Cronos Group Inc.

Good morning. My name is Catherine, and I'll be your conference operator today. I would now like to welcome everyone to Kronos Group's 2021 Third Quarter 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, Catherine, and thank you for joining us today to review Kronos Group's 2021 Third Quarter Financial and Business Performance. Today, I am joined by our President and CEO, Kurt Schmidt. our CFO, Bob Mador, and our Executive Chairman, Mike Gorenstein. 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 risk 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 cautionary statements and risk factors included in the company's earnings release and regulatory filings, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q, by which any forward-looking statements made during this call are qualified in their entirety. I want to stress that this call will be limited to third quarter 2021 earnings and the restatement of our second quarter financial statements, and we will not be addressing or taking questions on full year 2021 results. Full year 2021 results will be discussed after we file our annual report on Form 10-K with the SEC. 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 most comparable 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 will move into a question and answer session. With that, I'll pass it over to Kronos Group's President and CEO, Kurt Schmidt. Thank you, Shane, and good morning, everyone.

I want to thank our employees, board of directors, and shareholders for their support and patience as we work through completing our Q2 restatement and our Q3 filings. A special thanks to our finance and legal teams for putting in the extra effort over the past few months. These situations are never easy, but it's essential to learn and grow from them. We are committed to continuous improvement and have learned and evolved from this situation. Now I'd like to review recent developments related to our financial reporting and internal controls and the remediation actions we are taking. Well, Bob will take you through more details on these items shortly. As we noted in November 2021, the audit committee of the company's board of directors worked with our independent financial auditors to conduct a review to evaluate the goodwill and indefinite lived intangible assets in the U.S. reporting unit for impairment. As a result of this review, we have recorded impairment charges on the U.S. reporting unit totaling $236.1 million with respect to goodwill and indefinite lived intangible assets and on long-lived assets, and the three months ended June 30th, 2021. Accordingly, the company has restated the period's financial statements to reflect this new information. The restatement has no impact on cash and cash equivalents or revenues. We take these matters seriously, and in connection with the restatement, we commence making changes to our internal control policies and procedures to further strengthen internal controls related to financial reporting. We're also undertaking a realignment of the business that we believe will best position Kronos to drive profitable and sustainable growth over time. I view the realignment in three distinct pillars. First, we have realigned the organization to better enable our go-forward strategy. This includes centralizing functions under common leadership, allowing us to distribute resources more efficiently, improve strategic alignment, and eliminate duplicative roles and costs. Second, we will reduce complexity, leading to a decrease in fixed expenses. We are undergoing an evaluation of our global supply chain to become leaner and increase our ability to adapt quickly to the changing landscape. We are performing product reviews, pricing optimization, and pursuing distribution that matches our go-forward strategy across North America. We are steadfastly focused on aligning department priorities and team structure to support these initiatives. Finally, we will implement an operating expense target to help us optimize our cash deployments As more states legalize cannabis in the U.S., we are eager to build off our investment in Pharmacan to bring adult use THC products and brands to U.S. consumers upon federal legalization. We have set the foundation for our entry through the strategic investment in Pharmacan, and we are gaining invaluable experience through our existing businesses in Canada and other international markets. With our new organizational structure, we will be ideally positioned to enter and deliver it. The overall strategic realignment initiative is expected to deliver 20 to 25 million in initially identified savings across operating expense categories in 2022, primarily driven by savings in sales and marketing, general administrative, and research and development. As part of the first pillar of our realignment to centralized decision-making under common leadership, Kronos appointed Jeff Jacobson to the position of Senior Vice President, Head of Growth, Mr. Jacobson previously served as the company's general manager of Canada and Europe. Mr. Jacobson has been with Kronos Group since December 2016, and previous to that was a co-founder of Peace Naturals. Mr. Jacobson's expertise and experience in licensing and compliance, new business development, project management, and resource management will help Kronos Group lead in domestic and international markets. The company also appointed John Grease to the position of Senior Vice President, Head of Operations. Mr. Grease joined Kronos Group in August 2021 as the Vice President of Operations. Mr. Grease has worked with several cannabis organizations and was most recently the Chief Operating Officer for the Supreme Cannabis Company. Prior to Supreme, Ms. Grease garnered cannabis experience during California's adult use implementation as COO for global cannabis company, Crestle Pharma Limited. Prior to that, he spent the majority of his career in supply chain operations with PepsiCo, Nestle, and Sophina Foods. Mr. Grease's experience in building supply chains around the world will help the company win in the markets we are in today, while staying nimble in order to move fast and pivot as the industry changes over time. I'm confident these realignment efforts will better position Kronos to continue to assemble a portfolio of best-in-class brands and intellectual properties. while preserving the financial flexibility to make additional strategic investments in our R&D pipeline and brands as we continue to innovate and evolve with our consumers' wants and needs. Our future structure will be a brand-centered organization with teams focused on accelerating growth on the core, margin accretive innovation, winning in rare cannabinoids, U.S. adult use market entry, and streamlining the organization to make better decisions while increasing alignment and agility. There's a lot to look forward to as