Good morning. My name is Stacey, and I will be your conference operator today. I would now like to welcome everyone to Cronos Group’s 2022 Second Quarter Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Shayne Laidlaw, Investor Relations. Shayne, you have the floor.

Thank you, Stacey and thank you for joining us today to review Cronos’s 2022 second quarter financial and business performance. Today, I’m joined by our Chairman, President and CEO, Mike Gorenstein and our CFO, Bob Madore. Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and SEDAR 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 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 US 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 Cronos Chairman, President and CEO, Mike Gorenstein.

Thank you, Shayne and good morning, everyone. I want to start by reviewing the progress we've made towards our strategic realignment initiatives since our last call. We've continued to work hard to set Cronos 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 GrowCo, 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 GrowCo 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 GrowCo 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 GrowCo are intended to aid the margin profile of our products overtime, which is a critical strategic goal for us. This quarter, GrowCo reported preliminary unadded revenue of approximately $5.2 million to non-Cronos customers and in the year-to-date period, GrowCo has achieved profitability. As a reminder, we are a lender to GrowCo and its principles. GrowCo 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 market that they open. Balance sheet management…

Thanks, Mike, and good morning, everyone. The company reported consolidated net revenues in the second quarter of 2022 of $23.1 million, a 48% increase from the second quarter of 2021. Revenue growth year-over-year was primarily driven by an increase in net revenue in the Rest of the World segment driven by growth in the Israeli medical market and the Canadian adult-use market. Consolidated gross profit for the second quarter of 2022 was $4.1 million, representing a $19.9 million improvement from the second quarter of 2021. The gross margin was positive 18%, up from negative 101% last year. The improvement versus prior year was primarily driven by the absence of inventory write-downs in the current period and increased gross profit in the ROW segment, which I'll get into a little more shortly. Consolidated adjusted EBITDA for the second quarter of 2022 was negative $18.8 million, representing a $31 million improvement from the second quarter of 2021. The improvement versus prior year was primarily driven by an improvement in the gross profit and a decrease in sales and marketing expenses, R&D expenses and general and administrative expenses, as a result of the company's strategic realignment initiative. Turning to our reporting segments. In the Rest of the World segment, we reported net revenue in the second quarter of 2022 of $21.6 million, a 61% increase from the second quarter of 2021. Revenue growth year-over-year was primarily driven by increased sales in the Israeli medical market, which was up 212% year-over-year, driven primarily by the flower category and increased sales in the Canada adult-use market, which was up 35% year-over-year. The growth in Canada was led by the cannabis extracts product category, which received the boost via the introduction of our gummies platform as well as the introduction of 1-gram vapes. Gross profit for…

Thanks, Bob. Our strategic realignment puts our brands and products at the focal point by centralizing functions under common leadership, which has already resulted in cost savings and quicker decision-making. As we navigate this ever-changing environment, we know our cash must be mindfully spent and protected. We understand that the quarters that lie ahead for us may have their ups and downs, but I want to thank our dedicated employees who have worked very hard and continue to bring their passion for the industry and for Cronos to work with them every day. We're all rowing in the same direction with a keen focus on product innovation, revenue growth, gross profit improvement and mindfully reducing operating expenses. With that, I'll open the line for questions.

Thank you. [Operator Instructions] The first question is coming from John Zarana -- I'm sorry, Zamparo from CIBC Capital Markets. John, go ahead with your question.

Thank you. Good morning. I wanted to start on THCV, and this has been on your radar for some time, so it's encouraging to see the progress you've achieved. Can you talk about where you are in the past of getting product to market? And what have you learned from your experience with other cultured cannabinoids so far that can help you in this?

Sure. Thanks, John. I think there's two things to think about here. The first is making sure that we get everything right from a product and the other is which provinces and when we're able to sell in. I think it's -- you'll see new products launch in the coming months. I don't want to give any specific dates as we try to avoid doing that with any new product launches. But similar to what you saw with CVG, you would expect similar rollout as far as what type of products they go in. But I will say THCV has been one we're extremely excited about. I do think that the opportunities with every incremental rare cannabinoid we have, they grow because they're synergistic. It won't just be two cannabinoids that we can start combining multiples. So I think from that perspective, there is more opportunity, and it's a really impactful cannabinoid that the entire team is very excited about.

