Executive Summary / Key Takeaways

• Cronos Group is executing a focused strategy centered on developing high-quality cannabis products through advanced genetics and R&D, building iconic brands like Spinach and PEACE NATURALS, and expanding its global distribution network.
• The recent consolidation and expansion of Cronos GrowCo are pivotal, aiming to secure a dedicated supply of high-quality flower to meet growing demand in Canada and fuel international growth, with the expansion expected online in the second half of 2025.
• The company demonstrated significant financial improvement in Q1 2025, reporting a 28% year-over-year increase in net revenue to $32.3 million and a substantial rise in adjusted gross margin to 44%, driven by sales mix, cost efficiencies, and production improvements.
• Cronos maintains an industry-leading balance sheet with $838 million in cash and short-term investments and no debt as of March 31, 2025, providing strategic flexibility for investment, expansion, and the recently authorized $50 million share repurchase program.
• Key risks include the uncertain outcome of the proposed anti-dumping duty on Canadian cannabis imports into Israel and ongoing litigation, which could impact operations and financial results in specific markets.

Setting the Scene: A Focused Strategy in a Dynamic Industry

Cronos Group Inc. operates within the complex and rapidly evolving global cannabis industry, positioning itself as an innovative cannabinoid company dedicated to building disruptive intellectual property. Unlike some peers who pursued aggressive, broad-based expansion in the early days of legalization, Cronos has honed a more focused strategy centered on four core pillars: cultivating a portfolio of iconic brands, developing a diversified global sales and distribution network, establishing an efficient global supply chain, and creating and monetizing disruptive intellectual property. This approach reflects a strategic response to an industry characterized by significant supply/demand imbalances, price compression, high excise taxes, and increasing regulatory scrutiny, particularly the growing shortage of high-quality, desirable flower.

In this competitive landscape, Cronos faces established players like Canopy Growth (CGC), Aurora Cannabis (ACB), Tilray (TLRY), and Green Thumb Industries (GTBIF), each with varying strengths. While competitors like CGC and TLRY have pursued growth through scale and M&A, and GTBIF dominates U.S. retail, Cronos differentiates itself through a deliberate focus on product quality driven by its genetic breeding program and targeted international expansion. This strategic positioning aims to carve out profitable niches and build brand loyalty in key markets.

A foundational element of Cronos' strategy and a key differentiator is its investment in advancing cannabis research, technology, and product development. The company's genetic breeding program and tissue culture capabilities are central to this, focused on developing new strains that not only meet consumer preferences but also achieve higher cannabinoid yields, particularly high THC levels. This technological edge translates into tangible benefits: the ability to produce high-quality flower consistently, which is in short supply in the market, and to develop differentiated products like edibles and vapes featuring rare cannabinoids and proprietary flavor masking technology. These R&D initiatives are designed to enhance product performance, improve manufacturing efficiency, and ultimately contribute to better margins and a stronger competitive moat. While precise, publicly disclosed quantitative metrics on the yield or cost advantages derived solely from this technology are not detailed, management emphasizes its critical role in driving product quality and meeting consumer demand, underpinning the success of brands like Spinach and PEACE NATURALS.

The company's strategic Realignment, initiated in 2022 and continuing through Q1 2025 with transformations in IT and finance, further underscores its commitment to operational efficiency and scalability. This includes streamlining operations, centralizing functions, and optimizing the supply chain, positioning Cronos for profitable and sustainable growth.

Operational Backbone: The Strategic Importance of GrowCo

A pivotal development in Cronos' operational strategy is its evolving relationship with Cronos Growing Company Inc. (Cronos GrowCo). Initially a joint venture partner, Cronos obtained majority control of GrowCo's board and began consolidating its financial results on July 1, 2024. This move was driven by the recognition of GrowCo's proven capability as a leading cannabis grower, consistently delivering high yields and desirable THC levels. The consolidation provides investors with a more complete picture of Cronos' overall business, integrating a significant, previously underappreciated, component of its supply chain.

To address the growing demand for high-quality flower and capitalize on market opportunities, Cronos announced an expansion of GrowCo's state-of-the-art cultivation and processing facilities. This expansion, funded by an approximately $51 million credit facility provided by Cronos, is on track for completion in the second quarter of 2025, with first harvests and sales expected in the second half of the year. The expanded capacity is intended to support the majority of Cronos' current and future biomass supply requirements. Under a new supply agreement, Cronos has the right, but not the obligation, to purchase up to 80% of GrowCo's total production before Phase 2 sales commence, and 70% thereafter, at a preset price. This arrangement provides Cronos with preferential access to high-quality supply while maintaining flexibility. Management anticipates this expansion will be neutral to accretive to gross margins over time as fixed costs are better leveraged, though a ramp-up period is expected.

