Debra Borchardt
Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) stock fell over 13% to lately trade at $6.03 after the company reported a net loss for the second quarter of $107 million versus last year’s earnings of $185 million for the same time period. The loss of $0.31 cents per share was worse than the FactSet estimate for a loss of $0.07 per share.
Cronos Group delivered net revenue of $9.9 million in the quarter for an increase of $2.2 million over last year’s $7.6 million. The company said that 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 its financial results, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.
“In the second quarter of 2020, we continued our progress despite unprecedented shifts in our industry and the global economy. 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.
The company’s gross (loss) was $(3.0) million in the quarter versus $4.1 million for the same time period last year. 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.
COVID Problems
Cronos Group said that the ongoing restrictions and closures experienced by retail stores in the U.S. as a result of the COVID-19 pandemic had negatively impacted sales and demand which has resulted in slower than expected. The company said it expects the revenue growth and operating results in the U.S. reporting unit to continue to be
negatively impacted as the decrease in customer demand and retail closures are expected to continue as a result of the pandemic. The company reassessed the valuations on the U.S. and the Lord Jones brand and lowered those amounts. The company said it does not believe the declines in fair values are temporary. Cronos recorded $35.0 million of impairment charges on the U.S. reporting unit and $5.0 million on the Lord Jones brand for the three and six months ended June 30, 2020.
Litigation
On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. The Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Statement of Claim seeks a total of C$500 million for breach of contract, compensatory damages, and unjust enrichment or such other amount as may be proven in trial and C$5 million in punitive
damages against each defendant, including the Company. The Company has not responded to the Statement of the Claim.
A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business alleging, among other things, violations of state consumer protection, health and advertising laws. On April 8, 2020, a putative class action complaint was filed in the U.S. District Court for the Central District of California against Redwood, alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and breaches of the California Commercial Code for breach of express warranties and implied warranty of merchantability with respect to Redwood’s marketing and sale of U.S. hemp products. The complaint does not quantify a damage request. On April 14, 2020, the class action complaint was dismissed for certain pleading deficiencies and the plaintiff was granted leave until April 24, 2020 to amend the complaint to establish federal subject matter jurisdiction. As of the date of this Quarterly Report, the plaintiff has not refiled the
complaint and the complaint has been dismissed without prejudice. The company said it expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase.
