Cronos Group Inc

TSX:CRON

Earnings Call Transcript 2018-Q2

[Operator]

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

[Anna Shlimak]

Thank you, Kelly, and thank you for joining us today to review Cronos Group's Second Quarter 2018 performance. I'm joined by our Chairman, CEO and President Mike Gorenstein; and our CFO William Hilson. Earlier this morning, Cronos Group issued a news release announcing our financial results, which are all filed on our SEDAR and EDGAR profiles. This information as well as the prepared remarks will also be posted on our website at www.thecronosgroup.com 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 statement will prove to be correct. Forward-looking statements during this call speaks 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 we will move to a question-and-answer session. With that, I will turn the call over to Mike.

[Michael Gorenstein, Chairman, President & CEO]

Thank you, Anna, and good morning, everyone. During my remarks, I will review Cronos' company milestones during the quarter, provide an overview of the company's strategy and discuss the progress we are making across our strategic priority. I will also discuss the steps we're taking to prepare the company to accelerate our growth in the future. We started the second quarter by closing our $100 million bought deal and continue to sit in a comfortable cash position. In Canada, we uplisted to the TSX from the Venture Exchange. So I think we're all set on the listing front for years to come. We continued to strengthen our corporate governance in the quarter. We appointed a lead director to our Board of Directors, Jim Rudyk, who is the current CFO of Roots, an iconic Canadian brand. He has great experience and wisdom with omnichannel retail, managing rapid growth and lifestyle brand building. We also added Mike Coates to our board and Audit Committee. Mike was the former President and CEO of Hill+Knowlton, one of the largest PR and government relations firms in the world. He has the ton of insight into government relations globally and domestically, and recently was one of the 4 members of the newly elected Ontario Premier Doug Ford's transition team. We're very lucky to have Mike joining the Cronos family. Cronos is committed to being one of the world's leading global cannabis companies, and in achieving that goal, we seek to create value for shareholders by focusing on 4 core strategic priorities. I want to take some time now to provide color on each pillar and set the stage for how we think about our business. First is capacity. Capacity is necessary to get us where we're going, but it's not our endgame. There is very little existing infrastructure in the cannabis industry, which gives us a big first-mover advantage. We are focused on establishing an efficient global production footprint by leveraging methodologies and processes that are developed at PEACE NATURALS, our center of excellence, and then radiating out that knowledge in IP into other strategic capacity entities and partnerships. The goal here is to create the underlying infrastructure for cultivation and production, but scaling it out in a capital-efficient manner, creating operating leverage and reducing execution risks by having specialized experts with skin in the game managing regional operations. Second is distribution. Cronos is developing a diversified global sales and distribution network by leveraging established partners, their scale, their network, their sales force, their brand and market expertise to grow channels internationally and domestically. Third is intellectual property. We are dedicated to creating, monetizing and building a moat around disruptive intellectual property. We built PEACE NATURALS into a center of excellence and our innovation hub. We are constantly innovating across the value chain, starting with genetics, growing production, best practices, which we use to ensure our co-manufacturing partnerships are set up to be efficiency and quality leaders.Long term, we see ourselves as a cannabinoid platform company, where we develop and research efficient processes to effectively produce the full spectrum of cannabinoids not just THC and CBD. The focus here is to deliver our differentiated active pharmaceutical ingredients, or APIs, by reconstituting a formulation cannabinoids that deliver targeted psychoactive effects or therapeutic benefits. We will then formulate those APIs to optimize bioavailability and customize them to fit into targeted delivery systems. These products can then be produced and distributed globally, leveraging our co-manufacturing and distribution partnerships I discussed above. And last but not least is brands. Everything starts with the consumer and we are dedicated to growing a portfolio of iconic brands that resonate with the end user. Cronos will leverage our differentiated product offerings, whether it's genetics, APIs or delivery systems and the superior quality that we are known for to build genuine brands from the bottom up. Not just about packaging and celebrity endorsements, and frankly, they're not allowed anyway, we believe quality, consistency and innovation will drive the success of brands in this space. Now I want to speak to each strategic priority and provide an update on what we are doing to drive it forward and tactically execute against our strategy. Let's start off with capacity. Our state-of-the-art production and research facility, which is the largest purpose-built indoor cannabis