Cronos Group(CRON) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Cronos Group Inc.'s unaudited condensed consolidated financial statements and detailed notes on accounting policies and financial items Condensed Consolidated Balance Sheets Total assets decreased to $1,091,048 thousand by June 30, 2024, from $1,140,085 thousand at year-end 2023, with reduced liabilities and equity Condensed Consolidated Balance Sheets (in thousands of U.S. dollars) | Metric | As of June 30, 2024 (in thousands of U.S. dollars) | As of December 31, 2023 (in thousands of U.S. dollars) | | :--------------------------------- | :------------------------------------------------- | :---------------------------------------------------- | | Total assets | $1,091,048 | $1,140,085 | | Total current assets | $935,278 | $933,306 | | Cash and cash equivalents | $848,189 | $669,291 | | Short-term investments | — | $192,237 | | Total liabilities | $35,256 | $43,961 | | Total shareholders' equity | $1,055,792 | $1,096,124 | Condensed Consolidated Statements of Net Loss and Comprehensive Income (Loss) Net loss for the six months ended June 30, 2024, improved to $11,243 thousand from $27,754 thousand in the prior year, driven by revenue growth and expense reduction Condensed Consolidated Statements of Net Loss and Comprehensive Income (Loss) (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenue | $27,762 | $19,021 | $53,050 | $38,516 | | Gross profit | $6,297 | $3,099 | $10,780 | $6,026 | | Operating loss | $(15,561) | $(20,620) | $(31,509) | $(41,389) | | Total other income | $4,628 | $14,777 | $17,534 | $16,075 | | Net loss | $(8,759) | $(8,497) | $(11,243) | $(27,754) | | Basic and diluted net loss per share | $(0.02) | $(0.02) | $(0.03) | $(0.07) | Condensed Consolidated Statements of Changes in Equity Total shareholders' equity decreased to $1,055,792 thousand by June 30, 2024, primarily due to net loss and foreign exchange impacts Condensed Consolidated Statements of Changes in Equity (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | As of January 1, 2024 | As of June 30, 2024 | | :------------------------------------ | :-------------------- | :------------------ | | Share capital | $613,725 | $616,379 | | Additional paid-in capital | $48,449 | $49,298 | | Retained earnings | $416,719 | $405,650 | | Accumulated other comprehensive (loss)| $20,678 | $(12,013) | | Total shareholders' equity | $1,096,124 | $1,055,792 | Condensed Consolidated Statements of Cash Flows Operating cash outflow significantly improved to $460 thousand for six months ended June 30, 2024, while investing activities generated $180,999 thousand Condensed Consolidated Statements of Cash Flows (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Cash flows used in operating activities | $(460) | $(59,467) | | Cash flows provided by (used in) investing activities | $180,999 | $(298,964) | | Cash flows used in financing activities | $(905) | $(782) | | Net change in cash and cash equivalents | $178,898 | $(355,216) | | Cash and cash equivalents, end of period | $848,189 | $409,428 | Notes to Condensed Consolidated Financial Statements (Unaudited) Detailed notes cover background, accounting policies, segment information, revenue recognition, and specific financial items including discontinued operations and investments 1. Background, Basis of Presentation, and Summary of Significant Accounting Policies Cronos Group, a global cannabinoid company, exited U.S. hemp operations in Q2 2023, now operating as a single segment in Canada and Israel, with revenue from cannabis flower and extracts - Cronos Group Inc. is an innovative global cannabinoid company focused on building disruptive intellectual property through cannabis research, technology, and product development, with a portfolio including Spinach®, PEACE NATURALS®, and Lord Jones®[15] - In Q2 2023, the Company exited its U.S. hemp-derived cannabinoid product operations, which are now reported as discontinued operations[16] - The Company now operates as a single reportable segment, comprising operations in Canada and Israel, involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products[16] Revenue by Category (in thousands of U.S. dollars) | Revenue Category (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cannabis flower | $20,661 | $14,014 | $38,186 | $27,142 | | Cannabis extracts | $7,064 | $4,926 | $14,791 | $11,227 | | Other | $37 | $81 | $73 | $147 | | Net revenue | $27,762 | $19,021 | $53,050 | $38,516 | - As of June 30, 2024, 30% of the Company's accounts receivable were due from one major customer, indicating a concentration of credit risk[19] 2. Discontinued Operations Cronos Group exited U.S. hemp-derived cannabinoid operations in Q2 2023, classifying them as discontinued, with no activity reported in 2024 - The Company exited its U.S. hemp-derived cannabinoid product operations in Q2 2023, classifying them as discontinued operations[22] - No activity was reported in discontinued operations for the three and six months ended June 30, 2024[22] Net Loss from Discontinued Operations (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2023 | Six months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :----------------------------- | | Net revenue | $380 | $1,029 | | Gross profit | $(1,307) | $(1,854) | | Total operating expenses | $1,367 | $2,047 | | Net loss from discontinued operations | $(2,834) | $(4,056) | 3. Inventory, net Net inventory decreased slightly to $29,182 thousand by June 30, 2024, from $30,495 thousand at year-end 2023, with finished goods as the largest component Inventory by Category (in thousands of U.S. dollars) | Inventory Category (in thousands of U.S. dollars) | As of June 30, 2024 | As of December 31, 2023 | | :------------------------------------------------ | :------------------ | :---------------------- | | Raw materials | $5,351 | $4,795 | | Work-in-progress | $9,116 | $10,593 | | Finished goods | $14,367 | $14,819 | | Supplies and consumables | $348 | $288 | | Total | $29,182 | $30,495 | 4. Investments Equity investment in Cronos GrowCo increased to $21,226 thousand, while other investments decreased significantly due to $25,650 thousand impairment charges on the PharmaCann Option Investments (in thousands of U.S. dollars) | Investment (in thousands of U.S. dollars) | As of June 30, 2024 | As of December 31, 2023 | | :---------------------------------------- | :------------------ | :---------------------- | | Equity method investments, net | $21,226 | $19,488 | | Other investments | $3,168 | $35,251 | Share of Income (Loss) from Equity Method Investments (in thousands of U.S. dollars) | Share of Income (Loss) from Equity Method Investments (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :----------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cronos GrowCo | $917 | $270 | $2,365 | $(226) | - The PharmaCann Option, an investment in a U.S. cannabis company, incurred non-cash impairment charges of $12,734 thousand in Q1 2024 and $12,916 thousand in Q2 2024, totaling $25,650 thousand for the six months ended June 30, 2024, due to adverse forecast changes in PharmaCann's financial performance[32][33] - Beginning in Q3 2024, Cronos GrowCo's results will be consolidated into the Company's financial statements, and the investment will be reclassified as an intercompany transaction[30] 5. Loans Receivable, net Total loans receivable, net, increased to $78,040 thousand by June 30, 2024, driven by a C$70,000 thousand (approximately $51 million) increase in the GrowCo Credit Facility Loans Receivable, net (in thousands of U.S. dollars) | Loan Type (in thousands of U.S. dollars) | As of June 30, 2024 | As of December 31, 2023 | | :--------------------------------------- | :------------------ | :---------------------- | | GrowCo Credit Facility | $62,146 | $58,679 | | Mucci Promissory Note | $13,929 | $13,379 | | Cannasoul Collaboration Loan | $1,692 | $1,771 | | Accrued interest | $273 | $755 | | Total loans receivable, net | $78,040 | $74,577 | - The GrowCo Credit Facility was amended in June 2024 to increase the aggregate principal amount by C$70,000 thousand (approximately $51 million) through a second secured non-revolving credit facility (Term Loan B) to fund facility expansion[35] - Expected credit loss allowances on long-term financial assets increased by $1,021 thousand for the six months ended June 30, 2024, primarily due to increased loans under the GrowCo Credit Facility[37][38] 6. Restructuring Cronos Fermentation operations ceased in Q1 2024, incurring $1,631 thousand impairment and $445 thousand loss, while the Peace Naturals Campus sale agreement was terminated - The Company ceased operations at Cronos Fermentation in Q1 2024, leading to a $1,631 thousand impairment loss on long-lived assets and a $445 thousand loss for estimated costs to sell[40] Restructuring Costs (in thousands of