Cronos Group Inc

TSX:CRON

Earnings Call Transcript 2022-Q3

[Operator]

Good morning. My name is Chris, and I will be your conference operator today. I would like to welcome everyone to Cronos Group's 2022 Third 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. Please go ahead.

Thank you, Chris, and thank you for joining us today to review Cronos Group's 2022 third-quarter financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein; and our CFO, Bob Madore. Cronos Group issued a news release announcing our financial results this morning, which is filed on our EDGAR and SEDAR profiles. This information as well as the prepared remarks will also be posted on our website under Investor Relations. Before I turn the call over to Mike, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call.

These forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our website, by which any forward-looking statements made during this call are qualified in their entirety. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in the earnings materials that are available on our website. 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 Group's Chairman, President, and CEO, Mike Gorenstein.

[Michael Gorenstein, executive]

Thanks, Shayne, and Good morning, everyone. I'd like to start our call today by discussing the strategic realignment we have been working on this year. We've taken steps to cut costs, as you've seen within our operating expense structure, and continue refining our budgeting and capital allocation processes to improve further. Our slimmer cost structure and more targeted approach to growth across segments help ensure that we're allocating funds to the right projects and initiatives.

All new investments share a common goal, profitably grow Cronos with a focus on borderless products and brands that can adapt to new markets as they open. Thanks to continuous efforts and reinforcing our startup mentality, we remain on track to hit our cost savings target of $20 million to $25 million in operating expenses in 2022. As we complete the budgeting process for '23, we remain keenly focused on cutting additional costs throughout our business to provide a firm footing for Cronos to build its borderless product portfolio and enable long-term sustainable growth.

A key area of focus for us has been adapting our supply chain. The build-out of downstream processing capabilities at GrowCo is progressing with flower packaging up and running, and we continue to be pleased with the cultivation performance at GrowCo and our other CMO providers. In the third quarter, GrowCo reported to us preliminary unaudited revenue of approximately $5.8 million to non-Cronos customers. And as a reminder, GrowCo has been repaying its senior secured loan, which is now approximately $73 million.

These loan receivables, combined with our balance sheet of approximately $890 million in cash and short-term investments, and strategic investments in Cronos Australia and PharmaCann, set us up well to enter new markets as they open. Balance sheet management through economic uncertainty is paramount and our desire to maintain a significant industry-leading cash balance ahead of potential global strategic growth opportunities has guided many of our decisions year-to-date.

To maximize the benefits of our balance sheet, we have repositioned a significant portion of our cash into short-term investments to take advantage of the higher interest rate environment. Growth via innovation continued to be a theme for us. In Canada, our Spinach brand is winning in the edible and vape categories, and we expanded on our offerings in these 2 categories with finished fields, CBN gummy and bake products. We're excited that this portfolio of rare cannabinoids continues to grow. And with a best-in-class product development team, we believe we can continue to provide consumers with superior and differentiated products utilizing rare cannabinoids.

Further leveraging rare cannabinoids to expand our portfolio will continue to be pivotal for our ongoing new product launches. Having most recently announced the achievement of the equity milestone for THCV, we are pleased with the product development progress across categories and look forward to sharing more details on new product launches in the future. This quarter, we also received the results of an important third-party VERIFI study, which evaluated the sustainability and impact of traditional methods of cannabis extraction and their own proprietary fermentation methods. The results were clear. The environmental footprint of growing plant indoors is high, and using innovative fermentation processes dramatically lower the environmental impact of cannabinoid production.

These results show a striking advantage for the fermentation method as the average percentage carbon footprint saving of the fermentation method is 99.8%. While our industry is young, it's never too early to lead and invest in technology that helps contribute to a greener future. While fermentation enabled us to make a smaller environmental impact, it also allows us to leverage rare cannabinoids, making way for unique and new experiences through proprietary blends of cannabinoids. The fact that we're able to create breakthrough products while being environmentally friendly is a win-win for Cronos.

