Cronos Group(CRON) - 2022 Q4 - Annual Report

Product Portfolio Expansion - Cronos expanded its Spinach gummies portfolio in 2022 with new products including SOURZ by Spinach Cherry Lime (10mg THC per pack) and Spinach FEELZ™ DEEP DREAMZ CBN (10mg THC and 5mg CBN per pack)[90] - In 2022, Cronos launched new vape products including Spinach FEELZ™ Deep Dreamz Blackberry Kush (7:1 THC|CBN) 1-gram vape and Spinach Cosmic Green Apple and Polar Mint Vortex (800 mg/g THC) 1-gram vapes[92] Cannabinoid Research and Development - Cronos achieved equity milestones for cannabinoids THCVA, CBCA, and CBCVA in 2022 through its fermentation initiative with Ginkgo[93] - The Company collaborates with Ginkgo Bioworks to research, produce, and commercialize cultured cannabinoids under the Ginkgo Collaboration Agreement[491] - The Company has a research and development center in Canada focused on cannabinoid interaction, strain development, growing conditions, extraction technology, and biosynthesis[491] Financial Performance and Liquidity - Cronos reported net interest income of $22.5 million in 2022, compared to$9.1 million in 2021, with a 3.5% increase in average variable interest rate during 2022[326] - Cronos believes its significant cash on hand and short-term investments will meet liquidity and capital requirements for at least the next twelve months[89] - Net revenue for 2022 was $91.9 million, a 23.5$74.4 million in 2021[361] - Gross profit for 2022 was $11.9 million, compared to a gross loss of$17.5 million in 2021[361] - Operating loss for 2022 was $124.8 million, a 77.7$560.6 million in 2021[361] - Net loss for 2022 was $168.7 million, a 57.4$397.2 million in 2021[361] - Total operating expenses for 2022 were $136.8 million, a 74.8$543.1 million in 2021[361] - Cash used in operating activities decreased by 42.1% to $88.9 million in 2022 from$153.6 million in 2021[364] - Total shareholders' equity decreased by 14.5% to $1.14 billion in 2022 from$1.33 billion in 2021[363] - Net revenue for 2022 increased by 23% to $91.9 million compared to$74.4 million in 2021[374][379] - Gross profit for 2022 improved significantly to $11.9 million from a loss of$17.5 million in 2021, reflecting a 168% increase[374][379] - Research and development expenses decreased by $10.0 million to$13.4 million in 2022, primarily due to lower costs from the Ginkgo Collaboration Agreement and reduced U.S. product development spending[383] - General and administrative expenses decreased by $25.3 million to$71.2 million in 2022, driven by lower expected credit losses, reduced legal fees, and lower personnel-related costs[384] - Share-based compensation expenses increased by $5.0 million to$15.1 million in 2022, primarily due to accelerated equity awards for departing executives[386] - Depreciation and amortization expenses increased by $1.5 million to$6.0 million in 2022, mainly due to higher amortization on Ginkgo exclusive license intangible assets[387] - Interest income, net, increased by $13.5 million to$22.5 million in 2022, driven by higher short-term investment balances and interest rates[390] - Share of income from equity method investments improved by $9.4 million to$3.1 million in 2022, reflecting better performance from Cronos GrowCo[391] - Income tax expense for 2022 was $34.2 million, compared to a benefit of$0.4 million in 2021, primarily due to a capital gain of $479.8 million[392] - Consolidated net revenue for 2022 was$91.9 million, a $17.5 million increase from 2021, driven by higher cannabis sales in Israel and Canada[401] - Consolidated cost of sales for 2022 was$79.9 million, flat compared to 2021, despite a 23% increase in net revenue[402] - Consolidated gross profit for 2022 was $12.0 million, a$29.5 million improvement from 2021, driven by higher revenue in the ROW segment and lower cannabis biomass costs[404] - Sales and marketing expenses decreased by 50% to $22.3 million in 2022, primarily due to lower advertising and personnel-related costs[405] - ROW segment net revenue increased by 34$86.7 million in 2022, driven by higher cannabis extract sales in Canada and flower sales in Israel[417] - Gross margin for the ROW segment improved by 45 percentage points to 18% in 2022, compared to -27% in 2021[416] - Net revenue for the ROW segment in 2022 increased by 34% to $86.7 million, driven by a 156$33.0 million to $15.4 million, primarily due to increased revenue from cannabis extracts and lower biomass costs[438] - The US segment reported a 48$5.2 million in 2022, driven by the exit from the adult beauty business[439] - Cost of sales for the US segment decreased by 12% to $8.6 million in 2022, primarily due to lower sales volumes from exiting the adult beauty business[440] - The US segment reported a negative gross profit of$3.5 million in 