Complementing GrowCo, the Peace Naturals Campus in Stayner, Ontario, remains a key operational hub. Contrary to being idle, it continues to house distribution warehousing, certain R&D activities, and manufacturing for specific products, including edibles and derivatives. The decision to maintain and expand operations here, following the termination of a previous sale and leaseback agreement, reflects its importance in supporting the growing Canadian market and product portfolio. The wind-down of operations at the Cronos Fermentation facility, part of the broader Realignment, further streamlines the company's production footprint, with the assets classified as held-for-sale.

Brand Portfolio and Market Performance

Cronos' strategic focus on building iconic brands is yielding tangible results across its key markets. In Canada, the Spinach brand has established itself as a market leader, ending Q1 2025 as the second most popular brand overall with 4.6% market share. Spinach demonstrates category-leading performance, holding the number one position in edibles (20.7% market share, with SOURZ by Spinach capturing over 23% of the gummy category) and strong positions in vapes (number four overall, number three in cartridges) and flower (number three). The demand for Spinach flower products is strong, currently constrained by supply limitations that the GrowCo expansion is intended to address. Product innovation under the Spinach brand continues, with recent launches including "Fully Blasted" SOURZ gummies featuring 10mg THC and rare cannabinoids (CBC, CBN, CBG) and new vape cartridges extending SOURZ flavors with rare cannabinoids.

The premium Lord Jones brand also shows category-specific strength in Canada, ranking as the number three chocolate brand (9.6% market share) and the category leader in hash-infused pre-rolls (30.1% market share). Recent product introductions like the Lord Jones Chocolate Fusions fudge brownie bite featuring a CBN, CBD, and THC ratio highlight the brand's focus on differentiated, high-quality offerings.

In Israel, the PEACE NATURALS brand has achieved significant success in the medical market. Despite a competitive and dynamic environment, including geopolitical factors, Cronos Israel delivered a record quarter in Q1 2025 for sales volume, revenue, and margin, with the business growing revenue by over 40% year-over-year. PEACE NATURALS ended the quarter as the number one flower brand in Israel with well over 20% market share, a testament to the team's efforts in refining the portfolio, manufacturing processes, and pricing strategy, leveraging high-quality products derived from Cronos' genetics. New strain-based cannabis oils were also launched in Israel in Q1 2025.

International expansion continues to gain traction in other markets. The PEACE NATURALS brand is experiencing strong momentum in Germany and the United Kingdom, leveraging Cronos' proprietary genetics like GMO Cookies and Wedding Cake. The GrowCo expansion is expected to further enable growth opportunities in these and other international markets as they become available.

Financial Health and Recent Performance

Cronos' financial performance in the first quarter of 2025 reflects the positive impact of its strategic focus and operational improvements. The company reported consolidated net revenue of $32.3 million, a significant 28% increase compared to $25.3 million in the first quarter of 2024. On a constant currency basis, net revenue growth was even higher at 33% year-over-year, reaching $33.6 million. This growth was primarily driven by higher cannabis flower sales in Israel and other countries (which carry no excise taxes), as well as increased cannabis extract sales in the Canadian market. The consolidation of Cronos GrowCo contributed $2.9 million in cannabis flower sales in Q1 2025.

Cost of sales decreased by 11% year-over-year to $18.5 million, primarily due to lower direct costs and production efficiencies, partially offset by higher sales volumes and a $0.5 million impact from the inventory step-up related to the Cronos GrowCo transaction. This resulted in a substantial improvement in gross profit, which surged by 206% to $13.7 million in Q1 2025 from $4.5 million in Q1 2024. The gross margin improved significantly to 43%. Excluding the inventory step-up impact, the adjusted gross profit was $14.3 million, yielding a 44% adjusted gross margin, a marked improvement from 18% in the prior year period. Management attributes this improvement to regional mix shift, lower direct costs, and production efficiencies, noting that the blended adjusted gross margin over Q4 2024 and Q1 2025 is more indicative of current underlying margins.

Operating expenses (excluding restructuring and impairment) decreased by nearly $1 million year-over-year to $17.3 million, primarily due to lower sales and marketing costs, benefiting in the quarter from a reversal in previously accrued bonuses and expense timing. Management expects quarterly operating expenses to be higher than Q1 levels for the remainder of 2025 but to remain relatively flat year-over-year. The operating loss narrowed significantly to $4.1 million in Q1 2025 from $15.9 million in Q1 2024, partly due to the absence of a $2.0 million impairment loss on long-lived assets recorded in the prior year related to Cronos Fermentation.