U.S. dollars) | Restructuring Costs (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Six months ended June 30, 2024 | | :------------------------------------------------- | :------------------------------- | :----------------------------- | | Employee Termination Benefits | $24 | $24 | | Other Restructuring Costs | $547 | $547 | | Total Restructuring Costs | $571 | $571 | - The agreement for the sale and leaseback of the Peace Naturals Campus was terminated in Q2 2024, and the Company is exploring other strategic options for the facility[40] 7. Share-based Compensation Share-based compensation expense decreased to $4,251 thousand for the six months ended June 30, 2024, due to headcount reductions, with stock options decreasing and RSUs increasing Share-based Compensation Expense (in thousands of U.S. dollars) | Share-based Compensation Expense (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $33 | $372 | $67 | $1,106 | | RSUs | $2,203 | $1,959 | $4,184 | $3,760 | | Total share-based compensation | $2,236 | $2,331 | $4,251 | $4,866 | Share-based Awards | Share-based Awards | As of June 30, 2024 | As of December 31, 2023 | | :----------------- | :------------------ | :---------------------- | | Stock options | 721,505 | 2,103,201 | | RSUs | 8,450,225 | 7,381,541 | | DSUs | 366,296 | 521,679 | 8. Loss per Share Basic and diluted loss per share from continuing operations was $(0.03) for the six months ended June 30, 2024, with no discontinued operations loss Loss per Share (in thousands of U.S. dollars) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------------------------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss from continuing operations attributable to Cronos Group shareholders (in thousands of USD) | $(8,757) | $(5,526) | $(10,998) | $(23,473) | | Basic and diluted loss from continuing operations per share | $(0.02) | $(0.01) | $(0.03) | $(0.06) | | Net loss from discontinued operations attributable to Cronos Group shareholders (in thousands of USD) | — | $(2,834) | — | $(4,056) | | Basic and diluted loss from discontinued operations per share | — | $(0.01) | — | $(0.01) | - Total securities of 19,434,059 and 22,007,363 were not included in the computation of diluted shares outstanding for the three and six months ended June 30, 2024, respectively, as their inclusion would be anti-dilutive[49] 9. Commitments and Contingencies The company faces ongoing legal proceedings, including class actions and regulatory reviews, with new litigation and a proposed 369% anti-dumping duty on Canadian medical cannabis imports into Israel - The Company is subject to ongoing class action complaints in the U.S. and Canada related to the restatement of its 2019 interim financial statements, with a reconsideration motion pending in the U.S. and a class action certified in Canada[52][53] - Regulatory settlements with the SEC and OSC in October 2022 resolved investigations into the restatements, with the SEC settlement resulting in the loss of well-known seasoned issuer status for three years and restrictions on private offering exemptions for five years[54][55][56] - A class action lawsuit in Israel alleging violations in medical cannabis marketing was dismissed by the District Court of Tel Aviv, but the plaintiffs have appealed to the Supreme Court of Israel[58] - The Israel Ministry of Economy and Industry initiated an anti-dumping investigation into Canadian medical cannabis imports, with a preliminary determination proposing a 369% duty on Canadian licensed producers, which could materially impact the Company's Israeli business[58] 10. Fair Value Measurements Financial assets and liabilities are measured using a three-level fair value hierarchy, with the PharmaCann Option, a Level 3 asset, impaired to zero for the six months ended June 30, 2024 Fair Value Measurements (in thousands of U.S. dollars) | Asset/Liability (in thousands of U.S. dollars) | Level 1 | Level 2 | Level 3 | Total | | :--------------------------------------------- | :------ | :------ | :------ | :---- | | Cash and cash equivalents (June 30, 2024) | $848,189| — | — | $848,189| | Other investments (June 30, 2024) | $3,168 | — | — | $3,168 | | Derivative liabilities (June 30, 2024) | — | — | $21 | $21 | | Short-term investments (Dec 31, 2023) | $192,237| — | — | $192,237| - The PharmaCann Option, a Level 3 asset measured on a non-recurring basis, was impaired to zero for the six months ended June 30, 