Cronos Group Inc.

Good morning. My name is Ursula, and I will be your conference operator today. I would like to welcome everyone to the Kronos Group's 2020 Fourth Quarter and Full Year Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laidlaw, Ambassador Relations. Please go ahead.

Thank you, Ursula, and thank you for joining us today to review Kronos Group's 2020 Fourth Quarter and Full Year Financial and Business Performance. Today, I am joined by our President and CEO, Kurt Schmidt. our CFO, Jerry Barbato, our Executive Chairman, Mike Gorenstein, and our EVP of Legal and Regulatory Affairs, Su Ming Shun. Kronos Group issued a news release announcing these 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 Kurt, 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, 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 10-10 filed today, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, certain financial measures may be discussed that are not recognized under the 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, and 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 to a question and answer session. With that, I'll pass it over to Kronos Group's President and CEO, Kurt Schmidt.

Thank you, Shay. As we turn the page to 2021 and reflect on 2020, the accomplishments the Kronos team achieved, especially given the complex operating environment, were impressive. I'm incredibly excited to see what we can accomplish in 2021 and beyond. I want to take this moment to recognize and thank our global team for persevering through the challenges the world faced in 2020 and continue to face in 2021. I'm going to start this morning's call by reflecting on a few highlights from 2020 and to discuss our strategy to win in 2021. Since joining Kronos six months ago, I've made it my focus to help accelerate growth and plan for our future strategy. With the help of Mike and our passionate senior leadership team, we've honed in on the areas we want to concentrate on as an organization. In 2021, we plan to focus on four main pillars. to drive business results and growth across the organization. The first pillar is to ensure we're continuing to build a winning team. I plan on supporting our employee base by fostering collaborative, performance-focused culture that strives to win. We know that this burgeoning industry requires talented and driven employees, and I plan to continue to instill a spirit of winning and collaboration to enable our teams to execute as we grow in existing markets and for new markets support our brands and continue our R&D work in 2021. The second pillar is having a keen focus on building disruptive technology and innovation, which has always been a core strategy priority for Kronos. We continue to believe that investing in innovation and breakthrough research will unlock the potential of cannabis and provide us with a long term competitive advantage. The third pillar, as I mentioned on our previous call, is to build great cannabis brands. I'm a marketer at my core, and in 2021, we plan to continue to innovate with our brands with the goal of meeting the needs and exceeding the expectations of our consumers. I'm incredibly proud of how we are developing our brands across our markets. We'll be focused on robust marketing strategies and new retail partnerships to reach more consumers in 2021. The fourth pillar is to strengthen our ability to compete. which is supported by the first three pillars. We will focus on building competitive advantage through R&D capabilities, strategically placed global infrastructure, and engaging in the legislative process in the markets that matter to us. This includes sharpening our strategic focus in Canada, Israel, and the U.S. to ensure we're driving long-term value and preparing the company for new opportunities as they arise in 2021 and beyond. It was a busy year. But we're excited to continue delivering our strategy and drive long-term value for shareholders. And 2021 is also shaping up to be an important time for U.S. cannabis legislation. I want to share a few thoughts on legalization efforts and how Kronos is taking part to ensure that we have a seat at the table. Legalization in various forms continues to spread across U.S., with the vast majority of Americans now living in states where cannabis has been legalized in some form. whether medical or adult use or both. As many Americans express support for cannabis legalization in some form this past election, momentum continues to build at both the state and federal level. We believe cannabis should be legal at the federal level and that a comprehensive and reasonable federal regulatory framework should be put in place for the industry. We think the framework should create product and safety standards for the industry, and address critical societal considerations such as youth access prevention and social justice issues. As part of our focus and our participation in these efforts, it was announced a few weeks ago that Kronos is joining industry colleagues as a founding member of the U.S. Cannabis Council or USCC. With representation from leading cannabis and social justice organizations in North America, the USCC will be the premier trade association for cannabis thought leadership, innovation, and social responsibility in the US. We look forward to partnering with our industry peers to advance cannabis legalization in the US. As previously discussed, Mike Gorenstein's priority in his role as executive chairman is looking at US opportunities and the best way for us to participate. He has commissioned a team internally to analyze the various opportunities in the market and different potential strategies for us there. We are confident that our balance sheet, existing CBD infrastructure and our strategic investor, we will be a best in class cannabis company in the US. Jerry will focus on the fourth quarter results, but I wanted to take a moment to highlight the annual performance. In fiscal year 2020, on a consolidated basis, we increased revenue 97% year over year to 