Okay. That's helpful. Thanks. And then my follow-up is on the M&A side. I appreciate the commentary that you do want to be cautious and you want to preserve cash, but valuations in the sector continue to compress, especially in the US, I wonder how you feel about acquisition opportunities at the moment. Has your view changed at all and what you're looking for just based on the changing dynamics of the space, particularly valuations lately? Thanks.

Sure. Thanks. Yeah, view has not changed as far as what we're looking for. We still believe that in the long-term, this is an industry that will be about branded products. I think actually one of the things you're seeing, it's not just the macro environment that's changing valuations, but also price compression and often lack of differentiation. So we do see that there may be opportunities. But again, we would be looking more at how a company is able to differentiate with the brand, how durable do we think that their performance is as markets get more mature and more competitive versus just simply infrastructure and revenue.

Understood. Thank you very much.

Our next question is coming from Michael Freeman with Raymond James. Michael, go ahead with your questions.

Hi, Mike, hey, Bob, hey, Shayne. Congratulations on the quarter, and congratulations on the progress with your realignment plan. My first question is on Israel. I mean we saw another quarter of impressive revenue. I wonder if you could shed some more light on how you expect this pause on imports to impact your – the quarters going forward, we've recognize you have domestic operations and some other ways to buoy performance there, but I wonder how – if you could just shed more light on this?

Sure. Thanks. Great question. We feel we've got for the next few quarters we don't have any issues with inventory. And if we were to see, if there was something that would prolong and import pause beyond what we expect. We have other options we can set-up to ramp-up our capacity relationships in Israel. We think the one other thing that actually might be helpful is, given the, I'd say, a lot of products that came from a little bit excessive amounts of imports, I do think that it might reduce the amount of competitive discounting – and when you couple that with what we expect to be resuming patient growth, I think you'll start to see some unclogging. But we're very mindful in making sure that we have enough redundancy in our – pop-in.

All right. Thank you. That's very helpful. And as a follow-up question, following up on John's question on THCV. We saw -- we were very happy to see that passed on through Ginkgo this quarter. And we given our coverage of Ginkgo are focused on biosynthesis process. We noted that a similar course biosynthesis pathway is used to get from sort of CBD family of modules to the THC family, we sort of positive that you may have Ginkgo and you may have the capability to produce THCV given capability that was exhibited in producing THCV here. If that were the case, would that be something that's interesting to Cronos economically, given the availability of THCV – THC today in the markets globally?

So I think – that's a great question. I think when we had looked at it in prioritization, part of what we did intentionally was to prioritize the rare cannabinoids, just given that there is enough THC and CBD, I think the value for us in being able to use Canada to develop the borderless products and get them out. It's really about making sure that we have the actual product in market tested tweaks, so that as other markets open up. We're ready to go. So regardless of the, I'd say, financial viability of it from just the logistics of getting the Cronos fermentation set up and ready to do the runs of production for different products. For us, it makes sense to prioritize the rare cannabinoids first. Once that's done and up and running, though, we still do intend to have THC and CBD as part of the eight cannabinoids that we had in our deal since the start

Okay. Thank you very much. I'll jump back in the queue.

Do we have another question on the line?

We have Andrew Carter with Stifel on the line. Andrew, go ahead with your question.

Yes. Thanks. Good morning. First question I wanted to ask is about the Spinach flower performance in Canada. You did highlight the bags out there, but kind of looking at it, we use headset data. Your 28-gram bag is sequentially is up 202%. And your 8-ounce was down 35%. So I guess first thing I'd ask is, are you at the right price points on the 8-ounce, is the 28-gram bag cannibalizing it. And I guess I'm really surprised to see the focus here on the 28-gram bag. Can that be profitable on an incremental basis, a lot of other LPs have gone this route, it had diminished your returns? That's my first question.

Sure. So look, I think when we look overall at flower, we've still been able to outpace the market year-over-year, having grown 36% versus flat. And I think the reality we're seeing is that the market is -- you're seeing a big shift from smaller pack sizes to 28-gram. Now I think a lot of the 28-gram bags you've seen have been just by their nature, very focused on value. But we have seen there is still demand for Spinach and the tier that we're in at 28-gram. So we are doing that while maintaining our brand and price positioning. But certainly, there is some amount of cannibalization. And I think that we had to make the choice of if that's where consumers are shifting, we want to be able to deliver to our consumers what they're looking for.

And can that be profitable avenue of growth to 28-gram bag?

Yes, I think so, especially when you look at vis-à-vis cost absorption on packaging and that our -- with our realignment moving to GrowCo, having better cost structure for flower overall.

