Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group”
or the “Company”), today announces its 2020 first quarter business
results.
“Cronos Group started 2020 energized and
determined to continue to see through our core strategic
initiatives to drive long-term and sustainable growth. This
quarter, we moved closer to officially entering the Israeli medical
cannabis market with our Cronos Israel operations preparing to sell
PEACE NATURALS™ branded dried flower products to medical
patients. The Israeli medical market is a growing channel, and we
look forward to serving this market in 2020 and beyond,” said Mike
Gorenstein, CEO of Cronos Group.
“Despite the challenges and uncertainty posed by
the COVID-19 pandemic, we remain agile and focused as a business.
Our brand portfolio continues to launch innovative products to
consumers as we adapt to an online-first distribution model in both
the U.S. and Canada. We continue to reach our stakeholders and
consumers through creative digital marketing. And our product
innovation and R&D projects continue to progress. We believe
the mission of our Company, to improve lives through cannabinoid
innovation, resonates especially well during these times. We remain
well-positioned and committed to generating sustainable, long-term
value for shareholders and are confident 2020 will be a successful
building year for Cronos Group.”
Financial Results
(in thousands of U.S.
dollars) |
|
First Quarter |
|
First Quarter |
|
YoY Change |
|
|
2020 |
|
2019 |
|
$ |
|
% |
Net revenue |
|
|
|
|
|
|
|
|
United States |
|
$ |
2,176 |
|
|
$ |
— |
|
|
$ |
2,176 |
|
|
N/A |
Rest of World |
|
6,256 |
|
|
3,004 |
|
|
3,252 |
|
|
108 |
% |
Consolidated net revenue |
|
8,432 |
|
|
3,004 |
|
|
5,428 |
|
|
181 |
% |
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
$ |
(6,476 |
) |
|
$ |
1,555 |
|
|
$ |
(8,031 |
) |
|
(516 |
)% |
Gross margin |
|
(77 |
)% |
|
52 |
% |
|
N/A |
|
(129 |
)pp |
|
|
|
|
|
|
|
|
|
Reported operating loss |
|
$ |
(45,060 |
) |
|
$ |
(10,126 |
) |
|
$ |
(34,934 |
) |
|
345 |
% |
Adjusted operating loss
(i) |
|
(40,653 |
) |
|
(10,126 |
) |
|
(30,527 |
) |
|
301 |
% |
|
|
|
|
|
|
|
|
|
Other
Data |
|
|
|
|
|
|
|
|
Cash and cash equivalents
(ii) |
|
1,128,396 |
|
|
1,811,531 |
|
|
(683,135 |
) |
|
(38 |
)% |
Short-term investments
(ii) |
|
206,230 |
|
|
— |
|
|
206,230 |
|
|
N/A |
Capital expenditures |
|
7,516 |
|
|
10,157 |
|
|
(2,641 |
) |
|
(26 |
)% |
(i) See “Non-GAAP Measures” for
more information, including a reconciliation of adjusted
operating loss(ii) Dollar amounts are as of the last day
of the period indicated
First Quarter 2020
- Net revenue of $8.4 million in Q1
2020 increased by $5.4 million from Q1 2019. The increase
year-over-year was primarily driven by continued growth in the
adult-use Canadian cannabis market, sales resulting from the launch
of cannabis vaporizers to the Canadian market, including both
adult-use and direct-to-consumer, and the inclusion of the Redwood
acquisition in our financial results.
- Gross profit (loss) of $(6.5)
million in Q1 2020 decreased by $8.0 million from Q1 2019. The
decrease year-over-year was primarily driven by an inventory
write-down of $8.0 million on dried cannabis and cannabis extracts,
as well as an increase in the marginal production cost at our Peace
Naturals Campus, as we continue working towards operating at full
capacity after the repurposing of the facility in the fourth
quarter of 2019.
- The Company incurred an inventory
write-down of $8.0 million, on dried cannabis and cannabis
extracts, primarily driven by fixed-price contracts negotiated
prior to cannabis product price compression due to broader trends
of oversupply in the Canadian market. If we were to adjust for the
effects of the inventory write-downs, gross profit in Q1 2020,
would have been $1.5 million, representing a gross margin of 18%.
We anticipate further inventory write-downs in the short-term due
to pricing pressures in the marketplace and the impact of the
Company's operational repurposing of the Peace Naturals
Campus.
- Reported operating loss of $45.1
million in Q1 2020 increased by $34.9 million from Q1 2019. The
reduction year-over-year was primarily driven by an increase in
general and administrative expenses as a result of increased
headcount, internal review costs of $4.4 million related to the
restatement of our 2019 interim financial statements, higher sales
and marketing costs related to brand development, and research and
development costs related to our Ginkgo partnership, activities at
Cronos Fermentation, and spending on vaporizer innovation at the
Cronos Device Labs research and development center.
Business Updates
Brand Portfolio
Throughout the first quarter of 2020, Cronos
Group continued to roll-out cannabis vaporizer devices for the
Canadian adult-use market under the COVE™ and Spinach™ brands. In
addition, in March 2020 the Company launched PEACE NATURALS™
branded cannabis vaporizer devices for the direct-to-consumer
market in Canada.
In the first quarter, the Lord Jones™ brand
continued to launch innovative products with the introduction of
Lord Jones™ Acid Mantle Repair CBD Moisturizer to the U.S. market.
The Acid Mantle Repair Moisturizer is a soothing facial moisturizer
specifically formulated to help maintain the skin’s acid mantle and
rebalance the appearance of stressed skin. The new product is
currently being sold at Sephora, Beautylish, C.O. Bigelow and
online through the Lord Jones™ website directly.
