ndustry-leading balance sheet with $841 million in cash and short-term investments
Increased 2023 operating expense savings target to $20 to $25 million
Announces additional initiatives to streamline supply chain and improve cash flow
Spinach® was top-10 in retail sales in every category it participates in – flower, edible, vape and pre-roll, in Q2 2023
TORONTO, Aug. 08, 2023 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos” or the “Company”), today announces its 2023 second quarter business results.
“I am proud of our team’s execution in the second quarter despite facing dynamic market conditions across the countries we operate in,” said Mike Gorenstein, Chairman, President and CEO, Cronos. “Our teams in Canada continued to push forward in the edibles category, maintaining our number one market share position while bringing innovation to our pre-roll and vape portfolios. Turning to Israel, despite the slowdown in patient growth and political unrest, our team stayed focused on successfully maintaining one of the top positions in the market, driven by our high-quality flower offerings and distribution in nearly all pharmacies. With the new regulations intended to create more accessibility for patients set to go into effect in Israel in December 2023, we continue to be excited about the runway for growth in that market.”
“While we execute on product innovation and revenue growth, we are simultaneously laser-focused on reducing costs across our organization,” continued Mr. Gorenstein. “Our cost reduction efforts and improved balance sheet management continue to yield an improvement in cash flow. Having the best balance sheet in the industry allows us to be patient and selective with our growth initiatives, and you will continue to see a methodical approach to growth. We will continue to push forward on new market growth opportunities and expand our portfolio of borderless products to be ready for new markets as they open.”
Consolidated Financial Results
In the second quarter of 2023, the Company exited its U.S. hemp-derived CBD operations. The exit of the U.S. operations represented a strategic shift, and as such, qualifies for reporting as discontinued operations in our condensed consolidated statements of net loss and comprehensive income (loss). Prior period amounts have been reclassified to reflect the discontinued operations classification of the U.S. operations.
The tables below set forth our condensed consolidated results of continuing operations, expressed in thousands of U.S. dollars for the periods presented. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods.
| (in thousands of USD) | Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||
| Consolidated net revenue | 19,021 | 21,602 | (2,581 | ) | (12 | ) | % | 38,516 | 44,307 | (5,791 | ) | (13 | ) | % | |||||||||||||||||||||
| Cost of sales | 15,922 | 17,280 | (1,358 | ) | (8 | ) | % | 32,490 | 33,275 | (785 | ) | (2 | ) | % | |||||||||||||||||||||
| Gross profit | $ | 3,099 | $ | 4,322 | $ | (1,223 | ) | (28 | ) | % | $ | 6,026 | $ | 11,032 | $ | (5,006 | ) | (45 | ) | % | |||||||||||||||
| Gross margin(i) | 16 | % | 20 | % | N/A | (4 | ) | pp | 16 | % | 25 | % | N/A | (9 | ) | pp | |||||||||||||||||||
| Net income (loss)(ii) | $ | (5,663 | ) | $ | (17,527 | ) | $ | 11,864 | 68 | % | $ | (23,698 | ) | $ | (45,892 | ) | $ | 22,194 | 48 | % | |||||||||||||||
| Adjusted EBITDA(iii) | $ | (15,905 | ) | $ | (16,643 | ) | $ | 738 | 4 | % | $ | (31,587 | ) | $ | (32,094 | ) | $ | 507 | 2 | % | |||||||||||||||
| Other Data | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents(iv) | $ | 409,428 | $ | 789,543 | $ | (380,115 | ) | (48 | ) | % | |||||||||||||||||||||||||
| Short-term investments(iv) | 431,510 | 155,352 | 276,158 | 178 | % | ||||||||||||||||||||||||||||||
| Capital expenditures(v) | 502 | 1,905 | (1,403 | ) | (74 | ) | % | 1,306 | 2,639 | (1,333 | ) | (51 | ) | % |
(i) Gross margin is defined as gross profit divided by net revenue.
