Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with our consolidated financial statements and the related notes to those statements, which are included in Item 8 of this Annual Report. This discussion contains Forward-Looking Statements that involve risks and uncertainties. As a result of many factors, such as those set forth in Item 1A “Risk Factors,” of this Annual Report and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these Forward-Looking Statements.
Business Overview
Cronos Group is an innovative global cannabinoid company with international production and distribution across five continents. We are committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS™, a global wellness platform; two adult-use brands, COVE™ and Spinach™; and three U.S. hemp-derived consumer products brands, Lord Jones™, Happy Dance™ and PEACE+™.
Strategy
Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities:
• growing a portfolio of iconic brands that responsibly elevate the consumer experience;
• developing a diversified global sales and distribution network;
• establishing an efficient global supply chain; and
• creating and monetizing disruptive intellectual property.
Business Segments
Cronos Group reports through two segments: “United States” and “Rest of World.” These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. On September 5, 2019, as a result of the Redwood Acquisition, the Company established the United States segment, which includes only the results of Redwood since the date of acquisition. Redwood manufactures, markets and distributes U.S. hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States (“U.S.”) under the brands Lord Jones™ and Happy Dance™.
Recent Developments
In December 2019, an outbreak of a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. Since then, COVID-19 has spread across the globe, including the U.S., Canada and Israel, and other countries in which the Company or its affiliates operate (including Australia and Colombia) and was recognized as a pandemic by the World Health Organization. The COVID-19 pandemic has resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets. In response to the pandemic, the governments of many countries, provinces, states, cities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures. Such measures were eased or lifted in varying degrees by different governments of various countries, states and cities throughout 2020, but the continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway and re-impose quarantines, border closures, closure of certain businesses and stay-at-home orders. It is possible that jurisdictions in which the Company or its affiliates operate may reintroduce more stringent preventative or protective actions which could result in further closures of businesses. Governments in certain countries such as the U.S., Canada, and those in Europe have responded to the acute economic and market consequences with certain monetary and fiscal policy actions.
Impact on operating results
During the second quarter of 2020, the effects of the COVID-19 pandemic on retail stores and the increase of costs in production and sales in the U.S. had a material impact on the rate of growth of revenue in the U.S. segment, with revenue for the segment remaining flat from the first quarter of 2020. As a result of these impacts and the expectation of future impacts, for the three months ended June 30, 2020, the Company recorded $35 million of impairment charges on its U.S. reporting unit and $5 million on the Lord Jones™ brand (refer to Note 11 of the Company’s consolidated financial statements for more information regarding intangibles assets and goodwill).
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The continued negative impact on the Company’s results has been as expected during the three months ended December 31, 2020 and no further impairment charges were recorded to the U.S. reporting unit or brands as a result. The Company expects revenue growth and operating results in the U.S. segment to continue to be negatively impacted as retail closures are expected to continue as a result of the pandemic.
Revenue and the growth in revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the year ended December 31, 2020. However, prolonged closures of retail stores due to government mandated lockdowns as well as the changes in consumer purchasing behavior in Canada during the COVID-19 pandemic are expected to have a negative impact on the Company’s short-term revenue growth in Can ada.
In both segments, there were no material increases in the current expected credit loss in connection with COVID-19. The Company continues to closely monitor the effects of COVID-19 on its operating results.
Production and supply chain
The Company’s global production facilities currently remain operational. To comply with governmental orders or other health and safety requirements, the Company has: (i) reduced the number of personnel working on-site at its production facilities to only the roles that are necessary to be performed on-site, (ii) implemented work-from-home policies for other employees whose work can be performed off-site, and (iii) implemented other additional health and safety measures such as, among other things, enhanced hygiene and sanitation procedures, modified work schedules and social distancing protocols at its production facilities. Further, as recommended by certain jurisdictions in which it operates, the Company has implemented a documented COVID-19 prevention plan in these locations. The Company has and will continue to act in accordance with guidance from local, federal, and international health and governmental authorities, such as any government-mandated requirements for people to wear facemasks in all indoor communal spaces or at businesses, and is prepared to make additional operational adjustments, as necessary. Although the Company’s production facilities currently remain operational, governmental requirements, guidance and health and safety requirements continue to evolve as governmental and health authorities respond to the spread of the virus. Reopening plans in certain jurisdictions have been and may be further reversed, suspended or delayed and quarantines may be re-imposed. The Company’s production facilities may experience further temporary closures or quarantines if governmental or health authorities make changes to the businesses and workforces allowed to remain operational, which would result in reduced production or suspension of production if such closures or quarantines are mandated. In addition, to the extent the Company’s employees contract the virus, depending on the employee’s job duties and access to facilities, the Company’s ability to keep production and manufacturing facilities open may be impacted for health and safety reasons.