Global Sales and
Distribution
Subsequent to this quarter in April 2020, Cronos
Group completed its first export of bulk dried flower to Cronos
Israel in order to sell PEACE NATURALS™ branded cannabis
products for distribution in the Israeli medical market. Cronos
Israel will begin to build its distribution network and brand
presence in this rapidly growing medical market.
Global Supply Chain
During the first quarter of 2020, Natuera,
Cronos Group’s contract manufacturing joint venture in Latin
America, a fully licensed operation in Colombia for hemp- and
cannabis-derived bulk, consumer, and medicinal cannabinoid
products, achieved significant operational milestones. Natuera,
completed construction of its state-of-the-art, GMP-standard
extraction facility. In addition, Natuera gained preferential
access to four cultivars registered with the Colombian Agricultural
Institute and planting of one of the hemp strains took place in
mid-February, with its first harvest having taken place at the end
of April.
With its extraction and processing facility also
coming online, Natuera’s R&D department has developed its first
commercially available, hemp-derived CBD distillate, which was
granted a non-controlled substance ruling by Colombia’s Narcotics
Control Board, streamlining an efficient process for export.
Natuera successfully completed its first test export to the United
States in early March 2020. Natuera is focused on accessing new
markets and product expansion, including developing additional bulk
offerings of hemp-derived CBD distillate and water-soluble
hemp-derived CBD solutions.
The Cronos Israel facility continues to move
closer to operational readiness and is expected to become a growth
driver for the Company in the back half of 2020 and onward. The
Company has received the necessary regulatory approvals to produce,
manufacture and sell dried cannabis flower products and is awaiting
approvals for pre-rolls and oil products, which are expected to be
received throughout 2020.
Intellectual Property
Initiatives
Subsequent to this quarter in April 2020, Cronos
Israel entered into a collaboration agreement with Cannasoul
Analytics Ltd. (“Cannasoul”), a cannabis research company dedicated
to developing scientific intellectual property, medical products,
and technologies, to develop a commercial cannabis analytical
testing laboratory onsite at Cronos Israel.
Led by established cannabis researcher,
Professor Dedi Meiri from the Technion Israel Institute of
Technology, Cannasoul intends to operate the laboratory and conduct
in-house commercial analytical testing for Cronos Israel and
third-party clients. It is anticipated that the laboratory, once
operational, will address the current need in the Israeli market
for accurate, end-to-end cannabis analytical testing for purposes
of domestic sale and export to certain international markets.
In the first quarter of 2020, Cronos
Fermentation received an R&D license from Health Canada and
received initial cannabinoid producing strains from Ginkgo
Bioworks. Subsequent to the quarter end, Cronos Fermentation
successfully fermented one of our target cannabinoids, CBGA, using
the cannabinoid strains in our Winnipeg R&D labs. Cronos
Fermentation will continue using these strains to optimize
downstream processing and scale up procedures in advance of
receiving the final strains and commercial processing license, both
of which are required for commercialization.
Update on COVID-19
Cronos Group’s manufacturing sites have adjusted
in order to comply with the current COVID-19 guidelines provided by
local and federal governments. The Company has reduced the number
of personnel working on-site at its production facilities in the
U.S., Canada, and Israel to essential employees, implemented
work-from-home policies where appropriate, and implemented
additional health and safety measures, including enhanced hygiene
and sanitation procedures, modified work schedules and social
distancing protocols at its production facilities. The Company will
continue to act in accordance with guidance from local, federal,
and international health and governmental authorities, and is
prepared to make additional operational adjustments, as necessary.
Although the Company’s production facilities currently remain
operational, exemptions for essential businesses and workforces
continue to evolve as governmental and health authorities respond
to the spread of the virus.
The Company currently has sufficient inventory
and supply of materials to meet current demand, although closures
or other restrictions may impact business operations for
third-party manufacturers, suppliers or vendors, which may in turn
disrupt the Company's supply chain.
Cronos Group’s distribution channels continue to
see disruptions globally due to the COVID-19 pandemic. Many
brick-and-mortar retailers in the U.S., where Lord Jones™ products
are distributed, have closed, although some retail partners
continue to operate through their online sites. Lord Jones™
continues to sell directly to consumers through its website. In
Canada, brick-and-mortar cannabis retailers in certain provinces
have mandated curbside click-and-collect models, reduced store
opening hours, or have closed retail entirely. Provincial
purchasers and private retailers have also reduced staff on-site,
which has led to a decrease in delivery availability and a
reduction in the frequency and/or size of purchase orders. Online
cannabis stores throughout Canada have remained operational.
The slowdown and disruption faced by retail
partners, in addition to quarantine measures and travel
restrictions, impacts our customers' ability to access our products
in the U.S., Canada and other jurisdictions in which the Company
operates. COVID-19 restrictions differ across jurisdictions, which
has resulted in increased uncertainty in forecasting customer
demand and sales velocity.
Rest of World Results
Cronos Group’s Rest of World reporting segment
includes results of the Company’s operations for all markets
outside of the United States of America.