2024, following impairment charges in the first and second quarters[62] 11. Related Party Transactions Significant related party transactions with Cronos GrowCo include $16,952 thousand in purchases and a new supply agreement for 70-80% of GrowCo's production Related Party Transactions (in thousands of U.S. dollars) | Related Party Transaction (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cronos GrowCo – purchases | $9,942 | $6,549 | $16,952 | $14,015 | | Cronos GrowCo – germplasm supply agreement revenue | $266 | — | $627 | — | | Related-party vendor – purchases | $260 | $603 | $936 | $1,436 | - An amended and restated supply agreement with Cronos GrowCo grants Cronos the right to purchase 70-80% of Cronos GrowCo's forecasted and actual production capacity[64] - Beginning in Q3 2024, Cronos GrowCo's results will be consolidated into the Company's financial statements, and all transactions will be eliminated upon consolidation[64] 12. Subsequent Events Effective July 1, 2024, Cronos Group gained majority control of Cronos GrowCo, leading to consolidation of GrowCo's financial results starting in Q3 2024 - As of July 1, 2024, Cronos Group gained majority control of Cronos GrowCo's board, leading to the consolidation of Cronos GrowCo's financial results starting in Q3 2024[66] - The consolidation of Cronos GrowCo is a business combination under ASC 805, with $196 thousand in acquisition costs recorded in Q2 2024[66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results for Q2 2024, covering forward-looking statements, currency, business overview, strategy, recent developments, consolidated results, non-GAAP measures, and liquidity Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties, covering impacts of the Anti-Dumping Investigation, Middle East Conflict, market expansion, and Cronos GrowCo expansion - Forward-looking statements are based on current expectations and assumptions, covering topics such as the Anti-Dumping Investigation, Middle East Conflict, market expansion, cost-cutting, U.S. hemp exit, and Cronos GrowCo expansion[69][71][73] - Key risks include potential negative impacts from the Anti-Dumping Investigation and Middle East Conflict on Israeli operations, challenges in market distribution, inability to achieve anticipated benefits from restructuring, raw material shortages, and regulatory obstacles[75] Foreign currency exchange rates The company reports in U.S. dollars, translating foreign operations' assets and liabilities at period-end rates and income/cash flows at average rates, impacting reported financial results - The Company's reporting currency is U.S. dollars. Foreign operations' assets and liabilities are translated at period-end exchange rates, while income statements and cash flows use average rates[76] Canadian Dollar Exchange Rate (C$ per $) | Currency Exchange Rate (C$ per $) | As of June 30, 2024 | As of June 30, 2023 | As of December 31, 2023 | | :-------------------------------- | :------------------ | :------------------ | :---------------------- | | Spot rate | 1.3674 | 1.3242 | 1.3243 | | Year-to-date average rate | 1.3581 | 1.3474 | N/A | New Israeli Shekel Exchange Rate (ILS per $) | Currency Exchange Rate (ILS per $) | As of June 30, 2024 | As of June 30, 2023 | As of December 31, 2023 | | :--------------------------------- | :------------------ | :------------------ | :---------------------- | | Spot rate | 3.7742 | 3.7051 | 3.6163 | | Year-to-date average rate | 3.6950 | 3.5892 | N/A | Business Overview Cronos Group is a global cannabinoid company focused on cannabis research, technology, and product development, building an iconic brand portfolio including Spinach®, PEACE NATURALS®, and Lord Jones® - Cronos is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology, and product development[79] - The company's brand portfolio includes Spinach®, PEACE NATURALS®, and Lord Jones®[79] Strategy Cronos Group's strategy focuses on growing iconic brands, developing a global sales network, establishing an efficient supply chain, and monetizing disruptive intellectual property - Cronos's strategy includes four core priorities[81] - Growing a portfolio of iconic brands that responsibly elevate the consumer experience[81] - Developing a diversified global sales and distribution network[81] - Establishing an efficient global supply chain[81] - Creating and monetizing disruptive intellectual property[81] Discontinued Operations Cronos exited