Good morning. My name is Michele, and I will be your conference operator today. I would like to welcome everyone to the Cronos Group's Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Anna Shlimak, Investor Relations. Please go ahead.

Thank you, Michelle. And thank you for joining us today to review Cronos Group’s fourth quarter and full year 2018 financial and business performance. I am joined by our Chairman, President and CEO, Mike Gorenstein; and our CFO, William Hilson. Earlier this morning, Cronos Group issued a new release announcing our financial results which are filed on our SEDAR and EDGAR 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, 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. Management can give no assurance that any forward-looking statements will prove to be correct. Forward-looking statements during this call speak only as of the original date of this call, and we undertake no obligations to update or revise any of these statements except as required by applicable law. Management refers you to the cautionary statement and risk factors included in the Company’s most recent MD&A and Annual Information Form by which any forward-looking statements made during this call are qualified in their entirety. We will now make prepared remarks and then will move to a question-and-answer session. With that, I will turn the call over to Mike.

Thank you, Anna, and good morning, everyone. During my remarks today, I’d like to do a year-end review. I think it’s important to look back and reflect on all that we accomplished in just one year as both our Company and industry moved at such a fast pace. 2018 was a highly productive year for Cronos Group with many notable Company and industry milestones achieved. The past year saw the legalization of cannabis for adult-use, making Canada the first G7 country to legalize adult-use cannabis nationally. We are proud to be a participant in this emerging market. As I’ve mentioned before, the Canadian government’s leadership in implementing a federally legal framework is the reason we chose to operate in Canada. When we set out on this journey three years ago, we knew the value of operating in a legal environment would allow us to learn, build and create a company that has a potential to be a global industry leader. We take pride in leading the industry forward responsibly and are motivated to create meaningful products that excite our consumers and bring happiness and an improved quality of life. The growth opportunities in the cannabis industry are vast. With our differentiated brands, global footprint, growing production capacity and supply chain, commitment to cannabinoid innovation and a strategic investment from Altria Group, Cronos Group is well-positioned to realize these opportunities. To set the stage for our earnings call today, I want to briefly review the four aspects of our strategy. At Cronos Group, we are establishing an efficient global production footprint and supply chain, developing a diversified global sales and distribution network. We are creating and monetizing disruptive intellectual property and growing a portfolio of iconic brands that resonate with consumers. During this call, we’ll discuss each of these strategic pillars…

Thanks, Mike, and good morning, everyone. The figures I'm reviewing today can be found in our financial statements. We continued to see revenue growth in the fourth quarter ended December 31, 2018. The Company reported net revenue of $5.6 million versus $1.6 million in the same quarter in fiscal 2017, representing a 248% increase. Revenue increased 49% quarter-over-quarter. This increase was due to shipments into the Canadian adult-use market, including strong sales of the pre-roll format, which represented 14% of net revenue in the fourth quarter, and growth in cannabis oil revenues, which represented approximately 24% of net revenue in the fourth quarter. For full year of 2018, the Company reported net revenues of $15.7 million, as compared to $4.1 million for full-year of 2017, representing a 285% increase. Kilograms of cannabis sales increased 198% from 349 kilograms in the fourth quarter of 2017 to 1,040 kilograms in the fourth quarter of 2018. Quarter-over-quarter kilograms sold increased by 102%. The increase was due to the growth in cannabis production. As we look to 2019, we see that quarter-over-quarter increases will slowly scale in the first half of the year we ramp up production, with momentum for revenue growth building in the second half of the year. Average selling price for the fourth quarter 2018 was $5.39, versus $4.62 in the previous year. On a full year basis, the average selling price was $5.74 for 2018 versus $6.43 for the full year 2017. The decrease on a full year basis is due to the impact of the excise tax that came in the force in October 2018. As we discussed last quarter, we believe gross profit before fair value adjustments provides useful information to understand and evaluate operating performance by excluding the non-cash fair value adjustments associated with biological assets and…

[Operator Instructions] Our first question comes from Tamy Chen of BMO Capital Markets. Your line is open.

Thanks. Good morning, everyone. I just had a housekeeping question first. Are you able to disclose the breakdown of your volumes sold between rec, Canada medical and any international export?

Thanks. When we look at how we plan on disclosing, I think there is a few things to keep in mind. I'd say, first, we're still in a situation where we're trying to manage how we allocate between medical patients, provinces, private retail partners and international partners, in a pretty big shortage situation. But, we do look in the future as we think it becomes more material to break out in channels, but I think we're going to keep it as disclosed for now.