The impacts of certain closures or other restrictions on the conduct of business operations at the facilities of third-party manufacturers, suppliers and other vendors in the Company’s supply chain have not been significant to date but remain uncertain. Earlier closures at manufacturers in China in 2020 had resulted in delays of deliveries of batteries and cartridges for cannabis vaporizers and personal protective equipment, such as masks and gowns used in Cronos Group’s manufacturing facilities certified in accordance with Good Manufacturing Practices (“GMP”), from such manufacturers in China. Most delays have been ameliorated as manufacturers are now operational in China but other vendors or suppliers in the Company’s supply chain have been, and in the future could potentially be, impacted. Closures or other restrictions on the conduct of business operations on third-party manufacturers, suppliers or vendors may cause disruption in Cronos Group’s supply chain. As a result of a rise in infection rates late in the fourth quarter of 2020 and in the first quarter of 2021 in the U.S., certain contract manufacturers that manufacture U.S. hemp finished products for our U.S. business have experienced temporary closures or reductions in their operations leading to shortages of finished product available via the e-commerce channel. We expect these closures or reductions to ease and product shortages to be ameliorated as the spread of COVID-19 and infection rates decline. The Company has experienced delays in shipping and expects that the increased global demand on shipping and transport services, which has created challenges to container availability and port capacities, in addition to customs and border control policies put in place in response to the COVID-19 pandemic that require shipments to undergo a quarantine period, may cause the Company to experience further delays in the future which could impact the Company’s ability to obtain materials or deliver products in a timely and cost efficient manner. In addition, work-from-home policies for certain employees and the effects of the Company’s work-from-home policies may negatively impact productivity, disrupt access to books and records and disrupt the Company’s business. Even if the Company’s production facilities continue to remain open, mandatory or voluntary self-quarantines and travel restrictions may limit the Company’s employees’ ability to access facilities, and this, together with impacts on the Company’s supply chain and the uncertainty produced by the rapidly evolving nature of the COVID-19 pandemic, may result in reduced or suspended production.
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Customers
Retailers in the U.S. and Canada have been required to close at times or have curtailed their operations (such as reduced opening hours, reduced staff, limiting brand partner visits, and reduced traffic in stores) due to the implementation of health and safety measures. The slowdown or disruption faced by retailers, in addition to quarantine measures and travel restrictions, impacts the ability of customers to be able to access the Company’s products. These restrictions on retail stores are mandated by, and differ across, each state, province or territory and continue to change and evolve, which creates uncertainty in forecasting customer demand and sales velocity. In the U.S., while online sales have continued despite facing pressure, certain beauty and other retailers have temporarily closed physical boutiques. State specific limitations on retail capacity has also reduced the ability of larger retailers to offer in-store brand education for the Company’s products. In Canada, retailers have implemented a combination of measures from closing stores, offering curbside delivery (to the extent permitted by a province) and online sales only, reduced store opening hours and a reduction in the number of customers permitted in stores in light of social distancing measures. Suspensions of the ability of private retailers to offer click-and-collect or curbside delivery in certain provinces in Canada may further impact customer demand for products. Provincial purchasers have also similarly, among other things, reduced staff on-site leading to a decrease in delivery time slots for producers to deliver products or reduced frequency or size of their purchase orders. While various provinces in Canada have continued to increase the number of retail stores during the COVID-19 pandemic, we expect that the expansion of retail stores in various provinces in Canada will be delayed or slowed down in light of continued increases in COVID-19 cases. We anticipate that uncertainty created by these measures on forecasting customer demand and sales will continue as long as such measures are in place. Demand for the Company’s products could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a potential decline in the level of demand for vaporizer products or in discretionary spending as result of a general economic slowdown.
Macroeconomic impacts
The impacts of these current restrictions and measures on certain strategic projects continue to be uncertain. While facility design and expansion projects and product development initiatives are currently expected to proceed as planned, requirements and restrictions on the operation of businesses and workforces continue to evolve as governmental and health authorities respond to the spread of the virus and changes may result in delays or suspensions if authorities require such activities to be suspended.
In addition, a recession or market correction resulting from the spread of COVID-19 would likely materially affect the Company’s business and the value of its common shares. Collectively, the effects of the COVID-19 pandemic have adversely affected the Company’s results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect. At this time, neither the duration nor scope of the disruption can be predicted; therefore, the ultimate impact to the Company’s business cannot be reasonably estimated but such impact could materially adversely affect the Company’s business and financial results.
Liquidity and capital resource impact
Despite the impacts of the COVID-19 pandemic, the Company believes that its significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months. The impact of reduced interest rates has inhibited the Company’s ability to generate interest income in the short-term, but this has not, and is not expected to have, a material impact on the liquidity or capital resources of the Company.