U.S. hemp-derived cannabinoid operations in Q2 2023, classifying them as discontinued due to a strategic shift impacting operations and financial results - Cronos exited its U.S. hemp-derived cannabinoid product operations in Q2 2023, classifying them as discontinued operations due to a strategic shift[81] Business Segments After exiting U.S. operations in Q2 2023, Cronos now reports as a single segment encompassing Canadian and Israeli operations, adhering to medical cannabis certifications - Cronos now reports through one consolidated segment, encompassing operations in Canada and Israel, after exiting U.S. operations in Q2 2023[82] - Canadian operations are conducted through Peace Naturals Project Inc. in Stayner, Ontario, while Israeli operations adhere to IMC-GAP, IMC-GMP, and IMC-GDP certifications for medical cannabis[82] Recent Developments Recent developments include monitoring the Middle East Conflict, expanding investment in Cronos GrowCo with a $51 million credit facility, and terminating the Peace Naturals Campus sale agreement Middle East Conflict Cronos monitors the Middle East Conflict for potential impacts on Israeli personnel, business, and financial assets, acknowledging high uncertainty and material change possibility - Cronos is monitoring the Middle East Conflict for potential impacts on its Israeli personnel, business, and financial assets/liabilities, acknowledging high uncertainty and potential material changes[84] Transaction with Cronos GrowCo Cronos provided a $51 million (C**$70 million**) credit facility to Cronos GrowCo for expansion, gained enhanced governance, and will consolidate results from Q3 2024, with a new supply agreement for 70-80% of production - Cronos provided an approximately $51 million (C**$70 million**) secured non-revolving credit facility to Cronos GrowCo for facility expansion, aiming to meet global demand for high-quality cannabis flower[85] - As of July 1, 2024, Cronos gained enhanced governance over GrowCo, appointing three of five board members, and will consolidate GrowCo's financial results starting in Q3 2024[85][87] - A new supply agreement grants Cronos the option to purchase up to 80% of GrowCo's total production before expansion sales, and 70% thereafter[86] Termination of Agreement for Sale and Leaseback of Peace Naturals Campus The Peace Naturals Campus sale and leaseback agreement was terminated on May 28, 2024, prompting evaluation of alternative strategic options for the facility - The sale and leaseback agreement for the Peace Naturals Campus was terminated on May 28, 2024[87] - The Company is now evaluating strategic options for the Peace Naturals Campus, including potentially continuing and expanding operations at the facility[87] Consolidated Results of Operations Net revenue and gross profit significantly improved for Q2 2024, driven by increased cannabis sales and reduced operating expenses, despite impairment losses leading to a net loss Summary of select financial results Net revenue increased by 46% to $27.8 million for three months and 38% to $53.1 million for six months ended June 30, 2024, with gross profit growing 103% and 79% respectively Summary of Select Financial Results (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Change $ | Change % | | :------------------------------------ | :------------------------------- | :------------------------------- | :------- | :------- | | Net revenue | $27,762 | $19,021 | $8,741 | 46 % | | Cost of sales | $21,070 | $15,922 | $5,148 | 32 % | | Gross profit | $6,297 | $3,099 | $3,198 | 103 % | | Gross margin | 23 % | 16 % | N/A | 7 pp | Summary of Select Financial Results (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | Change $ | Change % | | :------------------------------------ | :----------------------------- | :----------------------------- | :------- | :------- | | Net revenue | $53,050 | $38,516 | $14,534 | 38 % | | Cost of sales | $41,875 | $32,490 | $9,385 | 29 % | | Gross profit | $10,780 | $6,026 | $4,754 | 79 % | | Gross margin | 20 % | 16 % | N/A | 4 pp | Net revenue Consolidated net revenue increased by $8.7 million (46%) for three months and $14.5 million (38%) for six months ended June 30, 2024, driven by higher cannabis sales in Canada and Israel - Net revenue increased by $8.7 million (46%) for the three months and $14.5 million (38%) for the six months ended June 30, 2024[91] - The increase was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market, higher