Despite a challenging macro environment in Canada, driven by disruptions at our provincial customers in Ontario and British Columbia, our team continued to push new innovations and drive profitable growth. To make up for these disruptions, we strive to maintain supply continuity with customers. Although those efforts resulted in higher labor and shipping costs, we expect that the focus we put on making sure our products were on the shelf will pay dividends over the long run. The following market share commentary will all be referencing high-fire data. In the flower category, 28-gram bags have come to dominate the market, making up 7 of the 10 -- top 10 SKUs.

Spinach once again achieved the #1 rank dry flower SKU in September with our 28-gram wedding cake offering, achieving a nationwide flower market share in Q3 of 6.4%, up 50 basis points from last quarter, making us the #3 brand nationally in flower. 28-gram flower typically carries a lower margin profile despite this impact to our financials. It is important that when selling into the provinces and building relationships with retailers that we have a full product portfolio that they are looking for.

Our 28-gram products are winning on quality, not just being the cheapest. We are confident that over the long run, in partnership with GrowCo and other contract manufacturers, we can improve the margin profile of the category. Moving to edibles. Expense continues to expand market share, up 100 basis points from last quarter to 15.3% and 19.8% market share when looking at just the gummy category. 5 finished company SKUs are in the top 15, including the #1 and #2 market share positions on a per-SKU basis.

We continue to be more efficient and targeted with our SKU launches in edibles, driving market share gains with limited cannibalization, which is exemplified by our spinach field, rare cannabinoid-focused gummy additions, which are quickly climbing market share ranks. In vapes, we expanded market share by 70 basis points versus last quarter to 4.1%, driven by the wave of new products we brought to market this year, including the BlackBerry Cush CBN vape, the tropical diesel CBG vape, and the atomic Sour Gratod vape. In free roles, despite not being where we want to be yet, we have several innovations and SKU assortment changes that we expect to change the trajectory of this category for us. This overhaul will include new packaging, market-aligned pricing, and innovative new infused pre-roll offerings that just shipped last week.

These new spinach pre-rolls include a THB-boosted product called Automic GMO, which is a cross-breed of 2 of our best-selling flower operators, atomicoured ratood and GMO cookies as well as the CBG-infused pre-roll under the new Spanish field sub-brand. We are very excited to get our new pre-roll product assortment into the retail channel, so our sales team can do what they do best. Turning to Israel. Our Peace Naturals products continue to win in the market. Our team in Israel grew reported net revenue 88% year-over-year to $7 million. And on a constant currency basis, net revenue in Israel increased 98% year-over-year to $7.4 million. We've had incredibly positive patient reactions to our newest train launches, TocoBomba, WettinCake, and GMO Cookies, in addition to our packaging redesign, which allows for additional information on the terpene profiles of our products.

Israel's patient count continues to grow as well, adding approximately 1,500 new medical cannabis patients in September, nearing a total of 120,000 patients. This is the third consecutive month we have seen patient growth of approximately 1,500 or greater. The reacceleration in year-over-year growth for patient permits provides a good foundation for growth in the Israeli market for us to capitalize on. Earlier this year, our brand Peace Naturals, launched an ad campaign in partnership with the Warriors for Life Association in Israel. The campaign called on mayors to restrict or stop traditional fireworks shows that cause distress and anxiety to medical patients and those with PTSD as a result of conflict and more, a serious problem faced by many veterans in the country.

We are proud to have been awarded a prestigious CLIA award for this campaign in the social good category. Congratulations to our deserving Peace Naturals team in Israel and the amazing work warriors for life due for our wet veterans. I want to take a moment to shed light on our U.S. business performance. As you have heard over the past couple of quarters, we have completely shifted away from our beauty category-focused portfolio. All inventory that is beauty-focused is being worked through in the wholesale and DTC channels as we shift the focus of these brands to adult-use product formats.

We continued improving our cost structure in the U.S. and believe it is important to focus our investments only in areas that will give us an advantage in adult-use product formats. We are focused on creating borderless products and brands that can easily be adapted to emerging cannabis markets as they become commercially viable opportunities. The pivot in our U.S. business further drives us towards our singular focus of creating adult-use cannabinoid products. Looking to the adult-use cannabis market opportunity, we are pleased to see progress by the bid administration last month to issue pardons for minor cannabis-related defenses at the federal level and urging governors to do the same. These actions represent a small but important step towards healing the harm done by cannabis prohibition in the United States.

