Cronos Group Reports 2020 Third Quarter Results

A surprising increase in revenue, but how long can Cronos survive without any profit?

Cronos Group Inc. (NASDAQ: CRON), today announces its 2020 third quarter business results.

"The opportunities before Cronos Group are more exciting than ever and I am honored to have brought the company to this important inflection point as we bring on Kurt Schmidt to serve as our new President and CEO," said Mike Gorenstein, Executive Chairman of Cronos Group. "We look forward to continuing to launch innovative cannabinoid products in Canada and to expand our portfolio of U.S. hemp-derived CBD brands. Internationally, we're pleased with the progress we have made in Israel and as regulations continue to evolve, we will look to establish ourselves as a leader in the markets in which we operate."

In such a short period of time, Mike and the Cronos team have achieved several impressive milestones Kurt Schmidt, President and CEO of Cronos Group

Mr Schmidt went on to say "From being the first pure-play cannabis company to list on the NASDAQ, to scaling operations worldwide, Cronos Group is well-positioned to continue to thrive. Joining as President and CEO is a unique opportunity for me to bring my expertise in building outstanding brands, high performance teams and results-driven organizations to Cronos Group. I look forward to helping this Company achieve many more exciting milestones."

Financial Results

(in thousands of U.S. dollars) Three months ended September 30, Change Nine months ended September 30, Change
  2020 2019 $ % 2020 2019 $ %
Net revenue                
United States $1,639   $675   $964   143 % $5,989   $675   $5,314   787 %
Rest of World 9,719   5,110   4,609   90 % 23,684   15,767   7,917   50 %
Consolidated net revenue 11,358   5,785   5,573   96 % 29,673   16,442   13,231   80 %
                 
Gross profit (loss) $(1,537)  $(3,137)  $1,600   (51)% $(10,935)  $2,511   $(13,446)  (535)%
Gross margin (14)% (54)%    40 pp (37)% 15 %    (52)pp
                 
Reported operating loss $(41,169)  $(30,698)  $(10,471)  34 % $(120,937)  $(57,539)  $(63,398)  110 %
Adjusted operating loss (i) (40,211)  (30,698)  (9,513)  31 % (112,113)  (57,539)  (54,574)  95 %
                 
Other Data                
Cash and cash equivalents (ii) 1,097,846   1,114,414   (16,568)  (1)%        
Short-term investments (ii) 202,883   390,538   (187,655)  (48)%        
Capital expenditures 8,330   16,808   (8,478)  (50)% 24,428   38,196   (13,768)  (36)%

 (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.

Third Quarter 2020

  • Net revenue of $11.4 million in Q3 2020 increased by $5.6 million from Q3 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market, the inclusion of the Redwood acquisition in our financial results and growth in the Israeli medical cannabis market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces in Q3 2020.
  • Gross loss of $1.5 million in Q3 2020 decreased by $1.6 million from Q3 2019. The decrease in losses year-over-year was primarily driven by an increase in net revenue and the gross profit contribution of the U.S. business segment. Offset by an increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower, and a decline in wholesale sales.
  • Reported operating loss of $41.2 million in Q3 2020 increased by $10.5 million from Q3 2019. The increase year-over-year was primarily driven by increased share-based payments related to separation agreements with certain Redwood employees, increased general and administrative expenses inclusive of review costs and costs related to the previously disclosed restatement of the Company's 2019 interim financial statements, higher sales and marketing costs related to brand development, and R&D spending, partially offset by a decrease in gross loss.

Business Updates

Brand Portfolio

Subsequent to the end of the third quarter of 2020, Cronos Group's U.S. segment launched a new hemp-derived CBD skincare and personal care brand called Happy Dance™, in partnership with Kristen Bell. Happy Dance™ products are made with CBD from premium full-spectrum hemp extract and provide consumers with high-quality skincare at an accessible price point. Happy Dance™ launched with three product offerings: All-Over Whipped Body Butter +CBD, Head-To-Toe Coconut Melt +CBD and Stress Away Bath Bomb +CBD, all of which are currently available online, with intentions to enter the brick and mortar channel in the future. Through the partnership with Ms. Bell, Cronos Group looks forward to future introductions of innovative products to the hemp-derived CBD market.