facility in the world, is now readying for planting. I'm frequently asked about the name of the facility, why B4? Well, we used all of our collective brain power and ingenuity to make sure that the design, process flow and automation was best-in-class and would be ready to go on our aggressive time line. And the ops team named it B4. I'm extremely proud of what we built. It will serve as foundation of Cronos in the long term, and in the short term, we're still on schedule to have our first harvest in 2018. About a month ago, we announced the capacity expansion through a strategic joint venture, and this time, we went all-out on naming the newly created entity Cronos GrowCo. The partnership is a 50-50 JV between Cronos and an investor group led by Bert Mucci, a leading Canadian large-scale greenhouse operator. Cronos GrowCo is planning to construct an 850,000 square foot purpose-built GMP certified greenhouse for cannabis production on approximately 100 acres of land in Kingsville, Ontario. The facility has secured priority full grid power at the most attractive rates we've seen in Canada, avoiding the need for deploying CapEx on power cogeneration. Once fully operational, the greenhouse is expected to produce up to 70,000 kilos of cannabis annually, and we believe will be a great source of high-quality products. Not only will this facility be GMP certified, but the increased capacity coming online will be right in time to feed extraction for value-added products expected to launch in the back end of 2019. Cronos GrowCo has been a co-manufacturing branch out of ours since 2017. So we're excited to see it come together. We already have the greenhouse materials on site and we're working towards construction beginning this summer, with production commencing in the second half of 2019. This is a perfect example of how we think of scaling our capacity, taking our genetics, our production methodologies and cannabis best practices, develop a piece to create a co-manufacturing relationship with one of the most sophisticated greenhouse growers in North America. You can look for us to continue to strategically entering into new markets with this same model. Moving on to distribution, which is a very exciting and quickly developing aspect of our business. We are still seeing more demand and supply in every channel we have, and we have enough demand for the capacity that we're currently building. Last week, we announced a supply agreement with Cura, one of the largest actual supply agreements in the industry, with one of the largest cannabis companies in the world. Cura is widely respected in the industry for the methodology and innovation of it extraction technique and shares our focus on setting standards for quality products across the industry. We signed a 5-year take-or-pay supply agreement to purchase a minimum of 100,000 kilos of cannabis from Cronos GrowCo. The agreement will start from the date Cura received its licenses from Health Canada. Cura also expects to build its proprietary state-of-the-art extraction facility on a parcel of land at OGBC. We continue to grow and expand on our international channels. During the second quarter, we announced a 5-year exclusive distribution agreement with Delfarma in Poland. Delfarma is a pharmaceutical wholesaler with a distribution network of over 5,000 pharmacies and more than 200 hospitals that collectively reaches approximately 40% of the Polish market. Cronos is the first LP to receive a distribution agreement in Poland, and we are excited for this market's prospects.Now I'm sure what everyone has been waiting for, what's our strategy and distribution plans for the launch of the domestic rec market. We have a very, very focused approach here and are taking a calculated and measured method to tackling this new segment of our business. I'm sure you have noticed, we have not rushed to announce the provincial listings. That was done purposefully and will be announced in due time in a cohesive and holistic manner, once all provinces we're working with have finalized their distribution models and listings. Every province that we have pursued, we've received a listing or in the final stages of securing a listing depending on what stage the province is in. We strategically did not pursue every province on this first go-round, so that we can balance demand based on our committed supply and maintain a healthy and positive relationship with those provinces for the next cycle. In the provinces we are supplying, we want to build and establish our brand and be able to list products and keep the shelves stocked. We've communicated this to the provinces that we aren't entering on the first listing and have already discussed our mutual intention to list Cronos products, once we have more available. In large provinces where there is a private retail channel, we are working through MedMen Canada to establish retail stores. As a reminder, MedMen Canada is a 50-50 joint venture between Cronos and MedMen and seeks to operate branded retail stores across Canada. At the outset of rec, branding on packaging will be very restricted and retail stores will have a lot of influence on end consumer, which is why we're so excited to have the most recognized retail brand in the industry as our partner in this segment. True to the MedMen model in the U.S., we will be very targeted and will launch these stores in large metropolitan Tier 1 markets in high foot traffic locations within established, premium shopping areas. We have secured