(in thousands of USD) |
|
First Quarter |
|
First Quarter |
|
YoY Change |
|
|
2020 |
|
2019 |
|
$ |
|
% |
Cannabis flower |
|
$ |
2,741 |
|
|
$ |
1,825 |
|
|
$ |
916 |
|
|
50 |
% |
Cannabis extracts |
|
3,400 |
|
|
1,103 |
|
|
2,297 |
|
|
208 |
% |
Other |
|
115 |
|
|
76 |
|
|
39 |
|
|
51 |
% |
Net revenue |
|
6,256 |
|
|
3,004 |
|
|
3,252 |
|
|
108 |
% |
|
|
|
|
|
Gross profit (loss) |
|
$ |
(7,558 |
) |
|
$ |
1,555 |
|
|
$ |
(9,113 |
) |
|
(586 |
)% |
Gross margin |
|
(121 |
)% |
|
52 |
% |
|
N/A |
|
(173 |
)pp |
|
|
|
|
|
|
|
Reported and adjusted
operating loss |
|
$ |
(31,867 |
) |
|
$ |
(10,126 |
) |
|
$ |
(21,741 |
) |
|
215 |
% |
(i) See “Non-GAAP Measures” for
more information, including a reconciliation of adjusted
operating loss
First Quarter 2020
- Net revenue of $6.3 million in Q1
2020 increased by $3.3 million from Q1 2019. The increase
year-over-year was primarily driven by continued growth in the
adult-use Canadian cannabis market, sales resulting from the launch
of cannabis vaporizers to the Canadian market, including both
adult-use and direct-to-consumer.
- Gross profit (loss) of $(7.6)
million in Q1 2020 decreased by $9.1 million from Q1 2019. The
decrease year-over-year was primarily driven by an inventory
write-down of $8.0 million on dried cannabis and cannabis extracts,
as well as increased marginal production costs at the Peace
Naturals Campus as we continue towards operating at full capacity
after the repurposing efforts in the fourth quarter of 2019.
- The Company incurred an inventory
write-down of $8.0 million, on dried cannabis and cannabis
extracts, primarily driven by fixed-price contracts negotiated
prior to cannabis product price compression due to broader trends
of oversupply in the Canadian market. If we were to adjust for the
effects of the inventory write-downs, gross profit in Q1 2020,
would have been $0.4 million, representing a gross margin of 6%. We
anticipate further inventory write-downs in the short-term due to
pricing pressures in the marketplace and the impact of the
Company's operational repurposing of the Peace Naturals
Campus.
- Reported operating loss of $31.9
million in Q1 2020 increased by $21.7 million from Q1 2019. The
reduction year-over-year was primarily driven by increased general
and administrative expenses as a result of increased headcount,
higher sales and marketing expenses related to brand development,
and research and development costs related to our Ginkgo
partnership, activities at Cronos Fermentation, and spending on
vaporizer innovation at the Cronos Device Labs research and
development center.
United States Results
Cronos Group’s United States reporting segment
includes results of the Company’s operations for all brands and
products in the United States of America.
(in thousands of USD) |
First Quarter |
|
First Quarter |
|
YoY Change |
|
2020 |
|
2019 |
|
$ |
|
% |
Net revenue |
$ |
2,176 |
|
|
$ |
— |
|
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
Gross profit |
$ |
1,082 |
|
|
$ |
— |
|
|
N/A |
|
N/A |
Gross margin |
50 |
% |
|
— |
% |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
Reported operating loss |
$ |
(6,523 |
) |
|
$ |
— |
|
|
N/A |
|
N/A |
First Quarter 2020
- Net revenue was $2.2 million in Q1
2020, of which the primary contributors to revenue in the quarter
were the continued distribution of products in both e-commerce and
physical retail channels and the introduction of Lord Jones™ Acid
Mantle Repair CBD Moisturizer.
- Gross profit was $1.1 million in Q1
2020, representing a gross margin of 50%.
- Reported operating loss was $6.5
million in Q1 2020. The loss was driven by increased sales and
marketing costs incurred in relation to the launch of new products
and increased general and administrative expenses driven by
increased headcount to support our growth strategy.
Conference Call
The Company will host a conference call and live
audio webcast on Friday, May 8, 2020, at 8:30 a.m. EDT to discuss
2020 first quarter business results. The call will last
approximately one hour. An audio replay of the call will be
archived on the Company’s website for replay. Instructions for the
conference call are provided below:
- Live audio webcast:
https://ir.thecronosgroup.com/events-presentations
- Toll Free from the U.S. and Canada dial-in: (866) 795-2258
- International dial-in: (409) 937-8902
- Conference ID: 9069454
About Cronos Group
Cronos Group is an innovative global cannabinoid
company with international production and distribution across five
continents. Cronos Group is committed to building disruptive
intellectual property by advancing cannabis research, technology
and product development. With a passion to responsibly elevate the
consumer experience, Cronos Group is building an iconic brand
portfolio. Cronos Group’s portfolio includes PEACE NATURALS™, a
global health and wellness platform, two adult-use brands, COVE™
and Spinach™, and two hemp-derived CBD brands, Lord Jones™ and
PEACE+™. For more information about Cronos Group and its brands,
please visit: www.thecronosgroup.com.
Forward-looking Statements
This press release may contain information that
may constitute forward-looking information and forward-looking
statements within the meaning of applicable securities laws
(collectively, “Forward-Looking Statements”), which are based upon
our current internal expectations, estimates, projections,
assumptions and beliefs. All information that is not clearly
historical in nature may constitute Forward-Looking Statements. In
some cases, Forward-Looking Statements can be identified by the use
of forward-looking terminology such as “expect”, “likely”, “may”,
“will”, “should”, “intend”, “anticipate”, “potential”, “proposed”,
“estimate” and other similar words, expressions and phrases,
including negative and grammatical variations thereof, or
statements that certain events or conditions “may” or “will”
happen, or by discussion of strategy. Forward-Looking Statements
include estimates, plans, expectations, opinions, forecasts,
projections, targets, guidance or other statements that are not
statements of historical fact.