We believe cannabis should be legal and that a comprehensive and reasonable regulatory framework should be put in place for the industry. As legalization efforts continue across the U.S., we are committed to using our voice to lead the industry forward responsibly and will continue to be an integral part of the conversation. We're proud to support responsible legalization efforts and meaningful social justice reform. Moving to Australia, where we have an approximate 10% stake in Cronos Australia, the team is executing at a high level in the early stages of the market development. During our third quarter, Cronos Australia announced the $0.01 per share cash dividend, which yielded Cronos approximately USD 390,000 in October.

Having a long-term low capital investment, such as Cronos Australia, start to pay capital back is a big positive. Cronos Australia also recently reported strong financial results, with revenue in September hitting a record AUD 9.9 million, which is a run rate of nearly $120 million annually. To continue to drive long-term growth, they recently brought a new state-of-the-art distribution center online. With a growing infrastructure, expanding medical market, and a strong team, we look forward to Cronos Australia's continued growth and market penetration.

And last but certainly not least, I would like to congratulate Jeff Jacobson on his expanded role and promotion to Chief Growth Officer. Jeff has been with Cronos since 2016 and most recently served as SVP, Head of Growth in North America. In addition to Jeff's oversight of the marketing and sales functions, in his new role, he will oversee North American operations. Given the speed at which this industry moves, we believe having one leader guide the process from the point of idea creation to getting the product on the shelf will lead to better results for us going forward. Congrats to Jeff on this new role. With that, I would like to pass it to Bob to take you through our financials.

[Robert Madore, executive]

Thanks, Mike, and Good morning, everyone. The company reported consolidated net revenue in the third quarter of 2022 of $20.9 million, a 3% increase from the third quarter of 2021. Constant currency consolidated net revenue increased 7% to $21.8 million. Revenue growth year-over-year was primarily driven by an increase in net revenue in the Rest of the World segment, driven by cannabis flower sales in Israel and cannabis extract sales in Canada, partially offset by reduced sales in the U.S. and lower cannabis flower sales in Canada, driven by adverse price/mix.

Consolidated gross profit for the third quarter of 2022 was $1.2 million, representing a $1.9 million improvement from the third quarter of 2021. The gross margin was positive 6%, up from a negative 4% last year. The improvement versus the prior year was primarily driven by increased revenue in the ROW segment, mainly driven by cannabis flower in Israel, a favorable mix of cannabis extract products to carry a higher margin profile than other product categories, and lower cannabis biomass costs, which were partially offset by lower fixed cost absorption due to the timing of the wind-down activities at the Peace Naturals Campus and lower revenue in the U.S. segment.

Consolidated adjusted EBITDA for the third quarter of 2022 was negative $21.7 million, representing a $25.1 million improvement from the third quarter of 2021. The improvement versus the prior year was primarily driven by decreases in general and administrative, sales and marketing, and research and development expenses as a result of the company's strategic realignment initiative and an improvement in gross profit. Now turning to our segments.

In the Rest of the World segment, we reported net revenue in the third quarter of 2022 of $20.4 million, an 11% increase from the third quarter of 2021. Constant currency net revenue in Israel increased 98% to $7.4 million, while constant currency net revenue in Canada was down 2% to $13.9 million. Revenue growth year-over-year was primarily driven by increased flower sales in Israel and increased cannabis extract sales in Canada. These gains were partially offset by lower cannabis flower sales in Canada, driven by an adverse price mix shift.

Gross profit in the Rest of the World segment for the third quarter of 2022 was $3.1 million, representing a $2.6 million improvement from the third quarter of 2021. The gross margin was positive 15%, up from positive 3% last year. The improvement versus the prior year was primarily driven by increased cannabis flower revenue in Israel, higher cannabis extract sales in Canada to carry a higher gross margin than other product categories, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities at the Peace Naturals Campus.