cannabis flower sales in Israel, and sales in other countries[91] - This growth was partially offset by an adverse price/mix in the Canadian cannabis flower category, leading to increased excise tax payments as a percentage of revenue[91] Inventory write-down Inventory write-downs of $0.4 million were reported for both three and six months ended June 30, 2024, primarily due to scrapped unusable inventory Inventory Write-down (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Inventory write-down | $395 | — | $395 | — | - The increase in inventory write-downs was primarily due to unusable inventory that was scrapped in the period[92] Cost of sales Consolidated cost of sales increased by $5.1 million (32%) for three months and $9.4 million (29%) for six months ended June 30, 2024, driven by higher cannabis sales volumes Cost of Sales (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of sales | $21,070 | $15,922 | $41,875 | $32,490 | - The increase in cost of sales was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market, and higher cannabis flower sales in Israel and other countries[93] Gross profit Gross profit increased by $3.2 million (103%) for three months and $4.8 million (79%) for six months ended June 30, 2024, driven by higher cannabis sales volumes Gross Profit (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross profit | $6,297 | $3,099 | $10,780 | $6,026 | - The increase in gross profit was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market, higher cannabis flower sales in Israel, and sales in other countries[93] - This was partially offset by an adverse price/mix in the Canadian cannabis flower category, driving increased excise tax payments as a percentage of revenue, and higher inventory write-downs[93] Operating expenses Total operating expenses decreased by $1.9 million (8%) for three months and $5.1 million (11%) for six months ended June 30, 2024, due to reduced sales, marketing, R&D, and G&A Operating Expenses (in thousands of U.S. dollars) | Operating Expense (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Change $ | Change % | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Sales and marketing | $4,330 | $5,297 | $(967) | (18)% | | Research and development | $962 | $1,107 | $(145) | (13)% | | General and administrative | $12,767 | $13,451 | $(684) | (5)% | | Restructuring costs | $547 | — | $547 | N/M | | Share-based compensation | $2,236 | $2,331 | $(95) | (4)% | | Depreciation and amortization | $1,016 | $1,533 | $(517) | (34)% | | Impairment loss on long-lived assets | — | — | — | N/A | | Total operating expenses | $21,858 | $23,719 | $(1,861) | (8)% | Operating Expenses (in thousands of U.S. dollars) | Operating Expense (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | Change $ | Change % | | :----------------------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Sales and marketing | $9,662 | $11,038 | $(1,376) | (12)% | | Research and development | $1,959 | $3,146 | $(1,187) | (38)% | | General and administrative | $21,674 | $25,307 | $(3,633) | (14)% | | Restructuring costs | $630 | — | $630 | N/M | | Share-based compensation | $4,251 | $4,866 | $(615) | (13)% | | Depreciation and amortization | $2,139 | $3,058 | $(919) | (30)% | | Impairment loss on long-lived assets | $1,974 | — | $1,974 | N/A | | Total operating expenses | $42,289 | $47,415 | $(5,126) | (11)%| Other income and income tax benefit Total other income decreased by $10.1 million (69%) for three months but increased by $1.5 million (9%) for six months, impacted by impairment losses and foreign currency gains Other Income/Benefit (in thousands of U.S. dollars) | Other Income/Benefit (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Change $ | Change % | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Interest income, net | $13,451 | $12,471 | $980 | 8 % | | Share of income (loss) from equity method investments | $917 | $270 | $647 | 240 % | | Gain (loss) on revaluation of financial instruments | $(3,615) | $5,193 | $(8,808) | N/M | | Impairment loss on other investments | $(12,916) | — | $(12,916)| N/M | | Foreign currency transaction gain (loss) | $6,543 | $(3,174) | $9,717 | N/M | | Other, net | $248 | $17 | $231 | N/M | | Total other income | $4,628 | $14,777 | $(10,149)| (69)%| | Income tax benefit | $2,174 | $180 | $1,994 | N/M | | Loss from discontinued operations | — | $(2,834) | $2,834 | N/M | Other