• Israel net revenue increased by 263% year-over-year to $9.1 million in Q1 2022
• Increased market share in Canada and Israel in Q1 2022
• Mike Gorenstein returned as CEO

TORONTO, May 10, 2022 – PRESS RELEASE – Cronos Group Inc., an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development, announced its 2022 first quarter business results.

“I founded Cronos because of the once-in-a-lifetime opportunity to help build and shape an industry that has the potential to improve countless lives. As CEO, I am committed to re-instilling a start-up culture with a founder’s mentality across all levels of the organization,” said Mike Gorenstein, chairman, president and CEO at Cronos Group. “The strategic realignment we announced in the first quarter of 2022 reset the organization to this mindset and we are seeing the benefits show through in our performance.”

“Our execution in product development, manufacturing, and go-to market strategy resulted in strong growth in both net revenue and gross profit in the first quarter of 2022, proving that we are headed in the right direction. Our Spinach brand is one of the most sought-after brands in the Canadian adult-use market, known for bringing high quality and differentiated products to the consumer. We are also winning with branded products in Israel, with Peace Naturals driving significant revenue growth in the first quarter of 2022. As we execute our strategic realignment, I am encouraged with the progress we are making by increasing our market share in both Canada and Israel, and continuing to bring disruptive branded products to market. In combination with our industry leading balance sheet, our borderless products, such as SOURZ by Spinach winning in Canada, is one of the best ways to be prepared for legalization in the U.S.”

Full details of financial results for the period ending March 31 can be viewed here.

First Quarter 2022

• Net revenue of $25 million in Q1 2022 increased by $12.4 million from Q1 2021. The increase year-over-year was primarily driven by an increase in net revenue in the Rest of World (“ROW”) segment driven by growth in the Israeli medical market and the Canadian adult-use market.
• Gross profit of $6.9 million in Q1 2022 improved by $9.9 million from Q1 2021. The improvement year-over-year was primarily driven by increased cannabis flower revenue in the ROW segment, the introduction of additional cannabis extract products in the ROW segment that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Peace Naturals Campus in connection with the impairment taken in Q4 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos Growing Company Inc. (“Cronos GrowCo”).
• Adjusted EBITDA of $(18.9) million in Q1 2022 improved by $17.7 million from Q1 2021. The improvement year-over-year was primarily driven by the improvement in gross profit and a decrease in sales and marketing and research and development (“R&D”) expenses.
• Capital expenditures of $0.7 million in Q1 2022 decreased by $6.3 million from Q1 2021. The decrease year-over-year was primarily driven by decreased spending on property, plant and equipment in the ROW segment.

Business Updates

Strategic and Organizational Update

In the first quarter of 2022, the company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the company’s supply chain (the “realignment”). The organizational and cost reduction initiatives undertaken are intended to better position Cronos Group to drive profitable and sustainable growth over time. The program consists of the following:

1. Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;
2. Evaluating the company’s global supply chain and reducing complexity and fixed expenses, which resulted in the announcement of the planned exit of the Peace Naturals Campus in Stayner, Ontario, and the company's ongoing review of product, pricing and distribution optimization; and
3. Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry. The overall strategic realignment initiative is expected to deliver $20 to $25 million in initially identified savings across operating expense categories in 2022, primarily driven by savings in sales and marketing, general and administrative, and research and development.

Brand and Product Portfolio

In April 2022, the company expanded its SOURZ by Spinach gummy portfolio with a new flavor, Cherry Lime, in a five piece per pack format with 2 milligrams of THC per piece. The company now has five SKUs in the gummy category across its SOURZ by Spinac and Spinach FEELZ sub-brands.

Spinach continues to organically grow market share across Canada, most notably, Spinach held an approximate 13% market share in the edibles category, which expands to approximately 17% within the gummy category during Q1 2022, according to Hifyre data.

Furthermore, three out of the four SOURZ by Spinach gummies ranked in the top-10 for market share in Canada in Q1 2022, according to Hifyre data. Having launched its first gummy product in July 2021, the consumer adoption of Spinach gummies speaks to the strong innovation Cronos Group is bringing to market.

Furthermore, in April 2022, the Spinach vape portfolio entered Ontario's top-10 in market share. The company will continue to launch new vape products in May, including Cosmic Green Apple and Polar Mint Vortex, across various provinces in an effort to continue to expand market share within the category.

Global Supply Chain

In the first quarter of 2022, the company began to leverage Cronos GrowCo's capabilities as part of the realignment. These activities include, among others, the transfer of certain manufacturing equipment to Cronos GrowCo from the Peace Naturals Campus. In April 2022, the company began building dedicated space within Cronos GrowCo for various manufacturing and R&D activities.