Adjusted EBITDA in the Rest of the World segment for the third quarter of 2022 was negative $11.4 million, representing an $18.3 million improvement from the third quarter of 2021. The improvement versus the prior year was primarily driven by a decrease in general and administrative expenses and an increase in gross profit. Turning to the U.S. segment. We reported net revenue in the third quarter of 2022 of $500,000, a 76% decrease from the third quarter of 2021.

The decrease year-over-year was primarily driven by a reduction in sales as a result of a decrease in promotional spend and SKU rationalization efforts as the company implements its realignment of the U.S. business. Gross profit for the U.S. segment for the third quarter of 2022 was negative $2 million, representing a $700,000 decline from the third quarter of 2021. The decline year-over-year was primarily due to lower sales volumes and increased inventory reserves, driven by realignment activities.

Adjusted EBITDA in the U.S. segment for the third quarter of 2022 was negative $4.9 million, representing a $7.3 million improvement from the third quarter of 2021. The improvement versus the prior year was primarily driven by decreases in sales and marketing, general and administrative, and research and development expenses, driven by the reduction in beauty category-focused R&D. Now turning to our balance sheet. The company ended the quarter with approximately $890 million in cash and short-term investments.

As foreign exchange rate volatility has impacted our P&L has also had a large impact on our balance sheet. If you apply the FX rates for the period ended December 31, 2021, on the current period balance sheet, we would have approximately $940 million in cash and short-term investments. It's approximately $50 million difference. We made significant strides to reduce spending and improve our cash burn rate. Our free cash flows improved by over 50% versus same period last year, driven by operating expense savings and a 35% reduction in CapEx, which was down to $1.6 million in the third quarter. With that, I'll turn it back to Mike.

[Michael Gorenstein, executive]

Thanks, Bob. We started in Canada to learn and build a borderless product portfolio. The lineup of products we've created to date continue to win, driving market share gains for Cronos across categories, giving us confidence that they can win in any market. Despite certain challenges in Canada that drag on profitability, proving our capabilities and building an elite team remain top priorities. In Israel, our team continues to fight for and win market share, which is a testament to our branding and product quality.

Having a team on the ground is a big differentiator for us, and you will see us continue to leverage that strength in Israel as the market continues to grow and evolve. As we continue to execute on our strategic realignment, I'm encouraged that we have maintained our innovation progress with a leaner cost structure. I want to thank our dedicated employees who continue to stay focused on the long-term plan. We remain singularly focused on winning in the adult-use cannabis market globally, and our industry-leading balance sheet affords us the opportunity to selectively invest and build our platform in new markets as they open. With that, I'll open the line for questions.

[Operator]

Thank you. T[Operator Instructions] Standby as we compile the Q&A roster. One moment, please, for our first question. Our first question will come from Andrew Carter of Stifel.

[W. Andrew Carter, analyst]

I wanted to drill down on the Spinach bags, which has been kind of the vast majority of your growth kind of in the headset trends. Obviously, it shows some diminishing returns. First, is that profitable on a gross margin basis? And is the theory there like an attachment rate that allows you to get the other Spanish products, whether it be pre-rolls, dates on the shelf and this is just a cost of doing business?

[Michael Gorenstein, executive]

Sure. Thanks, Andrew. Yes, it is a positive gross margin. And I think there's a few things. One, we do look at it. And it is important from a utilization perspective to be able to have sort of the outflow for the supply chain, but also, when you think about utilization for us, it does drive a lot of value in the ProCo equity that we have to make sure that we're utilizing the facility. But also, I think it's important for the strength of the brand and for some of the other products we're launching. Getting familiarity with some of the new strains will certainly fuel some of the work that we do in pre-rolled and based. So I think when you look at it overall for the portfolio and value driver, certainly there, and I take your point on 28 grams versus 3.5 grams. But I think we have to look at what consumers want and respond to it.

[W. Andrew Carter, analyst]

The second question I wanted to ask about the cost savings, the $20 million to $25 million achieved this year. Can you give us a sense of how much of those 20 to 25 million hit the P&L this year? Therefore, how much is incremental next year? And you did allude to further optimization savings. I wanted to make sure I understood that you could have more. And I know that you said kind of the U.S. is important for your future business, but that's $8 million of cost if I got that right a quarter. Is that just the cost that's going to be embedded with you until something changes until you hit some kind of disruptive, or is even those 8 million -- or therefore, $30 million annualized savings in scope as well.

