Cronos Group Inc.

Good morning. My name is Stacy and I will be your conference operator today. I would like to welcome everyone to the Cronus Group 2022 Second 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. Shane, you have the floor.

Thank you, Stacey, and thank you for joining us today to review Kronos' 2022 second quarter financial and business performance. Today, I am joined by our chairman, president, and CEO, Mike Gorenstein, and our CFO, Bob Mador. Kronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR profile. 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, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call. These forward-looking statements are based on management's current expectations and assumptions that are subject to risk and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our website, by which any forward-looking statements made during this call are qualified in their entirety. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in the earnings materials that are available on our website. 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' Chairman, President, and CEO, Mike Gornstein.

Thank you, Shane, and good morning, everyone. I want to start by reviewing the progress we've made toward our strategic realignment initiatives since our last call. We've continued to work hard to set Kronos up for the future and to prepare our company in the short term as we move through a more volatile macroeconomic environment and uncertain timing regarding regulatory change throughout our current markets and those in which we may look to operate in the future. With a substantial portion of our Canadian manufacturing moving to GroCo, The wind down of the Peace Naturals campus is going as planned and we're on track to fully cease operations at the facility by the end of the year. This changeover has been efficient and we're grateful to our employees and partners for ensuring a smooth transition of our operations. The build out of our own space at GroCo is progressing well and downstream processing equipment will be up and running in the coming weeks. We continue to be pleased with the cultivation operations at GroCo. and look forward to having this joint venture become a primary supplier of our products in Canada. The cost savings we expect to realize in GroCo are intended to aid the margin profile of our products over time, which is a critical strategic goal for us. This quarter, GroCo reported us preliminary unauded revenue of approximately $5.2 million to non-Kronos customers, and in the year-to-date period, GroCo has achieved profitability. As a reminder, we are a lender to GroCo and its principal. GroCo began to repay its current $79 million senior secured loan in the first quarter. These loan receivables, combined with our balance sheet of approximately $945 million in cash and short-term investments, set us up well to invest in new markets as they open. Balance sheet management through economic uncertainty is paramount, and our desire to maintain a significant industry-leading cash balance ahead of potential global strategic growth opportunities has guided many of our decisions year to date. In the second quarter, we implemented additional changes in the U.S. business as we continue to assess the best way to position our existing infrastructure to win in the U.S. and other markets globally with the borderless products we are creating today. In the coming months, to limit operating expenses while maintaining a foothold in the U.S., you'll see us pivot the Lord Jones brand away from the wholesale beauty category and lean into adult-use product formats. This will allow us to preserve the Lord Jones brand equity that should enable us to launch THC products and other cannabinoid products beyond CBD in the future. In addition, we've decided to focus our energy on the direct-to-consumer channel over wholesale opportunities. With the switch to a DTC focus, we are striving for a higher gross margin profile and can reduce our SG&A further. We are focused on creating borderless products and brands that can easily be adapted to emerging cannabis markets as they become commercially viable opportunities. The pivot in our U.S. business further drives us towards our singular focus of creating adult-use cannabinoid products. Globally, we continue to be on track to deliver 20 to 25 million of identified savings across operating expense categories in 2022, primarily driven by savings across sales and marketing, G&A, and R&D. While right-sizing our cost structure to strengthen our overall business, we still continue to make significant progress with expanding our borderless product portfolio in Canada under the Spinach brand and its sub-brand, Sours and Fields. In the second quarter of 2022, according to HIFIRE data, Spinach held an approximate 18.6% market share in the gummies category. Furthermore, three out of four Sours ranked in the top 10 for market share in Canada in Q2, and all five of our gummy products across Sours and Fields that were available on the market in Q2 were in the top 15. Last week, to further build on our category leadership, we launched a gummy featuring CBN under the Spinach Field brand Deep Dreams Blueberry Pomegranate, featuring 10 milligrams of THC and 5 milligrams of CBN per pack. We intend to bring our success and learnings in the gummy category to the vape category as well. Following the switch to offering one-grand formats earlier this year, our Spinach Vapes and Fields cultured CBG vape product lineups are doing well in market. In July, we launched another rare cannabinoid product featuring CBN, the Spinach Fields Blackberry Kush THC-CBN 1-gram vape, which provides a mellow and dreamy high. In June, in partnership with Ginkgo, we achieved the productivity target for THC-V, a cannabinoid believed to reduce the appetite-enhancing property of THC. Spinach Fields is our platform designed to deliver unique and