Okay, thanks. And my next question is, on your pricing, I know you disclosed the average price which would have both rec and medical but particularly on the rec side, could you provide some more color on the pricing dynamics because I would have thought maybe the -- your indoor product, and its premium position, particularly the COVE brand, would have thought there would be -- are you getting premium pricing in a rec market in Canada at this point?

Sure. It’s a great question. I think, this goes back to what I was talking about in the prepared remarks about how we're breaking down unit pricing versus using the weight. So, I think what you're seeing is most reflective of a breakdown between oil and flower. And when we think of the market we're in today and the current excise tax regimes, you're essentially incentivized not to sell as much oil because the excise tax, depending on the input that you use, can be -- I'd say, quite punitive. So, I think that we are still positioned in the premium space, but you're seeing a much bigger skew toward flower than you are towards oil.

Okay, got it. And if I could just squeeze in one more. I'm just wondering, you haven't made much public announcements or thinking about the whole U.S. hemp CBD market. This is an area you're actively considering and how are you assessing this market and trying to position the Company to enter this opportunity potentially?

Our original strategy and vision for Cronos was to come up to Canada, develop a turnkey solution that we could ultimately bring down to the U.S. once federally legal and everything hasn't changed. I think, relationships certainly matter in the Cannabis industry. And we feel that we've done a great job of building strong relationships, both with U.S. cannabis industry stakeholders and with other strategic partners sort of along the value chain, whether that's in cultivation of other regulated crops, general retail distribution. Ultimately, we think the farm bill is a great step for the industry. It's going to create a lot of opportunities and really encourage the regulators and lawmakers of all levels that are prioritizing CBD in an effort to provide clarity and opportunities to industry stakeholders, like us. I think that it's something that we're going to continue to watching very closely and probably won’t telegraph our strategy sort of as publicly as some others have, but we are absolutely excited about the opportunity.

Our next question comes from Matt Bottomley of Canaccord Genuity. Your line is open.

Good morning, everyone. Just wanted to go back to the quarter, couple of quick questions there, just housekeeping items just to make sure I understand direction where things are going. You mentioned quickly the oil pricing and some of the punitive elements depending on how it’s manufactured. Can you speak at all to the gross pricing? I noticed quarter-over-quarter your oil pricing came down quite a bit from about $9 to $5. So, is that all excise tax considerations or is there other pricing considerations there?

I think, that's certainly a consideration on the medical side, absorbing excise tax, but I'd say also again, when you're looking at the pricing for oil, we typically aren’t. Equivalency factor matters a lot. And I think that that factor matters when you think how much weight you're using, whether you're using trim or flower, certainly plays a role in your average price per gram, which is why we are -- when we're thinking about this, I think you're going to see things shift toward the unit cost of say a tincture of oil rather than the amount of input that was used.

Okay, great. And just a follow-up on the maybe just continued penetration into the Canadian rec market, I know you said you’d probably telegraph exact channels in the future. But, you're in five provinces currently and you had I think a little quickly but $11 million of inventory on hand at year-end, 1.5 of finished goods. So, are you as a company capacity constraint in order to continue to penetrate into additional markets? And can you give us any color on when you think you'll get into maybe markets like Alberta or Quebec or some of the other big markets you're not in today?

Sure. I think when we think of capacity, there is really two ways to look at it. So, the first is cultivation capacity, and then the second is really the downstream processing, packaging and other parts of the supply chain. So, I'd say on the first, we think that we're doing well in terms of being able to access the cultivation capacity. But, each time you add a province, you're adding complications to the other parts of the supply chain. You have to multiply your set of skews each time you add a province because of the tax stamps. So, making sure that we can manage the downstream logistics is really the biggest factor and when we'll add those provinces. And so, we're in constant dialogue, we understand there are shortages in provinces. But, we want to make sure that we can efficiently get product out the door to all partners we on-board. So, I think, you'll see that over time increase, but we want to make sure that we can get everything right and dialed in, in terms of automation before we onboard and spread across the entire country.

Our next question comes from John Zamparo of CIBC. Your line is open.

[Audio Gap] the taxation structure a of couple times. I was wondering, if you could comment on the draft regulations that you've seen for production and marketing restrictions on derivative products in October? And how do you think that will restrict your ability -- and how do you think that will restrict your ability to operate?

