Cronos Group Inc. Announces Results of Second Quarter and First Half 2019
Opened Cronos Device Labs, New Global R&D Center in Israel
Appointed Dr. Todd Abraham as Chief Innovation Officer
Announces Agreement to Acquire state-of-the-art fermentation plant
Established new growth opportunity in US with acquisition of hemp-based product platform
TORONTO, August 8, 201
During the second quarter, Cronos Group expanded its R&D capabilities, innovation capabilities and global infrastructure network in the which has been a year of tremendous growth. We opened Cronos Device Labs, our new global R&D center in Israel, announced the acquisition of our new state-of-the-art fermentation plant and added Dr. Todd Abraham as Head of Innovation Manager to our executive leadership team.
Mike Gorenstein, CEO of Cronos Group
We also took steps to enter the US market with our recent acquisition of Redwood Holding's hemp-based CBD platform. Looking ahead, we will continue to leverage this momentum by building on our partnerships with Altria and Gingko Bioworks and leveraging our collective resources and expertise to realize the significant potential of the growing cannabis industry.
Financial results Second quarter 2019 
- Net income was $ 10.2 million in the second quarter of 2019, representing a 202% increase from $ 3.4 million in the second quarter of 2018, mainly driven by the market launch for adult use in Canada. Net revenues increased 58% quarter over quarter from $ 6.5 million in the first quarter of 2019, driven primarily by increased sales of CBD oil, which did not lead to any special rebate and increased sales of dry flowers.
- 1,584 kg was sold in Q2 2019, representing a 232% increase from 477 kg sold in Q2 2018, primarily driven by increased cannabis production and the launch of the adult use market in Canada. Kilos sold increased 43% quarter over quarter from 1,111 kilos sold in the first quarter of 2019, mainly driven by increased cannabis production.
- Cost of sales before fair value adjustment per gram sold was $ 3.01 in Q2 2019, representing a 14% increase from $ 2.63 in Q2 2018 and a 12% increase from $ 2.69 in first quarter of 2019. The quarter-on-quarter increase was driven by higher processing costs per gram.
- The company experienced continued growth in cannabis oil sales, which accounted for 20% of net product revenue in Q2 2019 compared to 19% in Q2 2018.
Global Supply Chain
Cronos Group transfers its current production footprint into an efficient global supply chain model, which is expected to employ a combination of wholly-owned manufacturing facilities, third-party suppliers and global production collaborations, all expected to support the production of the company's adult consumer goods. The company is still focused on establishing industry-leading methods and best practices at Peace Naturals, the company's center of excellence, and leveraging expertise to create high-quality domestic and international products that resonate with consumers.
Pending the derivatives market launch in Canada this fall, the Cronos Group expanded its Canadian footprint with a cannabis concentrate supplier agreement with MediPharm Labs Corp. (“MediPharm Labs”) in May 2019. MediPharm Labs will supply the Cronos Group with approximately $ 30 million of cannabis concentrate over 18 months and, subject to certain renewal and purchase options, potentially up to $ 60 million over 24 months. In addition, Cronos Group and MediPharm Labs have signed a tolling agreement whereby Cronos Group can supply bulk cannabis for the extraction of MediPharm Labs to meet certain additional processing needs of the company.
In July 2019, after the end of the second quarter, the company entered into a contract manufacturing agreement with Heritage Cannabis Holdings Corp. (“Heritage”), a cannabis manufacturer based in British Columbia. Heritage will provide cannabis extract and services related to the filling and packaging of evaporator units for the Canadian adult and medical cannabis market. The agreement has a two-year term with the option of extending by agreement between both parties, to an annual potential contract value of $ 35 million, based on current projections.
Global Sales and Distribution
Cronos Group remains committed to leading the industry forward responsibly, while derivative products are introduced to the Canadian market this fall. Along with Cronos Group's in-house capabilities, the company has partnered with third-party manufacturers to support the company's entry into the evaporator category in Canada. Both of the aforementioned third-party suppliers are expected to use the company's proprietary formulations for production.
Intellectual Property Initiatives
In May 2019, the Cronos Group established Cronos Device Labs, a global research and development ("R&D") center for evaporator innovation. Cronos Device Lab's advanced facility is based in Israel, a leader in cannabis R&D, and supports Cronos Group's work to develop next-generation evaporator products designed specifically for cannabinoid applications.
Cronos Device Labs, equipped with an experienced team of product development talent, advanced vaporizer technology and analytical testing of infrastructure, serves as the global center of R&D for the company's vaporizer units.
