Cronos Group Inc.

Good morning. My name is Natalia, and I will be your conference operator today. I would like to welcome everyone to the Kronos Group's first quarter 2020 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laplaw, Investor Relations. Please go ahead, sir.

Thank you, Natalia, and thank you for joining us today to review Kronos Group's first quarter 2020 financial and business performance. Today, I'm joined by our Chairman, President, and CEO, Mike Gorenstein, our CFO, Jerry Barbato, and our EVP of Legal and Regulatory Affairs, Su Ming Shum. Goren's Group issued a news release announcing our financial results this morning, which are filed on our EDGAR and CDAR profiles. This information, as well as prepared remarks, will also be posted on our website under Investor Relations. Before I turn the call over to Mike, I would like to remind you that our discussion during this conference call will include forward-looking statements. that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of the factors described in the cautionary statement and risk factors included in the company's earnings release and regulatory filings, included in the company's most recent annual report on Form 10-KA and quarterly report on Form 10-Q, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, are not recognized under U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting, evaluating business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the SEC, which is available in the press room section of our website, thechronosgroup.com. These non-GAAP measures may not be comparable to measures used by other issuers. I'd also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or minor technical issues during this call. We thank you in advance for your patience and understanding. We will now make prepared remarks and then we'll move on to a question and answer session. With that, I'll pass it over to Kronos Group CEO, Mike Gorenstein.

Thank you, Shane, and good morning, everyone. As the COVID-19 pandemic continues to affect global markets and people around the world, we hope that everyone is staying safe and well during this time. We'd like to start this call by addressing how COVID-19 has affected us and how we as a company are adapting during this time. Our top priority continues to be the health and safety of our employees and our consumers, as well as ensuring that we secure our supply chain. As we mentioned on our most recent call, we have assembled a global cross-functional internal task force led by me. We have been monitoring the situation daily in order to implement modifications as the situation evolves. The company has implemented business continuity plans to support its employee base, while continuing to develop and produce reliable, high-quality products that meet and exceed the needs of consumers. As of today, our manufacturing facilities remain open, as governments in the regions where we operate have designated our business as essential. We are maintaining our work-from-home policies for certain employees until further notice, and we have a strict no-travel policy, including between our sites which are deemed essential. In our manufacturing facilities, we enhanced hygiene and sanitation practices, modified schedules, and have maintained social distancing protocols. As circumstances vary by region and country, we are working diligently to continue to act in accordance with all applicable guidance from local, federal, and international health and governmental authorities, and we are prepared to make additional operational adjustments as necessary. We have donated surplus N95 masks, goggles, face shield head mounts, and face shield replacements from our Peace Natural Campus to the Collingwood and Berry Area Hospitals. Additionally, the Lord Jones team has distributed skincare products to nurses and doctors working in hospitals in New York, Miami, New Orleans, and Houston. As a company, we feel fortunate to contribute and are honored to give back to our communities and frontline healthcare workers to support them in their efforts to take care of COVID-19 patients. We will continue to closely monitor the rapidly evolving COVID-19 situation, as well as how the opening of different regions will impact the business, our consumers, employees, and our supply chain. As you know, my focus and the company's focus are on creating long-term shareholder value by developing disruptive intellectual property and building iconic brands. I encourage long-term thinking, and especially in today's environment, we need to be planning for the future. Our value will come from technology breakthroughs and branded sales that help build and strengthen our relationship with our consumers. We believe that the best way to create value for this supply chain is by working with contract farmers and suppliers to support our capacity needs in global markets. During the first quarter of 2020, Konos Group's contract manufacturing joint venture in Latin America, Natuera, achieved significant operational milestones. As a reminder, Natuera is a 50-50 joint venture between Kronos Group and AGI, a company with multigenerational expertise in managing industrial-scale horticultural operations for export from Colombia. Natuera completed construction of its state-of-the-art extraction facility designed to GMP standards. Natuera also gained preferential access to four cultivars registered with the Colombian Agricultural Institute. One of the hemp strains was planted in mid-February and harvested at the end of April. With its extraction and processing facility also coming online, Natuera's R&D department has developed its first commercially available hemp-derived CBD distillate, which was granted a non-controlled substance ruling by Columbia's