2020 Business Highlights
Cronos Fermentation
In the second quarter of 2020, Cronos Fermentation successfully fermented CBGA, one of the Company’s target cannabinoids under the Ginkgo Strategic Partnership, at research scale. Cronos Fermentation has and will continue to optimize downstream processing and scale up procedures in advance of receiving the final strains and commercial processing license, both of which are required for commercialization.
Management Appointments
On September 9, 2020, Cronos Group expanded its leadership structure to drive its next phase of growth by appointing Kurt Schmidt as President and Chief Executive Officer. This move coincided with Mike Gorenstein’s appointment to Executive Chairman. Mr. Schmidt brings deep experience in consumer products with decades of leadership experience in the U.S. and overseas.
On August 31, 2020, the Company added Shannon Buggy as Senior Vice President, Global Head of People. With over 25 years of experience, Ms. Buggy has a proven track record of leading and managing global human resources teams and driving excellence in talent acquisition, development, retention, employee relations, compensation, benefits, talent management and labor relations.
On July 20, 2020, Summer Frein was named General Manager USA. Ms. Frein joined Cronos Group in January of 2020; however, she has worked with Cronos Group in various capacities since 2018. Under Ms. Frein’s leadership, the Company plans to further expand
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its U.S. hemp-derived business, including introducing new product formats under both Lord Jones™ and Happy Dance™, that will target different retail channels and consumers.
Cronos Research Labs
In the third quarter of 2020, Cronos Device Labs expanded its scope for cannabinoid research and the R&D center was renamed to Cronos Research Labs. Cronos Group engages in both understanding the fundamental science behind the interactions of cannabinoids with each other and how those interactions can be leveraged to best deliver on the consumer’s needs. Additionally, the Company partners with leading scientific institutions engaged in fundamental cannabis science to augment and accelerate its internal efforts. Cronos Group’s work spans many aspects of cannabis research from strain development to growing conditions to extraction technology to biosynthesis to product development, all supported by advances in analytical sciences.
Recent Developments
Happy Dance™
Happy Dance™ continues its expansion by securing its first major U.S. retailer, ULTA Beauty™. The full collection of Happy Dance™ products is expected to launch online at ULTA.com and in-store at over 550 ULTA Beauty™ locations across the U.S. in the coming weeks. Happy Dance™ was co-founded by actress and New York Times best-selling author Kristen Bell and features an easy-to-use line of clean, vegan and cruelty-free U.S. hemp-derived CBD bath and body products including an All-Over Whipped Body Butter + CBD, Head-to-Toe Coconut Melt + CBD and Stress Away Bath Bomb + CBD.
Cronos Israel
During 2020, Cronos Israel received all certifications and licenses required for the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel and currently has PEACE NATURALS™ dried flower and oils in market. On January 11, 2021, the PEACE NATURALS™ brand was recognized by the Israeli Marketing Association and was given the 2020 Innovation Award for its successful marketing strategy in 2020, which led to increased brand exposure. The marketing campaign gained this accolade for standing out amongst its peers by focusing on the high-quality nature of PEACE NATURALS™ products. In February 2021, Cronos Israel signed a distribution agreement with the largest pharmacy chain in Israel, Super-Pharm, which has over 250 branches in Israel. Cronos Israel continues to build distribution and brand awareness through a growing network of pharmacies.
Natuera
Throughout 2020, Natuera, the Company’s joint venture in Latin America, a fully licensed operation in Colombia for hemp and cannabis derived bulk, consumer, and medicinal cannabinoid products, continued to achieve significant operational milestones. In addition to completing a number of test exports of hemp-derived CBD extract to both the U.S. and the United Kingdom for business development and R&D purposes over the course of 2020, during the fourth quarter of 2020, Natuera completed its first export of hemp-derived CBD extract to the U.S. for commercial purposes.
Cronos GrowCo
In 2020, Cronos GrowCo, the Company’s joint venture in Canada, fully completed construction of its production facility, including all fixtures within the greenhouse and all post-harvest activity areas. In November 2020, Cronos GrowCo obtained a cultivation license for the operations contemplated by the first phase of the project. The Company expects the facility to become operational in phases beginning in the first half of 2021.
2019 Financial Results Compared to 2018
For a discussion of our 2019 financial results compared to 2018, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10K/A for the year ended December 31, 2019.
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Foreign currency exchange rates
All currency amounts in this Annual Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2020, December 31, 2019 and December 31, 2018, as reported on Bloomberg. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated statements of cash flows of the Company’s foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period, as reported on Bloomberg.
