Debra BorchardtCronos Group Inc. (NASDAQ: CRON) announced that its 2020 first-quarter net revenue rose to $8.4 million versus last’s year’s $5.4 million for the same time period. Cronos stock was lifted in early trading as the company beat revenue estimates by $0.25, but despite revenue rising 181% year-over-year, it missed estimates by $0.89 million.
Cronos said that the increase was primarily driven by continued growth in the adult-use Canadian cannabis market, sales resulting from the launch of cannabis vaporizers, and the inclusion of the Redwood acquisition in our financial results. The company reported a net income of $75.6 million, which was helped by a $113 million pre-tax unrealized gain resulting from the non-cash change in the fair value of financial derivative liabilities associated with the investment by Altria.
Losses though remain elevated as the company delivered an operating loss of $45.1 million in the record, which was also higher than last year’s operating loss of $34.9 million. The company said that it was due to 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.
“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.
Write-downs
Cronos said that it wrote-down $8 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. The company said in a statement, “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%.” Cronos said it expects to incur more inventory write-downs as a result of pricing pressures and the repurposing of the Peace Naturals Campus.
COVID-19
Like most companies, Crons has also been affected by the pandemic. The company said that its distribution channels continue to see disruptions globally. “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.” The company noted that 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.” The company also stated that it continues to have increased uncertainty in forecasting customer demand and sales velocity.
Gorenstein added, “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.”
