Cronos Group continues progress through second quarter despite challenges.
Cronos Group Inc. (NASDAQ: CRON), today announces its 2020 second-quarter business results.
In the second quarter of 2020, we continued our progress despite unprecedented shifts in our industry and the global economy.Mike Gorenstein, CEO of Cronos Group
"We officially entered the Israeli medical cannabis market, with Cronos Israel commencing the sale of PEACE NATURALS™ branded dried flower products to medical patients. During these extraordinary times, it is very encouraging to see that we are making progress against our strategy across our global footprint," said Mike Gorenstein, CEO of Cronos Group.
"While following safety guidelines, our employees are finding new and creative ways to keep our production, manufacturing, and R&D facilities operating, and we are bringing new products and brands to markets across the globe. Cronos Group was founded on the mission to improve people's lives by unlocking the full potential of cannabis and our Company is very proud to be at the forefront of providing safe access and high-quality products to patients and consumers around the world."
Second Quarter 2020
- Net revenue of $9.9 million in Q2 2020 increased by $2.2 million from Q2 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 in the Canadian market, including both adult-use and direct-to-consumer, and the inclusion of the Redwood acquisition in our financial results, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.
- Gross profit (loss) was $(3.0) million in Q2 2020 as compared to $4.1 million in Q2 2019. The decrease year-over-year was primarily driven by an increase in cost of sales driven by a higher volume of adult-use sales and the lack of wholesale revenue, as well as an inventory write-down of $3.1 million on dried cannabis and cannabis extracts.
- The Company incurred an inventory write-down of $3.1 million, on dried cannabis and cannabis extracts, primarily driven by cannabis product price compression in the Canadian market. If we were to adjust for the effects of the inventory write-downs, gross profit in Q2 2020 would have been $0.1 million, representing a gross margin of 1%. We anticipate further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.
- Reported operating loss of $34.8 million in Q2 2020 increased by $18.0 million from Q2 2019. The change year-over-year was primarily driven by a decrease in gross profit, an increase in general and administrative expenses as a result of increased headcount, review costs and costs related to the Company's responses to requests for information from various regulatory authorities related to the restatement of our 2019 interim financial statements totaling $3.5 million, higher sales and marketing costs related to brand development, and research and development costs related to increased spending at the Cronos Device Labs R&D center and upscaling activities at Cronos Fermentation.
During the quarter, we continued to expand distribution of cannabis vaporizer devices in the Canadian adult-use market under the COVE™ and Spinach™ brands, and for the direct-to-consumer market in Canada under the PEACE NATURALS™ brand.
In June 2020, Cronos Group's luxury hemp-derived CBD brand, Lord Jones™, launched the Lord Jones Limited Edition Pride hemp-derived CBD Gumdrops to the United States market. These special edition gumdrops were designed to honor the LGBTQ community with a percentage of profits donated to the West Hollywood-based group, LA Pride. In addition, Lord Jones™ launched a new product size for the best-selling Lord Jones CBD Body Lotion, which is now available in a larger 100ml bottle.
Global Sales and Distribution
In June 2020, following the successful export of bulk dried flower from Cronos Group to Cronos Israel in April 2020, Cronos Israel commenced sales of PEACE NATURALS™ branded cannabis to the Israeli medical market. Cronos Israel will continue to build distribution of dried flower while it awaits final licensing for the sale of oils and pre-rolls, which are currently expected to be received later in 2020. Cronos Israel will seek to continue to build its distribution network and brand presence in this rapidly growing medical market.
Global Supply Chain
During the second quarter of 2020, Natuera, the Company'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, continued to achieve significant operational milestones. At the end of April 2020, Natuera completed its first harvest of a non-psychoactive (hemp) cultivar registered with the Colombian Agricultural Institute. Between May 2020 and July 2020, Natuera successfully completed three test exports of hemp-derived CBD extract to the U.S. for business development and R&D purposes.
With its extraction facility commencing operations in the first quarter of 2020, Natuera is currently focused on accessing new markets and product development, including developing additional bulk offerings of hemp-derived CBD distillate and water-soluble hemp-derived CBD solutions.