and are in the process of securing locations in Ontario, BC and Alberta for retail stores. Cronos applauds the Ontario decision to implement a private retail system. We think this is a very important step towards implementing a responsible distribution framework that provides a wide participation for entrepreneurs and allows consumers to pick the brands and products of the future. We look forward to bringing a world-class responsibly elevated consumer experience to Ontarians through our MedMen partnership. For our third strategic pillar, intellectual property, I want to take the time to reiterate the strategy here and describe what our goals are. Cronos seeks to build the world's most innovative cannabinoid platform using different plant genetics and production methodologies to develop a portfolio of cannabinoid and terpene recipes that deliver differentiated psychoactive effects and therapeutic benefits. We are learning from and using the plant as a guide to create differentiated APIs by understanding and creating full-spectrum cannabinoid formulations, while leveraging technology to ensure consistency of those products. We're setting the stage for what we want to accomplish, and this is certainly a pillar to watch for upcoming Cronos milestones. And again, last but not least, I'm going to talk about the execution of our brand strategy. We are focused in providing consumers with a premium, high-quality product. That is where we want to fit in the customer value proposition. This is why we've invested in the most sophisticated indoor growth, this is why we invested in genetics and develop propriety growing methodologies. This is why we're investing in IP, and this is why our end product is not irradiated and all flowers hand trimmed. If I sound like I'm on a high horse on this topic, it's because it's extremely important on how we differentiate our product and hence our brands. As investors, it's tempting to build model based off companies that are talking about supply agreements and allocating market share out accordingly, as of the winners are preselected. But that's not how this or any consumer-focused industry works. Ultimately, the winning brands will be chosen by the consumer. A provincial listing is simply a chance to have that consumer vote with their wallets for your brand. So our focus here is differentiation through quality. We've got the opportunity to be one of the only available brands consumers try at the outset of a recreational market. And we refuse to cut any corners to cease on that opportunity.In the second quarter, our medical brand, PEACE NATURALS continued to penetrate the medical domestic and international markets. We're one of the only LPs that links genetics to the final product. To illustrate this example, I want to talk about our oils, which are strain-specific. Meaning the taste, aroma, flavor and effect our consumers get from their favored flowers is reconstituted in the same way within our strain-specific oils. So the exact experience our patients get from the flower of their choosing carries over to the oil and eventually will do the same for other value-added products when they are allowed in the market. We believe this methodology and our high-quality genetics are the reason our oils are the top-voted oils on the ratings website list. As Cronos prepares for Canada to legalize recreational cannabis on October 17, we'll carry over the same promise of high-quality products to consumers. We're in the process of launching a number of brands, but the one I will talk about today is called COVE. It was previewed at our model MedMen store at the LIFT Conference in Toronto and is the final hour of its full activation and interaction with consumers.Utilizing a collection of award-winning cult of ours, COVE was born in the Okanagan Valley in British Columbia, which is known for producing some of the world's finest cannabis. Focused on every detail in the process, COVE products are non-irradiated and hand-trimmed, using only the best colas from each harvest. By avoiding shortcuts like harsh refining processes, Cove is able to maintain the natural balance of the plant across all of the brand's terpene-rich cannabis extracts. The goal of this premium brand is to make each experience a discovery for COVE consumers. In a market that doesn't allow advertising, it's important to have a premium high-quality product. We've observed this firsthand through point-of-sale data from legalized U.S. markets. Even if you have the best shelf space, you have to have a great product to drive repurchasing behavior from consumers. We've held off on launching our rec brands because we want to make sure that the buzz generated from our activation strategies doesn't wear off, rather that it leads directly into purchasing opportunities for consumers. More details on COVE and our other brands will be released in the lead up to October 17. Just remember, brands are not about packaging, celebrity endorsements or TV ads. Brands are about how people interact with what you create. We spent the last 2 years quietly putting chess pieces on the board. And I want to make sure that we set the stage to give everyone a thorough overview of our high-level strategy. So there's context behind the milestones in the second quarter and the tactical execution you'll see from us in the near future. All right. Now for the fun stuff, I'll turn it over to Billy to talk about biological assets and all that jazz, and provide the financial details on the quarter.