Income/Benefit (in thousands of U.S. dollars) | Other Income/Benefit (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | Change $ | Change % | | :-------------------------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Interest income, net | $27,696 | $23,646 | $4,050 | 17 % | | Share of income (loss) from equity method investments | $2,365 | $(226) | $2,591 | N/M | | Gain (loss) on revaluation of financial instruments | $(6,257) | $(2,565) | $(3,692) | (144)% |\ | Impairment loss on other investments | $(25,650) | — | $(25,650)| N/M | | Foreign currency transaction gain (loss) | $19,802 | $(4,817) | $24,619 | N/M | | Other, net | $(422) | $37 | $(459) | N/M | | Total other income | $17,534 | $16,075 | $1,459 | 9 % | | Income tax benefit | $2,732 | $1,616 | $1,116 | 69 % | | Loss from discontinued operations | — | $(4,056) | $4,056 | N/M | Non-GAAP Measures Non-GAAP measures, including Adjusted EBITDA and constant currency, provide insights into operational performance, showing improvement for both three and six months ended June 30, 2024 Adjusted EBITDA Adjusted EBITDA improved to $(11,051) thousand for three months and $(21,720) thousand for six months ended June 30, 2024, reflecting adjustments for non-cash and non-recurring items - Adjusted EBITDA is a non-GAAP measure that excludes non-cash items and items not reflecting management's assessment of ongoing business performance[111] Adjusted EBITDA (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Net loss | $(8,759) | $(8,497) | | EBITDA | $(22,871) | $(18,771) | | Adjustments (total) | $11,820 | $1,890 | | Adjusted EBITDA | $(11,051) | $(16,881) | Adjusted EBITDA (in thousands of U.S. dollars) | Metric (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(11,243) | $(27,754) | | EBITDA | $(38,427) | $(48,239) | | Adjustments (total) | $16,707 | $14,594 |\ | Adjusted EBITDA | $(21,720) | $(33,645) | Constant Currency Constant currency adjustments show net revenue increased by 49% for three months and 40% for six months, with Adjusted EBITDA improving by 32% due to higher sales and reduced expenses - Constant currency measures are used to assess underlying operational performance by excluding the effect of foreign currency rate fluctuations[119] Constant Currency Performance (in thousands of U.S. dollars) | Metric (Constant Currency, in thousands of U.S. dollars) | Three months ended June 30, 2024 | Change % (YoY) | | :------------------------------------------------------- | :------------------------------- | :------------- | | Net revenue | $28,290 | 49 % | | Gross profit | $6,434 | 108 % | | Gross margin | 23 % | 7 pp | | Operating expenses | $21,861 | (8)% | | Net loss from continuing operations | $(8,162) | (44)% | | Adjusted EBITDA | $(10,863) | 32 % | Constant Currency Performance (in thousands of U.S. dollars) | Metric (Constant Currency, in thousands of U.S. dollars) | Six months ended June 30, 2024 | Change % (YoY) | | :------------------------------------------------------- | :----------------------------- | :------------- | | Net revenue | $53,795 | 40 % | | Gross profit | $10,983 | 82 % | | Gross margin | 20 % | 4 pp | | Operating expenses | $42,336 | (11)% | | Net loss from continuing operations | $(10,643) | 55 % | | Adjusted EBITDA | $(21,508) | 32 % | - The improvement in Adjusted EBITDA on a constant currency basis was driven by higher cannabis flower and extract sales in Canada and Israel, decreases in general and administrative expenses, and lower costs associated with Ginkgo milestones[130] Liquidity and Capital Resources As of June 30, 2024, Cronos held $848.2 million in cash, with significantly decreased operating cash outflow and substantial cash generated from investing activities - As of June 30, 2024, the Company had $848.2 million in cash and cash equivalents and no short-term investments, which is believed to be sufficient for the next twelve months[132] Cash Flow Activity (in thousands of U.S. dollars) | Cash Flow Activity (in thousands of U.S. dollars) | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Cash flows used in operating activities | $(460) | $(59,467) | | Cash flows provided by (used in) investing activities | $180,999 | $(298,964) | | Cash flows used in financing activities | $(905) | $(782) | | Net change in cash | $178,898 | $(355,216) | - The $59.0 million decrease in cash used in operating activities was driven by a $32.8 million decrease in income taxes payable