Second question I wanted to ask in terms of the shift in focus in the US, the more kind of adult focus. That's going to be pretty -- I mean, well, not the beauty was doing well, but that's going to be a pretty narrow kind of focus on a market. I guess, can that segment on its own with just the market opportunities in hand be a profitable segment, or is there like an annual kind of loss or burn you're willing to endure in that segment just to kind of keep that alive and keep a toehold into any kind of future positive regulatory developments? Thanks.

Sure. No, we certainly believe that it can be a profitable segment, and that's why you're seeing the focus. We're really looking at what flows through to the bottom line. I think as you're pointing out, if you look at revenue and look at bottom line and not all revenue is created equal. We see a much better margin profile with DTC than in wholesale beauty. And I'd also note that when we talk about the adult-use product formats, CBD is one cannabinoid that fits in there, but there's still other cannabinoids you're seeing us develop different rare cannabinoids, and for us it's about the product format that will eventually be able to fit what the consumer wants with our full suite of cannabinoids. So I'd say this quarter is a little bit of shrinking and getting a little bit more flexible and agile so that we can grow longer-term with so then that's more aligned with our focus.

Thanks. I’ll pass it on.

Our next call -- our next question is coming from Andrew Bond with Jefferies. Andrew, go ahead with your question.

Thank you. Good morning all. This is Andrew on the line for Owen Bennett. Thanks for taking our questions. So first one for me is on international. I appreciate the color you gave on Israel and kind of some of the regulatory headwinds and price competition you're seeing. But moving outside of Israel, we also know you've had a position in Germany, a market where we've had some encouraging updates in recent weeks. So first one maybe for you, Mike. Can you remind us just kind of how you're positioned in the Germany market and any update on your strategic outlook there? That would be great. Thanks.

Sure. So, we have a distribution partnership with Pohl-Boskamp in Germany, largely flower sales and there's a lot of movement right now Germany-wise and I think a lot of discussion, our outlook is it can be – it can be a very good market. It's a market we are we are certainly focused on. I don't know that, that's next 6 to 12 months. We will be ready when we think there's movement, but it's looking like it's probably a little over a year away. Our best estimate now is 2024. And I think that some things need to be sorted out as far as dynamics. But our view is that ultimately in any market, especially in adult use market, having the best branded product portfolio is what's going to lead to success. And we feel that continuing to preserve our balance sheet flexibility allows us to move in and get the right infrastructure to support our -- getting our products out in the market. And so in parallel continuing to develop sours and field, our vape line and pre-rolls is what's going to lead to us winning an terminate.

Great. Very helpful color, Mike. Thank you. And just as a quick follow-up, a housekeeping item on gross margins maybe for you, Bob. Is there a way you could characterize or help quantify the impact to margins from the under absorption of fixed cost from the ceased production at Peace Naturals? Just want to get a sense of maybe what underlying gross margins could be, given some of the favorable items you called out around positive mix and reduction in purchasing costs? Thank you.

Yes. That's a great question, Andrew. Just strip out the depreciation change, resulting from our activities and the realignment and moving out of Stainer, if you look at gross margin, excluding the depreciation change, the margin rates in Q1 versus Q2 are pretty comparable at the end of the day. They're probably 3 percentage points different. And part of it is really in Q2 related to the US segment and our realignment repositioning, some inventory reserves and other things we took. But it's pretty -- it's a very comparable margin rate Q1 versus Q2 and a significant improvement versus prior year. So hopefully, that answers your question, if you eliminate the noise around depreciation or absorption – under absorption of fixed costs.

Very good. Thank you, very helpful color. I will pass it on.

Our next question comes from Vivien Azer with Cowen. Vivien, please go ahead with your question.

Hi, thank you. Good morning. I was hoping to follow up on some of the US commentary, please Mike, in terms of the repositioning of Lord Jones to adult-use form factors. How are you thinking about preserving and then ultimately enhancing brand equity, when that was such a topical static business? And what do you mean by adult-ease form factors specifically? Thanks.

Sure. Thanks, Vivien. It's a great question. I think you remember the Lord Jones brand, I think from back in its call like THC days, but to me, Lord Jones always actually a gum drop brand first, that was the original hero SKU, and I think that's what it became known for. And what I want to make sure is that we get back to being well known with cannabis consumers and I think that it's very difficult to sort of start bearing to beauty and cannabis at the same time. So making sure that we're on the form factor that even if it's not Delta 9 THC today, right, it can pivot in the future. So, we just launched CBN in Canada. So certainly, you can see that we're moving the other form factor -- or sorry, other cannabinoids in the same form factors. And I think that cannabis consumers do go and look at other cannabinoids that aren't just THC.

