Cronos Group Archives - Green Market Report

Video StaffOctober 28, 2022

4min13460

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This week Canopy Growth (NASDAQ: CGC) surprised the markets with news that it was creating a Canopy Holding company for its U.S. properties. The Canadian company has options to acquire some American cannabis companies like Acreage Holdings and Wana Brands, but those deals weren’t supposed to happen until cannabis was federally legalized. Now it seems Canopy has decided not to wait until that happens. The question though is whether the Nasdaq will allow the company to continue to trade on its exchange. The exchange has been firmly against trading plant-touching cannabis companies and so far it looks as if they aren’t on board with Canopy’s plans. 

The SEC has been busy this week with bad actors in the cannabis industry.  Cronos Group settled with the SEC for some accounting errors. The company agreed to pay over $1.3 million and the company’s accountant was also fined and barred from serving in that capacity for the next 3 years. NewAge Beverage also found itself in hot water with the SEC for continually making false statements about the company The CEO was ousted and the stock was delisted from the Nasdaq. The SEC also targeted CannAwake for not filing its financial statements.

Turning Point Brands, Inc.  (NYSE: TPB) announced its third-quarter sales fell by 1.9% to $107.8 million. However, it beat analyst estimates. The company is seeing good growth in ZigZag sales products, but vape products keep sliding.  

Verano is being sued by Goodness Growth over the company’s decision to walk away from the planned acquisition. In addition to that, Verano has refinanced its debt and pushed out its maturity dates. The company is also going to lean harder on debt secured by its real estate holdings. 

And finally, the state of Florida threw cold water on the plan to combine medical dispensaries with Circle K convenience stores. GTI has recently announced that it had arranged to work with the store chain that is owned by Alimentation Coutard, which already owns 20% of Fire & Flower. GTI said the dispensaries are next door to Circle K, not inside, but regulators don’t seem amused with the thought of gas station grass.


StaffOctober 25, 2022
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The Daily Hit is a recap of cannabis business news for Oct. 25, 2022.

ON THE SITE

Canopy Growth Forms New Holding Company to Speed US Entry

Canadian cannabis producer Canopy Growth Corp. (TSX: WEED) (NASDAQ: CGC) has agreed to absorb a trio of companies within its newly formed holdings entity, Canopy USA. Under the deals, which still need approvals from shareholders, Canopy USA will acquire all of Acreage Holdings (OTC: ACRHF), as well as Jetty Extracts and Wana Brands, in a longstanding bid to gain entry into the U.S. cannabis industry. Read more here.

SEC Charges Cronos Group With Accounting Fraud

The Securities and Exchange Commission (SEC) charged Cronos Group Inc. (Nasdaq: CRON)  for improperly accounting for millions of dollars of revenue and for other accounting misconduct in multiple reporting periods. The SEC said in a statement that it also charged Cronos’s former Chief Commercial Officer, William Hilson, with fraud and aiding and abetting the company’s violations. Read more here.

CBD Beverage Company Targeted by SEC For False Statements

The SEC is issuing cease-and-desist orders against a CBD beverage company called NewAge Inc. The SEC said in its Administrative Proceeding dated Oct. 19, 2022 that from approximately July 2017 through April 2019, NewAge, through its former chief executive officer and director Brent D. Willis, made numerous false and misleading public statements concerning NewAge’s business operations and activities. Read more here.

Michigan’s Top Cannabis Regulator Promises Crackdown as Prices Free-Fall

For Michigan’s marijuana industry, a crackdown is coming. The state’s Cannabis Regulatory Agency is preparing to launch a new offensive to combat illicit market product that’s been long-rumored to be making its way into the regulated industry, Brian Hanna, the newly appointed acting director of the agency, told reporters in a media roundtable Tuesday morning at the CRA’s Lansing headquarters. Read more here.

IN OTHER NEWS

New York

Leaders of NY’s largest cannabis business association say certain aspects of the state’s marijuana testing regulations are unnecessarily strict and that if they’re not changed, most of NY’s conditionally licensed growers won’t be able to sell their weed. The Office of Cannabis Management last month posted testing requirements for marijuana flower and extract. Read more here.

Goodness Growth/Verano Holdings

Cannabis company Goodness Growth saw its market cap drop by more than 60% after Verano Holdings backed out of a deal to buy the Canadian firm for $413 million, according to a lawsuit filed Friday in the Supreme Court of British Columbia accusing the Chicago-based company of “undermining” the deal. Read more here.