46.7 million. with strong performance across all regions. Our rest of world segment recorded net revenue in fiscal year 2020 of $37.2 million, representing an 83% increase year-over-year. And lastly, the United States segment, in its first full year of operations under the Kronos umbrella, recorded net revenue fiscal year 2020 of $9.5 million. After a modest third quarter, the U.S. team came back strong in the fourth quarter and executed. Although our USCBD business continues to navigate turbulent times due to retail closures and other impacts due to the COVID-19 pandemic, we are confident the team will continue to successfully operate in this environment. A critical component to our USCBD business results with the successful launch of Happy Dance, our new skincare and personal care brand in partnership with Kristen Bell. Today we announce an exciting expansion for Happy Days by securing its first major U.S. retailer, Ulta Beauty, making the brand's first brick-and-mortar retail rollout. Happy Dance features an easy-to-use line of clean and cruelty-free hemp-derived CBD bath and body products. The full collection, expected to launch in the coming weeks on Ulta.com, follows shortly thereafter in store at over 550 Ulta locations across the U.S. We're incredibly excited to be partnering with Ulta and look forward to bringing the brand to a broad audience through Ulta's retail network. Broadening our distribution capability is an important next step in the evolution of this brand, which will be followed by additional product launches to expand variety for our consumers. In June 4, Lord Jones, our prestige position U.S. CBD grant, launched a new whole plant formula CBD lip balm, which has been well received by consumers. Introducing entry-level products to the Lord Jones portfolio improves the accessibility of the brand and increases trial. The Lord Jones Acid Mantle Repair Cream was awarded the prestigious Refinery29 Beauty Award in Q4 2020. The self-care and beauty segment offers a respite from daily stressors, and we are fortunate to be able to continue to bring high-quality products to consumers in the U.S. during this time. We plan to continue to expand our innovative product portfolio in 2021. In Canada, we continue to broaden our distribution across the retail landscape. We let consumer insights drive our decision-making while leveraging our robust R&D and innovation teams to bring products to market that consumers desire. Our innovation funnel is fast at the top, but it's our consumer insights that enable us to focus on what the consumers want today while keeping an eye on what they may want in the future. To that point, As segments of the industry have grown and consumer adoption increases, we are excited to tackle these additional opportunities with innovative products in 2021. Our spinach brand continues to perform well. In this past quarter, spinach's dancehall strength was awarded Best Hybrid Dry Flower of the Year by Kind Magazine. This award is especially appreciated as bud tenders across our Canadian retail network nominated us. Although COVID-19 limits our ability to engage face-to-face, retail marketing opportunities will be an area of focus for our adult-use brands, and we are excited to meet more consumers in retail spaces in 2021 as our marketing strategies are expected to focus heavily on this channel. Moving to the Israeli medical market, we are excited to see the market continue to expand, now with roughly 80,000 medical patients in the country. Kronos Israel began selling Peace Naturals branded oil along with the previous launched flower products to the medical patients. These successful launches have enabled Kronos Israel to quickly build their distribution network and brand awareness through a growing network of pharmacies. In February 2021, Kronos Israel signed a distribution agreement with the largest pharmacy chain in Israel, Superpharm, which has over 250 branches in Israel. As we grow our share, the size of the pie is also expanding, with the number of pharmacies in Israel wanting to carry medical cannabis products increasing, which presents a great growth opportunity for the industry. The Peace Natural brand has already been recognized by the Israeli Marketing Association for its successful marketing strategy at launch in 2020 to generate exposure for the Peace Natural brand to patients. as well as for differentiating and highlighting the brand's high quality amongst its competitors. We're incredibly pleased to see the sales volume and resonance amongst patients in this region. A critical component to our R&D and innovation initiatives continues to be our biosynthesis work taking place at Kronos Fermentation in Winnipeg in partnership with Geco Bioworks. Following the successful fermentation of CBG in our Winnipeg R&D labs at research scale, and the second quarter of 2020, the team has continued to optimize for scale and downstream processing and preparation for commercialization. Kronos is prioritizing rare cannabinoids such as CBG over common ones such as THC and CBD and plans to sequence commercial production and subsequent product launches based off this approach. Canada is an important platform for us to develop innovative products to be ready for other markets We look forward to leveraging our R&D, innovation, and consumer insights to drive the creation of differentiated products through consumer learnings as part of the commercialization plan. On the innovation side, we believe providing rare cannabinoids at a meaningful scale could elevate and differentiate the consumer experience. We look forward to leveraging current insights and building future ones on consumer acceptance of these innovative products over time. In short, this past quarter is a summation of the hard work our teams have put into the past year plus. As we look to 2021, I'm incredibly excited about the teams we have supporting our brands and all the R&D, innovation, and exciting plans we have in store. With that, I'll turn the call over to our CFO, Jerry Barbato. Jerry?