Forward-Looking Statements include, but are not
limited to, statements with respect to:
- the uncertainties associated with
the Covid-19 pandemic, including our ability, and the abilities of
our joint ventures and our suppliers and distributors, to
effectively deal with the restrictions, limitations and health
issues presented by the Covid-19 pandemic, the ability to continue
our production, distribution and sale of our products, and the use
of our products by consumers;
- laws and regulations and any
amendments thereto applicable to our business and the impact
thereof including uncertainty regarding the application of U.S.
state and federal law to U.S. hemp (including CBD) products and the
scope of any regulations by the U.S. Federal Drug Administration,
the U.S. Federal Trade Commission, the U.S. Patent and Trademark
Office and any state equivalent regulatory agencies over U.S. hemp
(including CBD) products;
- expectations regarding the
regulation of the U.S. hemp industry in the U.S., including the
promulgation of regulations for the U.S. hemp industry by the U.S.
Department of Agriculture (the “USDA”);
- the grant, renewal and impact of
any license or supplemental license to conduct activities with
cannabis or any amendments thereof;
- our international activities and
joint venture interests, including required regulatory approvals
and licensing, anticipated costs and timing, and expected
impact;
- the ability to successfully create
and launch brands and further create, launch and scale U.S.
hemp-derived consumer products, including through the acquisition
of four Redwood Holding Group, LLC operating subsidiaries (the
"Redwood Acquisition") and cannabis products in jurisdictions where
such products are legal and that we currently operate in;
- the benefits, viability, safety,
efficacy, dosing and social acceptance of cannabis including CBD
and other cannabinoids;
- the anticipated benefits and impact
of the Altria Group Inc.’s ("Altria") C$2.4 billion (approximately
$1.8 billion) investment in us (the “Altria Investment”);
- the potential exercise of the
warrant held by Altria, pre-emptive rights and/or top-up rights in
connection with the Altria Investment, including proceeds to us
that may result therefrom;
- expectations regarding the use of
proceeds of equity financings, including the proceeds from the
Altria Investment;
- the legalization of the use of
cannabis for medical or adult-use in jurisdictions outside of
Canada, the related timing and impact thereof and our intentions to
participate in such markets, if and when such use is
legalized;
- expectations regarding the
potential success of, and the costs and benefits associated with,
our joint ventures, strategic alliances and equity investments,
including the strategic partnership with Ginkgo Bioworks,
Inc.;
- our ability to execute on our
strategy and the anticipated benefits of such strategy;
- the ongoing impact of the
legalization of additional cannabis product types and forms for
adult-use in Canada, including federal, provincial, territorial and
municipal regulations pertaining thereto, the related timing and
impact thereof and our intentions to participate in such
markets;
- the future performance of our
business and operations;
- our competitive advantages and
business strategies;
- the competitive conditions of the
industry;
- the expected growth in the number
of customers using our products;
- our ability or plans to identify,
develop, commercialize or expand our technology and research and
development (“R&D”) initiatives in cannabinoids, or the success
thereof;
- expectations regarding acquisitions
and the anticipated benefits therefrom, including the Redwood
Acquisition and the acquisition of certain assets from Apotex
Fermentation Inc.;
- expectations regarding revenues,
expenses and anticipated cash needs;
- expectations regarding cash flow,
liquidity and sources of funding;
- expectations regarding capital
expenditures;
- the expansion of our production and
manufacturing, the costs and timing associated therewith and the
receipt of applicable production and sale licenses;
- the expected growth in our growing,
production and supply chain capacities;
- expectations regarding the
resolution of litigation and other legal and regulatory
proceedings, reviews and investigations;
- expectations with respect to future
production costs;
- expectations with respect to future
sales and distribution channels;
- the expected methods to be used to
distribute and sell our products;
- our future product offerings;
- the anticipated future gross
margins of our operations;
- accounting standards and
estimates;
- our ability to timely and
effectively remediate material weaknesses in our internal control
over financial reporting;
- expectations regarding our
distribution network; and
- expectations regarding the costs
and benefits associated with our contracts and agreements with
third parties, including under our third-party supply and
manufacturing agreements.
Certain of the Forward-Looking Statements
contained herein concerning the industries in which we conduct our
business are based on estimates prepared by us using data from
publicly available governmental sources, market research, industry
analysis and on assumptions based on data and knowledge of these
industries, which we believe to be reasonable. However, although
generally indicative of relative market positions, market shares
and performance characteristics, such data is inherently imprecise.
The industries in which we conduct our business involve risks and
uncertainties that are subject to change based on various factors,
which are described further below.
The Forward-Looking Statements contained herein
are based upon certain material assumptions that were applied in
drawing a conclusion or making a forecast or projection, including:
(i) our ability, and the abilities of our joint ventures and our
suppliers and distributors, to effectively deal with the
restrictions, limitations and health issues presented by the
Covid-19 pandemic and the ability to continue our production,
distribution and sale of our products; (ii) management’s
perceptions of historical trends, current conditions and expected
future developments; (iii) our ability to generate cash flow from
operations; (iv) general economic, financial market, regulatory and
political conditions in which we operate; (v) the production and
manufacturing capabilities and output from our facilities and our
joint ventures, strategic alliances and equity investments; (vi)
consumer interest in our products; (vii) competition; (viii)
anticipated and unanticipated costs; (ix) government regulation of
our activities and products including but not limited to the areas
of taxation and environmental protection; (x) the timely receipt of
any required regulatory authorizations, approvals, consents,
permits and/or licenses; (xi) our ability to obtain qualified
staff, equipment and services in a timely and cost-efficient
manner; (xii) our ability to conduct operations in a safe,
efficient and effective manner; (xiii) our ability to realize
anticipated benefits, synergies or generate revenue, profits or
value from our recent acquisitions into our existing operations;
and (xiv) other considerations that management believes to be
appropriate in the circumstances. While our management considers
these assumptions to be reasonable based on information currently
available to management, there is no assurance that such
expectations will prove to be correct.
