Cronos Group Releases Q1 2019 Financials, Net Revenue Jumps 120% to $6.5 Million

Cronos Group Closes C$2.4 Billion Strategic Investment from Altria Group

Cronos Group Establishes Cronos Device Labs, a State-of-the-Art Vaporizer R&D Initiative

NatuEra Receives License to Cultivate Psychoactive Cannabis in Colombia

Spinach™ Partners with Arrive Alive DRIVE SOBER®

Cronos Group Sells Investment in Whistler Medical Marijuana Corporation

TORONTO, May 09, 2019 (GLOBE NEWSWIRE) — Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos Group” or the “Company”), today announced financial results and business highlights for the first quarter ended March 31, 2019.

“In the first quarter of 2019, the business performed in line with our expectations. We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios,” said Mike Gorenstein, CEO of Cronos Group. “We’re delighted to have officially closed our transaction with Altria and to kick off a relationship we expect to lead to significant growth and value creation. Altria’s investment and the services that Altria will provide to Cronos Group will enhance our financial resources and allow us to expand our product development and commercialization capabilities. Altria’s skills in these areas as well as its regulatory expertise position Cronos Group to compete, scale and lead the rapidly growing global cannabis industry as markets open and welcome legalization.”

“Additionally, the launch of Cronos Device Labs announced earlier this week is an exciting next step on our journey to become a leader in cannabinoid innovation. Vaporizers have become one of the most popular forms of cannabis consumption, and we see a clear opportunity for Cronos Group to bring the next-generation of vaporizer products designed specifically for cannabinoids.”

Financial Results First Quarter 2019

Net revenue was $6.5 million in first quarter 2019, representing a 120% increase from $2.9 million in first quarter 2018, primarily driven by the launch of the adult-use market in Canada. Net revenue increased 15% quarter-over-quarter from $5.6 million in fourth quarter 2018, primarily driven by increased sales in CBD oil, which carries no excise tax reduction and increased sales of dry flower.
1,111 kilograms were sold in first quarter 2019, representing a 122% increase from 501 kilograms sold in first quarter 2018, primarily driven by increased cannabis production and the launch of the adult-use market in Canada. Kilograms sold increased 7% quarter-over-quarter from 1,040 kilograms sold in fourth quarter 2018, primarily driven by increased cannabis production.
Cost of sales before fair value adjustments per gram sold was $2.69 in first quarter 2019, representing a 14% decrease from $3.13 in first quarter 2018, and an 11% decrease from $3.02 in fourth quarter 2018. The decrease year-over-year and quarter-over-quarter was driven by increased productivity in our cultivation operations.
The Company experienced continued growth in cannabis oil sales, which represented 23% of net product revenue in first quarter 2019 compared to 9% in first quarter 2018.

Transactions

Altria Strategic Investment

In March 2019, Altria Group, Inc. (“Altria”) completed its investment of $2.4 billion in Cronos Group (the “Altria Investment”). The Altria Investment represents a 45% economic and voting interest in Cronos Group and a warrant, which is exercisable over the next four years, to acquire an additional 10% equity stake if exercised in full (the “Altria Warrant”). The Company’s strategic partnership with Altria provides Cronos Group with additional financial resources, product development and commercialization capabilities, and deep regulatory expertise to better position the Company to compete in the global cannabis industry.

Altria also received certain pre-emptive rights and top-up rights (collectively “Anti-Dilution Rights”) to purchase Cronos Group shares in order to maintain its ownership percentage upon the occurrence of specified events as described in the Company’s Financial Statements which have been filed on SEDAR and with the SEC on EDGAR. Cronos Group will record the Altria Warrant and the Anti-Dilution Rights as derivative liabilities, which will be recorded at fair value at the end of each quarter. As such, in the future Cronos Group may experience significant reported earnings volatility, primarily driven by quarterly adjustments related to movement in Cronos Group’s stock price. Such fair-value adjustments to derivative liabilities are non-cash items and have been excluded from Adjusted EBITDA.

In the first quarter 2019, Cronos Group recorded a non-cash unrealized gain on revaluation of derivative liabilities of $436.4 million.

Whistler Transaction

In March 2019, the Company sold all of its approximate 19% equity interest in Whistler Medical Marijuana Corporation (“Whistler”) to Aurora Cannabis Inc. (“Aurora”) in an all-share transaction (the “Whistler Transaction”). In connection with the closing of the Whistler Transaction, the Company received approximately $24.7 million in value of Aurora common shares, which the Company subsequently sold for approximately $25.6 million in cash. Subject to the satisfaction of certain specified milestones, the Company expects to receive an additional $7.6 million in value of Aurora common shares. Based on market conditions at the time of the transaction and assuming all milestones are met, the Company expects to generate, in aggregate, an 8.7x return on its investment in Whistler.

Business Highlights

Global Production

In March 2019, the Company’s joint venture NatuEra S.à r.l. (“NatuEra”) with affiliate Agroidea SAS, a leading Colombian agricultural services provider, received a license from the Colombian Ministry of Justice and Law to cultivate psychoactive cannabis for the production of seeds for cultivation, the production of grain, and the manufacture of derivative products.