Debra BorchardtAugust 9, 2022
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Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) reported its 2022 second-quarter earnings with net revenue of $23.1 million which jumped from last year’s $7.4 million for the same time period. However, total revenue before taxes was $28 million which just beat the Yahoo Finance average analyst estimates for revenues of $27 million. It was also better than the first quarter‘s revenue of $25 million. The stock was dropping by roughly 8% in early trading to lately sell at $3.26.

Cronos attributed the improvement to an increase in net revenue in its Rest of World segment driven by growth in the Israeli medical market and the Canadian adult-use market. The company also reported a net loss of $20 million, a significant drop from last year’s net loss of $179 million for the same time period. The earnings were ($0.05) per share in line with analyst estimates.

“I am encouraged by the progress we are making to realign our business around our brands to become more efficient in our decision making and agile throughout our supply chain,” said Mike Gorenstein, Chairman, President, and CEO, of Cronos. “Our supply chain transformation in Canada is going very well, with GrowCo achieving profitability in the year-to-date period, and the operational efficiencies we envisioned when we embarked on this initiative are starting to be realized. We are also refocusing the U.S. business to prioritize hero SKUs while leaning into adult-use product formats and concentrating on the direct-to-consumer channel. Although early in the repositioning of our U.S. business, we are confident the new strategy will improve our bottom-line while maintaining brand equity that we can leverage into cannabinoids beyond CBD, and in the U.S. THC market once regulations permit.”

Retail Breakdown

Cronos broke out its revenue results for investors. The bulk of the company’s sales or $21.6 million was driven by an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extract products. The U.S. only contributed $1.5 million in the quarter, which dropped from the previous year. The decrease year-over-year was primarily driven by a reduction in volume as a result of a decrease in promotional spending and SKU rationalization efforts as the company goes through its reorganization.

Reorg Update

As Gorenstein mentioned, the company has been reorganizing its focus.  In the U.S., Cronos began a phased exit of the wholesale beauty category to focus the portfolio on adult-use product formats within the direct-to-consumer channel. “As a result, the company reduced sales and marketing headcount in the U.S. to better align the business structure with the new strategy. Due to the restructuring of the U.S. business and other newly identified cost savings opportunities, the company now expects to incur approximately $6.4 million in expenses in connection with the Realignment, an increase from the previously stated $5.8 million.” The expenses are attributed to the costs needed to modernize information technology systems and build distribution capabilities.

“As we realign our business, we remain focused on what we know will drive differentiation: product development and long-term focused innovation. We continue to expand our borderless cannabinoid product portfolio with the recent launch of a CBN vape and gummy in select markets in Canada, and we achieved the THCV equity milestone in partnership with Ginkgo. Continuing to hit these productivity milestones fuels our innovation pipeline focused on creating borderless products with rare cannabinoids that amplify and differentiate the consumer experience. With a focus on utilizing rare cannabinoids, you have seen the success of our approach in the gummy category in Canada. We intend to apply this same strategy to win in other categories such as vapes and pre-rolls.”


Debra BorchardtMay 10, 2022
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Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) delivered its 2022 first-quarter business results as revenue jumped by 99% to $25 million versus last year’s $12 million for the same time period. Cronos attributed the increase to its segment in the Israeli medical market and the Canadian adult-use market. Cronos beat the Yahoo Finance average analyst estimate for revenue of $23 million.

Cronos also trimmed its net loss by 80% to $32.7 million from last year’s net loss of $161 million. The improvement year-over-year was primarily driven by the fluctuation in the non-cash gain (loss) on the revaluation of derivative liabilities. The earnings per share were ($0.09), which missed the analyst expectations for earnings per share of ($0.08).

Chairman, President, and CEO Mike Gorenstein said, “The strategic realignment we announced in the first quarter of 2022 reset the organization to this mindset and we are seeing the benefits show through in our performance. Our execution in product development, manufacturing, and go to market strategy resulted in strong growth in both net revenue and gross profit in the first quarter of 2022, proving that we are headed in the right direction. Our Spinach brand is one of the most sought-after brands in the Canadian adult-use market, known for bringing high quality and differentiated products to the consumer. We are also winning with branded products in Israel, with Peace Naturals driving significant revenue growth in the first quarter of 2022. As we execute our strategic realignment, I am encouraged with the progress we are making by increasing our market share in both Canada and Israel and continuing to bring disruptive branded products to market. In combination with our industry-leading balance sheet, our borderless products, such as SOURZ by Spinach winning in Canada, is one of the best ways to be prepared for legalization in the U.S.”