By their nature, Forward-Looking Statements are
subject to inherent risks and uncertainties that may be general or
specific and which give rise to the possibility that expectations,
forecasts, predictions, projections or conclusions will not prove
to be accurate, that assumptions may not be correct and that
objectives, strategic goals and priorities will not be achieved. A
variety of factors, including known and unknown risks, many of
which are beyond our control, could cause actual results to differ
materially from the Forward-Looking Statements in this press
release and other reports we file with, or furnish to, the SEC and
other regulatory agencies and made by our directors, officers,
other employees and other persons authorized to speak on our
behalf. Such factors include, without limitation, the risk that the
COVID-19 pandemic may disrupt our operations and those of our
suppliers and distribution channels and negatively impact the use
of our products; the risk that cost savings and any other synergies
from the Altria Investment may not be fully realized or may take
longer to realize than expected; disruption of production,
distribution and sales as a result of the COVID-19 pandemic and any
adverse effects the COVID-19 pandemic has on the use of our
products; disruption from the Altria Investment making it more
difficult to maintain relationships with customers, employees or
suppliers; future levels of revenues; consumer demand for cannabis
and U.S. hemp products; our ability to manage disruptions in credit
markets or changes to our credit rating; future levels of capital,
environmental or maintenance expenditures, general and
administrative and other expenses; the success or timing of
completion of ongoing or anticipated capital or maintenance
projects; business strategies, growth opportunities and expected
investment; the adequacy of our capital resources and liquidity,
including but not limited to, availability of sufficient cash flow
to execute our business plan (either within the expected timeframe
or at all); the potential effects of judicial, regulatory or other
proceedings on our business, financial condition, results of
operations and cash flows; volatility in and/or degradation of
general economic, market, industry or business conditions;
compliance with applicable environmental, economic, health and
safety, energy and other policies and regulations and in particular
health concerns with respect to vaping and the use of cannabis and
U.S. hemp products in vaping devices; the anticipated effects of
actions of third parties such as competitors, activist investors or
federal (including U.S. federal), state, provincial, territorial or
local regulatory authorities, self-regulatory organizations,
plaintiffs in litigation or persons threatening litigation; changes
in regulatory requirements in relation to our business and
products; and the factors discussed under the heading “Risk
Factors” in the Company's Annual Report on Form 10-K for the year
ended December 31, 2019 (as amended) and the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 2020. Readers
are cautioned to consider these and other factors, uncertainties
and potential events carefully and not to put undue reliance on
Forward-Looking Statements.
Forward-Looking Statements are provided for the
purposes of assisting the reader in understanding our financial
performance, financial position and cash flows as of and for
periods ended on certain dates and to present information about
management’s current expectations and plans relating to the future,
and the reader is cautioned that the Forward-Looking Statements may
not be appropriate for any other purpose. While we believe that the
assumptions and expectations reflected in the Forward-Looking
Statements are reasonable based on information currently available
to management, there is no assurance that such assumptions and
expectations will prove to have been correct. Forward-Looking
Statements are made as of the date they are made and are based on
the beliefs, estimates, expectations and opinions of management on
that date. We undertake no obligation to update or revise any
Forward-Looking Statements, whether as a result of new information,
estimates or opinions, future events or results or otherwise or to
explain any material difference between subsequent actual events
and such Forward-Looking Statements. The Forward-Looking Statements
contained in this press release and other reports we file with, or
furnish to, the SEC and other regulatory agencies and made by our
directors, officers, other employees and other persons authorized
to speak on our behalf are expressly qualified in their entirety by
these cautionary statements.
As used in this press release, “CBD” means
cannabidiol and “U.S. hemp” has the meaning given to the term
“hemp” in the U.S. Agricultural Improvement Act of 2018, including
hemp-derived CBD.
Cronos Group Inc. |
Condensed Consolidated Balance Sheets |
As of March 31, 2020 and December 31,