The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below:
(Exchange rates are shown as C$ per $) Year ended December 31,
2020 2019 2018
Average rate 1.3411 1.3268 1.2955
Spot rate 1.2751 1.2990 1.3639
Consolidated Results of Operations: FY 2020 compared with FY 2019
Summary of financial results - consolidated
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Net revenue $ 46,719 $ 23,750 $ 22,969 97 %
Gross profit (loss) (25,833) (17,597) (8,236) 47 %
Gross margin (55) % (74) % N/A 19 pp
Adjusted EBITDA (i)
$ (147,253) $ (98,308) $ (48,945) 50 %
(i) See “ Non-GAAP Measures ” for information related to Non-GAAP measure.
Net revenue - consolidated
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Net revenue, before excise taxes (i)
$ 54,353 $ 25,639 $ 28,714 112 %
Excise taxes (7,634) (1,889) (5,745) 304 %
Net revenue 46,719 23,750 22,969 97 %
(i) Net revenue, before excise taxes, is calculated net of sales returns and discounts as described under Note 4 to the consolidated financial statements.
For the fiscal year 2020 (“FY 2020”), we reported net revenue of $46.7 million, representing an increase of $23.0 million from the fiscal year 2019 (“FY 2019”). This change was primarily due to:
• An increase in sales in the Rest of World (“ROW”) segment in FY 2020 compared to FY 2019, due to the continued growth of the adult-use market in Canada and sales in the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in FY 2019 and strategic price reductions on various adult-use cannabis products in Canada in FY 2020.
• An increase in net revenue in the U.S. segment of $6.1 million in FY 2020 compared to FY 2019 due to FY 2020 results including a full year of the Redwood business as opposed to 117 days in FY 2019.
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Cost of sales and gross profit (loss) – consolidated
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Cost of sales $ 46,497 $ 12,174 $ 34,323 282 %
Inventory write-down 26,055 29,173 (3,118) (11) %
Gross profit (loss) (25,833) (17,597) (8,236) 47 %
Gross margin (55) % (74) % N/A 19 pp
For FY 2020, we reported gross loss of $25.8 million, representing an increase in losses of $8.2 million from FY 2019. This change was primarily due to:
• An increase in ROW cost of sales primarily driven by third party purchased flower associated with adult-use products in Canada and a decline in wholesale sales in FY 2020 versus FY 2019.
• Partially offset by increased gross profit in the U.S. segment in FY 2020 compared to FY 2019, primarily due to a full year of gross profit in FY 2020 versus 117 days in FY 2019 and a decrease in inventory write-downs in the ROW segment. We may incur further inventory write-downs due to pricing pressures in the marketplace.
Adjusted EBITDA – consolidated
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Adjusted EBITDA (i)
$ (147,253) $ (98,308) $ (48,945) 50 %
(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.
For FY 2020, we reported an adjusted earnings (loss) before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of $(147.3) million, representing a decrease in Adjusted EBITDA of $48.9 million from FY 2019. This change was primarily due to:
• An increase in gross loss as described above.
• An increase in general and administrative costs driven primarily by an increase in salaries and wages as a result of increased headcount in order to support the Company’s growth strategy, increased office and general expenses and increased costs due to a full year of U.S. segment results versus 117 days in 2019.
• An increase in sales and marketing costs, primarily related to brand development as well as increased costs due to a full year of U.S. segment results versus 117 days in the same period in 2019.
• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and increased spending on product development and developing cannabinoid intellectual property.
Other items affecting the comparability of net income (loss) during FY 2020 and FY 2019 – consolidated
Review costs related to restatement of 2019 interim financial statements
For FY 2020, we reported review costs related to the restatement of 2019 interim financial statements of $9.7 million within the general and administrative line in the consolidated statements of net income (loss). These financial statement review costs include costs related to the restatement of the Company’s 2019 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement. There were no costs related to the restatement of the Company’s 2019 interim financial statements incurred during FY 2019.
Repurposing charges
For FY 2019, we reported pre-tax charges of $7.3 million related to the Company’s decision to redesign its efforts at the Peace Naturals Campus, which includes impairment costs, inventory write-down, and employee termination benefits. There were no repurposing costs incurred during FY 2020.
Interest income, net
For FY 2020, we reported interest income, net of $18.4 million representing a decrease of $9.6 million from FY 2019 primarily due to the impact of a decrease in interest rates on cash and cash equivalents and short-term investments during FY 2020 compared to FY 2019.
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Gain on revaluation of derivative liabilities
For FY 2020, we reported a gain on revaluation of derivative liabilities of $129.3 million representing a decrease of $1,147.6 million from FY 2019 primarily driven by a decrease in our share price since December 31, 2019. The Company expects continued changes in derivative valuations as the Company’s share price fluctuates period-to-period. For further information, see Note 14 to the consolidated financial statements in Item 8 of this Annual Report.
