Cronos Group Inc.

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

Thank you, Lashana, and thank you for joining us today to review Kronos Group's second quarter 2020 financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, our CFO, Jared Barbato, and our EVP of Legal and Regulatory Affairs, Sun Ming Shum. Corners 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 the 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, including the company's most recent annual report on Form 10-A 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, We believe these non-GAAP measures assist management in planning, forecasting, and evaluating business and financial performance, including allocating resources. Reconciliation 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, thecornosgroup.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 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. To start the conversation, I'd like to speak about two issues affecting everyone around the world today. First, I want to address the topic of racism, and specifically, how we at Kronos are dedicated to making a difference. As a leader in the cannabis industry, we are committed to using our voice to lead our industry forward responsibly. We cannot do that without recognizing the historical injustice specifically tied to cannabis prohibition that continues to this day. As we continue to grow, entering new and evolving markets, we are committed to supporting meaningful and progressive social justice reform and legislation in markets such as the U.S. We believe this work starts from the inside out, so we have established a committee to address how we as a company can make an impact in the communities we operate in, both through our time and financial investment to fight racial injustice and inequity within our industry. We are fortunate to have a platform, resources, and influence, and we will continue to use it to do our part to combat racial injustice and to change society for the better. Secondly, COVID-19 has impacted markets, industries, and people globally, leading to material changes in the way we live and the way we do business. We've also seen the profound impact our products have on our consumers' everyday lives, and we continue to modify and monitor our distribution networks to bring quality products to market during this time. Kronos Group was founded on the mission to improve people's lives by unlocking the full potential of cannabis, and our company has always been at the forefront of providing safe access and high quality products to patients and consumers. 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 always encourage long-term thinking, especially in today's economy and environment. Kronos is truly building a business for the future. Our value will come from technology breakthroughs and branded sales that will help establish relationships with our consumers. Moving to our operations in Israel. In June 2020, following the successful shipment of bulk-dried flour from Canada to Israel, we commenced sales of Peace Naturals branded cannabis to the Israeli medical market. This is an important milestone for Kronos, and we look forward to expanding our distribution and the Peace Naturals brand in the Israeli market. The team at Kronos Israel is also preparing to introduce new SKUs in adjacent categories, such as oils and pre-rolls, which will further establish our leadership position. Allow me to take a moment to dive more into the Israeli market and how we've positioned ourselves as a leader there. Israel has a population of just over 9 million people and boasts one of the world's highest cannabis usage rates. Unlike the North American cannabis markets, Israel has a much less competitive illicit market, given Israel's stringent border controls and security infrastructure. The Israeli government has taken several steps to optimize and expedite the patient access process for medical cannabis. In 2016, the Israeli Ministry of Health published a medical cannabis information booklet and guide, which includes a 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 systems 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 program, patients fill prescriptions directly through pharmacies. The medical patient count in Israel is expected to grow rapidly, representing an excellent opportunity for our business to grow in this market. The rapid growth in the Israeli medical market reminds us of the early days in Canada's medical market, with demand outpacing supply and the stigma associated with the product quickly fading away. Beyond the medical market in Israel, We are encouraged by the progress being made on further legalization of the potential adult use market, which provide more legal access to cannabis in Israel. There are currently two bills being reviewed by the government, and they are progressing through Parliament quicker than many had anticipated. As a reminder, Kronos Group consolidates the results and captures 90% of the economics through our equity interests across the Kronos Israel entities. With our manufacturing footprint, established local team, strong brand and product portfolio, we are very well positioned to succeed in the market. Kibbutz Khan Shmuel is one of the largest and most sophisticated kibbutzim in Israel, producing and exporting a variety of products to 35 countries throughout Europe and Asia. For our Kronos Israel facility, we work closely with our partners at Kibbutz Khan Shmuel and are able to leverage not only their agricultural expertise, but also their skilled labor pool. with about 80 employees currently working on site and extensive infrastructure including warehousing, utilities, and much more. I'm pleased to share that we are in full production and have had successful harvests. Outside of Kronos Israel's direct operations, we have further committed to the region and have a strong presence from an R&D and analytical sciences perspective. We have two partnerships with top cannabis researcher, Dr. Didi Miri, through the skin care repair research we are doing at Technion and through the analytical testing lab on Kronos Israel's campus called Canasol. Under our agreement, Canasol is developing a commercial cannabis analytical testing business on-site at Kronos Israel. In addition, we have created our own research hub, Kronos Device Labs, which employs about 30 people and is focused on everything from understanding the effects of different cannabinoids to creating next-generation devices for cannabis products. Turning to the Canadian market, in the second quarter, we continue to supply the adult use market, working with provinces and private retailers to meet demand during this time. As COVID-19 continues to impact global markets and global supply