Cronos Group Exits Its US Operations After Spending $300 Million To Acquire Them During Height Of Cannabis Bubble

Cronos Group (NASDAQ: CRON) announced on Wednesday that it will be closing down its existing US hemp-derived CBD-focused operations by the end of Q2 2023. The company stated that it made this decision to increase its cash flow in the short term and to position itself to enter the US THC market directly when the necessary adjustments in US regulatory conditions arise.

“We believe that one day, the U.S. will be one of the most important cannabis markets in the world,” said CEO Mike Gorenstein. “But we also believe our resources are best spent on staying laser-focused on becoming cash flow positive by driving cost savings and process efficiencies for our borderless adult-use products.

The move will yield additional expenses expected to be incurred in the second quarter, up to $1.8 million comprised of inventory write-offs, severance and other employee costs, and asset impairment charges.

The company is also raising its previously announced 2023 operational expense savings target from $10 to $20 million to $20 to $25 million, owing in part to its plan to wind down and abandon its existing US operations.

Cronos will instead focus on launching the Lord Jones brand in the Canadian market by Q4 2023 while investing in research and product development in preparation for when the U.S. THC market opens.  

Back in 2019, Cronos bought then US-based CBD startup Lord Jones for $300 million, which was 75 to 150 times the company’s 2018 annual revenue. Also noteworthy is that a fund co-founded by the Cronos CEO and a longtime director stood to get 40% of the purchase price, plus over $20 million in fees.

Prior to the deal, Gorenstein and board member Jason Adler, who also have a private-equity firm called Gotham Green Partners, saw their fund pay $12.8 million for a 40% stake in Lord Jones. The fund stood to make $21 million in fees, plus a $107.2 million profit on the increase in value of Lord Jones shares from the transaction with Cronos, as per Marketwatch.

The move comes as the firm is reeling from its regulatory kerfuffle with the Securities and Exchange Commission last fall. The company and its former chief commercial officer William Hilson were charged by the SEC with accounting fraud for improperly reporting revenue during various quarters.

Specifically, the SEC alleged that Hilson made a $2.3 million oral deal to sell raw cannabis and then repurchase the subsequent cannabis product later on, which was not disclosed by Cronos Group on its accounting documents.

A similar case was put forth by the Ontario Securities Commission owing to Cronos incorrectly recognizing $7.6 million in revenue from three wholesale cannabis transactions in its Q1, Q2, and Q3 2019 interim financial statements.

In its Q2 2021 interim financial statements, the company additionally inflated practically all of its US goodwill and a major percentage of its US intangible assets by a total of $234.9 million. As a result of these accounting errors, the firm revised its interim financial statements for the first, second, and third quarters of 2019, as well as its interim financial statements for the second quarter of 2021.

Cronos revealed material flaws in internal control over financial reporting in both cases.

The Canadian cannabis company paid a $1.3 million administrative penalty and an additional $40,000 towards the cost of the OSC’s investigation.

Cronos last traded at $1.75 on the Nasdaq, down 30% year-to-date.

Information for this briefing was found via MarketWatch and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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