Impairment loss on goodwill and intangible assets
For FY 2020, we reported an impairment loss on goodwill and intangible assets of $40.0 million representing an increase of $40.0 million from FY 2019 primarily driven by a $35.0 million impairment charge on the U.S. reporting unit and a $5.0 million impairment charge on the Lord Jones™ brand during the year ended December 31, 2020. For further information, see Note 11 to the consolidated financial statements in Item 8 of this Annual Report.
Gain on disposal of other investments
For FY 2020, we reported a gain on disposal of other investments of $4.8 million representing a decrease of $11.5 million from FY 2019 primarily driven by a decrease in the sale of shares associated with the Whistler Transaction (as defined below) during FY 2020 compared to FY 2019. For further information, see Note 7 to the consolidated financial statements in Item 8 of this Annual Report.
Financing and transaction costs
For FY 2020, we reported financing and transaction costs of $0.04 million representing a decrease of $32.2 million from FY 2019 primarily driven by the increased financing and transaction costs incurred in FY 2019 compared to FY 2020 as a result of the Altria Investment and the Redwood Acquisition. For further information see Note 27 and Note 14 to the consolidated financial statements in Item 8 of this Annual Report.
Income tax expense
For FY 2020, we reported an income tax expense of $1.3 million representing an increase of $1.3 million from FY 2019 primarily driven by changes in valuation allowance, partially offset by a decrease in the fair value gain on financial liabilities.
Results of Operations by Business Segment: FY 2020 compared with FY 2019
Summary of financial results – ROW
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Net revenue $ 37,224 $ 20,386 $ 16,838 83 %
Gross profit (loss) (29,993) (19,470) (10,523) 54 %
Gross margin (81) % (96) % N/A 15 pp
Adjusted EBITDA (i)
$ (98,349) $ (84,826) $ (13,523) 16 %
(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.
Net revenue – ROW
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Cannabis flower $ 27,932 $ 15,020 $ 12,912 86 %
Cannabis extracts 8,759 5,338 3,421 64 %
Other 533 28 505 1,804 %
Net revenue 37,224 20,386 16,838 83 %
For FY 2020, we reported net revenue of $37.2 million, representing an increase of $16.8 million from FY 2019. This change was primarily due to:
• An increase in sales due to the continued growth of the adult-use market in Canada and sales in the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in FY 2019 and strategic price reductions on various adult-use cannabis products in Canada in FY 2020.
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Cost of sales and gross profit (loss) – ROW
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Cost of sales $ 41,162 $ 10,683 $ 30,479 285 %
Inventory write-down 26,055 29,173 (3,118) (11) %
Gross profit (loss) (29,993) (19,470) (10,523) 54 %
Gross margin (81) % (96) % N/A 15 pp
For FY 2020, we reported gross loss of $30.0 million, representing an increase in losses of $10.5 million from FY 2019. This change was primarily due to:
• An increase in cost of sales primarily driven by third-party purchased flower associated with adult-use products in Canada and a decline in wholesale sales in FY 2020. The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.
• Partially offset by an increase in net revenue from FY 2019, as described above and a decrease in inventory write-downs. We may incur further inventory write-downs due to pricing pressures in the marketplace.
Adjusted EBITDA – ROW
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Adjusted EBITDA $ (98,349) $ (84,826) $ (13,523) 16 %
(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.
For FY 2020, we reported Adjusted EBITDA of $(98.3) million, representing a decrease in Adjusted EBITDA of $13.5 million from FY 2019. This change was primarily due to:
• An increase in ROW gross loss from FY 2019, as described above.
• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and costs related to increased spending on product development and cannabinoid intellectual property.
• An increase in general and administrative costs from FY 2019 driven by an increase in salaries and wages as a result of increased headcount to support the Company’s growth strategy and increased office and general expenses.
• An increase in sales and marketing costs primarily related to building and developing our brands and products in the Canadian adult-use market.
Summary of financial results – U.S.
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Net revenue $ 9,495 $ 3,364 $ 6,131 182 %
Gross profit 4,160 1,873 2,287 122 %
Gross margin 44 % 56 % N/A (12) pp
Adjusted EBITDA (i)
$ (28,019) $ (1,703) $ (26,316) 1,545 %
(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.
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Net revenue – U.S.
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Net revenue $ 9,495 $ 3,364 $ 6,131 182 %
For FY 2020, the U.S. segment reported net revenue of $9.5 million, representing an increase of $6.1 million from FY 2019. The increase was primarily due to:
• An increase in sales due to a full year of U.S. segment results in FY 2020 as opposed to 117 days in FY 2019.
• The growth in existing product lines and introductions of new U.S. hemp-derived CBD products during FY 2020. A significant amount of the U.S. segment’s FY 2020 revenue was earned during the fourth quarter as a result of increased sales in the direct-to-consumer channel driven by holiday sales.