In October 2020, the U.S. segment also launched new full-spectrum tinctures under its hemp-derived CBD brand, Lord Jones™. The full-spectrum tinctures are available in two flavors, peppermint and orange. The U.S. segment anticipates launching a Lord Jones™ branded hemp-derived CBD infused Lip Balm in November 2020. The Whole Plant Formula CBD Lip Balm is expected to contain 25mg of U.S. hemp-derived CBD from full-spectrum hemp extract and other premium ingredients, including shea butter, mimosa wax, beeswax, and an oil blend to provide additional hydration.

Global Sales and Distribution

Cronos Israel has now received the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel. Subsequent to the end of the third quarter of 2020, in addition to the PEACE NATURALS™ branded dried flower currently sold in the Israeli medical market, Cronos Israel began selling PEACE NATURALS™ branded oils into the Israeli medical market.

Global Supply Chain

In the third quarter of 2020, Natuera continued to successfully complete imports of hemp-derived CBD extract to the U.S. for business development and R&D purposes. Natuera also completed its first export of hemp-derived CBD distillate to the United Kingdom for R&D purposes. Moreover, Natuera's wholly-owned subsidiary in Colombia was awarded four quotas by the Colombian government for psychoactive cannabis R&D production: (i) one cultivation quota to conduct field trials and characterize cultivars; (ii) one cultivation quota to conduct R&D related to the manufacture of derivatives; and (iii) two R&D manufacturing quotas to analyze and characterize THC products.

Intellectual Property Initiatives

In the third quarter of 2020, Cronos Device Labs expanded its scope for cannabinoid research and the R&D center was renamed to Cronos Research Labs. Cronos Group engages in both understanding the fundamental science behind the interactions of cannabinoids with each other and how those interactions can be leveraged to best deliver on the consumer's needs. Additionally, the Company partners with leading scientific institutions engaged in fundamental cannabis science to augment and accelerate the internal efforts. Cronos Group's work spans many aspects of cannabis research from strain development to growing conditions to extraction technology to biosynthesis to product development, all supported by advances in analytical sciences.  

Enterprise Initiatives

In the third quarter of 2020, the Company implemented a new enterprise resource planning ("ERP") 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.

Appointments

On September 9, 2020, Cronos Group expanded its leadership structure to drive its next phase of growth by appointing Kurt Schmidt as President and Chief Executive Officer. This move coincides with Mike Gorenstein's appointment to Executive Chairman. Mr. Schmidt brings deep experience in consumer products with decades of leadership experience in the U.S. and overseas. Mr. Schmidt previously served as Director and Chief Executive Officer of Blue Buffalo Company, Ltd. from 2012 through 2016. Prior to joining Blue Buffalo, Mr. Schmidt was Deputy Executive Vice President at Nestlé S.A., where he was responsible for Nestlé Nutrition, including several science-oriented and heavily regulated businesses. He also served as a member of Nestlé's Executive Committee. Mr. Schmidt joined Nestlé in 2007 as part of Nestlé's acquisition of Gerber Products Company, where he was the President and Chief Executive Officer from 2004 to 2007. Prior to Gerber, Mr. Schmidt held a variety of leadership roles at Kraft Foods, Inc.

In addition, the Company further bolstered its senior leadership team by adding Shannon Buggy as Senior Vice President, Global Head of People. Prior to joining Cronos Group, Ms. Buggy was the Senior Vice President of Global Human Resources for Nielsen where she led HR strategy for Nielsen Media. With over 25 years of experience, Ms. Buggy has a proven track record of leading and managing global human resources teams and driving excellence in talent acquisition, development, retention, employee relations, compensation, benefits, talent management and labor relations.