In the first quarter of 2022, Cronos GrowCo reported preliminary unaudited net revenue of approximately $7 million to licensed producers excluding sales to the company.

Appointments

In March 2022, the Board of Directors appointed Cronos Group’s founder, Mike Gorenstein, as chairman, president and CEO, in connection with Kurt Schmidt’s retirement. Gorenstein previously served as chairman, president and CEO of Cronos Group until September 2020, when he transitioned to the executive chairman role.

In April 2022, the company appointed Terry Doucet as Senior Vice President, Legal, Regulatory Affairs and Corporate Secretary, after serving in an interim capacity since December 2021. Doucet has been with Cronos Group since 2018 and has guided Cronos Group through significant growth over the last few years, including the build-out of the company's Legal and Regulatory Affairs teams, its strategic investment from Altria Group Inc., its R&D partnership with Ginkgo Bioworks Holdings Inc. (the “Ginkgo strategic partnership”), the PharmaCann Option (as defined below) and various product commercialization initiatives.

Rest of World Results

Cronos Group’s ROW reporting segment includes results of the Company’s operations for all markets outside of the U.S.

Detailed results can be found here.

First Quarter 2022

• Net revenue of $22.7 million in Q1 2022 increased by $12.5 million from Q1 2021. The increase year-over-year was primarily driven by an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extracts used in edibles and vaporizers.
• Gross profit of $6.7 million in Q1 2022 improved by $10.8 million from Q1 2021. The improvement year-over-year was primarily driven by increased cannabis flower revenue, the introduction of additional cannabis extract products that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Peace Naturals Campus in connection with the impairment taken in Q4 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

United States Results

Cronos Group’s U.S. reporting segment includes results of the company’s operations for all brands and products in the U.S.

Detailed results can be found here.

First Quarter 2022

• Net revenue of $2.3 million in Q1 2022 decreased by $0.1 million from Q1 2021. The decrease year-over-year was primarily driven by a reduction in volume as a result of a decrease in promotional spend as the company works through its review of the U.S. business as part of the realignment.
• Gross profit of $0.2 million in Q1 2022 decreased by $1 million from Q1 2021. The decrease year-over-year was primarily due to increased inventory valuation adjustments, higher shipping costs and unfavorable sales mix.

Cleveland leaders’ attempt to expunge cannabis possession convictions en masse has run into a legal wall, one month after Mayor Justin Bibb and other city officials carried boxes of filings to the Justice Center to expunge over 4,000 convictions.

Now, the city’s government is changing course. State law requires that residents make their own requests to expunge their criminal records, according to Ideastream Public Media. So, Cleveland’s law department plans to file motions in municipal court this week to dismiss charges and vacate convictions, per the news outlet.

The new approach is different from expungement because the initial arrest record remains on file. What’s more, the city “would likely owe court costs and fines paid back to the defendant,” according to the Cleveland Scene, citing Cleveland Municipal Judge Michelle Earley and Cleveland.com.

A new study on California’s cannabis tax structure and low participation in the state’s legal market suggests that lawmakers should consider repealing or suspending the cultivation tax—a revenue stream that grossed more than $163 million in 2021.

The six-part study was published May 4 in a 42-page report by Los Angeles-based Reason Foundation, a nonprofit libertarian think tank. It provides an empirical model to estimate the degree to which California’s tax regime affects participation within its commercial cannabis market.

One key finding was that keeping the state’s current tax structure would generate slightly more revenue than reducing tax rates, based on market growth projections for December 2024. However, eliminating the cultivation tax would bolster enough market growth to yield similar revenue results over the same time period (see full details below). 

The study also provides further insights on California’s various tax structures and examines consumer decisions to participate in the legal or illegal market in an effort to quantify the impact of taxes on participation.

“Taxes affect both consumers’ and producers’ decisions in the legal market primarily by introducing a price disparity between legal cannabis products and comparable cannabis products offered through the illicit market,” wrote Geoffrey Lawrence, the foundation’s managing director of drug policy, who authored the report.

“Similarly, local bans on legal sales over extended geographic areas can drive consumers without access to legal products within a reasonable distance of their homes to purchase substitute goods on the illicit market,” he added.

The Bottom Line

In the conclusion of the report, Lawrence suggested that wholesale cannabis taxes are hidden from the ultimate consumer, and are difficult to administer, audit and “pyramid” up the supply chain. He added that the Reason Foundation’s analysis makes clear that repealing California’s cultivation tax will result in faster growth of the legal market and will “quickly” result in more total tax revenue than the state receives currently.

