Cronos Group Inc.

Good morning. My name is Valerie, and I'll be your conference operator today. I would like to welcome everyone to Kronos 2023 Third Quarter Earnings Conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Shane Laidlaw, Investor Relations. Please go ahead.

Thank you, Valerie, and thank you for joining us today to review Kronos' 2023 third quarter financial and business performance. Today, I'm joined by our Chairman, President, and CEO, Mike Ornstein, and our CFO, James Holm. Kronos issued a news release announcing our financial results this morning, which is 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, 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 risks 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. Lastly, we will be making statements regarding market share information throughout this conference call, and unless otherwise stated, all market share data is provided by HIFIRE. 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 Commerce's Chairman, President, and CEO, Mike Gorenstein.

Thank you, Shane, and good morning, everyone. I want to start by addressing the horrifying and despicable terrorist attacks in Israel in early October. Our thoughts remain with all victims, their loved ones, and all Israelis as they fight to be free from terror today and in the future. Kronos continues to prioritize the safety of our Israeli team and their families, and it will do everything we can to support them and our patients during this time. While our hearts are with our Israeli team, we have not lost focus on growing existing markets where appropriate and opening new international markets such as Germany and Australia. James will go into more detail on the financial results during his remarks, but I want to comment on the wins this quarter. We grew revenue by 22% year-over-year and 30% sequentially to $24.8 million, propelled by 40% year-over-year growth in Canada, driven by strength in pre-rolls, flour, and edibles. Adjusting our gross margin for an inventory write-down associated with transitioning out of our Winnipeg facility, the gross margin would have been approximately 19% in the quarter, a strong 260 basis point sequential improvement. We continue to have an industry-leading balance sheet with a cash and short-term investment balance of approximately $840 million. The strength of our balance sheet is supported by improved gross margin, lower operating expenses, robust interest income, and improved working capital management. We intend to build on this momentum for the remainder of the year and into 2024 as we realize P&L efficiencies and additional interest income from our cash and short-term investments. In September, we sent our first order of cannabis to our German distribution partner, CanSativa, and we are very excited to bring the Peace Naturals brand back to the German market. CanSativa is one of the leading distributors of medical cannabis in Germany and has a network of approximately 2,000 high-volume, cannabis-focused pharmacies that currently supply around 300,000 patients. Re-entering the German market, which has about 83 million people, is a significant milestone for us. We are working closely with the CanSativa sales team, who are excited about selling this brand in the market. Traction in the early innings of our launch is strong, and CanSativa has already received significant orders of Peace Naturals. Our goal is to continue to expand our reach and brand awareness in Germany with the help of CanSativa to establish our Peace Naturals brand as a top medical brand, similar to the brand's reputation in other international markets. Re-establishing Kronos and our Peace Naturals brand in the German market will position us to capitalize on this growing opportunity with additional upside potential from future legislative changes, including in the event the German government reschedules cannabis and no longer labels cannabis as a narcotic. Turning to Australia, we are in the process of filing our first order to Vitora, with the first shipment to Australia planned to go out later this month. As a reminder, Kronos owns approximately 10% of the common shares of Vitora. In addition to forming a commercial relationship with Vitora, we also received a cash dividend of approximately $346,000 in Q3, making this the second dividend received from Vitora. pharmacy and supplier online platform focused on creating medicinal cannabis products and digital health solutions that connect and strengthen the cannabis ecosystem in the Australian medical cannabis market. The Australian market has seen medical cannabis patient approvals through the authorized prescriber pathway increased by over 120% year over year to approximately 300,000 approvals as of the first half of 2023, according to the Australian government's Department of Health. Expanding in this market is a top priority for Kronos, and we look forward to providing our partners at Vytura with high-quality cannabis products. Turning to Canada, during the third quarter, we continued to execute our plan to create a robust offering of borderless products, highlighted by new launches and strong market performance. As of October, Spinach was the number one brand in the edible and flower categories, number three in vapes, and the number three ranked cannabis brand overall in Canada. Spinach edibles accounted for 17.9% of the market's retail sales in Q3, remaining the market leader in edibles. We have an incredible product that continues to launch in new flavor profiles and cannabinoid blends, the perfect example of a borderless, scalable product. In the third quarter, our newest Sours by Spinach flavor, Pink Lemonade, became the ninth most popular edible in Canada. In total, we have five edible products in the top 15. In dried flour, we continue to see strong performance. Spinach was the number two brand in dried flour in Q3, with 5.8% market share, and we have three products in the top 15 best-selling SKUs, led by our GMO Cookies genetics across various pack sizes. We carried the Q3 strength in October, and we were very excited to say that Spinach rose to be the number one flour brand in Canada. This achievement is the culmination of years of genetic breeding and best-in-class cultivation that separate our products from the field. In the vape category, we held a 4.7% market share in Q3, climbing to number six. Looking at the monthly breakdown, Spinach rose to be the number five vape brand in September, and even more impressively, grew to be number three in October. We've done a lot of work on our vape portfolio over the last year, and it's great to finally see these strong results in the markets. Our 1-gram blueberry dynamite and our new 1.2-gram format, which have been flying off the shelf, have helped us gain share in the vape category. We will build on this momentum in