[William Hilson, Chief Financial Officer]

Thanks, Mike, and good morning, everyone. The figures I'm revealing today can be found in our financial statements. We continue to see healthy revenue growth. In the second quarter ended June 30, 2018, revenue of $3.4 million versus $0.6 million in the same quarter in fiscal 2017 represented a 428% increase. The main drivers associated with the increase in revenue are an expansion in our patient onboarding and acquisition as domestic medical patients sales grew 81% quarter-over-quarter, a 21% increase in average selling price quarter-over-quarter and a continued strong growth in our cannabis oil, which went from 29% of domestic medical revenues in the previous quarter to 40% this quarter. We are pleased with the demand and uptake of our strain-specific oil offering as patients see it as a differentiated and premium product. Total cost of sales was a recovery of $3 million in Q2 2018 as compared to $0.5 million in Q2 2017, representing a decrease in expenses of $2.5 million. The change was largely driven by an increase in the number of kilograms sold during the period and increased growing costs related to the addition of new production facilities, such as the PEACE NATURALS greenhouse, which is also used for developing best practices and is engineered to replicate different growing environments in climates around the world. And lastly, an offset from our overall growing costs on a per gram basis. Inventory expense, the cost of sales before fair value adjustments represents the actual growing and processing costs associated with cannabis sold during the period, including labor material, consumable supplies, utilities, overhead allocation and amortization of production equipment and facilities. In May, we bolstered our corporate assurance program by appointing the big 4 full-service accounting firm KPMG as independent auditors of the company. In parallel, we made a voluntary change in accounting policy to capitalize the direct and indirect costs attributable to the biological asset transformation. The previous accounting policy was to expense these costs as period costs identified as production costs. The new accounting policy provides more reliable and relevant information as the gross profit before fair value adjustments only considers the costs incurred on inventory sold during the period and excludes costs incurred on biological transformation until the related harvest is sold, as further described in the notes in our financial statements. In the second quarter, inventory expense to cost of sales, net of fair value effects of $1.2 million on sales of $3.4 million resulted in a 63% gross margin before fair value adjustments on 477 kilograms sold. Management anticipates the costs to produce dry cannabis will continue to decrease as production output increases, now that buildings 1, 2, 3 and the PEACE NATURALS greenhouse are fully operational. Operational costs in Q2 2018 included expenditures related to the PEACE NATURALS greenhouse. However, no product was harvested from the greenhouse during this period, which is typical when onboarding a new facility. Fair value adjustments of recovery of $4.2 million in the second quarter consists of unrealized change in fair value of biological assets of $6.8 million recovery and a realized change in fair value adjustments on inventory sold in the period of $2.6 million. The change in fair value adjustments is largely driven by the large number of plants under cultivation, but is partly offset by an increase in growing costs associated with a larger footprint of cultivation. The cost to produce dry cannabis per gram is used by management to measure the estimated amount of growing costs, including all direct and indirect costs, overhead allocation and amortization associated with the cultivation of cannabis on a per gram basis. Our all-in growing costs dropped 25% quarter-over-quarter from $2.18 to $1.62 per gram. Excluding amortization of $100,000, cost per gram fell to $1.52 in Q2 2018. Gross profit including fair value adjustments for Q2 2018 of $6.3 million or 187% of sales as compared to $1.1 million or 174% of sales in Q2 2017 represented an increase in gross margin of 466%. Gross profit increased during the quarter primarily due to the increase in sales and an increase in fair value gains, driven by increased production capacity, yield improvement and increased cannabis oil sales. Operating expenses for the second quarter, including sales and benefits of non-production staff, stock-based compensation, general and administration, sales and marketing, interest and depreciation expenses totaled $5.9 million, representing an increase of $3.2 million from the same period last year. The increase in OpEx includes an increase in professional and consulting fees associated with services rendered in connection with our various strategic initiatives and strengthening the company's governance and internal controls, hiring new employees and bringing on dedicated functions such as procurement, information technology and investor relations. It is important to note that we are building a business for the long term and are in a growth mode. Our OpEx as a percent of sales continues to decline as we scale the business, given that we've built infrastructure of PEACE NATURALS that can support a much lower revenue base on a go-forward basis. For the second quarter, the company reported comprehensive income of $0.8 million as compared to income of $0.2 million for Q2 2017, representing an increase of $0.6 million during the period. A change in total comprehensive income results in factors I described earlier. Turning to the balance sheet. As of June 30, total liquidity amounted to $118 million, comprised of $90 million in cash and $29 million of additional borrowings available under the construction loan. And finally, turning to cash flows. During the second quarter, the company used $6.9 million of cash in operating activities as compared to $3.3 million in Q2 2017, representing an increase of $3.5 million. During Q2 2018, the company used $30.2 million of cash in investing activities, primarily due to $30 million in capital expenditures related to B4 construction, which remains on track for second half of 2018 for service. This concludes my review of the financials for the quarter ended June 30, 2018. As Mike had stated, we are making great strides towards executing against our strategy, which will directly translate to our financial results. I'll turn it back to you, Mike.

