration, issuing shares and paying cash as consideration.
  • Key risks include dependence on continued Israeli market growth and cannabis imports, execution of the Stayner exit, supply and licensing reliance on Cronos GrowCo, U.S. hemp regulatory uncertainty, competition, COVID-19 and supply-chain disruptions, and potential effects of the Russia-Ukraine conflict.
  • Controls and legal matters: Management reported that disclosure controls were not effective because material weaknesses in internal control over financial reporting remained unremediated, involving the control environment and impairment testing. The company continues to respond to regulatory requests relating to prior financial-statement restatements and faces shareholder litigation; outcomes are uncertain. Cronos expects litigation and regulatory proceedings concerning product marketing, distribution and sales to increase.
  • Other unusual items include an $11.2 million first-half impairment of the PharmaCann option and $2.9 million of Q2 foreign-currency transaction losses. Altria held approximately 41% of Cronos’s shares; its warrant to purchase additional shares expires March 8, 2023.

Important facts for investors to verify

  • Whether ROW revenue growth—particularly in Israel—and improved gross margins can continue without relying on the prior-year inventory write-down comparison.
  • Progress, costs and savings from the Stayner exit and Realignment, including whether GrowCo can provide reliable, cost-effective supply and required regulatory approvals are obtained.
  • U.S. segment performance after the wholesale beauty exit and the shift toward direct-to-consumer adult-use products.
  • Cash burn, investment balances and the assumptions supporting management’s stated 12-month liquidity outlook.
  • Remediation and testing of the disclosed material weaknesses, and developments in regulatory reviews and shareholder litigation related to past restatements.
  • Potential dilution and accounting effects from Altria’s warrant and rights, as well as fair-value volatility in derivative liabilities and investments.