Debra Borchardt
Cronos Group Inc. (Nasdaq: CRON) (TSX: CRON) delivered its 2023 second-quarter earnings as lower flower sales in Israel caused total revenue to fall to $25.7 million. Cronos also reported a net loss of $8.4 million, withdrew guidance, and announced the sale of assets.
Revenue
Cronos reported that its net revenue of $19.0 million fell by $2.6 million from last year’s $21 million for the same time period. The company attributed the drop to weaker cannabis flower sales in Israel due to competitive activity.
Other factors included 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. In addition to that, the weakened Canadian dollar and Israeli shekel against the U.S. dollar during the current period adversely impacted results.
“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,” CEO Mike Gorenstein said. “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.”
Cronos’ Spinach brand continued to hold its number one market share position in the edibles category in Canada. According to Hifyre data, Spinach products had an approximate 14.5% market share in the edibles category. In the gummy category, the SOURZ by Spinach and Spinach FEELZ sub-brands held approximately 21.8% share.
Losses
Cronos reminded shareholders that in the second quarter of 2023, it exited its U.S. hemp-derived CBD operations. The departure of the business led to the reporting of discontinued operations in the condensed consolidated statements of net loss. The company said that prior period amounts have been reclassified to reflect the discontinued operations classification of the U.S. operations.
The comprehensive net loss for the quarter was $8.1 million and the operating loss was $20 million. The net loss on a constant currency basis (excluding foreign currency exchange rates) was $6.7 million, representing a 62% reduction in net loss from the three months ended June 30, 2022.
Asset Sale and Layoffs
On August 4, the Cronos Board approved plans to wind down operations at its Winnipeg, Manitoba, facility and list the Cronos fermentation facility for sale. The company said it expects to incur approximately $1.2 million in restructuring costs associated with that exit. These charges include employee-related costs such as severance, relocation, and other termination benefits, as well as contract termination and other related costs.
Cronos expects to incur the costs primarily in the second half of 2023, but would not include any impairment charges to the property, plant, or equipment.
The company said that at the same meeting, the board approved additional organization-wide cost reductions. The expected restructuring costs will be approximately $2 million, with the majority expected to be incurred in the second half of 2023, including mostly one-time employee-related severance charges.
“While we execute on product innovation and revenue growth, we are simultaneously laser-focused on reducing costs across our organization,” Gorenstein said. “Our cost reduction efforts and improved balance sheet management continue to yield an improvement in cash flow. … 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.”
Guidance
Cronos said in its statement that it decided to discontinue providing net revenue guidance and to withdraw its previously announced net revenue target of $100 million 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 an unfavorable impact on our net revenue,” the statement read.
Israeli Lawsuit
Cronos is also facing a lawsuit from a group of plaintiffs led by the Green Leaf (Ale Yarok) political party, which filed a Statement of Claim and Request for Approval of a Class Action on behalf of a purported class of Israeli cannabis consumers in the District Court of Tel Aviv, Israel. The case targets 26 cannabis-related parties, including three Cronos Israel entities.
The Statement of Claim alleges that the defendants violated certain laws relating to the marketing of medical cannabis products, including marketing to unlicensed cannabis consumers. The lawsuit seeks a total of ILS 420 million.