NatuEra intends to develop, cultivate, manufacture and export cannabis-based medical and consumer products for the Latin American and global markets. NatuEra is the cannabis industry’s first Contract Manufacturing Organization (CMO) in Latin America; it plans to allow the growing number of cannabis brands to outsource cultivation and manufacturing. NatuEra plans to develop its initial cultivation and manufacturing operations with a purpose-built, GMP-standard facility located in Cundinamarca, Colombia.

Global Sales and Distribution

In January 2019, the Company secured listings with various private retailers in Saskatchewan. Together with its established listings in Ontario, British Columbia, Nova Scotia and Prince Edward Island, the Company has secured listings to distribute its products in five provinces, which represent approximately 58% of the Canadian population. As the Company’s production capacity grows, the Company intends to increase penetration within existing markets and expand its distribution into additional provinces and territories in Canada.

In January 2019, the Israeli government approved the export of medical cannabis from Israel, which would allow medical cannabis license holders that meet certain quality standards to export medical cannabis, under the supervision of the Israeli authorities, to United Nations’ Single Convention on Narcotic Drugs-signatory countries that have explicitly approved the import of cannabis. Subject to obtaining all necessary licenses and permits, the Company intends to export medical cannabis products from Cronos Israel once operations have commenced.

Intellectual Property Initiatives

Cronos Group established Cronos Device Labs, a global research and development (“R&D”) center for vaporizer innovation. Cronos Device Labs’ state-of-the-art facility is based in Israel, a leader in cannabis R&D, and supports Cronos Group’s efforts to develop next-generation vaporizer products that are designed specifically for cannabinoid applications.

Cronos Device Labs, which is equipped with an experienced team of product development talent, advanced vaporizer technology and analytical testing infrastructure, serves as the global center of R&D for the Company’s vaporizer devices. The 23-member team at Cronos Device Labs, which brings to Cronos Group over 80 years of combined expertise in vaporizer development, is comprised of product designers, mechanical, electrical and software engineers, and analytical and formulation scientists. Cronos Device Labs significantly enhances Cronos Group’s technology and development capabilities and is expected to enable the Company to deliver expanded product offerings to customers that are specially tailored to cannabinoid use.

Brand Portfolio

Cronos Group’s adult-use cannabis-brand Spinach™ partnered with foodora, Canada’s on-demand food delivery service, and arrive alive DRIVE SOBER® to encourage responsible, sober driving. Every dollar raised for arrive alive DRIVE SOBER® goes directly to the campaign’s road safety initiatives. The campaign works with police services, public health units, schools, community groups and businesses to help spread the message of safe and sober driving through resource sharing, public campaign and awareness events.

Conference Call

The Company will host a conference call and live audio webcast on Thursday, May 9, 2019 at 8:30 a.m. EST to discuss first quarter 2019 results. The call will last approximately one hour. Instructions for the conference call are provided below:

Live audio webcast: https://ir.thecronosgroup.com/events/event-details/first-quarter-2019-earnings-conference-call
Toll Free from the U.S. and Canada dial-in: (866) 795-2258
International dial-in: (409) 937-8902
Conference ID: 8599026

An audio replay of the call will be archived on the Company’s website for replay.

About Cronos Group
Cronos Group is an innovative global cannabinoid company with international production and distribution across five continents. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group’s portfolio includes PEACE NATURALS™, a global health and wellness platform, and two adult-use brands COVE™ and Spinach™. To learn more about Cronos Group and its brands, please visit: www.thecronosgroup.com; www.peacenaturals.com; www.covecannabis.ca; www.spinachcannabis.com.

All references in this news release to “dollars”, “C$” or “$” are to Canadian dollars and all references to “US$” are to United States dollars.

Non-IFRS measures

The Company uses certain measures that are not recognized under International Financial Reporting Standards (“IFRS”), do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. Rather, these measures are provided as a supplement to those IFRS measures to provide additional information regarding the Company’s results of operations from management’s perspective. Accordingly, non-IFRS measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with IFRS. Each non-IFRS measure is reconciled to its most directly comparable IFRS measure.

Adjusted EBIT
Adjusted earnings before interest and tax (“Adjusted EBIT”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis. Adjusted EBIT is defined as net income or loss, excluding interest expense, interest income, deferred income tax expense or recovery, share-based payments, unrealized change in the fair value of biological assets, realized fair value adjustments on inventory sold, financing costs, gain on revaluation of derivative liabilities, share of income or loss from investments in equity accounted investees and gain or loss on investments. The Company believes that Adjusted EBIT is useful to compare its operating profitability across periods. A reconciliation of Adjusted EBIT to net income, the most directly comparable IFRS measure, is provided below.

Adjusted EBITDA
Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis. Adjusted EBITDA is defined as Adjusted EBIT excluding depreciation and amortization. The Company believes that EBITDA is useful to compare its ability to generate cash from operations across periods. A reconciliation of Adjusted EBITDA to net income, the most directly comparable IFRS measure, is provided below.

Reconciliation of non-IFRS measures
A reconciliation of Adjusted EBIT and Adjusted EBITDA to net income, the most directly comparable IFRS measure, is presented in the following table.