this process unfolds, and we will be providing updates in the coming quarters. In the meantime, we remain focused on driving the initiatives forward, advancing our core business priorities, and preparing for our entry into the U.S. While we are confident our realignment strategy will improve certain areas of business, I believe Pronos is sitting in a great position within the global cannabis landscape, which is a credit to Mike Gornstein's prudent leadership in the early days of legalization in Canada and the evolving landscape across the world. From the very beginning, Kronos has taken a different approach. Instead of aiming for a multiple unfunded capacity, we stayed relatively lean and focused on R&D while creating cultivation partnerships with large-scale agricultural specialists. Instead of controlling positions in countries outside of the U.S., Canada, and Israel, we chose low capital-intensive partnerships to create exposure while limiting risk. Instead of a desire to be first to market, we focused on differentiation and delivering products that consumers didn't know were possible. While this approach was not the most popular and requires patience from our shareholders, partners, and employees, we are beginning to see it pay off. The success we are seeing is proven in point-of-sale data. Our sours by Spinach Edibles achieved double-digit market share in the gummies category in Canada within six months of launching. And our breeding and genetics program has yielded some of the best-selling high-THC flower SKUs on the market in Canada. We weren't first to achieve these rankings, but once we pushed go on these product launches, we proved the muscle we have across our organization and the desire to win. We have looked and continue to look at the Canadian adult use market as a test and learn market. We all know why it's not the easiest market to operate in, but we are focused on making it work for us. That means focusing on limiting losses with an eye towards profitability, but most importantly, creating products through extensive R&D that develop turnkey solutions for any market we operate in. Chronos is out without its challenges and has had missteps. We're aware of that, and we're working to address them with this strategic realignment. But at the same time, we have a lot of confidence, given we have one of the strongest balance sheets in the industry and strength across our organization, which I believe makes Kronos poised to be a leader in any market we operate. Now, getting into updates on some of the items that are working today. In October 2021, we launched the first cannabis edible in Canada to feature cultured CBGs. Spinach Fields Chill Blast 2-to-1 THC CBG Gummy. Following this successful launch in January 2022, we launched a 1-gram THC vape pen featuring cultured CBG, further extending our leadership position and bringing high-quality, rare cultured cannabinoids to the market. Subsequent to the third quarter, we hit the equity milestone for cultured CBGVA, which is a crucial step to developing cultured THCVs. We're very proud of the work we are accomplishing with Ginkgo and how we are positioning the company to win with rare cannabinoids. The Spinach brand's new platform, Spinach Fields, will deliver a variety of cannabis products, which will prominently feature rare cannabinoids made using our proprietary processes designed to provide unique and enhanced experience. As a reminder, Kronos believes that the best way to sustainably win in cannabis is to compete with differentiated products than just competing on price. We feel we've done a great job executing that strategy with our flagship adult-use brand, Spinach, by delivering consumers better products and providing great overall value. And we're just getting started. As part of the second pillar of our strategic alignment, we are conducting product and brand reviews across our portfolio, and we've decided to stop selling the cold brand in Canada. Over the last year, we have increased our focus on growing Spinach across categories. We believe we have something exceptional with spinach brands that will be transferable across borders when the time comes. There may be opportunities in the future for additional brands to enter the built used cannabis market in Canada in different price tiers. But for now, we are focusing on our highest ROI brand, spinach. We also want to provide an update on Kronos Grow Coat. During the third quarter of 2021, we started to purchase biomass produced at Grow Coat for our Canadian operations. Kronos has always maintained that working with experts in large-scale agriculture is a strategic way to build an efficient supply chain. Seeing early successes from GrowCo has proven our instincts correct, and we're happy to see our vision for this partnership come to life. In Israel, our medical business continues to form incredibly well, posting another quarter of strong top-line growth. We're proud of what we have accomplished in this market and establishing the relationships with patients, and distributing to nearly all pharmacies that carry medical cannabis. According to a recent survey published by Cannabis Magazine, our Peace Naturalist brand was the most recognized brand in the Israeli medical cannabis market, a true testament to the team's efforts in Israel. As of December 2021, the cannabis patient count in Israel is approximately 109,000, which is up 40% versus the same period last year. We believe this market is still in the early innings of growth, which gives Kronos a great opportunity to continue to grow our Peace Naturals brand with medical consumers in Israel. Turning to the U.S. segment, Jeff Jacobson and his role as head of growth is digging into the business with his team, all of whom are critical components to the success we have experienced in Canada. Jeff is leading the charge on a full portfolio view, which will likely include pricing optimization, SKU rationalization, and pursuing distribution that matches our go-forward strategy. Jeff and team have had a lot of great products to work with in our U.S. CBD portfolio. As we advance, we will be focused on driving future innovation towards products that better align with our desire to be an adult-use cannabis company, with a keen focus on doing fewer things better and a strict mandate on return on investment. We don't expect this recovery to happen in a straight line, but we look forward to sharing the evolution with you over time. As we realign the organization to match our go-forward strategy, the primary focus of our energy will be towards elevating our brands by utilizing rare cannabinoids and focusing on adult-use products. We have a lot of work ahead of us, but I feel confident in the actions we are taking to improve our business. With that, I would like to welcome Bob Nador to his first earnings call as Kronos' new CFO. Bob, please take it away.