Perfect. Thank you. And then on Israel, encouraging that you called out a sequential improvement in the patient adds. But where do you think that market stands in terms of total population penetration rates? Thanks.

Sure. Look, that's a great question. I think it's still very, very early. There were some issues with the doctors that had historically been prescribing that we have not been able to prescribe over the last few months. We understand there to be quite a bit of pent-up demand. And we think that, that number of patients today could depending on how the regulatory environment goes could easily double or triple, if we were to have something that sort of smooth open a little bit. So I don't think that we've come anywhere close to penetrating the population there. I think that -- you've got the highest consumption in Israel of any country in the world. So having 116,000 patients is really just scratching the surface.

Yeah. Understood. But like when you think about kind of that opportunity that doubling or tripling, how do you think about benchmarking it? Does it look like Florida? Does it look like in Oklahoma? Is that even appropriate? Thanks.

Sure. I'd say Ford is a unique market. And so it's kind of hard to compare there. One of the things that's really difficult when you think about Israel, should the illicit market is so different than it is in North America. So it's a little bit more captive. Oklahoma is -- there's a lot of interesting dynamics around Oklahoma as well. I look at it as Colorado when it starts to near completion, but I also do think that it will be a pretty lucrative medical market, probably going to be hard to find a comp. When you think about population size, when you think about consumption and general attitude towards cannabis, I do think it's long-term and a little bit like Colorado.

That's helpful. Thank you.

Our next question is coming from Shaun McGeough from Canaccord Genuity. Shaun, go ahead with your question.

Good morning and thank you for taking my questions. The first one is on the Ginkgo Bioworks relationship. So I just wanted to get an understanding for the for the export potential as it relates to the cultured cannabinoid products coming out of that relationship. Just any sort of anecdotes that you could give on what kind of hurdles would need to be overcome to export those products? And how that may differ from the current process for exporting THC-based products?

Thanks. Yes, it's a great question. Certainly, depends on the country. A lot of the countries do have programs that mirror Canada. And if the language mirrors Canada, there's not going to be any issues, there are some markets, and I think a lot of the newer markets you see that are still flower or primarily flower only markets, so until that opens up, it's really more of an opportunity to export flower. Each market is very different, but expectation is as markets mature, you're going to see, you're going to see us be able to provide a data set to have it treated the same as other cannabinoids. So to me, the biggest issue is getting different types of extracts and derivative products open up.

Okay. Thank you. And then just pivoting, I wanted to take a deeper look into just the scale of your partnership with Geocann and the rollout of the – I don't know, if I'm pronouncing it right, VESIsorb delivery technology. Are there plans to leverage that technology across your entire product platform, including your THC offerings, or does it just only cover CBD based products, so essentially, would you be transitioning your current portfolio edibles and other derivatives to use that technology? And if so, could you just speak to any of the considerations or investments needed from Cronos standpoint to do this? And if there's any benefits to that?

Sure. I think, today, the only product that we've announced that will have the technology in it is in the Gel Capsules in the US. But what I will say is, when we think about our product portfolio and think about what consumers want, there's always been sort of a matrix. So on the one hand, we talk about the product format that's – the different types of edibles like, like the gummy platform, vapes, pre-rolls and on the other hand, we talk about effects. And usually, you hear us talk about what that means as far as what are the actual cannabinoid formulas we have. So is it THCV, is it CBC, is it THC, but part of the effects in addition to those cannabinoids is also timing. So what type of a multiplication using onset, offset. So it's something that is – has been factored in and we've done consumer research. It's something that we do think, there is a lot of demand for consumers, and it's something that we think can be very, very positive for the portfolio. But I wouldn't think of it as a cutover there. Just to give you an example on edibles, there are a lot of people that have become accustomed to waiting for the onset with edibles and there's a ritual, there's comfort and they like that. There are other people who wish it with faster. So it really depends on what the product is, how we would formulate and what we would do. But I would expect a lot more innovation from us to come, and there's certainly been a lot of work done there for – for what we do with onset and offset.

Appreciate the color there. I'll pass it on.

Thank you for your participation in today's conference. That was our last question. So this does conclude the program. You may now disconnect.