Cronos Group Reports 2022 First Quarter Results

• 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.