According to the analysis, California’s total monthly revenue would grow to roughly $145 million by December 2024—a 223.2% increase from March 2022—should the state eliminate its wholesale cultivation tax and retain its current cannabis retail excise tax rate of 15% and statewide general sales tax rate of 7.25%. That calculation was based on data from Headset and the California Department of Tax and Fee Administration (CDTFA).

If California makes no changes to its current cannabis tax policies, the Reason Foundation projects total monthly revenue would grow even more, to roughly $152.8 million by December 2024—a 235.3% increase from March 2022.

While making no changes still yields the highest amount of tax revenue, eliminating the cultivation tax would result in only a 5.15% reduction in revenue by December 2024, all while encouraging greater participation in the legal market, according to the analysis. 

The study also provides revenue projections based on both eliminating the cultivation tax and lowering the state’s excise tax to 12.5%, 10%, 7.5%, 5% and 0%.

“As reductions in the cultivation and retail excise taxes drive overall market growth, revenues realized from the general sales tax grow in both proportional and absolute terms, partially offsetting revenue loss from the tax reductions,” Lawrence wrote.

Reason Foundation | reason.org

The Significance

In a forward commentary to the report, California NORML Director Dale Gieringer, Ph.D., wrote that reducing the illicit market is a key element in restructuring the state’s cannabis tax system.

“In the end, [the study] projects that even with substantial tax reductions, the state can expect total revenues to rise substantially in the next two years due to increased consumer demand,” he wrote. “Substantive tax cuts therefore seem to be a feasible strategy for reducing demand for the illicit market while still retaining reasonable revenues for the state programs funded in Prop. 64.”

For many operators playing by the rules in California’s cannabis industry, the state’s cultivation tax makes no sense.

In addition to the 7.25% sales tax and 15% excise tax, California levies its current cultivation tax rate of $10.08 per dry-weight ounce of flower, $3 per dry-weight ounce of leaves and $1.41 per fresh cannabis plant ounce.

“It’s weight-based, which means it goes up as a percentage as prices compress, and [it] hits outdoor farmers the hardest,” Santa Barbara-based Glass House Brands co-founder and president Graham Farrar told Cannabis Business Times in January.

For instance, if a greenhouse grower endures a $160 cultivation tax for a pound of cannabis that wholesales  at $1,000 per pound, and an outdoor grower endures the same $160 cultivation tax for a pound of cannabis that wholesales at $500 per pound, then the tax burden would be 16% for the greenhouse grower and 32% for the outdoor grower.

Cannabis Benchmarks® | cannabisbusinesstimes.com/cannabisindex/

Aside from percentage discrepancies associated with a weight-based tax, cultivators, retailers and cannabis law experts alike continue to point to the state’s overall tax structure as a burden that has kept licensed operators from competing with the illicit market.

Under California’s current tax structure and an insufficient number of licensed retailers, among other factors, the Reason Foundation’s report estimates that the illicit market accounts for roughly two-thirds of total sales in the state.

How California Ended Up Here

Under 2016’s voter-approved Proposition 64, an ambitious package of cultivation and excise taxes were imposed with the aim of raising more than $1 billion a year for various state programs. That effort succeeded soon after the state’s 2018 adult-use retail launch.

Adult-use cannabis wholesalers and retailers generated more than $1.1 billion in total state taxes in 2020 and nearly $1.3 billion in 2021, according to CDTFA data.

On top of that, local governments were authorized to levy more taxes on their own.

But, as Gieringer pointed out in his commentary, municipalities were given the authority to prohibit cannabis operations altogether through Prop. 64 and the Legislature’s subsequent Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which established a parallel licensing system for both medical and adult-use cannabis.

“The situation was further exacerbated by local dispensary bans and licensing delays, which left the state with half as many adult-use dispensaries as there were medical collectives before Prop. 64 was passed,” Gieringer wrote. “As a result, California’s legal industry has been hard-pressed to compete with untaxed, unregulated providers on the underground market. So dire is the current situation that advocates now fear that the cannabis industry in California faces an ‘existential crisis’ in the absence of meaningful tax reform.”

RELATED: ‘Surviving is Thriving’ in California’s Cannabis Market

California Department of Tax and Fee Administration | cdtfa.ca.gov

Legislative Effort

While the Reason Foundation’s report recommends repealing or suspending the cultivation tax, California lawmakers are already proposing that policy shift.