(ii) Net income (loss) of $(5.7) million in Q2 2023 improved by $11.9 million from Q2 2022. The improvement year-over-year was primarily driven by increased interest income and the reduction in operating expenses.
(iii) See “Non-GAAP Measures” for more information, including a reconciliation of adjusted earnings (loss) before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) to net income (loss).
(iv) Dollar amounts are as of the last day of the period indicated.
(v) Capital expenditures represent component information of investing activities and is defined as the sum of purchase of property, plant and equipment, and purchase of intangible assets.
Second Quarter 2023
- Net revenue of $19.0 million in Q2 2023 decreased by $2.6 million from Q2 2022. The decrease was primarily due to lower cannabis flower sales in Israel due to competitive activity, the slowdown in patient permit authorizations and political unrest, and an adverse price/mix in the Canadian cannabis flower category driving increased excise tax payments as a percent of revenue. Furthermore, the weakened Canadian dollar and Israeli shekel against the U.S. dollar during the current period adversely impacted results.
- Gross profit of $3.1 million in Q2 2023 decreased by $1.2 million from Q2 2022. The decrease was primarily driven by lower cannabis flower sales in Israel, and an adverse price/mix shift in cannabis flower sales in Canada.
- Adjusted EBITDA of $(15.9) million in Q2 2023 improved by $0.7 million from Q2 2022. The improvement year-over-year was primarily driven by decreases in general and administrative expenses and research and development expenses due to the Company’s cost savings initiatives.
Business Updates
Guidance and Outlook
The Company has decided to discontinue providing net revenue guidance and to withdraw our previously announced net revenue target of $100 to $110 million for full-year 2023. The discontinuance of providing net revenue guidance reflects turbulent market conditions beyond previous expectations in the markets in which we operate, specifically, increasing political unrest and stagnant patient growth in Israel, the decision to exit the U.S. business, and competitive activity in Canada. In addition, foreign exchange rates have had unfavorable impact on our net revenue.
Following a careful evaluation of the Company’s global supply chain, the Company announced today the planned wind-down of the Cronos Fermentation facility in Winnipeg, Manitoba, Canada, with intentions to list the facility for sale. Cronos expects to continue to operate the Cronos Fermentation facility with a phased reduction and planned exit by the end of 2023.
The Company previously increased its operating expense savings target for 2023 from $10 to $20 million to a new range of $20 to $25 million, primarily driven by savings in sales and marketing, general and administrative, and research and development.
Today, the Company announced incremental operating expense reductions across the organization. The Company anticipates that the exit of the Cronos Fermentation facility and the additional operating expense reductions announced today will capture an incremental $10 to $15 million in full-year savings in 2024. The organizational and cost savings initiatives are intended to position the Company to drive profitable and sustainable growth over time.
Cronos anticipates that the net change in cash, defined as the sum of cash and cash equivalents and short-term investments, for the last six months of fiscal year 2023 will decline by less than $5 to $10 million. This is an improvement to the previous guidance of declining less than $25 million in the remaining nine months of fiscal year 2023. The Company maintains its expectation that the net change in cash will be positive in 2024.
The fiscal year 2023 guidance assumes: (i) the Company will experience relatively consistent foreign exchange and interest rates; (ii) the general economic conditions and regulatory environment in the markets in which Cronos participates will not materially change; (iii) timely receipt of interest and principal payments on the GrowCo senior secured credit facility; (iv) anticipated interest income of approximately $20 to $25 million for the last six months of fiscal year 2023; (v) steady gross margin profile; and (vi) meeting our target for reducing our operating expenses by $20 to $25 million.
These statements are forward-looking and actual results may differ materially. Refer to “Forward-Looking Statements” below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.