2022, a decrease of $3.5 million from 2021, due to the exit from the adult beauty business and higher inventory reserves[441] - Operating expenses on a constant currency basis decreased by 74$140.1 million in 2022, driven by lower advertising and marketing spend and reduced payroll-related costs[430] - Net revenue for 2022 was $91.9 million, a 23$74.4 million in 2021, driven by higher cannabis extract and flower sales[447][448] - Adjusted EBITDA for 2022 improved to $(80.6) million, a 50$(160.5) million in 2021[447] - Cash and cash equivalents decreased by 14% to $764.6 million in 2022 from$887.0 million in 2021[447] - Cannabis extract sales grew 48% to $27.7 million in 2022, while cannabis flower sales increased 15$63.6 million[448] - Net loss improved by 58% to $(168.7) million in 2022 from$(397.2) million in 2021[447] - Operating expenses decreased by 75% to $136.8 million in 2022 from$543.1 million in 2021[447] - Cash used in operating activities decreased by $66.8 million to$88.9 million in 2022 compared to $153.6 million in 2021[453] - The company had$1.7 million in R&D cash requirements as of December 31, 2022, all payable within 12 months[456] - Total cash and short-term investments decreased by 13% to $877.7 million in 2022 from$1.0 billion in 2021[447] - Gross profit improved to $12.0 million in 2022 from a loss of$(17.5) million in 2021, with gross margin increasing to 13% from (24%)[447] - Net cash used in financing activities decreased to $2.9 million in 2022 from$13.4 million in 2021, primarily due to lower withholding taxes paid on equity awards[462] - Net revenue increased by 23% to $91.9 million in 2022 compared to$74.4 million in 2021, with constant currency growth of 28% to $95.2 million[473] - Gross profit on a constant currency basis increased by 172$12.6 million in 2022, driven by higher revenue in the ROW segment and lower cannabis biomass costs[474] - Net loss improved by 57% on a constant currency basis to $170.9 million in 2022, primarily due to lower impairment charges and higher gross profit[475] - Adjusted EBITDA on a constant currency basis improved by 49$82.1 million in 2022, driven by lower operating expenses and improved gross profit[476] - Cash and cash equivalents decreased by 9% to $913.8 million as of December 31, 2022, compared to$1,004.7 million in 2021, primarily due to cash flows used in operating activities[476] - Net cash used in operating activities decreased to $88.9 million in 2022 from$153.6 million in 2021[487] - Net cash provided by (used in) investing activities was $(1.8) million in 2022 compared to$(28.9) million in 2021[487] - Future minimum lease payments totaled $4.8 million as of December 31, 2022, with$1.6 million payable within 12 months[480] - Cronos GrowCo had approximately $0.7 million undrawn on its loan receivable as of December 31, 2022[481] Impairment and Asset Valuation - Non-cash impairment charges of$11.2 million, $29.0 million, and$21.2 million recorded in the first, third, and fourth quarters of 2022, respectively, related to the PharmaCann Option[340] - Non-cash impairment charge on long-lived assets in the Canadian asset group amounted to $119.9 million[349] - CBGA exclusive license impairment recognized at$1.8 million, fair value recorded at $7.3 million[349] - CBGVA exclusive license impairment recognized at$3.0 million, fair value recorded at $5.3 million[349] - THCVA exclusive license issued with total consideration of$8.4 million, no impairment recorded[349] - CBCA exclusive license issued with total consideration of $1.5 million, no impairment recorded[349] - CBCVA exclusive license issued with total consideration of$3.7 million, no impairment recorded[349] - Derivative liabilities valuation using Black-Scholes model, significant assumptions include expected term and stock price[349] - PharmaCann Option fair value estimated at $49,000 thousand as of December 31, 2022[353] - Impairment losses on goodwill and intangible assets were$236.1 million in 2021, with no impairment recorded in 2022[361][366] - Impairment loss on long-lived assets in 2022 totaled $3.5 million, primarily related to the corporate headquarters sublease plan, compared to$127.6 million in 2021[374][388] - Impairment loss on other investments in 2022 was $61.4 million, primarily due to impairment charges on the PharmaCann Option[432] - The company recognized impairment charges totaling$3,493 in 2022, a significant decrease from $127,619 in 2021[405] Corporate Governance and Leadership - Cronos appointed Mike Gorenstein as Chairman, President, and CEO in March 2022, and James Holm as CFO in November 2022[94] Strategic Priorities - Cronos' strategic priorities include growing iconic brands, developing a global sales network, establishing an efficient supply chain, and monetizing