Last week, the state’s Senate Governance and Finance Committee members voted, 4-1, to advance Senate Bill 1281, which aims to repeal the cultivation tax and reduce the state’s excise tax rate to 5%.

The legislation’s sponsor, Sen. Steven Bradford, D-Gardena, said he hopes those changes will undercut the illicit market.

“While [Prop. 64’s] implementation is still in its early years, the industry is overregulated and overtaxed, putting the legal cannabis industry on the brink of collapse,” Bradford said in the analysis of his bill before the committee.

“Cannabis operators report that without meaningful change, the industry is destined to failure,” he said. “S.B. 1281 would eliminate the cultivation tax and reduce the excise tax as they undermine the viability and sustainability of California’s cannabis industry.”

Bradford added that while eliminating the cultivation tax and reducing the excise may decrease overall tax revenue, it’s anticipated that greater demand and increased sales of a more competitively priced cannabis product will offset lost revenues.

According to the Reason Foundation, repealing the cultivation tax and lowering the excise tax to 5% would result in roughly $89.2 million in total monthly tax revenue by December 2024—a 137.4% increase from March 2022.

Bradford’s legislation was referred to the Senate Appropriations Committee, where it’s scheduled for a May 16 hearing.

More Hope on the Horizon

Despite the retail shortage since Prop. 64, California’s Department of Cannabis Control (DCC), which was established on July 12, 2021, by consolidating three former state cannabis authorities, has made recent advances in licensing cannabis retail operators.

In less than a year, DCC has increased California’s active retail footprint by 20.3%, including an additional 140 storefront dispensaries, 91 retail delivery licensees and 38 microbusinesses with retail activity, according to department’s licensing data from May 9.

In March alone, DCC officials issued 31 dispensary, 22 delivery and seven microbusiness licenses—the department’s highest monthly volume to date, DCC Deputy Director of Public Affairs Maria Luisa Cesar told Cannabis Business Times.

“We are proud of our efforts to streamline cannabis licensing regulations by combining them into one rulemaking package,” she said. “This has allowed prospective applicants, pending applicants, and licensees one regulatory framework to review and follow. Within the Licensing Division at the department, staff have aligned internal review processes to ensure that applications, license renewals and license modifications are moving more efficiently.”

Also, DCC officials announced in January that the department had awarded nearly $100 million in grant funding for local jurisdictions to aid in more swiftly transitioning high numbers of provisional cannabis licenses into annual licenses.

Overall, California now has 948 active dispensaries, 427 delivery retailers and 218 microbusinesses. The DCC issued 190 of those licenses, or 12% of the active total, in the first four months of this year.

California Department of Cannabis Control | cannabis.ca.gov/

Buckling Up For Long-Term Growth

Amidst the recent advances, the state’s retail footprint still has a long way to go, according to Hirsh Jain, who serves on the board of Los Angeles NORML and the Los Angeles Cannabis Chamber of Commerce.

The 100 storefront dispensary licenses issued in the first four months of 2022 surpassed the 96 dispensary licenses issued in all of 2020, Jain pointed out on social media last month.

Nevertheless, California’s licensed retail industry will take years to get to where it needs to be without drastic change, he said.

“[California needs a minimum of] 4,000 dispensaries to serve the legal market,” Jain said. “Despite recent positive trends, CA’s retail infrastructure will remain lacking for years, creating challenges for operators across the supply chain. Many won’t be able to survive in this harsh operating environment.”

What the Numbers Say

Specifically, California’s 948 licensed brick-and-mortar cannabis retailers equates to roughly 2.4 dispensaries per 100,000 residents, much fewer than Pacific Coast neighbor Oregon’s roughly 18.3 dispensaries per 100,000 residents. Although, Oregon recently enacted a licensing moratorium in response to a crowded marketplace.

Should California increase its footprint to 4,000 dispensaries, as Jain suggested, its retail rate would increase to roughly 10.2 dispensaries per 100,000 residents.

But that retail growth would depend heavily on a tax structure that attracts more potential operators into the licensed marketplace in addition to more consumers transitioning to the legal marketplace.

In 2016, California’s Legislative Analyst’s Office (LAO), a nonpartisan government agency, projected that providing legal status would result in more efficient production and lower risk premiums demanded by suppliers, which would lower the cost of production and bestow a price advantage on legal retailers, thus, driving consumers toward legal products, according to the Reason Foundation’s report.

“It is clear that the LAO’s anticipated price advantages have not materialized, and many consumers have failed to transition toward legal retailers,” Lawrence wrote. “Existing tax structures and rates may be a key reason why.”