Additionally during the quarter, as previously disclosed, following the resignation of Robert Rosenheck on July 20, 2020, Summer Frein was named General Manager USA. 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, 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 both Lord Jones™ and Happy Dance™, 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 governmental authorities. During the third quarter of 2020, because of the effects from COVID-19 in the U.S. a significant number of the Company's retail customers continued to be challenged by permanent and temporary store closings. Those stores that are open are faced with operating at reduced staff levels, reduced opening hours and lower consumer foot traffic, which has continued in the third quarter to negatively impact sales and demand for our products in the U.S. segment. Revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the three or nine months ended September 30, 2020.

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 U.S.

(in thousands of U.S. dollars) Three months ended September 30, Change Nine months ended September 30, Change
  2020 2019 $ % 2020 2019 $ %
Cannabis flower $7,958   $4,266   $3,692   87 % $16,373   $12,187   $4,186   34 %
Cannabis extracts 1,504   825   679   82 % 6,821   3,463   3,358   97 %
Other 257   19   238   1,253 % 490   117   373   319 %
Net revenue 9,719   5,110   4,609   90 % 23,684   15,767   7,917   50 %
         
Gross profit (loss) $(2,203)  $(3,580)  $1,377   (38)% $(13,270)  $2,068   $(15,338)  (742)%
Gross margin (23)% (70)%    47 pp (56)% 13 %    (69)pp
             
Reported and adjusted operating loss $(17,999)  $(21,228)  $3,229   (15)% $(71,957)  $(48,069)  $(23,888)  50 %

 (i)  See "Non-GAAP Measures" for more information, including a reconciliation of adjusted operating loss.

Third Quarter 2020

  • Net revenue of $9.7 million in Q3 2020 increased by $4.6 million from Q3 2019. The increase year-over-year was primarily driven by continued growth in the adult-use Canadian cannabis market and growth in the Israeli medical cannabis market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces.
  • Gross loss of $2.2 million in Q3 2020 decreased by $1.4 million from Q3 2019. The decrease in losses year-over-year was primarily driven by an increase in net revenue, offset by an increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower and a decline in wholesale sales. The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.
  • Reported operating loss of $18.0 million in Q3 2020 decreased by $3.2 million from Q3 2019. The decrease in losses year-over-year was primarily driven by a decrease in general and administrative costs driven by a reclassification of $4.6 million to corporate expenses in Q3 2020, which had no effect on the Company's consolidated statement of net income (loss) and a decrease in gross loss, partially offset by an increase in R&D spending.

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.

(in thousands of U.S. dollars) Three months ended September 30, Change Nine months ended September 30, Change
  2020 2019 $ % 2020 2019 $ %
Net revenue $1,639   $675   $964   143 % $5,989   $675   $5,314   787 %
                 
Gross profit $666   $443   223   50 % $2,335   $443   1,892   427 %
Gross margin 41 % 66 %    (25)pp 39 % 66 %    (27)pp
                 
Reported operating loss $(12,191)  $(830)  $(11,361)  1,369 % $(24,289)  $(830)  $(23,459)  2,826 %

Third Quarter 2020

  • Net revenue of $1.6 million in Q3 2020 increased by $1.0 million from Q3 2019. The increase year-over-year was primarily driven by a full quarter of results in Q3 2020 as opposed to 25 days in Q3 2019.
  • Gross profit of $0.7 million in Q3 2020 increased by $0.2 million from Q3 2019. The increase year-over-year was primarily driven by an increase in net revenue, partially offset by increased discounts, sales and promotions and new product introductions.
  • Reported operating loss of $12.2 million in Q3 2020 increased by $11.4 million. The increase year-over-year was primarily driven by an increase in share-based payments related to separation agreements with certain Redwood employees, increased sales and marketing costs incurred in relation to the launch of new U.S. hemp-derived CBD products under the Lord Jones™ and Happy Dance™ brands and increased general and administrative expenses driven by salaries and wages to support the Company's growth strategy across a variety of functions, partially offset by an increase in gross profit.

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Disclaimer: Past performance is not an indicator of future performance.

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Mark Page
Mark Page

Mark is a UK born investing enthusiast based in Sydney. He has a keen eye for technical analysis and is paying close attention to the ongoing legalisation of cannabis for the health benefits, opportunities, and emergent industries that will follow.

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