2019 |
(In thousands of U.S. dollars, except share amounts,
unaudited) |
|
As of |
|
March 31, 2020 |
|
December 31, 2019 |
Assets |
|
|
|
Current assets |
|
|
|
Cash and cash equivalents |
$ |
1,128,396 |
|
|
|
$ |
1,199,693 |
|
|
Short-term investments |
206,230 |
|
|
|
306,347 |
|
|
Accounts receivable(1) |
3,404 |
|
|
|
4,638 |
|
|
Other receivables |
7,642 |
|
|
|
7,232 |
|
|
Current portion of loans receivable |
3,911 |
|
|
|
4,664 |
|
|
Prepaids and other assets |
11,079 |
|
|
|
9,395 |
|
|
Inventory |
43,118 |
|
|
|
38,043 |
|
|
Total current assets |
1,403,780 |
|
|
|
1,570,012 |
|
|
Investments in equity accounted investees |
1,089 |
|
|
|
557 |
|
|
Advances to joint ventures |
17,079 |
|
|
|
19,437 |
|
|
Loan receivable, net |
54,147 |
|
|
|
44,967 |
|
|
Property, plant and equipment |
154,164 |
|
|
|
161,809 |
|
|
Right-of-use assets |
10,379 |
|
|
|
6,546 |
|
|
Intangible assets |
72,599 |
|
|
|
72,320 |
|
|
Goodwill |
214,689 |
|
|
|
214,794 |
|
|
Total
assets |
$ |
1,927,926 |
|
|
|
$ |
2,090,442 |
|
|
|
|
|
|
Liabilities |
|
|
|
Current liabilities |
|
|
|
Accounts payable and other liabilities |
$ |
34,290 |
|
|
|
$ |
35,301 |
|
|
Current portion of lease obligation |
1,057 |
|
|
|
427 |
|
|
Derivative liabilities |
166,176 |
|
|
|
297,160 |
|
|
Total current liabilities |
201,523 |
|
|
|
332,888 |
|
|
Due to non-controlling interests |
1,681 |
|
|
|
1,844 |
|
|
Lease obligation |
9,454 |
|
|
|
6,680 |
|
|
Total
liabilities |
$ |
212,658 |
|
|
|
$ |
341,412 |
|
|
|
|
|
|
Shareholders’
equity |
|
|
|
Share capital(2) |
$ |
563,165 |
|
|
|
$ |
561,165 |
|
|
Additional paid-in capital |
25,483 |
|
|
|
23,234 |
|
|
Retained earnings (accumulated deficit) |
1,213,686 |
|
|
|
1,137,646 |
|
|
Accumulated other comprehensive income (loss) |
(85,877 |
) |
|
|
27,838 |
|
|
Total equity attributable to shareholders of Cronos Group |
1,716,457 |
|
|
|
1,749,883 |
|
|
Non-controlling interests |
(1,189 |
) |
|
|
(853 |
) |
|
Total shareholders’
equity |
1,715,268 |
|
|
|
1,749,030 |
|
|
Total liabilities and
shareholders’ equity |
$ |
1,927,926 |
|
|
|
$ |
2,090,442 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net of current expected credit loss (“CECL”)
of $141 as of March 31, 2020 (December 31, 2019 – $136) |
(2) Authorized for issuance as of March 31, 2020:
unlimited (December 31, 2019 – unlimited). Shares issued as of
March 31, 2020: 348,817,472 (as of December 31, 2019:
348,817,472) |
Cronos Group Inc. |
|
|
|
Condensed Consolidated Statements of Net
Income and Comprehensive Income (Loss) |
For the three months ended March 31,
2020 and 2019 |
(In thousands of U.S. dollars, except share
amounts, unaudited) |
|
|
Three months ended March 31, |
|
2020 |
|
2019 |
Net revenue, before excise taxes |
$ |
9,344 |
|
|
|
$ |
3,391 |
|
|
Excise taxes |
(912 |
) |
|
|
(387 |
) |
|
Net revenue |
8,432 |
|
|
|
3,004 |
|
|
Cost of sales |
6,946 |
|
|
|
1,449 |
|
|
Inventory write-down |
7,962 |
|
|
|
— |
|
|
Gross profit
(loss) |
(6,476 |
) |
|
|
1,555 |
|
|
Operating
expenses |
|
|
|
Sales and marketing |
7,112 |
|
|
|
1,128 |
|
|
Research and development |
4,590 |
|
|
|
1,171 |
|
|
General and administrative |
23,759 |
|
|
|
7,293 |
|
|
Share-based payments |
2,436 |
|
|
|
1,771 |
|
|
Depreciation and amortization |
687 |
|
|
|
318 |
|
|
Total operating expenses |
38,584 |
|
|
|
11,681 |
|
|
Operating
loss |
(45,060 |
) |
|
|
(10,126 |
) |
|
Other income
(expense) |
|
|
|
Interest income |
7,751 |
|
|
|
2,087 |
|
|
Share of loss from investments in equity accounted investees |
(1,172 |
) |
|
|
(198 |
) |
|
Gain on revaluation of derivative liabilities |
113,368 |
|
|
|
328,216 |
|
|
Financing and transaction costs |
— |
|
|
|
(22,233 |
) |
|
Other income |
794 |
|
|
|
16,243 |
|
|
Total other income |
120,741 |
|
|
|
324,115 |
|
|
Income before income taxes |
75,681 |
|
|
|
313,989 |
|
|
Income tax recovery
(expense) |
— |
|
|
|
— |
|
|
Net income |
$ |
75,681 |
|
|
|
$ |
313,989 |
|
|
Net income (loss)
attributable to: |
|
|
|
Cronos Group |
$ |
76,040 |
|
|
|
$ |
314,092 |
|
|
Non-controlling interests |
(359 |
) |
|
|
(103 |
) |
|
|
$ |
75,681 |
|
|
|
$ |
313,989 |
|
|
Other comprehensive
income (loss) |
|
|
|
Foreign exchange gain (loss) on translation |
$ |
(113,692 |
) |
|
|
$ |
3,898 |
|
|
Total other comprehensive income (loss) |
(113,692 |
) |
|
|
3,898 |
|
|
Comprehensive income
(loss) |
$ |
(38,011 |
) |
|
|
$ |
317,887 |
|
|
Comprehensive income
(loss) attributable to: |
|
|
|
Cronos Group |
$ |
(37,675 |
) |
|
|
$ |
317,987 |
|
|
Non-controlling interests |
(336 |
) |
|
|
(100 |
) |
|
|
$ |
(38,011 |
) |
|
|
$ |
317,887 |
|
|
Net income per
share |
|
|
|
Basic |
$ |
0.22 |
|
|
|
$ |
1.43 |
|
|
Diluted |
0.20 |
|
|
|
0.33 |
|
|
Weighted average number
of outstanding shares |
|
|
|
Basic |
348,817,472 |
|
|
|
218,949,590 |
|
|
Diluted |
375,574,354 |
|
|
|
271,086,575 |
|
|
Cronos Group
Inc. |
|
Condensed
Consolidated Statements of Cash Flows |
For the three months