Subsequent to the second quarter, the Company successfully implemented a new enterprise resource planning system across the Canadian business. Cronos Group has also commenced work to broaden the reach of our ERP system to the U.S. business, which is currently expected to be launched in the first half of 2021. The new ERP system will be a meaningful component of the Company's internal control over financial reporting and is expected to enable us to realize efficiencies throughout our supply chain and operations.
Cronos Group continues to build and fortify a seasoned management team. Subsequent to the second quarter, following the resignation of Robert Rosenheck on July 20, 2020, Summer Frein was named General Manager of the U.S. hemp-derived CBD business, with oversight of sales, marketing, and operations. Ms. Frein joined Cronos Group in January of this year; however, she has worked with Cronos Group in various capacities since 2018. Previously, Ms. Frein was employed with Altria Group, Inc., where she led the Strategy and Business Development team's due diligence in the cannabis space which culminated in Cronos Group's strategic investment from Altria. Most recently, she was responsible for leading the Company's U.S. sales efforts, including managing brand and retail partnerships for Lord Jones™. Under Ms. Frein's leadership, the Company plans to further expand its U.S. hemp-derived business, including introducing new product formats under Lord Jones™ and launching new brands, that will target different retail channels and consumers.
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.
While the production and sale of cannabis have been generally allowed to continue in the various geographies in which Cronos Group operates, due to ongoing developments and uncertainty resulting from the COVID-19 pandemic, it has been difficult to predict the continuing impact that COVID-19 will have on the Company. During the second quarter of 2020, the Company determined that there had been a material impact on the Company's revenue growth rate in the U.S. segment as a result of the effects from COVID-19. A significant number of the Company's retail customers experienced store closures in connection with COVID-19 which negatively impacted sales and demand in the segment. Further decreases in consumer demand, increases in COVID-19 case numbers in various states in the U.S. and extended periods of retail store closure could result in negative impacts on future operating results. As a result, the Company recorded $35 million of impairment charges on its U.S. reporting unit and $5 million of impairment charges on the Lord Jones™ brand.
Revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the three or six months ended June 30, 2020. 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 Company currently has sufficient inventory and supply of materials to meet current demand, although closures, quarantine requirements or other restrictions may impact business operations for third-party manufacturers, suppliers or vendors, which may, in turn, disrupt the Company's supply chain.
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.
Second Quarter 2020
- Net revenue of $7.7 million in Q2 2020 increased by $0.1 million from Q2 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market and sales resulting from the launch of cannabis vaporizers to the Canadian market, including both adult-use and direct-to-consumer, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.
- Gross profit (loss) was $(3.5) million in Q2 2020 as compared to $4.1 million in Q2 2019. The decrease year-over-year was primarily driven by an increase in cost of sales driven by a higher volume of adult-use sales and the lack of wholesale revenue, as well as an inventory write-down of $3.1 million on dried cannabis and cannabis extracts.
- The Company incurred an inventory write-down of $3.1 million, on dried cannabis and cannabis extracts, primarily driven by cannabis product price compression in the Canadian market. If we were to adjust for the effects of the inventory write-downs, gross profit (loss) in Q2 2020, would have been $(0.5) million, representing a gross margin of (6)%. We anticipate further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.
- Reported operating loss of $(22.1) million in Q2 2020 increased by $5.4 million from Q2 2019. The change year-over-year was primarily driven by a decrease in gross profit and an increase in research and development costs related to increased spending at the Cronos Device Labs R&D center and upscaling activities at Cronos Fermentation.
United States Results
Cronos Group's U.S. reporting segment includes results of the Company's operations for all brands and products in the U.S.
Second Quarter 2020
- Net revenue was $2.2 million in Q2 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 which has been somewhat restricted by the temporary closure of a significant number of customers' physical retail stores as a result of COVID-19 preventive measures.
- Gross profit was $0.6 million in Q2 2020, representing a gross margin of 27%. The sequential decline in gross margin from 50% in Q1 2020 was driven by an increase in labor costs due to premiums paid to our essential employees during the COVID-19 pandemic as well as increased discounts and promotions in the direct-to-consumer channel to drive online sales growth in an effort to offset the negative impact of retail channel customer closures due to COVID-19.
- Reported operating loss was $(5.6) million in Q2 2020. The loss was driven by a decrease in gross profit, 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 across a variety of functions.
To learn more about Cronos Group, visit the company HQ here.
Disclaimer: Past performance is not an indicator of future performance.
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