Narcotics Control Board, streamlining an efficient process for export. Natuera successfully concluded its first test export to the United States in early March. The JV is focused on accessing new markets and product expansion. including developing additional bulk offerings of hemp-derived CBD distillates and water-soluble hemp-derived CBD solutions. Despite this being a small test shipment, we're very pleased with this joint venture and believe our approach to building a world-class, low-cost, scalable supply chain with partners like Natuera positions Kronos Group to develop new business and trade channels in geographies like Latin America and other markets globally. Let's now turn to discuss our latest developments in Israel. Subsequent to this quarter in April 2020, Kronos Group completed its first export of bulk dried flour to Kronos Israel in order to sell Teeth Naturals branded cannabis products for distribution in the Israeli medical market. Kronos Israel will begin to build its distribution network and brand presence in this rapidly growing medical market. Concurrently with building our brand presence, we have worked with our JV partners at Kibbutz Gan Shmuel to bring the Kronos Israel facility online. and we are encouraged that this operation will become a growth driver for our business in the back half of 2020 and onward. We have received the necessary regulatory approvals to produce, manufacture and sell dried cannabis flower and are awaiting approvals for pre-rolls and oil products, which we are expected to receive throughout 2020. I want to provide a bit of color on the Israel medical market and why we're looking forward to bringing Peace Natural branded products to patients. which are expected to become available sometime in the second quarter of this year. Israel has taken several steps to optimize and expedite the patient access process for medical cannabis and we are excited to join this thriving regulated market. The cannabis usage rate in Israel is among the highest in the world and the medical patient count in Israel is expected to grow rapidly which represents an excellent opportunity for a business to grow in this market. In 2016, the Israeli Ministry of Health published a medical cannabis information booklet and guide, which includes the methodology intended for doctors to prescribe cannabis. This is meant to guide and assist in customizing treatment with medical cannabis. Many doctors in the Israeli healthcare system have been trained and certified using this clinical methodology, which enables them to provide treatment and issue patients licenses for possession and use of medical cannabis. The Israeli Medical Cannabis Agency currently grants personal medical cannabis permits and prescriptions to patients to treat a variety of medical conditions. And unlike the Canadian medical cannabis programs, patients fill prescriptions directly through pharmacies. The existing sophisticated legal framework for medical cannabis in Israel, coupled with a less established black market due to Israel's stringent border controls, makes an exciting and potentially lucrative opportunity for Kronos Group. In April, Kronos Israel entered into a collaborative agreement with Canasol Analytics, a cannabis research company dedicated to developing scientific, intellectual property, medical products, and technologies. Under our agreement, Canasol intends to develop a commercial cannabis analytical testing laboratory onsite at Kronos Israel. Canasol is led by established cannabis researcher, Professor Didi Miri from the Technion Israel Institute of Technology. Professor Meary intends to operate the laboratory and conduct in-house commercial analytical testing for Kronos Israel and third-party clients. Once operational, the lab's capabilities are anticipated to address the current gap and need in the Israeli market for accurate end-to-end cannabis analytical testing for both domestic sale and export to certain international markets. We are delighted to partner with Dr. Meary again and to bring this expertise to the Israeli market. Another initiative we remain excited about is our intellectual property work with Ginkgo Bioworks and our commitment to investing in cutting-edge breakthrough technologies in cannabinoid innovation. Every day we move one step closer to our vision of creating cultured cannabinoids at scale using fermentation. Ginkgo has already filed patent applications which pertain to the fermentation of cannabinoids in order to protect the intellectual property work we have developed to date through this partnership. As previously noted, we are the exclusive global perpetual licensee of the intellectual property covered by the patent applications for the eight target cannabinoids outlined in our agreement with Ginkgo. In the first quarter of 2020, Kronos Fermentation received an R&D license from Health Canada and received additional cannabinoid-producing strains from Ginkgo Bioworks. Subsequent to the quarter end, Kronos Fermentation successfully fermented one of our target cannabinoids, CBGA, Using the cannabinoid strains in our Winnipeg R&D labs. Kronos Fermentation will continue using these strains to optimize downstream processing and scale-up procedures in advance of receiving the final strains and commercial processing license, both of which are required for commercialization. This groundbreaking work has the ability to transform our business and disrupt the industry in a variety of ways. First, it will allow us to be more cost-competitive as we roll out derivative products. As consumer demand shifts from flour to derivative products, lowering the cost of active ingredients will become critical to compete effectively against our peers and the illicit market. Second, fermented cannabinoids