in the prior period, a $21.5 million increase in net income (after non-cash adjustments), higher interest received, and lower inventory increases[133] - Investing activities generated $181.0 million, a $480.0 million change from the prior year, primarily due to the maturity of short-term investments reinvested as cash equivalents[134] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces foreign currency risk from Canadian and Israeli operations; a 10% CAD exchange rate change would impact net assets by $103.4 million, with no hedging in place Foreign currency risk Cronos Group faces foreign currency risk from Canadian and Israeli operations; a 10% CAD exchange rate change would impact net assets by $103.4 million, with no hedging leading to potential significant gains or losses - The Company is exposed to foreign currency risk from its Canadian and Israeli operations, with assets, liabilities, and revenues denominated in Canadian dollars and Israeli new shekels[139] - A 10% change in the Canadian dollar exchange rate would affect the carrying amount of net assets by approximately $103.4 million as of June 30, 2024[139] - The Company does not engage in hedging transactions, making it susceptible to significant foreign currency translation gains and losses, such as the $32.5 million loss for the six months ended June 30, 2024[139] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2024, ensuring timely and accurate SEC reporting - As of June 30, 2024, the Company's disclosure controls and procedures were deemed effective by management, including the CEO and CFO[141] - These controls provide reasonable assurance that information for SEC reports is recorded, processed, summarized, and reported timely, and communicated to management for disclosure decisions[141] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended June 30, 2024 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2024[141] PART II OTHER INFORMATION Item 1: Legal Proceedings Legal proceedings information is incorporated by reference from Note 9(b) of the condensed consolidated interim financial statements, detailing ongoing legal and regulatory matters - Information regarding legal proceedings is incorporated by reference from Note 9(b), 'Contingencies,' in the financial statements[143] Item 1A: Risk Factors Key risks include potential auditor delays, raw material shortages, and a proposed 369% anti-dumping duty on Canadian medical cannabis imports into Israel, which could materially impact operations - The new auditor, Davidson & Company LLP, may not complete the review of Q3 2024 financial statements on time, potentially delaying the filing of the Quarterly Report on Form 10-Q[144] - The Company anticipates shortages in raw materials, particularly biomass, and may face challenges in obtaining adequate supplies at commercially reasonable prices, potentially leading to product shortages, delays, and reputational damage[145] - A proposed 369% anti-dumping duty on Canadian medical cannabis imports into Israel, following a preliminary determination by the Trade Levies Commissioner, could materially and negatively impact the Company's Israeli business and financial results[146] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds to report[147] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities to report[147] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable[147] Item 5. Other Information No directors or executive officers entered, modified, or terminated Rule 10b5-1 trading plans during Q2 2024, though share withholding elections may occur Rule 10b5-1 Trading Plans No directors or executive officers entered, modified, or terminated Rule 10b5-1 trading plans during Q2 2024, though share withholding elections may occur - No directors or executive officers entered into, modified, or terminated Rule 10b5-1 trading plans during the three months ended June 30, 2024[147] - Officers or directors may elect to have shares withheld for taxes or option exercise prices, which may or may not satisfy Rule 10b5-1 conditions[147] Item 6. Exhibits Exhibits filed with the Quarterly Report include the Certificate of Continuance, Credit and Supply Agreements, and various CEO/CFO certifications - Exhibits include the Certificate of Continuance and Articles, Amended and Restated Credit Agreement, Amended and Restated Supply Agreement, and various certifications (e.g., CEO/CFO certifications under Sarbanes-Oxley Act)[149]