Brand and Product Portfolio
The Spinach® brand continued to hold its number one market share position in the edibles category in Canada in Q2 2023. According to Hifyre data, Spinach® products had an approximate 14.5% market share in the edibles category expanding to approximately 21.8% within the gummy category alone across the SOURZ by Spinach® and Spinach FEELZ™ sub-brands. In the second quarter, we launched a new SOURZ by Spinach® flavor, Pink Lemonade, which is quickly climbing the market share ranks and is already our fourth-highest-ranked edible SKU.
Spinach® pre-rolls are ranked number eight in the category, up from number-14 in Q4 2022, according to Hifyre. Cronos launched several new offerings to bolster the Spinach® pre-roll portfolio, including Sonic Lemon Fuel pre-rolls, and three new infused pre-rolls offerings: Fully Charged Pink Lemonade, Fully Charged Peach Punch, and Fully Charged Strawberry Slurricane. Winning in the pre-roll category is a top priority, and we will continue to flex our robust product development capabilities to formulate differentiated products with flavors and rare cannabinoids to win with consumers.
Cronos’ strong breeding program and portfolio of genetics continued to drive growth, propelling the Spinach® brand to become the number two flower brand in Canada with a 6.0% market share in June 2023, according to Hifyre. We have three SKUs in the top-10 for market share, led by our GMO Cookies and Wedding Cake genetics.
Spinach® was ranked the number seven vape brand in Q2 2023, holding a 4.2% market share, according to Hifyre. Spinach® is the number one rare cannabinoid vape brand, with our SKUs that feature cannabinol (CBN), cannabigerol (CBG), and cannabichromene (CBC), holding the top three spots among rare cannabinoid vapes. In July, we launched three new vapes under the Spinach® portfolio. These new vapes come in a 1.2-gram format in the flavor offerings: Pink Lemonade, Peach Punch, and Strawberry Slurricane.
Cronos intends to launch its Lord Jones® brand in the Canadian adult-use market in Q4 2023, bringing Lord Jones® back to its roots as an adult-use brand. We expect this launch will be highly complementary to our offerings under the Spinach® brand and will elevate our growing portfolio of borderless products.
In Israel, Cronos launched two new pre-roll offerings under the Peace Naturals® brand, Wedding Rolls and Cocoa Bomba, and a new flower offering with our successful Space Cake genetic. In June 2023, the Knesset Health Committee in Israel changed the cannabis regulations streamlining and simplifying the process for some patients to obtain prescriptions; the new regulations are scheduled to take effect in December 2023. For certain medical conditions, patients will no longer be required to obtain a license with approval from the health ministry and doctors can directly prescribe cannabis to those patients. This change simplifies the process for patients and doctors alike and is expected to increase patient count.
Global Supply Chain
Cronos Growing Company Inc. (“Cronos GrowCo”) reported to the Company preliminary unaudited net revenue to licensed producers, excluding sales to the Company, of approximately $3.6 million in the second quarter of 2023. Cronos previously provided GrowCo with a senior secured credit facility, which currently has approximately $72.4 million outstanding following a principal repayment of $2.5 million by GrowCo in Q2 2023. In addition to principal repayment, Cronos also received $1.7 million in interest payments from GrowCo, and a $1.3 million payment from its joint venture partner on its promissory note in Q2 2023, totaling approximately $5.5 million in cash payments to Cronos in Q2 2023.
In July 2023, we signed an agreement with one of the leading distributors of medical cannabis in Germany. We anticipate commencing shipments of cannabis in the third quarter of 2023. The recently proposed regulatory change to reschedule cannabis, no longer labeling medical cannabis as a narcotic, is expected to unlock significant growth in the market. We intend to launch our Peace Naturals® medical-focused brand in Germany with a goal to make it a top brand similar to our success in Israel.
Conference Call
The Company will host a conference call and live audio webcast on Tuesday, August 8, 2023, at 8:30 a.m. ET to discuss 2023 Second Quarter business results. An audio replay of the call will be archived on the Company’s website for replay. Instructions for the live audio webcast are provided on the Company’s website at https://ir.thecronosgroup.com/events-presentations.