ended March 31, 2020 and 2019 |
|
(In thousands of
U.S. dollars, except share amounts, unaudited) |
|
Three months ended March 31, |
|
2020 |
|
2019 |
Operating
activities |
|
|
|
Net income (loss) |
$ |
75,681 |
|
|
|
$ |
313,989 |
|
|
Items not affecting cash: |
|
|
|
Inventory write-down |
7,962 |
|
|
|
— |
|
|
Share-based payments |
2,436 |
|
|
|
1,771 |
|
|
Depreciation and amortization |
1,162 |
|
|
|
494 |
|
|
Share of net loss from investments in equity accounted
investees |
1,172 |
|
|
|
198 |
|
|
Gain on revaluation of derivative liabilities |
(113,368 |
) |
|
|
(328,216 |
) |
|
Gain on disposal of other investments |
(781 |
) |
|
|
(15,498 |
) |
|
Loss (gain) on unrealized foreign exchange |
(412 |
) |
|
|
51 |
|
|
Provision for doubtful accounts |
2,068 |
|
|
|
— |
|
|
Non-cash sales and marketing |
1,821 |
|
|
|
— |
|
|
Other, net |
(1,157 |
) |
|
|
(745 |
) |
|
Net changes in non-cash working capital |
(15,482 |
) |
|
|
14,118 |
|
|
Cash flows used in operating activities |
(38,898 |
) |
|
|
(13,838 |
) |
|
Investing
activities |
|
|
|
Purchase of short-term investments |
(126,514 |
) |
|
|
— |
|
|
Proceeds from disposal of short-term investments |
206,847 |
|
|
|
— |
|
|
Investments in equity accounted investees |
— |
|
|
|
(1,658 |
) |
|
Proceeds from sale of other investments |
781 |
|
|
|
19,614 |
|
|
Advances to joint ventures |
— |
|
|
|
(11,893 |
) |
|
Purchase of property, plant and equipment |
(6,411 |
) |
|
|
(10,119 |
) |
|
Payment of accrued interest on construction loan payable |
— |
|
|
|
(89 |
) |
|
Purchase of intangible assets |
(1,105 |
) |
|
|
(38 |
) |
|
Advances on loans receivable |
(14,512 |
) |
|
|
— |
|
|
Cash flows provided (used) in investing activities |
59,086 |
|
|
|
(4,183 |
) |
|
Financing
activities |
|
|
|
Increase in bank indebtedness |
— |
|
|
|
316 |
|
|
Advance from non-controlling interests |
— |
|
|
|
84 |
|
|
Repayment of lease obligations |
(448 |
) |
|
|
(23 |
) |
|
Proceeds from Altria Investment |
— |
|
|
|
1,809,556 |
|
|
Proceeds from exercise of warrants and options |
— |
|
|
|
889 |
|
|
Withholding taxes paid on share appreciation rights |
— |
|
|
|
(411 |
) |
|
Share issuance costs |
— |
|
|
|
(3,642 |
) |
|
Repayment of construction loan payable |
— |
|
|
|
(15,971 |
) |
|
Advance under Credit Facility |
— |
|
|
|
48,715 |
|
|
Repayment of Credit Facility |
— |
|
|
|
(48,309 |
) |
|
Cash flows provided (used) by financing activities |
(448 |
) |
|
|
1,791,204 |
|
|
Effect of foreign currency
translation on cash and cash equivalents |
(91,037 |
) |
|
|
14,421 |
|
|
Increase (decrease) in cash and
cash equivalents |
(71,297 |
) |
|
|
1,787,604 |
|
|
Cash and cash equivalents,
beginning of period |
1,199,693 |
|
|
|
23,927 |
|
|
Cash and cash equivalents, end of period |
$ |
1,128,396 |
|
|
|
$ |
1,811,531 |
|
|
Supplemental cash flow
information |
|
|
|
Interest paid |
7 |
|
|
|
507 |
|
|
Interest received |
7,758 |
|
|
|
— |
|
|
Non-GAAP Measures
In addition to its financial results reported in
accordance with accounting principles generally recognized in the
U.S. ("GAAP"), the Company uses certain measures that are not
recognized under GAAP such as adjusted operating loss, adjusted
operating loss by business segment and adjusted earnings before
interest, tax, depreciation and amortization ("Adjusted EBITDA").
These financial measures do not have a standardized meaning
prescribed by GAAP and are therefore unlikely to be comparable to
similar measures presented by other companies. Rather, these
measures are provided as a supplement to those GAAP measures to
provide additional information regarding our results of operations
from management’s perspective. Accordingly, non-GAAP measures
should not be considered a substitute for, or superior to, the
financial information prepared and presented in accordance with
GAAP. All non-GAAP measures presented in this press release are
reconciled to their closest reported GAAP measure. Reconciliations
of historical adjusted financial measures to corresponding GAAP
measures are provided below.
Adjusted operating lossManagement reviews
operating loss on an adjusted basis, which excludes certain income
and expense items that management believes are not part of
underlying operations. These items typically include non-recurring
charges such as our internal review costs related to the
restatement of our 2019 interim financial statements. Management
does not view these items to be part of underlying results as they
may be highly variable, may be infrequent, are difficult to predict
and can distort underlying business trends and results.
Management believes that adjusted operating loss
provides useful insight into underlying business trends and results
and provides a more meaningful comparison of year-over-year
results. Management uses adjusted operating loss for planning,
forecasting and evaluating business and financial performance,
including allocating resources and evaluating results relative to
employee compensation targets.