enhanced experiences, made possible through proprietary blends of rare cannabinoid. We are excited about the possibilities THCV is expected to give us and look forward to getting THCV products on the market in the future to complement our growing portfolio of rare cannabinoid offerings. As a reminder, last quarter we announced a bolstering of our flower portfolio to meet the increasing demand for the 28-gram format. With the launch of strain-specific 28-gram offerings, Wedding Cake and Tangerine Twist, We now have three flower SKUs in the top 10 for market share as of June 2022, according to HiFire. Let me take a moment to discuss Kronos retail sales performance in the Canadian market. All the following numbers will be referencing retail sales for the second quarter of 2022 provided by HiFire. Kronos grew retail dollar sales by 69% year-over-year, while the broader Canadian market grew by just 23%. Differentiated gains for Kronos were driven by 36% growth in flour versus no market growth, and 271% growth in vape versus the market growth of 34%. We didn't offer edibles for the vast majority of second quarter in 2021, and now we have 14.3% market share in the broader edibles category and 18.6% market share in the gummies category, maintaining our strong number two position in gummies. While we lagged market growth in pre-rolls, growing 9% versus market growth of 62%, we have a plan to improve this trajectory through SKU architecture and innovation. Despite challenges in the Canadian market, we continue to be focused on building profitable market share, utilizing our growing portfolio of borderless products. Moving to our results in Israel, coming off a record first quarter for the team, this quarter we celebrated the second anniversary of our Peace Naturals brand launch. In the second quarter, we recorded $7.2 million in revenue of branded product sales, up 212% year over year. And as of June 30th, we have sold more branded products than we did in all of 2021. Incredible growth in just one year. Similar to macro environments and other markets during early growth phases, Israel is not without its challenges. As we know well, regulations, especially in cannabis, can change rapidly. There are two regulatory challenges that the Israeli market is currently facing, a pause in cannabis imports and a slowdown in patient permit authorizations by the ACAR. While we believe the pause in imports will be resolved over the coming months, we feel well-equipped to manage a prolonged pause given our domestic cultivation and third-party supply relationships in Israel. We believe the slowdown in patient permit authorizations led to an increase in competitive discounting. Recently released patient permit data for July showed evidence of a recovery in patient growth, growing slightly over 2% sequentially from June. We expect these regulatory issues will be resolved over the coming months, and our business will return to strong growth. We're invested for the long term in the Israeli market and plan to expand on our leadership position. Our products continue to be sold in nearly all pharmacies offering medical cannabis, and we maintained our top three market share status in the quarter. As this market evolves, our continued focus on product quality and innovation will differentiate us and drive more consistent patient and consumer loyalty with our brand, Peace Naturals. Moving to Australia, where we have an approximate 10% stake in Kronos Australia, the team is executing at a high level in the early stages of the market development. Kronos Australia reported a preliminary 22 revenue range of 66 million to 68 million Australian dollars and an EBITDA range of 10 million to 11 million Australian dollars. Australia's cannabis market growth has picked up pace and is estimated to have a market size of 400 million by the end of year 2022, up from 230 million in calendar year 2021. We are pleased with the team's progress in this growing market. Turning to appointments within the organization, I am pleased to announce that REA Wigginsburg, was appointed SVP, Head of Research and Development, after serving in an interim capacity since November of 2021. Aria has been with Kronos since 2019 and has played a foundational role in our innovation program. Prior to serving as Interim Head of R&D, Aria was the General Manager and Vice President of Research and Technology at Kronos Research Labs. Before that, Aria was the CEO of Altria Israel, an Altria Research and Development Hub. I'm confident REA will drive Kronos' research and innovation initiatives forward as we look to the future and further develop our borderless product portfolio. Lastly, it's been a while since we could speak to momentum in Washington, D.C. regarding cannabis reform. Although we remain conservative in our thinking, we are pleased with progress moving in the right direction. We continue to see a wave of legalization in various forms state by state across the U.S., further building the support for legalization at the federal level. We continue to participate directly in various industry associations and through our employees' PACs to drive the initiative forward. Outside of direct participation through our government affairs initiatives, we also have an option agreement with Pharmacan, one of the country's largest cannabis companies. We are pleased with their progress following their merger with Live Well Health and are confident in their go-forward strategy as a combined company. Outside of North America, we are also seeing growing interest in cannabis legalization, leading to more potential market opportunities. Although most of these efforts are in their early stages, we are assembling a portfolio of borderless products with strategic infrastructure and partnerships globally, combined with an industry-leading balance sheet to execute when the time comes. With that, I would like to pass it to Bob to take you through our financials.