[Michael Gorenstein, Chairman, President & CEO]

Thanks, Billy. I would like to now open up the line for questions. Let's try and stick with one question per caller, please. If it's a 2-part question, we can potentially let that slide.

[Operator]

[Operator Instructions] Your first question comes from the line of Martin Landry from GMP Securities.

[Martin Landry, MD Equity Research & Equity Research Analyst]

I would like to talk about the topic of the day, the retail networks? Wondering if you can discuss in a little bit more details your plans to roll out a retail network with MedMen in Canada. How many stores do you expect to have open by year-end?

[Michael Gorenstein, Chairman, President & CEO]

Sure. So a lot of this obviously depends on the provinces and how things open up. As I'm sure you can imagine, for Ontario, we do not expect any stores to be open. We do have real estate secured in Western provinces, but how the licensing regime rolls out and when licenses are issued is really something that we will determine when the stores are opened. So we really do look at the world here that we'd rather have, say, 5 to 10 premium locations, high foot traffic kind of flagship best stores rather than opening 50. So for us, it's -- we'd rather have 1 store similar to what MedMen has done in New York, in LA, in Vegas. We think that will drive more traffic than, say, 10 stores spread out, but overall, our number is looking at 5 to 10. We would be ready to open up to 5 before year-end. The question is, just when is the actual -- when are the licenses issued? And another point here is, how much supply would there be before year-end to be able to stock the stores. It seems like most of the supply across the industry is going to be coming on more in the first quarter of -- or second quarter of 2019.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. And just a follow-up to that. What would be the CapEx per store that you would expect to incur to build these stores?

[Michael Gorenstein, Chairman, President & CEO]

It's something that we aren't disclosing because it really depends on location and what the size of the store is. It's not a uniform size. One of the stores where we're looking at building out is double the size of another store. So I think that there is some variance there, but if you look at -- just to get a benchmark, you could probably look at the MedMen data from the different stores they've built out just to get a rough idea of how it would look.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. And just -- maybe just a, sorry, follow-up to that. How fast do you expect them to be profitable?

[Michael Gorenstein, Chairman, President & CEO]

Don't really have a projection on that, yet. I think there's still a lot of details we need to have to come online before we can give that projection. I think it will certainly depend on each province.

[Operator]

Your next question comes from the line of Jason Zandberg from PI Financial.

[Jason Zandberg, Special Situations Analyst]

Just noticed that you did -- you build up your inventory nicely during Q2. Just wanted to find out whether you can sort of put a number on where you expect your inventories to be by sort of October 17, sort of right before rec.

[Michael Gorenstein, Chairman, President & CEO]

It's something that's really tough to do. As you can tell, sort of just pace of trajectory, we're certainly in -- kind of heading into more of inventory build focus right now. But a lot of that depends on medical sales and certain timing, but we are on track to fill everything that we've committed. So we're -- I think we're in good shape. And we also expect that this idea that the October 17 date is sort of the end of deal, we expect that there is a gradual ramp, which we're very fortunate and sort of aligned with the way that our production comes online. We were always hesitant to kind of mortgage our future to have the capacity day 1, and I think that, that's paid off by being conservative and focusing on quality. So and we're very, very happy about that.

[Jason Zandberg, Special Situations Analyst]

Okay. Fair enough. And just a follow-up question. You mentioned that you're expecting the cultivation license imminently for B4. Just wanted to get an idea in terms of there is a fair amount of production capacity in that building, how would you expect production to come online? Do you expect to stage it? Sort of how would you expect, say, if you've got a production -- or a cultivation license tomorrow, 1/4 of it gets planted and then every couple months, you build out? Or sort of what's that production profile look like for B4?