The increase in year-over-year revenue was primarily driven by an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extracts used in edibles and vaporizers.

Realignment

In the first quarter of 2022, Cronos announced a strategic plan to realign the business around its brands, centralize functions and evaluate the company’s supply chain. The organizational and cost reduction initiatives undertaken are intended to better position Cronos Group to drive profitable and sustainable growth over time. These activities included the transfer of certain manufacturing equipment to Cronos GrowCo from the Peace Naturals Campus. In April 2022, the company began building dedicated space within Cronos GrowCo for various manufacturing and R&D activities. In the first quarter of 2022, Cronos GrowCo reported preliminary unaudited net revenue of approximately $7.0 million to licensed producers excluding sales to the company.

Analyst Comments

Stifel analyst W. Andrew Carter recently wrote, “We continue with our Hold rating for the shares of Cronos Group and our $4 target price. Our target price reflects an EV/Sales multiple of 3x EV/FY23E sales (a discount to high growth consumer/industrial companies), with the outlook including our estimate for $240 million in cash needs over the next two years. There are points of differentiation for Cronos Group – ROW revenue growth outpacing Canadian peers and the two key end markets (Canada adult use, Israeli medical). Headset data validates the Canadian strength with the early results from innovation suggesting the potential to capture future category growth. Cronos is the only Canadian producer with domestic Israeli operations suggesting the ability to consistently capture growth in the $350 million market while positioning for any favorable developments (expanded products in Israeli medical market, Israeli adult use). The optionality case remains robust here with Cronos touting nearly $1 billion in cash and the vested interest of Altria to capitalize on future category developments. But without clarity around the ongoing investment needs, it is very difficult to outline a constructive case for the shares or fully evaluate the investment case.”

Cronos was lately trading at $2.92 as the stock inches higher in early trading on the positive earnings report.


Debra BorchardtMarch 1, 2022
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Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) announced its 2021 fourth quarter and full-year business results. Cronos reported that in the fourth quarter it had net revenue of $25.8 million an increase of $8.7 million from the same time period last year. Cronos said the increase year-over-year was primarily driven by continued growth in the adult-use market in Canada and increased sales in the Israeli medical market. Once again though the company recorded an eye-popping net loss of $133 million in the quarter and earnings per share of ($0.36).  The stock was slipping 2% in early trading to lately sell at $3.50, down from its year high of $11.67.

For the full year, the net revenue was $74.4 million an increase of $27.7 million over 2020. The company attributed the increase year-over-year to continued growth in the adult-use market in Canada and increased sales in the Israeli medical market. The operating loss for the full year was a staggering $560 million, while the net loss was $389 million. This was even higher than 2020’s net loss of $321 million. The earnings per share for the year was ($1.07).

“I am proud of the dedication and resilience our team has shown throughout the past year as we navigated through a dynamic market environment,” said Kurt Schmidt, President, and CEO, Cronos Group. “Our fourth quarter 2021 results indicate positive momentum, which we will look to carry forward as we begin to implement our strategic and operational realignment initiatives. As we look to 2022, we will continue to realign Cronos Group’s organizational structure to match our strategy, with a primary focus on adult-use products and elevating our brands through rare cannabinoids. We also remain intensely focused on positioning ourselves for long-term opportunities by continuing to invest in our brands, creating and supporting an efficient manufacturing strategy, investing in rare cannabinoids and innovation, and readying Cronos Group for entry into the U.S. cannabis market once federally permitted. We are optimistic about the future of the Company and the year ahead.”

Peace Out To Peace Naturals

Cronos announced in its earnings report that it plans to exit its Peace Naturals Campus in Stayner, Ontario, Canada. Cronos Group said it will continue to operate the Peace Naturals Campus with a phased reduction and transition of activities with a planned exit by the end of 2022. The company did say that various research and development initiatives, inclusive of cannabinoid formulation, product development, tissue culture and micropropagation will continue across multiple facilities available to Cronos Group.

“In addition to the results we are announcing today and in line with our focus on enhancing agility and fostering long-term growth, we have made the decision to exit our Peace Naturals Campus in Stayner, Ontario. As we continue to execute our asset-light approach and focus on brands and R&D, we will continue to leverage our joint venture with Cronos GrowCo and other contract manufacturing partnerships moving forward. We are grateful to our Stayner associates for their hard work and the contributions they have made to Cronos Group, and appreciate their ongoing support in helping to provide a seamless transition out of the facility throughout 2022.”