[Michael Gorenstein, executive]

Sure. So when we think about the U.S., there's still -- we see opportunity there. I wouldn't say that we're happy with the cost structure versus what the contribution is today. But we do see opportunity in the U.S. So it's still a business that we're working on and making sure that we're making it as lean as possible and basically transforming something that's a positive contributor. I'll let Bob speak to where we are overall in the $25 million. But part of that, when I talk about further opportunities, is just because we had to plan at the beginning of the year, it doesn't mean we're not constantly looking for any incremental savings, evaluating everything we do to find places that we can improve our bottom line.

[Robert Madore, executive]

Yes. Thanks, Mike. I'll just add a little more color on that. Listen, we're very confident in our ability to hit the $20 million to $25 million in cost savings. Those are actual realized cost savings in this fiscal year versus the prior year. We're in the middle of and working through our 2023 budget process. And as Mike pointed out in his prepared comments, we're very focused on continuing to become more efficient and effective. Our realignment strategy and restructuring activities are really going to be a big contributor to improve not just gross margin, but also operating efficiencies, too. So we're anticipating additional savings beyond the $20 million to $25 million we realized this year going into 2023 also.

[Operator]

One moment please, for our next question. And our next question will come from the line of Michael Freeman of Raymond James.

[Michael Freeman, analyst]

I was glad to see the launch of CPG-infused pre-rolls, products involving CBN, product development with THCV. I wonder if you could provide us an update on your -- if there's any new strategic thinking on how you are considering deploying cultivated cannabinoids through your partnership with Kinko.

[Michael Gorenstein, executive]

Sure. We actually think that will be going well as far as uptake for the products. And a lot of the strategy for the product pipeline that we've had in motion does involve heavily those products. So we've seen a great response to the edibles anticipate. And with just shipping with a rare cannabinoid this week -- or, sorry, last week with pre-rolls. We do feel like those are the 3 main categories that make sense to have the rare cannabinoids in. Now it's some of the cannabinoids we've been developing that haven't been on the market starting to come out. So just given when we look at, say, CBG field gummy having 1.9% market share, just on a single SKU basis, we think the strategy is working, and we think that the portfolio will continue to gain strength as there's more and more new differentiating cannabinoids that we can add to the roster.

[Michael Freeman, analyst]

And as a follow-up, I was reading that the -- your exit from the Peace Naturals campus is going to be pushing into 2023. I wonder if you could provide us an update on that.

[Michael Gorenstein, executive]

Sure. While we think the bulk of the transition should still be done this year, there's just been some delays with getting some of the CMOs up and running to be able to handle the capacity. And for us, what we think is most important is making sure that we're able to maintain the products on shelf to be able to kind of keep the top-line momentum so that when the transition is complete, we can fully realize the benefits of the cost savings. So we're being careful and making sure that we're not rushing. So we expect still the first half of next year the transition should be complete noting that it's definitely a gradual transition, but we have completed all cultivation activities at map.

[Michael Freeman, analyst]

If you would entertain just one more. Thinking about your U.S. strategy, I wonder if you could shed some light on your internal thinking, especially in light of Canopy's recent move to execute U.S. investments by way of holding co and if this changes your view on the U.S. outlook.

[Michael Gorenstein, executive]

Yes. I think for us, we're in a different situation than a lot of peers, given that we have a strong investment with PharmaCann today, -- but most of our dry powder is still maintained on the balance sheet. We have a lot of flexibility, not having any debt. And we do look at it still is making sure we have the right product portfolio. And ultimately, when you look at the U.S., it's how do we get out our product portfolio and how do we find new products to add to it? We think that there is certainly a lot of momentum with the 5 announced, but we're looking at structures that fit us best. And I think you'll see us getting closer and closer to that. So we're really excited about the U.S. opportunity, and we still feel that it is a branded product opportunity, and things are going to continue moving more towards the CPG-looking market.

[Operator]

And one moment for our next question. Our next question will come from Vivien Azer of Cowen.