[Michael Gorenstein, Chairman, President & CEO]

The way our production methodology works, we've separated out propagation, veg and flower. We populate in the earlier stages and -- as if it was one of our other facilities is fully operational. The plants are self-populate. So we're not saying 1/4, 1/4, 1/4. It goes, it gets planted and then as our first harvest, we have each subsequent harvest on time as if the building had been planted for 6 months. So it ramps up so that your first harvest is kind of at your run rate. It might be helpful to think of it more like a manufacturing plant than a grow facility.

[Operator]

Your next question comes from the line of Matt Bottomley from Canaccord Genuity.

[Matt Bottomley, Analyst]

Just wondering if you could expand a little on where in your minds are you allocating a lot of the capacity that will come online from GrowCo? So the 70,000 kilograms later in 2019, is it more for international? Is it more for other endeavors? Just wondering how that lines up with respect to the fairly substantial amount of capacity you're building out of that piece already.

[Michael Gorenstein, Chairman, President & CEO]

Sure. Thanks. So obviously, 20,000 a year, and we've thought of this as a minimum as going to Cura. I wouldn't be surprised if certainly more than that is allocated to them. But really the way we've thought of this is, we wanted to have premium indoor flower starting from PEACE NATURALS, and then as we grow into the value-add products next October, this is where most of that product will likely feed into. I think that we will allocate a portion of the product coming from PEACE and Cronos GrowCo to go international, but long term, the way we think of it is in Canada, production, it's fungible, it can either go to international markets or it can go into the domestic recreational market. Production outside of Canada can only go to international markets. So we do look at using all this production in Canada to sort of speed and open up distribution channels, but long term, we think of it mostly meant for Canada. I'm going to say whether that's directly through our brands to the provinces or helping to bring online and supply strategic partners. And I think that, that will evolve over time and you'll see more details on that from us.

[Matt Bottomley, Analyst]

Okay. And just one quick follow-up on the 20,000 kilograms earmarked for Cura. I guess, it's not overly relevant as it's take-or-pay, but in your mind, where do you see them distributing that product. You're considering, I know, October 17, as you said to be on, and all but considering it's a dynamic process with provisional distribution agreements, just curious on their strategy of where they're going to deploy that -- their capacity they're buying from you.

[Michael Gorenstein, Chairman, President & CEO]

I don't want to steal their thunder, and I'm sure that they will be communicating that in the near future. I will say that they -- from what we've seen in the U.S., they've been able to really gain the largest market share for extraction companies. In Oregon, California, they are a extremely talented sales and marketing group. But I think for them, it's really the Canadian recreational and medical market and international markets and I think that they'll have more details on that when they're ready.

[Operator]

[Operator Instructions] Your next question comes from the line of Martin Landry from GMP Securities.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Just a couple of follow-up, if I can. Your sales price this quarter at $7.12 was a little bit lower than I expected. Wondering, did you sell to other LPs during the quarter?

[Michael Gorenstein, Chairman, President & CEO]

So yes, one of the things that is, I'd say, challenging about a shortage, and shortages are great, it's always great to have more demand and supply. But part of the kind of black box on channels is, we're in these pretty difficult negotiations where we have to tell certain partners that we do not have enough supply for them. So until we're able over the next few quarters to start meeting that demand, we're not going to disclose where we're shipping product, whether that's to a medical channel, province to province or internationally. We're hoping to open that up to give more segmentation once those negotiations there are complete.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. But can you confirm that you had international sales this quarter?

[Michael Gorenstein, Chairman, President & CEO]

I can confirm we had that international sales.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay, because I remember you had a permitting delay in Q1. So you've had international sales. So can you talk a little bit about the puts and takes of your sales price just so that we get a bit of better understanding because excluding B2B, your sales price was $10 a gram last quarter?

[Michael Gorenstein, Chairman, President & CEO]

Yes. So I think if you look overall at margin, it's increased from last quarter. A lot of what we've been doing in terms of sales that might account for that is because we're getting in these larger contracts, we've got to start sort of cycling through SKUs, we're not just -- you could think long -- sorry, last 6 months, our production has really been about developing different genetics, trying to research what different SKUs do, that's why we've had so many different SKUs in our store. What we've been trying to do now is, get ready to fill these large supply agreements, which are pretty focused on a small number of SKUs. So we've had to take sort of smaller batches and be able to allocate them to clear out space to bring in sort of large batches to fill channels.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. And just on your building 4, just so we're clear, have you submitted your first to harvest to Health Canada?