Sure. Well, I'd say, overall, certainly step in the right direction in terms of new formats that are allowed. And I think that there are some pros and cons. I think that there will be a fair amount of flexibility in the vaporizer space, which we're pleased to see. But, I do think that the packaging rules for edibles will likely prove challenging, and we'll hope to see some revision or changes there in the future. And specifically, I'm referring to the way that packaging will work on amount of dosage. I think that that's very different than what we've seen in other markets in the U.S. And also I think some of the limits on co-manufacturing will limit the amount and the diversity of product format that will be initially available.

And my follow-up was on the M&A side. Maybe you could talk a bit about the opportunities and deal flow you're seeing. Are you encouraged by the assets that are available and what are your thoughts on valuations within the sector?

Sure. So, I do have a background in M&A. So hopefully that'll come in handy. But, the way that I look at it is there are a lot of good assets available. One thing that is always a question is whether the regulations make it feasible for us to capitalize on those opportunities today. I think we tend to be attracted to assets that aren't always top of mind for most other companies. So, we do see a lot of opportunities, but our focus really is on assets that we think will contribute to scalable value that we can take and transfer really across borders and across regulated channels, whether that's adult-use pharmaceuticals/medical or the general CPG channel. So, I think that there are a lot of opportunities. But, I would say that regulations evolving will certainly play a factor.

Our next question comes from Owen Bennett of Jefferies. Your line is open.

Just one question for me. On GrowCo, you say, it won't become operational until 2020. With this in mind, I was hoping you could give an estimate as where you expect annualized calendar year 2019 capacity to be up?

Sorry, the question is about GrowCo or prior to GrowCo?

No. Obviously, that's not coming operational in 2020. So, I just wanted to get an idea of 2019 where you think annualized capacity will be up?

Sure. So, we think the second quarter of this year will have all of the flower rooms planted and Building 4. And from a capacity perspective, once we're able to fill everything up, we'll be able to dial in and ramp up efficiency. So, from a utilization perspective, I think we'll see that increased throughout the year. And then we also have Israel that we expect to be ready for the second half of the year. So, I think that that will factor in among the supply sources that we have.

Our next question comes from Vivien Azer of Cowen. Your line is open.

Hi. This is Steve Schneiderman here for Vivien today. Thanks for taking our question. Michael, why don’t you break out medical versus, I thought used revenues given the amount of tax? I think -- it looks like it's fairly fair to say that there was a sequential decline in medical revenues. And while that wouldn't be unique in this industry, what is your outlook in general for this part of the segment in particular? What are you seeing in terms of the interaction between medical and adult-use sales?

Sure. So, first, I just would say, we do absorb the excise tax for medical patients. So, the effect of excise tax for us as a company affects us regardless of whether it’s medical or recreational. But overall, what we're seeing is likely going to be a larger decline in Canada than you saw in some of the U.S. states. And while it's too early to really use I think the immediate data we're seeing because of the shortage that you don't have enough supply that -- really where you allocate the supply is where you're going to see the demand. But, there are different incentives in the market in Canada than they were in the U.S. states. For one, we haven't seen excise tax really apply to medical patients in the U.S. but we're seeing in here in Canada. And from a regulation and distribution perspective there is additional incentives for the government to push demand towards the recreational channel, because they play a part in the distribution. So, given that, I would say in the short to medium term, we would expect to see that decline faster than how it declined in the U.S. That being said, we do think there is a huge long-term opportunity and what I would say is more of a pharmaceutical market where you're able to focus on developing very tailored formulations of specific active ingredients that can target actual therapeutic benefit different indications. Those will take time to develop. So, you'll see that decline. But, I think in the coming years, you'll see that market really start to build back up. We have a lot of preclinical results that are available and a lot of early indications that there is a promise. But, we still have a lot of work to do to be able to get those into a more formalized and traditional medical channel.

Okay, great. So, moving on to Israel. With the upcoming election, it seems that adult-use cannabis has seemingly become increasingly topical over there. To the extent a pro adult-use candidate is elected, how does that change the opportunity for your Israeli business?