The 23-member team at Cronos Device Labs, which brings to the Cronos Group over 80 years of combined expertise in evaporator development, consists of product designers, mechanical, electrical and software engineers, and analytical and formulation researchers. Cronos Device Labs significantly improves Cronos Group's technology and development capabilities, and is expected to enable the company to deliver expanded product offerings to customers specially designed for cannabinoid use.
After the end of the second quarter, Cronos Group closed the previously announced acquisition of an 84,000-square-foot GMP-compliant fermentation and production facility in Winnipeg, Manitoba from Apotex Fermentation Inc. ("AFI") on July 31, 2019. The modern plant that will serve as "Cronos Fermentation", Includes fully equipped laboratories covering microbiology, organic and analytical chemistry, quality control and method development as well as two large-scale microbial fermentation production areas with a combined production capacity of 102,000 L, three downstream processing plants, and bulk product and packaging functions.
The acquisition was funded with existing cash on hand and has been expo chosen to provide the fermentation and production capability the company needs to leverage the progress that is underway with Ginkgo Bioworks, Inc. ("Ginkgo Bioworks"). The Ginkgo Bioworks partnership aims to bring innovation and biological production to the cannabis industry, which will allow for large-scale cannabinoid production and greater efficiency compared to traditional cultivation and recovery. Commercial on-site production is subject to completion of the cannabinoid-based production facility, receiving appropriate licenses from Health Canada to produce cultivated cannabinoids under the Cannabis Act (Canada), and achieving certain milestones under the strategic partnership with Ginkgo Bioworks.
After the end of the second quarter, Cronos Group entered into a final agreement to purchase four of Redwood Holding Group, LLC's operating companies (collectively "Redwood"). Redwood manufactures, markets and distributes hemp-derived CBD-infused skincare and other consumer products online and through US retail and hospitality partner channels under the Lord Jones ™ brand. Redwood's products use pure hemp oil containing natural phytocannabinoids and terpenes found in the plant.
Under the agreement, Cronos Group will acquire Redwood for approximately $ 300 million, net of Redwood's estimated cash and debt, and subject to a customary adjustment of working capital. $ 225 million of the total consideration (subject to the above adjustments) will be paid in cash with the balance paid in newly issued common shares in the Cronos Group. Cronos Group will finance the cash portion of the transaction with cash on hand. The acquisition is expected to close in the third quarter of 2019, subject to normal closing conditions and regulatory approvals.
The company will host a conference call and live audio webcast on Thursday, August 8, 2019 at 8:30 am EST to discuss the results for the second quarter of 2019. 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/second-quarter-2019-earnings-conference-call  Royalty Free from US and Canada dialing: (866) 795-2258
International dialing: (409) 937-8902
Conference ID: 3164005
An audio playback of the call will be filed on the company's replay website.
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 promoting cannabis research, technology and product development. With a passion for responsibly lifting 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 brands COVE ™ and Spinach ™. To learn more about the Cronos Group and its brands, visit: www.thecronosgroup.com; www.peacenaturals.com; www.covecannabis.ca; www.spinachcannabis.com.
The Company uses certain measures not recognized under International Financial Reporting Standards ("IFRS") does not have any standardized meaning prescribed by IFRS and can therefore not be compared with similar measures presented by other companies. Rather, these measures are provided as a supplement to these IFRS measures to provide additional information on the Company's results of operations from the management's perspective. Accordingly, non-IFRS measures should not be considered as a substitute for or better than the financial information prepared and presented in accordance with IFRS. Each non-IFRS measure is aligned with the most directly comparable IFRS measure.
Adjusted profit before interest and tax ("Adjusted EBIT") is used by management as an additional measure to review and evaluate operating results and trends on a comparable basis. Adjusted EBIT is defined as net income or loss, excluding interest expense, interest income, deferred tax expense or recoupment, share-based payments, unrealized change in fair value of biological assets, realized adjustments of fair value of stock sold, financing costs, gain on revaluation of derivative liabilities of income or loss from investments in equity accounting investments and gains or losses on investments. The company believes that Adjusted EBIT is useful for comparing operating results over periods.
Adjusted profit before interest, tax, depreciation and amortization ("Adjusted EBITDA") is used by management as a supplement to measure and evaluate operating results and trends on a comparable basis. Adjusted EBITDA is defined as Adjusted EBIT excluding depreciation and amortization. The Company believes that Adjusted EBITDA is useful for comparing its ability to generate cash from operations over periods.
Reconciliation of Non-IFRS Measures
A reconciliation of Adjusted EBIT and Adjusted EBITDA to net income, most directly comparable IFRS targets, is presented in the following table.
Original press release
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