As a result of the company’s planned exit from the Peace Naturals Campus, the company has incurred a $119.9 million non-cash impairment charge on long-lived assets in the fourth quarter of 2021. In addition, the company expects to incur charges of approximately $4.5 million in connection with the planned exit, all of which impact the ROW segment. These charges include employee-related costs, such as severance, relocation, and other termination benefits, as well as contract termination and other related costs, which are expected to be incurred primarily in the second half of 2022. In addition, the company said it expects capital expenditures of approximately $2.5 million to modernize information technology systems and build distribution capabilities.


Debra BorchardtFebruary 18, 2022
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 Cronos Group Inc. (NASDAQ: CRON) reported that its 2021 third quarter jumped by 80%  over last year to $20.4 million. However, the strong increase in earnings was overshadowed by the company’s restatement of earnings from the second quarter and a whopping charge of $235 million. In addition to that, Cronos said it was restructuring the company to cut costs.

First up, the net revenue rose year-over-year and it also rose sequentially from the second quarter’s revenue of $15.6 million. The company attributed the increase year-over-year to continued growth in the adult-use market in Canada, increased sales in the Israeli medical cannabis market, and increased sales in the U.S. segment.

Next, those expenses. The operating expenses for the quarter were $55 .6 million with an operating loss of $56 million. The bulk of the expenses were in general and administrative, but $10 million alone was spent on sales and marketing. The cost of sales in the quarter was $21 million vs. revenue of $20 million. The company also reported a net income of $77 million, but this was mostly achieved through a gain on the revaluation of derivatives.

Impairment Charge

The Audit Committee and KPMG LLP, and the company’s Board decided that Cronos Group should restate its unaudited interim financial statements for the second quarter of 2021. Cronos also said it was recording “an impairment charge of $236.1 million on goodwill and indefinite-lived intangible assets and on long-lived assets in its U.S. reporting unit for the three and six months ended June 30, 2021.” The impairment charges are to have no impact on cash and cash equivalents or revenues.

“We are pleased that the Audit Committee has completed its evaluation and that Cronos Group is now current with the filing of our financial reports. As we move forward, we are committed to improving our internal controls and financial reporting practices, maintaining the highest standards of transparency and accountability, and enhancing our capabilities and resources across functions to support our strategy,” said Kurt Schmidt, President, and CEO, Cronos Group.

Restructuring

Cronos Group also decided that it would realign its businesses and that organizational and cost initiatives were being taken “to drive profitable and sustainable growth over time.”  The restructuring is expected to bring $20-$25 million in savings in 2022. The company outlined in a statement the following steps it planned to take:

  1. Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;
  2. Evaluating the Company’s global supply chain and performing product reviews, and pricing and distribution optimization in order to reduce fixed expenses and reduce complexity; and
  3. Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry.

“As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, we have determined that now is the right time to realign the business around our brands by centralizing functions under common leadership, managing expenses and prioritizing our investments in innovation. Through this realignment, our goal is to position Cronos Group to be able to successfully assemble a portfolio of best-in-class brands, products and intellectual property, while preserving the financial flexibility to make additional strategic investments in our R&D and brand pipeline as we innovate and evolve with our consumers’ wants and needs,” said Kurt Schmidt, President and CEO, Cronos Group.


Debra BorchardtJune 14, 2021
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Canadian-based Cronos Group Inc. (NASDAQ: CRON) stock was rising over 2% on news that the company was buying an option to acquire 10.5% of U.S.-based PharmaCann for $110.4 million. The company said that the option exercise will be based upon various factors, including the status of U.S. federal cannabis legalization, as well as regulatory approvals, including in the states where PharmaCann operates that may be required upon exercise.

PharmaCann remains a privately-owned company that has a broad geographic footprint in the U.S. that includes six production facilities and 23 dispensaries operating under the Verilife brand across six limited license states: New York, Illinois, Ohio, Maryland, Pennsylvania, and Massachusetts. The New England states are particularly valuable. Pennsylvania and New York are only legal for sales of medical marijuana at this time, but New York adult-use sales will begin in 2022. The market is expected to be one of the largest in the country. Massachusetts continues to set records with its adult-use sales and Pennsylvania is expected to eventually follow suit. PharmaCann said it continues to invest in its manufacturing infrastructure and brand development to capitalize on the significant consumer retail and business-to-business wholesale opportunities.