the remainder of 2023 and into 2024 with a continued push to include flavor-forward profiles and rare cannabinoids in our vapes. This year, we launched several new offerings to bolster the spinach pre-roll portfolio, including Sonic Lemon Fuel 3-pack pre-rolls and three new infused pre-roll offerings, Pink Lemonade, Peach Punch, and Strawberry Slurricane. In Q3, Spinach rose to be the number seven market share ranked pre-roll brand, a significant improvement from our 2022 position, powered by our number one ranked flower as a base to our pre-rolls. We can grow in this category and our pre-rolls are already receiving additional attention from consumers and industry. In October, Our spinach brand won best pre-roll at the Grow Up Awards for our spinach fully charged atomic GMO infused pre-roll. The Grow Up Awards celebrate excellence in the cannabis industry, recognizing outstanding achievements and innovation in various cannabis-related categories. We are incredibly proud to be recognized by the Grow Up Awards in this category. Winning with our pre-roll is particularly important for us as we overhauled our portfolio earlier this year to ensure our offerings enhance and elevate the consumer experience. We continue to invest our resources and expertise into expanding our innovation pipeline and look forward to bringing new, high-quality pre-rolls to market in the coming year. In October, we launched our much-anticipated THCV-focused products in the vape and gummy categories. The Spinach Fields Full Tilt THC and THCV vape and gummies are designed to provide a boosted and elevated high. We plan to launch a THC-V infused pre-roll later in Q4, adding an additional offering under our robust pre-roll portfolio. We're incredibly excited about the possibilities of THC-V. We've put a lot of work into these proprietary formulations that offer a unique and differentiated experience we know consumers have been eager to try. Spinach Field's rare cannabinoid infused products have helped Kronos bolster its gummy, vape, and pre-roll offerings under the Spinach brand umbrella. Spinach Fields is a leading brand in Canada with a lineup featuring rare cannabinoids, CBN, CBG, CBC, and now THCV, many of which are made using our proprietary fermentation methods. Earlier this year, we mentioned our intentions to bring our award-winning cannabis brand, Lord Jones, to the Canadian adult use market. In November, our first product under this brand launched, and we are thrilled to bring the Lord Jones brand back to its roots with bold and elevated THC-focused products. The Lord Jones brand is inspired by the possibilities of cannabis, and we plan to leverage this brand to explore creative and unexpected ways to bring cannabis to the world and shape the category's future. Lord Jones products have been artfully crafted with scientific precision to bring the purest products and boldest flavors that deliver an unparalleled cannabis experience. We can't wait for adult consumers to go above and beyond with us and try these new products. The first product under the Lord Jones brand in Canada is Hash Fusion's pre-rolls. The popularity of Hash products and premium pre-rolls is increasing amongst adult consumers. Hash is currently the most popular solventless infusion and is the second most popular infusion overall in the pre-roll category. These hash fusion pre-rolls go beyond delivering an elevated true to plant consumption experience. These pre-rolls are crafted with an optimized ratio of premium high potency flour and complimentary solventless ice water hash, which preserves the bud's natural terpenes fitted with a reusable ceramic tip to help cool the smoke. This new product has been extensively researched and sensory tested to deliver a smoother experience featuring bold flavors. Later this month, we'll also launch a Lord Jones live resin vape, which will feature sought after cultivars and deliver a flavorful full spectrum live resin high. Our next highly anticipated edible that was researched and developed over multiple years, the Lord Jones Chocolate Fusion, will launch early in 2024. In sensory panel testing, these products receive even more buzz in their category than our award winning and number one ranked spinach sour dummies. These edibles will feature mouth-watering, multi-textured artisanal chocolate and high-quality ingredients in three flavors, cookies and cream, dazzleberry pop, and salted caramel crunch. Turning to Kronos Groco, their performance and cultivation continues to be strong. Groco reported a preliminary unauded revenue of approximately $6.2 million from non-Kronos customers in the third quarter. Additionally, The credit facility that Kronos previously provided GroCo currently has $69.4 million outstanding, following the principal repayment of $1.1 million by GroCo in Q3. In addition, GroCo made a $1.2 million interest payment in Q3. The solid financial performance of GroCo, yielding equity pickup, interest payments, and loan payback to Kronos, is a vital component of our overall financial picture. In Israel, our team impressively achieved sequential growth in the third quarter, despite relatively stagnant patient growth and continued competitive pricing pressures. Despite the war and challenging situation, our team continued to execute in market, maintaining distribution and launching new products. Still, the bigger priority in the near term is ensuring we do what we can for our Israeli employees, their families, and the broader Israel population. Turning to the U.S. market, We were pleased with reports of HHS's recommendation to the DEA, suggesting that cannabis be reclassified as a Schedule III drug under the Controlled Substances Act. Reclassification would signify a significant shift away from cannabis's current Schedule I drug status. Schedule III substances are recognized as offering potential therapeutic benefits and can be obtained with a prescription. Regardless of the specifics of how federal regulation and commercialization of cannabis products evolved, rescheduling would be a massive step for U.S. cannabis. Now three quarters of the year, we are well on our way to achieving our previously guided 20 to 25 million cost savings in 2023. And we still anticipate saving an incremental 10 to 15 million in 2024 as we fully realize the savings from our actions taken this year. This quarter's successes have resulted in significant top line growth and operating expense savings. culminating in a substantial improvement in cash flow from operations, which better positions us to assemble a portfolio of borderless products with strategic infrastructure and global partnerships. The combination of these efforts and an industry-leading balance sheet sets us up well to execute in any market. With that, I would like to pass it on to James to take you through our financials.