intellectual property[85] COVID-19 Impact - The COVID-19 pandemic negatively impacted Cronos' short-term revenue growth in Canada in 2021 due to lockdown measures, with some restrictions reinstated in early 2022[89] Foreign Currency and Exchange Rate Impact - Foreign currency translation loss of$50.6 million in 2022 compared to a gain of $8.2 million in 2021[328] - A 10$77.4 million as of December 31, 2022[328] Inventory and Asset Management - Total assets decreased to $1,213.0 million as of December 31, 2022, from$1,397.7 million as of December 31, 2021[346] - Cash and cash equivalents decreased to $764.6 million as of December 31, 2022, from$887.0 million as of December 31, 2021[346] - Inventory, net increased to $37.6 million as of December 31, 2022, from$32.8 million as of December 31, 2021[346] - Retained earnings decreased to $490.7 million as of December 31, 2022, from$659.4 million as of December 31, 2021[346] - Accumulated other comprehensive income (loss) decreased to $(797) thousand as of December 31, 2022, from$49.9 million as of December 31, 2021[346] - Inventory write-downs in 2021 were $12.0 million, primarily related to outdated cannabis strains in Canada, with no write-downs reported for 2022[403] Internal Control and Financial Reporting - Material weakness identified in internal control over financial reporting related to IT general controls[357] - Adverse opinion expressed on the effectiveness of the company's internal control over financial reporting[357] Revenue Recognition and Accounting Policies - Revenue recognition for dried cannabis, cannabis oil, cannabinoid-derived products, and hemp-derived products is based on the transfer of control to the customer, typically at the point of physical shipment or delivery, except for consignment transactions where revenue is recognized upon customer usage[503] - Net revenue before excise taxes is calculated by deducting expected price discounts, allowances for customer returns, and other variable considerations from gross revenue[503] - The company estimates variable consideration in contracts using the expected value method, based on historical information at contract inception[503] - Long-lived assets are reviewed for impairment when indicators suggest their carrying amount may not be recoverable, with impairment charges measured as the excess of carrying amount over fair value based on discounted cash flows[504] - Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or more frequently if events indicate a potential reduction in fair value below carrying amount[505] - Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the assets and liabilities are recovered or settled, with valuation allowances established if realization is uncertain[505] - The company uses a two-step approach to evaluate uncertain tax positions, recognizing benefits only if the position is more likely than not to be sustained upon audit[505] - Adoption of ASU 2022-02, effective for fiscal years beginning after December 15, 2022, eliminates troubled debt restructuring guidance and introduces new disclosure requirements for loan modifications[509] - Adoption of ASU 2022-03, effective for fiscal years beginning after December 15, 2023, clarifies that contractual sale restrictions on equity securities are not considered in fair value measurement[509] Share-Based Compensation and Equity - Share-based compensation includes equity-settled awards like stock options and RSUs, with fair value determined using the Black-Scholes model or market price of common shares[491] Consolidation and Subsidiaries - The Company consolidates entities where it has a controlling voting interest or is the primary beneficiary of a variable interest entity (VIE)[495] - Cronos Israel subsidiaries include Cronos Israel G.S. Cultivation Ltd. (70$928, $11,514, and$6,087 respectively[491] Intangible Assets and Amortization - Intangible assets from the Ginkgo Strategic Partnership are amortized over 10 years using the straight-line method[501] - Israeli codes (intangible assets) are amortized over the useful life of corresponding facilities using the straight-line method[501] Restructuring and Realignment - Restructuring costs in 2022 amounted to $5.3 million, related to Realignment activities, compared to no restructuring costs in 2021[385] Other Financial Metrics - Other, net for 2022 was a loss of$0.5 million, compared to income of $0.7 million in 2021, due to asset disposal losses partially offset by dividend income[433] - Net loss for 2021 was$397.2 million, with the US segment contributing $283.9 million, ROW segment$81.8 million, and Corporate $31.5 million[424] - Adjusted EBITDA for 2021 was a loss of$160.5 million, with the US segment at $40.7 million, ROW segment at$99.1 million, and Corporate at $20.6 million[424]