Yes. Well, I'd say this is something we're seeing in a lot of markets where the conversation is certainly shifting towards recreational cannabis. I think, we have a huge regulatory tailwind globally. But, we set ourselves up and the IP that we develop for the recreational market is transferable. And a big reason for us to start setting up these manufacturing regional hubs is -- ensures that whether it's a traditional ethical pharma market, a health and wellness or sort of a market like you're seeing start to develop with the farm bill or an adult-use market, we’ll be well positioned to capitalize on the opportunity. So, it's something that we would be very excited for. And we think that would certainly be an exciting market for us.

Okay, great. And final one for me as it relates to Cronos GrowCo, can you please elaborate on the structure of that venture and what Cronos specific capital commitments for the construction of the facilities going to be?

So, it's a 50-50 joint venture with equal contributions from each of the partners. And I'd say the ultimate capital contribution will really be a function of the amount of leverage that’s used in order to fund it. Obviously, we feel that to go back to that old metric that I don't love about funding capacity, we feel that regardless of whether we are able to access debt, that it’s something that we will be able to fund but it is our expectation that we’ll be able to use some leverage. And then, we would think of it as really sort of a third-party from there, where we are purchasing products and then depending on the channel, either selling this flower, processing it into pre-rolls or using it to serve in derivative products such as vaporizers and edibles.

And just to clarify, will that be pushing third-party from the JV or is that just on a go forward basis, once that GrowCo is completed?

Yes, from the JV. Our model really does assume that cannabis will follow the same principles of economics we see in other industries where supply catches up with demand. One of the ways that we can ensure that we’ll have a efficient supply chain to use contract growers and by essentially building them with leaders ourselves. So, we think it's going to be a great way for us to make sure that we don't sacrifice quality and for flower based product, especially, we can have the genetics that that we know, grown in the way that we're used to. But, that's really the model that we’ll follow in most countries is how do we find a way that there aren’t existing contract growers and give our genetics to, how do we build up that infrastructure? And when we can find experts like the Mucci, the GrowCo, we're very excited about being able to bring them in early and work with them.

Okay. And just to clarify, how much is the actual projected cost of the facility?

It's not something we disclose. So, we'll give updates as capital contributions are made. But, we haven't given any forward-looking guidance on that.

Our next question comes from Martin Landry of GMP Securities. Your line is open.

Hi. Good morning. Just wondering, now that your partnership with Altria is closed, could you talk about what are the near-term goals that you want to achieve with the help of Altria?

Sure. So, I think, first and foremost when we think of ourselves still as an aggressive growth company. So, talent acquisition is one of the key priorities. We think that that's really what's going to be the differentiator over the next few years. Product development and R&D is I think the -- after a human capital is the biggest priority. When we think about Canada, the value that we see is having the opportunity to develop the processes and products that ultimately will be spread globally. So, making sure that we accelerate that innovation whether through organic investment or through external ventures is going continue to be a key priority. And then, preparing and making sure that we set up a framework to be a leader in responsibility is something we think will be required to make sure that we are able to participate in what we hope to be a very long term, sustainable industry.

Okay. That's helpful. And now that edibles are going to be allowed this fall in Canada, wondering what's your readiness to tackle this market? And is it fair to expect that you're going to have edible products on the shelf this fall in Canada?

Well, I'd say we are hopeful, but one thing that is likely out of our control is how the regulations are really finalized and implemented; how will retailers be ready. There is a lot of work I think that still needs to go in. So, I think that again, I'd say, we're very hopeful. But, as we’ve seen their can and usually are delays when we try and to bring on these types of regulatory frameworks quite quickly.

Yes. And is it fair to see that with the Altria's partnership with Juul that there could be something that could be brought later, vape pen or brought to the Canadian market with their help?

I think, we look at the cannabinoid category as a very unique and distinct category from nicotine. While we both have Altria as a partner and access to the resources that Altria has, we think that the leading and winning device will be specifically tailored to cannabinoid formulations and to target very, I’d say, nuanced cannabis consumer need states. And so, that's something that we're working on, on bringing a proprietary product to market. But, we will and are excited to benefit from years of expertise and infrastructure at Altria in that regard.

Our next question comes from Graeme Kreindler of Eight Capital. Your line is open.

Yes. Hi, good morning. Thanks for taking my question. I just wanted to ask, with respect to the pre-roll segment, I know that was around 14% of the revenues in the quarter. Is this a segment that you can cause a long-term value for the Company? And is there any sort of existing work or future work that could be done leveraging the partnership with Altria with respect to that vertical?