[Michael Gorenstein, Chairman, President & CEO]

Yes. Our packaging application is in there. We have occupancy. So we're ready to go, and we expect that imminently to be able to start going.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. But do you have plants in growing right now in building 4?

[Michael Gorenstein, Chairman, President & CEO]

No. That we're waiting to be able to plant. So it's ready to go, but we have not planted yet. We expect that in the coming days or weeks.

[Operator]

Your next question comes from the line of Matt Bottomley from Canaccord Genuity.

[Matt Bottomley, Analyst]

Just going back maybe to the provincial ordering right now. I know every province is doing it a bit differently and it's a rather dynamic process. So you guys, I believe, were named in the BC press release, but you mentioned not targeting every market in Canada, but can you give any sort of color as to what percentage of the market you think you're going to start out? Is it going to be more West Coast than East Coast? Any sort of color on where you might be in that first 6 months or a year, recreationally?

[Michael Gorenstein, Chairman, President & CEO]

Sure. I think a big thing for us all of -- all of the team at Cronos is really proud of the products we produce and everyone is really excited about the opportunity to be able to walk into a store, when rec opens and purchase the product that they've been a part of. So you could take a guess that we'd be looking to focus on provinces where we have presence physically, specifically, Ontario and BC. We'll not be limited just to those 2, but we do expect that will be the bulk of where the product goes.

[Matt Bottomley, Analyst]

Okay. And maybe just speaking to Ontario then just expanding on some of the MedMen commentary you had. How do you -- I guess, maybe just your takeaways from that press conference yesterday with the attorney general and the minister, and then how do you strategize potentially getting a retail footprint on Ontario, given a lot of the uncertainty with the licensing? To me, it's unclear how much might go towards the LPs being vertically integrated and maybe more traditional retailers such as like a Loblaw that sells beer. What are your thoughts on that in your strategy in order to try and get ahead here in terms of getting a retail store maybe in Toronto or some other large metropolitan area like that?

[Michael Gorenstein, Chairman, President & CEO]

Sure. So I think starting with the first part of the question, we think it's a huge positive. There has always been this idea people have had that there is going to be -- everyone is going to open or a province is going to open 50 or 100 stores in a few months. This is a new category. It's very, very difficult for anyone to open that many stores in a -- let alone in an industry that they've never operated in. So we think that this is a big positive. It also ensures that consumers will be able to pick the winning brands. We are very, very pleased with it. Also given the way that we've approached capacity and the way we've expected it to come online, I think this is a lot of validation for our strategy. We were never really panicked on trying to accelerate things beyond what we felt would be the most efficient. So the fact of this is sort of a phased onboarding we think is something that's a positive. As far as licenses and how we approach that, I think there's a few things. First, it's going to be really important, I believe, to demonstrate that you have experience in retail, whether that's being a traditional retailer like Loblaws or whether that's showing that you have a long track record, like MedMen, I think that what Ontario sort of said here is, we want to derisk this process, we want to make sure that this rollout is smooth, we're willing to take the time to ensure that. So demonstrating that competency is really important. And for us the big part of that is being able to point to a model that really all the provinces have been to and seen. You'll see a number of different articles and quotes from the different liquor boards where they actually visited the MedMen store in LA to do their diligence. So we think it's a model, a lot of different regulators are already comfortable with. And second, it's not just securing real estate. There are different mappings that we do to get an idea of what's around the location, what restrictions there might be, early engagement with municipalities and influencers at the local level. I think all of those are very important. And as with just about anything else in business, it's going to be relationship based on making sure that people are comfortable with you.

[Operator]

There are no further questions at this time. I will now turn the call back to Mike Gorenstein for closing remarks.

[Michael Gorenstein, Chairman, President & CEO]

All right. Well, thank you, everyone, for taking the time. I know it's going to be an exciting day with the Ontario news. So I appreciate you joining.

[Operator]

This concludes today's conference call. You may now disconnect.