will deliver more consistent products. Like other consumer packaged good companies, in order to develop trusted cannabis brands that resonate with consumers, it is critical that we deliver the same experience each time a consumer interacts with our products. We expect the fermentation platform to provide us with the manufacturing precision to deliver consistent cannabinoid blends and products. And third, we plan to leverage rare cannabinoids to provide differentiated products to consumers and become a leader in the growth of new product categories. In the long run, differentiated products will drive margin durability and market share. Rare cannabinoids will enable us to distinguish our products in existing categories. leveraging rare cannabinoids as the primary ingredient in new product categories will allow us to expand the addressable market. Having accomplished the milestone of successfully fermenting a cannabinoid at R&D scale at our facility, we continue to be confident in our ability to commercially ferment cannabinoids under our previously disclosed timeline of September 2021. We anticipate these cultured cannabinoids will one day not only be an integral part of our supply chain, but also help our brand innovation potential reach new heights. This quarter, we continue to bring new innovative products to market and further establish our brand portfolio. Our goal is to deliver high-quality, consistent cannabinoid products to the market while expanding how consumers approach and shop within the category. Early this quarter, our luxury hemp-derived CBD brand, Lord Jones, launched the Lord Jones Acid Mantle Repair CBD Moisturizer to the U.S. market. This soothing facial moisturizer is formulated to help maintain the skin's acid mantle and Rebalance the Appearance of Stressed Skin. The brand continues to deliver on its promise of authenticity to consumers while launching new and innovative skincare products. Toward the end of the first quarter, Lord Jones saw a shift to the direct-to-consumer online channel as well as online sales through its partner sites, as most brick-and-mortar luxury retailers have closed due to COVID-19 and subsequent social distancing orders. As an online-first business, Lord Jones has the existing infrastructure in place to meet the online demand for hemp-derived CBD products. Despite our readiness to adapt to the changing landscape, both near and long term, consumer behavior does not always shift as easily. We believe the beauty category could have lingering impacts in regard to product trials and purchasing, as consumers in the skincare category typically like to try it in retail before they buy. In the Canadian 2.0 market, our direct consumer medicinal cannabis brand, Peace Naturals, launched new vaporizer devices in the first quarter. Our Peace Naturals brand has always kept quality as a top priority, and this commitment to quality holds true with our new vaporizer devices. These devices aim to deliver a premium extract for consumers with precise cannabinoid concentration levels and terpene profiles for consistent experience. The premium cannabis extracts are made using CO2 extraction processes and each product has a unique and aromatic blend which uses all-natural, terpene-rich flavors. Our Peace Naturals batteries and cartridges are rigorously tested before sale and we receive positive feedback on the products to date. We are proud of our uncompromising approach to quality, which is at the heart of everything we do. As we continue to glean more consumer insights in the Canadian market, we look forward to developing innovative and differentiated products that meet the needs and exceed the expectations of our consumers. Turning to distribution in the Canadian market. In Q1, we continue to supply the adult use market, working with provinces and private retailers to meet demand during this time. As COVID-19 has impacted global markets and various industries and supply chains, we have begun to see a contraction in demand as cannabis stores in various provinces have been either closed or are going through changes in how they are forced to operate. In Canada, while certain cannabis retailers were designated an essential business, Additional new measures have been implemented to permit click and collect and online delivery of cannabis products to consumers. Several provincial purchasers have similarly implemented additional health and safety measures and reduced staff at on-site operations, including limiting delivery time slots, which has posed logistical challenges and created a reduction in purchase order fulfillment. The slowdown in disruption faced by retailers is also in addition to quarantine measures and travel restrictions. which could impact the ability of consumers to readily access our products outside of the online channel. These restrictions will continue to change and evolve which creates uncertainty in forecasting consumer demand and sales velocity. As mentioned, in the U.S., while online sales have continued, most beauty and luxury brick and mortar retailers have temporary closed their stores and boutiques. However, Lord Jones has adapted during this time and has made and will continue to make modifications to meet the online sales demand in this environment. Through these challenges, we continue to modify and monitor our distribution networks to bring quality products to market during this unprecedented time. We understand that this disruption is impacting everyone, but we are committed to providing our consumers with the level of consistency and stability with our products that they have come to expect from our brands and from us. With that, I'll turn it over to Jerry to provide a discussion on this quarter's financial results and our remediation efforts.