Cost of sales and gross profit – U.S.
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Cost of sales $ 5,335 $ 1,491 $ 3,844 258 %
Gross profit (loss) 4,160 1,873 2,287 122 %
Gross profit margin 44 % 56 % N/A (12) pp
For FY 2020, the U.S. segment reported gross profit of $4.2 million representing an increase in gross profit of $2.3 million from FY 2019. This was primarily due to:
• The increase in net revenue, as described above.
• Partially offset by an increase in cost of sales primarily driven by a full year of U.S. segment results in FY 2020 as opposed to 117 days in the same period in 2019.
Adjusted EBITDA – U.S.
(In thousands of U.S. dollars) Year ended December 31, Change
2020 2019 $ %
Adjusted EBITDA
$ (28,019) $ (1,703) $ (26,316) 1,545 %
(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.
For FY 2020, we reported an Adjusted EBITDA of $(28.0) million, representing a decrease in Adjusted EBITDA of $26.3 million from FY 2019. This change was primarily due to:
• Sales and marketing costs incurred in relation to the introduction of new U.S. hemp-derived CBD products.
• Increased general and administrative costs driven by increased headcount to support the Company’s growth strategy across a variety of functions.
• Partially offset by an increase in gross profit from FY 2019, as described above.
Liquidity and Capital Resources
We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our business operations and capital expenditures over the next twelve months.
Liquidity
Our primary need for liquidity is to fund operations and capital expenditures. Our ability to fund operations and capital expenditures depends on, among other things, future operating performance and cash flows that are subject to general economic conditions and financial and other factors, including factors beyond our control.
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Historically, we have primarily funded our operations through equity financing. In March 2019, Altria closed a C$2.4 billion (approximately $1.8 billion) investment in us, pursuant to which we issued to certain wholly owned subsidiaries of Altria 149,831,154 of our common shares and one warrant, as further discussed under “ Altria Strategic Investment ” herein. As of February 23, 2021, we had a cash and cash equivalents balance of $1.1 billion and $0.2 billion in short term investments to fund operations and capital expenditures.
Capital resources
As of December 31, 2020, we had $1.1 billion in cash and cash equivalents and $0.2 billion in short term investments. As of December 31, 2020, the Company had no external financing.
Contractual obligations
As of December 31, 2020, the Company had the following contractual obligations:
(In thousands of U.S. dollars) Payments Due by Period
Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
Long-term debt obligations $ — $ — $ — $ — $ —
Capital (finance) lease obligations 59 39 20 — —
Operating lease obligations 12,017 2,381 6,214 2,261 1,161
Purchase obligations 18,942 14,489 3,341 1,112 —
Other long-term liabilities 8,962 8,962 — — —
Total contractual obligations $ 39,980 $ 25,871 $ 9,575 $ 3,373 $ 1,161
Finance lease obligations relate to equipment leases maturing in June 2022. Operating lease obligations relate to land, buildings, vehicles, and office space in Canada, the U.S. and Israel. Purchase obligations include commitments for capital expenditure, information technology services, and other professional services. Other long-term liabilities relate to commitments for research and development such as Ginkgo foundry access fees, as well as undrawn but committed loans to our joint ventures.
Summary of cash flows
(In thousands of U.S. dollars) Year ended December 31,
2020 2019 2018
Net cash provided by (used in) operating activities $ (142,457) $ (130,274) $ (7,517)
Net cash provided by (used in) investing activities 20,150 (603,272) (93,908)
Net cash provided by (used in) financing activities (5,465) 1,856,941 122,112
Effect of foreign currency translation on cash and cash equivalents 6,102 52,371 (4,085)
Net change in cash $ (121,670) $ 1,175,766 $ 16,602
FY 2020 cash flows vs FY 2019 cash flows
Operating activities.
During FY 2020, we used $142.5 million of cash in operating activities as compared to $130.3 million in FY 2019, representing an increase of $12.2 million in cash used. This change is primarily driven by an increase in operating expenses in FY 2020 partially offset by increased revenues in FY 2020.
Investing activities.
During FY 2020, we received $20.2 million of cash in investing activities, as compared to $603.3 million of cash used during FY 2019, representing an increase of $623.5 million in net cash provided. This change is primarily driven by the Redwood Acquisition in FY 2019 for cash consideration of $224.3 million, as well as a $395.3 million increase from FY 2019 from the net effect of the purchase of and proceeds from maturity short-term investments.
Financing activities.
During FY 2020, cash used in financing activities was $5.5 million, as compared to $1,856.9 million of cash provided by financing activities in FY 2019, representing a net increase of $1,862.4 million. This change is primarily driven by proceeds from the strategic investment from Altria of $1,809.6 million as well as the proceeds from exercises Top-up Rights of $67.1 million by Altria partially offset by the $16.0 million repayment of the construction loan payable.