Adjusted EBITDA showed a dramatic improvement, moving to a positive $2.3 million in Q1 2025 from a negative $10.7 million in Q1 2024. This $13 million improvement was driven by the combination of increased revenue, significantly higher adjusted gross margins, and reductions in operating expenses.

Other income decreased to $11.3 million from $12.9 million, primarily due to lower net interest income (reflecting lower interest rates and the consolidation of the GrowCo loan) and a decrease in foreign currency transaction gain, partially offset by the absence of a $12.7 million impairment loss on other investments (PharmaCann Option) recorded in Q1 2024.

Cronos maintains a robust liquidity position, ending Q1 2025 with $798 million in cash and cash equivalents and $40 million in short-term investments, totaling $838 million. This represents a decrease of $21 million from Q4 2024, primarily driven by a net working capital outflow and approximately $50 million in capital expenditures related to the GrowCo expansion, partially offset by positive cash flow from operations before changes in working capital. The company has no debt, providing significant financial flexibility. Management believes the existing cash and investments are sufficient to fund operations and CapEx for the next twelve months. Capital expenditures are expected to remain elevated for the next couple of quarters due to the GrowCo expansion before normalizing.

Cash used in operating activities was $2.1 million in Q1 2025, a slight decrease from $2.2 million used in Q1 2024, reflecting improved net income after adjusting for non-cash items, partially offset by changes in working capital. Cash used in investing activities was $55.4 million, a significant change from $189.6 million provided in the prior year, driven by the purchase of short-term investments and higher CapEx in Q1 2025 compared to the maturity and reinvestment of short-term investments in Q1 2024. Cash used in financing activities increased to $2.9 million from $0.6 million, primarily due to higher withholding taxes paid on share-based awards.

The company's strong balance sheet and improving operating fundamentals were underscored by the Board's authorization of a $50 million share repurchase program on May 7, 2025, expected to commence on May 14, 2025. This program, funded by available cash, signals confidence in the company's value and financial position.

Risks and Challenges

Despite the positive momentum, Cronos faces notable risks. A significant challenge is the ongoing anti-dumping investigation by the Israel Ministry of Economy and Industry into Canadian medical cannabis imports. While the Minister of Finance vetoed the Minister of Economy's approval of a proposed duty of up to 165%, the Minister of Economy has stated intent to proceed, potentially seeking final approval from the Knesset's Finance Committee. The company firmly disputes the allegations and believes the proposed duty is inappropriate, risking higher prices and reduced choice for Israeli patients. The outcome of this regulatory and legal dispute is uncertain and could significantly impact Cronos' operations and profitability in the Israeli market.

The company is also subject to ongoing litigation, including class action complaints in the U.S. and Canada related to the restatement of its 2019 interim financial statements, and an Israel class action regarding marketing practices. While the Israel marketing case was dismissed at the district court level, it is currently under appeal. These legal proceedings could result in significant costs or liabilities. Furthermore, regulatory settlements with the SEC and OSC in 2022 resulted in limitations, including the loss of well-known seasoned issuer status and inability to rely on certain private offering exemptions and the PSLRA safe harbor for specified periods.

Foreign currency fluctuations also pose a risk, impacting the translation of foreign-denominated assets, liabilities, and revenue into U.S. dollars. While not currently hedging, significant changes in exchange rates could adversely affect results. Interest rate risk impacts income from cash equivalents and short-term investments.

Conclusion

Cronos Group is executing a clear strategy focused on quality, innovation, and targeted market leadership, underpinned by a robust balance sheet. The recent consolidation and expansion of Cronos GrowCo represent a critical step in securing high-quality supply to meet growing demand for its successful brands like Spinach and PEACE NATURALS in Canada and internationally. The significant improvements in net revenue, gross margin, and Adjusted EBITDA in Q1 2025 demonstrate positive momentum and the increasing effectiveness of the company's operational efficiencies and strategic initiatives.

While challenges such as the potential Israeli import duties and ongoing litigation persist, Cronos' strong cash position and lack of debt provide substantial flexibility to navigate these headwinds, invest in its technological differentiators (genetics, R&D), pursue international growth opportunities, and return value to shareholders through initiatives like the share repurchase program. The successful completion and ramp-up of the GrowCo expansion in the second half of 2025 are key catalysts to watch, potentially unlocking further revenue growth and margin improvement, reinforcing the investment thesis centered on disciplined execution and leveraging core strengths in a dynamic global market.