Canadian companies are unable to trade on the Canadian securities exchanges if there is any U.S. company ownership since cannabis is still federally illegal in the U.S. This option will get triggered if the U.S. removes the illegality of cannabis sales at the federal level. It is a similar strategy that Canopy Growth (NASDAQ: CGC) took with its option with Acreage Holdings.

“Our U.S. growth strategy focuses on delivering long term shareholder value by assembling a best-in-class brand and intellectual property portfolio and positioning to deploy our products in the U.S. market through investments and opportunities with U.S. leaders who share our vision and commitment to responsibly distributing disruptive cannabinoid products that improve people’s lives,” said Kurt Schmidt, President and Chief Executive Officer of Cronos Group. “We were attracted to PharmaCann as an investment because of their disciplined capital allocation, strong track-record and compelling licensed manufacturing and retail footprint. Further, we are excited to partner with PharmaCann because of our shared commitment to elevating product quality and consistency through science and best in class operations and manufacturing.”

Once the option is exercised, Cronos Group and PharmaCann will enter into commercial agreements that would allow each other to sell products through either party’s distribution channels. In addition, Cronos Group and PharmaCann could enter into an investor rights agreement that would provide Cronos Group with certain governance rights, such as a board seat or board observer subject to certain conditions, and a registration rights agreement that would provide Cronos Group with customary registration rights of PharmaCann common stock.

“We are pleased to announce our strategic alliance with Cronos Group,” said Brett Novey, Chief Executive Officer of PharmaCann. “This investment validates our position as a leading vertically integrated U.S. cannabis company and highlights our ability to continue to expand and enhance our strong asset base. We are excited to work with Cronos Group as we advance PharmaCann’s mission to improve people’s lives through cannabis.”


Debra BorchardtMay 7, 2021
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Cronos Group Inc. (NASDAQ: CRON) released its 2021 first-quarter business results with net revenue of $12.6 million versus last year’s $4.2 million for the same time period. The revenue from Cronos missed estimates by $4.81 million. It also dropped sequentially from the fourth quarter’s consolidated net revenue of $17 million.

The company said that the increase was due to continued growth in the adult-use Canadian cannabis market, sales in the Israeli medical cannabis market. In addition to that, an increase in sales in the U.S. segment driven by new U.S. hemp-derived CBD products introductions, partially offset by strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020.

The Cronos first-quarter GAAP EPS of -$0.44 missed by $0.35. Cronos shares were trading down by almost 5% in early trading and were lately selling at $7.24. Traders on social media were pointing out the company has reported six consecutive quarters of negative gross margin. Gross margins for the first quarter were (23%) versus last year’s (77%) for the same time period.

Cronos also reported an adjusted EBITDA loss of $37.1 million in the first quarter which was marginally higher than last year’s loss of $5.7 million. The company attributed the increase in losses to an increase in sales and marketing costs due to brand development in the U.S. segment, and an increase in research and development costs driven by increased spending on product development and developing cannabinoid intellectual property. It was partially offset by decreases in sales and marketing spend in the ROW segment, gross loss, and general and administrative expenses.

“In the first quarter of 2021, our results in Canada were impacted by market dynamics due to the COVID-19 pandemic and ensuing stay-at-home orders and various other restrictions. Despite this, we continued to push forward our innovation pipeline and execute on our strategy, which was a true testament to the strength of our team,” said Kurt Schmidt, President and CEO, Cronos Group.

Brand Updates

It seems the marketing costs will probably remain elevated. In April 2021, Cronos Group announced that its Lord Jones brand launched a brand campaign entitled, “A Higher Order”. The campaign features new creative assets along with a mix of market activations including out-of-home advertising and television spots in select U.S. test markets. In April 2021, Lord Jones also launched a new product, the Lord Jones CBD Bump & Smooth Body Serum, which is designed to deliver non-abrasive chemical exfoliation that reduces bumpiness to reveal smoother, brighter-looking skin. The product is available on the Lord Jones website and is expected to be on Sephora’s website and in their retail outlets in the coming weeks.

In the coming weeks, Cronos said it intends to launch Spiniach edibles, a new product category in the Canadian adult-use market. The company is late to enter the edibles market in Canada but explained this by saying it aims to be the best, not necessarily the first.

In the first quarter of 2021, Cronos Israel successfully launched PEACE NATURALS branded pre-rolls into the Israeli medical cannabis market. This launch follows the successful launch of dried flower and oils to the Israeli medical cannabis market in 2020. Cronos Israel continues to execute in Israel’s rapidly growing market.


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