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Non-GAAP Measures
Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”). This Annual Report refers to measures not recognized under US GAAP (“non-GAAP measures”). These non-GAAP measures do not have a standardized meaning prescribed by US GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these non-GAAP measures are provided as a supplement to corresponding US GAAP measures to provide additional information regarding our results of operations from management’s perspective. Accordingly, non- GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with US GAAP. All non-GAAP measures presented in this Annual Report are reconciled to their closest reported GAAP measure. Reconciliations of historical adjusted financial measures to corresponding US GAAP measures are provided below.
Adjusted EBITDA
Management reviews Adjusted EBITDA, a non-GAAP measure which excludes non-cash items or items that do not reflect management’s assessment of on-going business performance. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: impairment loss on goodwill and intangible assets, repurposing charges, financing and transaction costs, loss (gain) on revaluation of derivative liabilities, loss (gain) on disposal of investments, share of loss (income) from equity accounted investees, loss from discontinued operations, other loss (income), review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings, of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements), and share-based payments.
Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of year-over-year results. Management uses Adjusted EBITDA for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. As a result of the appointment of Mr. Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, Adjusted EBITDA is now the primary metric upon which management views the consolidated business performance and results year-over-year.
Adjusted EBITDA by segment
Management also reviews adjusted earnings (loss) before interest, tax, depreciation and amortization by segment (“Adjusted EBITDA by segment”), a non-GAAP measure which excludes non-cash items or items that do not reflect management’s assessment of on-going business performance. Corporate expenses are removed from Adjusted EBITDA by segment. Corporate expenses are expenses that relate to the consolidated business. The Company’s method of allocating corporate expenses is refined periodically. Management defines Adjusted EBITDA by segment as net income (loss) by segment before interest, tax expense, depreciation and amortization adjusted for the same items that are adjusted in consolidated Adjusted EBITDA.
Management believes that Adjusted EBITDA by segment provides useful insight into underlying segment trends and results and provides a more meaningful comparison of year-over-year segment results. Management uses Adjusted EBITDA by segment for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. As a result of the appointment of Mr. Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business by segment, Adjusted EBITDA by segment is now the primary metric upon which management views the segment performance and results year-over-year.
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Adjusted EBITDA and Adjusted EBITDA by segment is reconciled to net income (loss) as follows for the years ended December 31, 2020 and 2019:
(in thousands of U.S. dollars) Year ended December 31, 2020
US ROW Corporate
Expenses Total
Net income (loss) $ (77,368) $ 32,671 $ (30,573) $ (75,270)
Adjustments
Interest expense (income), net 18 (18,433) — (18,415)
Income tax expense 323 1,024 — 1,347
Impairment loss on goodwill and intangible assets 40,000 — — 40,000
Financing and transaction costs 40 — — 40
Gain on revaluation of derivative liabilities — (129,254) — (129,254)
Gain on disposal of other investments — (4,789) — (4,789)
Share of loss from equity accounted investees — 4,510 — 4,510
Loss from discontinued operations — 650 — 650
Other loss (income) 20 1,814 — 1,834
Review costs related to restatement of 2019 interim financial statements — — 9,688 9,688
Share-based payments 8,714 6,647 — 15,361
Adjusted EBIT (28,253) (105,160) (20,885) (154,298)
Adjustments
Depreciation and amortization 234 6,811 — 7,045
Adjusted EBITDA $ (28,019) $ (98,349) $ (20,885) $ (147,253)
(in thousands of U.S. dollars) Year ended December 31, 2019
US ROW Corporate
Expenses Total
Net income (loss) $ (3,070) $ 1,180,241 $ (11,597) $ 1,165,574
Adjustments
Interest income, net (6) (27,963) — (27,969)
Repurposing charges — 7,268 — 7,268
Financing and transaction costs 117 32,091 — 32,208
Gain on revaluation of derivative liabilities — (1,276,819) — (1,276,819)
Gain on disposal of other investments — (16,277) — (16,277)
Share of loss from equity accounted investees — 2,009 — 2,009
Loss from discontinued operations — 363 — 363
Other loss (income) 182 (197) (182) (197)
Share-based payments 900 10,719 — 11,619
Adjusted EBIT (1,877) (88,565) (11,779) (102,221)
Adjustments
Depreciation and amortization 174 3,739 — 3,913
Adjusted EBITDA $ (1,703) $ (84,826) $ (11,779) $ (98,308)
Adjusted operating loss
Management previously reviewed operating loss on an adjusted basis, which excluded certain income and expense items that management believed were not part of underlying operations. These items typically included repurposing charges and non-recurring charges such as the review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings , of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).