Absolutely. We’ve seen certainly in tobacco, if you're looking for comps that over time that I guess you called the pre-roll segment as well became very popular relative to loose flower or loose leaf. And we think that there is a lot of innovation that really can be leveraged. So, it's a big of ours we think as far as differentiation and branding, something there is a lot of opportunity. And we think whether that's advantage in the actual form factor and the presentation or in the efficiency in the production that that will arguably be a bigger differentiator than just cultivation.

And are you making any investments right now or trying to leverage any of this technology that Altria might have in terms of assembly lines or packaging, making that more efficient on the...

Absolutely, that’s -- yes, I think, big focus for us is downstream processing and pre-rolls, when we talk about downstream processing, especially for flower-based products is a major focus. So, yes, I'd say that that is a -- that's a clear, yes. And we have a lot of people to work with who’ve got quite a bit of experience. And, really while you may think of just Marlboro, there's a big expense across a lot of other rolled and automated formats where we think that there's, again, a lot of opportunity.

Okay, thanks. And then, my other question is here just more a big picture. As we're entering, they're getting closer to derivative products coming online and the Canadian dollar used market, sort of next gen products with respect to what you guys are doing on R&D. Is there any sort of expertise, again, with Altria and their experience dealing with federal regulators? Are they working at all with Canadian regulators with respect to some of the products you are looking to come online, or are we still kind of too early days for that?

Yes. I think, we've been able to increase our regulatory bench strength I'd say. But, the bigger focus is really on making sure that we have certain technologies ready and are able to -- whether that's leverage the rare cannabinoids and formulations and tailor them to the devices, or be able to find different ways of optimizing bio-availability, taste masking, speed of onset for oral ingestibles, I think that's really the focus, and then what we need to do not just for Canada, but for other markets, to be able to collect data to get regulators comfortable. And we think having that data set will become increasingly important over time.

Our next question comes from Rob Wertheimer of Melius Research. Your lines open.

Hi. Good morning. There was an announcement out of the team out of Berkeley on used based production of cannabinoids during the quarter, I think. And I just wanted to see if you saw that as support for the path that you guys are taking, whether there's any intellectual property threat, or your general comments?

Yes. I think it's great to see others that are working on and are having success. I think, there's always this funny situation in entrepreneurship where if you look at a space and you don't have competitors, then that's not always a good sign. It may mean that no one else saw an opportunity. But, when you look at a space and you’ve got groups from MIT and Berkeley or the ones that are focusing on, it's reassuring that even though it's not crowded yet, but there's huge opportunity. I think, as far as the actual pathways and enzymes, I don't want to dig too deep into the assays that we're using. But, we think that there is very different pathways as far as the specifics. So, we don't really see it as a threat. But, we do see that it is an area where focus will increasingly shift to as people start to understand the opportunity.

That's a very helpful answer. Thank you. And can you give us any sense of the cost per kilogram that you're targeting there? I don't know, as the greenhouse based or even field crop based costs fall. Are they approaching at all what you can see as possible for primary cannabinoids? I wish maybe not targeting THC, CBD. And then, is it always going to be the case that if that works at the targeted costs that that would be far lower? And is there a definitive cost advantage that you can continue to see even as costs fall on and get optimize on the plant [ph] based production?

Sure. So, without speaking to our specific costs target, I would say that Ginkgo felt comfortable in staking their compensation on being able to achieve cost of less than 1,000 a kilo for the actual active ingredient, not for the flower.

Not for the flower. Yes, exactly, yes.

As far as competing with field crops, I think it really will be dependent on the market as far as feasibility. So, I think, if you're in a climate like Canada, it would be extremely difficult even outdoors to produce -- to produce at the same level. The innovations we have to see would be likely using some types of transgenic or really sophisticated marker assisted selection to have a field crop be able to compete from a specific cannabinoid production cost. I think, CBD would be the -- have the best chance because it crystallizes easier. You tend to have genetics already developed and it's probably the easiest pathway biosynthetically to produce. The biggest advantage we see certainly is on the rare cannabinoids. But when we think of the purity advantage of being able to have end to end CGMP manufacturing and ultimately precision, when you start factoring in using chromatography columns, when you're extracting, it gets very, very expensive if you want to reconstitute and have the same type of consistency you would have with fermented products.

This concludes our Q&A session. I’d like to turn the call back over to Mike Gorenstein for any closing remarks.

Thank you everyone for joining, and I hope you join us in a few months.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.