chains, we have seen an uptick in sales driven by consumer demand and the growth in retail outlets in key provinces. Despite the strength we have seen and the continued store openings in some provinces, We remain cautious, knowing that the shock of the economy could potentially have negative impacts on our industry. In Canada, we're now seeing most retailers open with limited capacity and social distancing guidelines. Several provincial purchasers continue to implement health and safety measures and reduce staff at on-site operations, including limited delivery time slots, which have posed logistical challenges and created a reduction in purchase order fulfillment. The slowdown and disruption faced by retailers are in addition to quarantine measures and travel restrictions, which would impact the ability of consumers to readily access our products outside of online channels. These restrictions will continue to change and evolve, which creates uncertainty in forecasting consumer demand and sales velocity. Despite the changing landscape, throughout the second quarter, the Alcohol and Gaming Commission of Ontario continued to grant retail store authorizations. with the objective of making the legal supply of cannabis more broadly available. With over 100 stores authorized to open as of July, Ontario seems to be committing to their plan of growing store count each month throughout 2020 and they have a long runway for growth given the demand for new retail licenses. In the Canadian 2.0 market, our adult use brands, Spinach and Cove, and our direct-to-consumer medicinal cannabis brand, Peace Naturals, continue to expand distribution throughout the country in their respective channels. 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 into the Canadian market, we look forward to producing new and differentiated products over time. We know the adult use consumers and medical patients in Canada are looking for value during this time, and some of our peers have committed to a deep discount strategy as a way to provide this perceived value to the consumers and to compete with the illicit market. At Kronos, we believe that the real essence of value revolves around the trade-off between the benefits the consumer receives from a product and the price he or she pays for it. We pride ourselves on the quality of the product we bring to market. For instance, our vaporizer 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. All of our batteries and cartridges were rigorously tested before sale and we continue to receive positive feedback on these innovative new products. We believe our consumer benefit and pricing profile provide a great value to consumers currently. We will continue to look at ways to provide more value to the consumer, whether through benefit or price, on a regular basis as the industry evolves. Moving to the U.S., I want to start off the discussion by welcoming Summer Freen into her new role as General Manager of our U.S. segment. Last month, Summer was named General Manager of our U.S. hemp-derived CBD business with oversight of sales, marketing, and operations. Summer officially joined Kronos in January of this year, but she has been part of the team since 2018 in her role at Altria. While at Altria, Summer led the strategy and business development team's due diligence in the cannabis space, which culminated in the strategic investment from Altria. She has been responsible for leading our U.S. sales efforts, including managing brand and retail partnerships for Lord Jones. Summer is a proven and results-oriented leader with 14 years of regulated consumer packaged goods experience. We're confident in our U.S. brands and our strategic direction under Summer's leadership. There are many opportunities we see on the horizon, from introducing new product formats under Lord Jones to launching new brands and targeting different retail channels and consumers. Last quarter, in response to market feedback and part of our evolving effort to provide true value to our consumers, our Lord Jones brand launched a new size format for our hero product, the Lord Jones CBD Body Lotion. Now available in a larger 100ml bottle, our popular body lotion is twice the size but available at the same price as our original 50ml size. In conjunction with this introduction, we lowered the price of our original 50ml size by 30%. We think the new pricing structure provides for a great entry point to attract trial consumers into the brand and convert them to refeed customers. The support from our consumers during this quarter has been felt, and we're excited to be bringing these new format sizes and products to our loyal Lord Jones consumers. We would be remiss not to mention the work we are doing with Ginkgo and our joint venture, Naturera. Following the successful fermentation of CBG at R&D scale at Gronos Fermentation, we have continued to optimize the process for downstream processing and scale-up procedures, and are very pleased with our results to date. With the progress we have made, we remain on schedule to produce fermented cannabinoids at commercial scale in September of 2021. And in Colombia, our joint venture, Natuera, successfully completed three additional test exports of hemp-derived CBD extract to the U.S. between May and July of this year for business development and R&D purposes. Although this does not signify the start of revenue for this business, they provide good learnings that set us up well for the future. During these unprecedented times, it is very encouraging to see that we are making progress against our strategy across our global footprint. The current environment doesn't make things easy for any industry, let alone one that is in a nascent stage of development, but I am very proud of our employees and all that we have accomplished during this time. From our production and manufacturing facilities to our continued R&D efforts, we are creating and launching new products and brands in different markets across the globe, and we are committed to bringing high-quality brands and products to our consumers. There are a few silver linings from this environment. First, given our strong balance sheet and decreased access to capital for industry competitors, we continue to feel that we are extremely well positioned to be opportunistic in how we create value for shareholders. Second, we believe that as attention turns to economic recovery, accelerating cannabis legalization is a great solution to help create much-needed jobs and tax revenue. We can't always tell what the future holds, but we remain optimistic and ready to seize opportunities as they come our way. With that, I will turn it over to Jerry to provide a discussion on this quarter's financial results and our remediation efforts.