(In thousands of USD) |
|
First Quarter |
|
First Quarter |
|
|
2020 |
|
2019 |
Reported operating loss |
|
$ |
(45,060 |
) |
|
|
$ |
(10,126 |
) |
|
Adjustments |
|
|
|
|
Internal review costs related to restatement of 2019 interim
financial statements |
|
4,407 |
|
|
|
— |
|
|
Adjusted operating loss |
|
$ |
(40,653 |
) |
|
|
$ |
(10,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating loss by business
segmentManagement reviews operating loss by business segment, which
excludes corporate expenses, and adjusted operating loss by
business segment, which further excludes certain income and expense
items that management believes are not part of the underlying
segment’s operations. Corporate expenses are expenses that relate
to the consolidated business and not to an individual operating
segment while the income and expense items typically include
non-recurring charges such as our internal review costs related to
the restatement of our 2019 interim financial statements.
Management does not view the income and expense items above to be
part of underlying results of the segment as they may be highly
variable, may be unusual or infrequent, are difficult to predict
and can distort underlying business trends and results.
Management believes that adjusted operating loss
by business segment provides useful insight into underlying segment
trends and results and will provide a more meaningful comparison of
year-over-year results, going forward. Management uses adjusted
operating loss by business segment for planning, forecasting and
evaluating segment performance, including allocating resources and
evaluating results relative to employee compensation.
(In thousands of USD) |
For the three months ended March 31,
2020 |
|
US |
|
Rest ofWorld |
|
TotalSegments |
|
CorporateExpenses |
|
Total |
Reported operating loss |
$ |
(6,523 |
) |
|
|
$ |
(31,867 |
) |
|
|
$ |
(38,390 |
) |
|
|
$ |
(6,670 |
) |
|
|
$ |
(45,060 |
) |
|
Adjustments |
|
|
|
|
|
|
|
|
|
Internal review costs related to restatement of 2019 interim
financial statements |
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,407 |
|
|
|
4,407 |
|
|
Adjusted operating loss |
$ |
(6,523 |
) |
|
|
$ |
(31,867 |
) |
|
|
$ |
(38,390 |
) |
|
|
$ |
(2,263 |
) |
|
|
$ |
(40,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAAdjusted earnings before
interest, tax, depreciation and amortization (“Adjusted EBITDA”) is
used by management as a supplemental measure to review and assess
operating performance and trends on a comparable basis with the
rest of the industry, although our measure of Adjusted EBITDA may
not be directly comparable to similar measures used by other
companies.
Management reviews EBITDA on an adjusted basis,
which excludes net income attributable to non-controlling
interests, and special items. Special items consist of financing
and transaction costs, other non-cash gains (losses) and other
unforeseeable, non-recurring charges which management has described
below.
(in thousands of USD) |
|
For the three months ended March 31, |
|
|
2020 |
|
2019 |
Net income (loss) |
|
$ |
75,681 |
|
|
|
$ |
313,989 |
|
|
Adjustments |
|
|
|
|
Interest income |
|
(7,751 |
) |
|
|
(2,087 |
) |
|
Share of loss from investments in equity accounted investees |
|
1,172 |
|
|
|
198 |
|
|
Gain on revaluation of derivative liabilities |
|
(113,368 |
) |
|
|
(328,216 |
) |
|
Financing and transaction costs |
|
— |
|
|
|
22,233 |
|
|
Other income |
|
(794 |
) |
|
|
(16,243 |
) |
|
Internal review costs related to restatement of 2019 interim
financial statements |
|
4,407 |
|
|
|
— |
|
|
Share-based payments |
|
2,436 |
|
|
|
1,771 |
|
|
Adjusted EBIT |
|
(38,217 |
) |
|
|
(8,355 |
) |
|
Adjustments |
|
|
|
|
Depreciation and amortization |
|
1,162 |
|
|
|
494 |
|
|
Adjusted EBITDA |
|
$ |
(37,055 |
) |
|
|
$ |
(7,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Special Items
Management does not view any of the following
special items to be part of the underlying results as they may be
highly variable, may be infrequent, may be unpredictable and may
distort underlying business results and trends.
Financing and transaction costs1. During the
three months ended March 31, 2020, there were no financing or
transaction costs.2. During the three months ended March 31,
2019, the Company recorded pre-tax charges of $22.2 million
primarily related to the Altria Investment.
Gain on revaluation of derivative liabilities1.
During the three months ended March 31, 2020, Cronos Group
recorded a pre-tax unrealized gain of $113.4 million primarily
resulting from the non-cash change in the fair value of financial
derivative liabilities associated with the investment by Altria.2.
During the three months ended March 31, 2019, the unrealized
gain resulting from the non-cash change in the fair value of the
financial derivative liabilities was $328.2 million.
Internal Review Costs1. During the three months
ended March 31, 2020, the Company incurred $4.4 million in
internal review cost associated with the restatement of the
Company's interim financial statements in 2019.
Foreign currency exchange
rates
All currency amounts in this Press
Release are stated in U.S. dollars (“USD”), which is
our reporting currency, unless otherwise noted. All references to
“dollars” or “$” are to USD. The assets and liabilities
of the Company's foreign operations are translated into USD at the
exchange rate in effect as of March 31, 2020 and December 31,
2019. Transactions affecting shareholders' equity are translated at
historical foreign exchange rates. The consolidated statements of
net income (loss) and comprehensive income (loss) and the
consolidated statements of cash flows of the Company's foreign
operations are translated into USD by applying the average foreign
exchange rate in effect for the reporting period.
The exchange rates used to translate from USD to
Canadian dollars (“C$”) is shown below:
(Exchange rates are shown as
C$ per $) |
As of |
|
March 31, 2020 |
|
December 31, 2019 |
|
March 31, 2019 |
Average rate |
1.3437 |
|
1.3268 |
|
1.3296 |
Spot rate |
1.4062 |
|
1.2990 |
|
1.3349 |
For further information, please
contact:Anna ShlimakInvestor RelationsTel: (416)
504-0004investor.relations@thecronosgroup.com
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