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Management did not view these items to be part of underlying results as they may have been highly variable, unusual or infrequent, were difficult to predict or could distort underlying business trends and results. Management believed that adjusted operating loss provided useful insight into underlying business trends and results and provided a more meaningful comparison of year-over-year results. Management used to use adjusted operating loss for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. As a result of the appointment of Mr. Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, adjusted operating loss is no longer a primary metric upon which management views the consolidated business performance and results year-over-year.
(In thousands of U.S. dollars) Year ended December 31,
2020 2019
Reported operating loss $ (179,347) $ (121,108)
Adjustments
Review costs related to restatement of 2019 interim financial statements 9,688 —
Repurposing charges — 7,268
Adjusted operating loss $ (169,659) $ (113,840)
Adjusted operating loss by segment
Management previously reviewed operating loss by segment, which excluded corporate expenses, and adjusted operating loss by segment, which further excluded certain income and expense items that management believed were not part of the underlying segment’s operations. Corporate expenses were expenses that relate to the consolidated business and not to an individual operating segment while the income and expense items typically included non-recurring charges such as repurposing charges and review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings , of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements). Management did not view the income and expense items above to be part of underlying results of the segment as they may have been highly variable, unusual or infrequent, were difficult to predict and could distort underlying business trends and results.
As a result of the appointment of Mr. Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, adjusted operating loss by segment is no longer the primary metric upon which management views the segment performance and results year-over-year.
(In thousands of U.S. dollars) Year ended December 31, 2020
US ROW Total Segments Corporate Expenses Total
Reported operating loss $ (36,967) $ (111,807) $ (148,774) $ (30,573) $ (179,347)
Adjustments
Review costs related to restatement of 2019 interim financial statements — — — 9,688 9,688
Adjusted operating loss $ (36,967) $ (111,807) $ (148,774) $ (20,885) $ (169,659)
(In thousands of U.S. dollars) Year ended December 31, 2019
US ROW Total Segments Corporate Expenses Total
Reported operating loss $ (2,777) $ (106,552) $ (109,329) $ (11,779) $ (121,108)
Adjustments
Repurposing charges — 7,268 7,268 — 7,268
Adjusted operating loss $ (2,777) $ (99,284) $ (102,061) $ (11,779) $ (113,840)
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
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Critical Accounting Estimates
Estimates and critical judgments by management
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are reviewed periodically and adjustments are made as appropriate in the year they become known. Items for which actual results may differ materially from these estimates are described in the following section.
Refer to Note 2 “ Summary of Significant Accounting Policies ” within the Consolidated Financial Statements for further information on our critical accounting estimates and policies, which are as follows:
Goodwill and indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are not subject to amortization. We test goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if an event occurs or circumstances change that could indicate a potential impairment. We compare the fair value of our reporting units with their carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
We believe that the accounting estimate for goodwill and indefinite-lived intangible assets is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit as well as the use of the relief-from-royalty method on the Lord Jones™ brand. The expected future cash flows for each reporting unit are significantly impacted by current market conditions. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill and indefinite-lived intangible assets represents our best estimate of future events.
Based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss related to goodwill and indefinite life intangible assets of $35 million and $5 million in the U.S. reporting unit, respectively, in FY 2020. During our annual quantitative impairment test in the fourth quarter of 2020, no further impairment was recorded. Both fair values of the goodwill as well as the Lord Jones™ brand exceeded carrying value by more than 10%. No impairment was recorded in FY 2019 or FY 2018.
Inventory valuation
We value our inventory at lower of cost or net realizable value determined using weighted average cost. Inventory is reflected at the lower of cost or net realizable value considering future demand, market conditions and market prices. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions which do not reflect unanticipated events and circumstances that may occur. We record an inventory valuation adjustment for excess, slow moving, and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value. We also experience inventory write-downs due to reduced market prices. The inventory valuation adjustment to net realizable value establishes a new cost basis of the inventory that cannot be subsequently reversed. Inventory valuation adjustments are based on inventory levels, expected product life, and estimated product demand. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels.
Share-based compensation
We measure the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the Black-Scholes option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based primarily on historical daily price changes of our stock and peers. The expected option term is the number of years that we estimate that the stock options will be outstanding prior to exercise.
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Valuation of derivative liabilities
Derivative liabilities consist of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights. We measure derivative liabilities at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in net income (loss) and comprehensive income (loss). We calculate fair value of the derivative liability using the Black-Scholes model. Significant assumptions are used in the valuation of derivative liabilities, including the volatility of the share price of our Company and our peers, expected dividend yield, expected term and expected risk-free interest rate. The assumptions used in computing the fair value of derivative liabilities reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Sensitivity is performed on various inputs, refer to Note 14 “ Derivative Liabilities ” in Item 8 of this Annual Report.