[Vivien Azer, analyst]

I wanted to follow up on the rare cannabinoids. While it's clearly early days for you, Mike, I know you're a keen observer of the U.S. marketplace where products are featuring where cannabinoids are more available. So I'd like to just get your impressions on what you see from a category kind of creative perspective and whether you think that will apply to Canada.

[Michael Gorenstein, executive]

Sure. It's a great question. I think one of the challenges that led us to sort of work down this pathway is it's still very difficult to get enough availability of some of those rare cannabinoids. There are some cannabinoids that are easier to get in the U.S. now at CBG. But we look at some of the ones, THCV, for example, that you're just not seeing commercial availability and being able to supply. But we've seen that even outside of the traditional cannabis channels, cannabinoids like CBN, once consumers have now learned what CBN does, there is a lot of uptake of it, and it does provide a differentiator and really like the stand-alone branded products. So we continue to believe that it's a great opportunity and a good way to escape, call it, commoditization of the products.

[Vivien Azer, analyst]

And for my follow-up, just pivot into Israel, please. Nice to hear that the market has reaccelerated. Just would love to get an updated view of where you think market penetration can go in Israel.

[Michael Gorenstein, executive]

Sure. Yes, I think we did have those temporary kind of stopped for a few months, and we've seen things start to turn back on. We think that things are now headed back in the right direction. The market is looking good growth-wise. And it's really -- the thing to watch is what's happening with patient growth, how much is that reaccelerates. We just had an election last week, which we think gives more certainty to how things move forward politically. And we're very optimistic. We think that our ability to continue outpacing the growth of the market. in the wholesale channel, and then also the market continue to grow gives us a bright future.

[Operator]

One moment, please follow our next question. The next question will come from John Zamparo of CIBC Capital Markets.

[John Zamparo, analyst]

I also wanted to touch on the Israeli market. And can you talk about the pricing dynamics here? And do you think you're taking a share in Israel?

[Michael Gorenstein, executive]

Sure. Yes, I think there has still been some limited pricing pressure, but it's relieved compared to what we had a quarter or 2 ago. So you're seeing some of the excess supply work its way to the system. And I think we are taking share. I think that we stand out when it comes to quality. I think that the branch is recognized as being a leader. And we're continuing to perform.

So I think that the combination of having better quality but also now getting back to patient growth is generally improving the dynamics there. And I think that there was sort of a lesson that was learned as far as we did have a big shortage in Israel. So there was a lot of activity to bring in whatever product local companies could find. And I think now there's a little bit more skepticism in what product coming in. So we see those macro dynamics continue to improve, and we've already seen them improve over the last couple of months.

[John Zamparo, analyst]

And then my follow-up is on gross margin, and apologies if I missed it, but can you say what this was either consolidated or the rest of the world if you back out the Peace Naturals extracts?

[Michael Gorenstein, executive]

Yes. Bob, do you want to go ahead and take that one?

[Robert Madore, executive]

Yes. No, definitely. We really feel confident in the trajectory of our margin profile. There are a lot of pluses and some minuses that transpired in the quarter. But as you guys talked about a second ago, Israel's margin has remained strong and is growing as that business continues to grow in revenues. We're experiencing lower biomass costs through our relationship partnership with GrowCo, and that's going to be a long-term sustainable type of savings versus history, past experience. As cannabis extracts continue to become a bigger part of our business in Canada, it will continue to have favorable margin trends. They have higher margins than other product categories. And that was offset, particularly in this quarter by a few things. One was we realized and recorded a $1.8 million decline in gross profit dollars sequentially from Q2 in the U.S. business.

And a lot of that was driven by taking inventory reserves, discounting products as we worked through discontinued SKUs and product categories. We had, and we experienced in the ROW segment, lower fixed cost absorption this particular quarter with the slight delay in our transition out of the stainer facility, as we've talked about a little bit. We also discussed in the call the adverse price mix shifts in the Canadian flower category that's driven by the 28-gram bags that drove some of the margin impact in the quarter.

So -- and then lastly, and again, another like period-based anomaly, we believe, during this quarter -- in the third quarter, we did some -- began downstream processing of some rare cannabinoids that haven't reached their milestones yet on efficiency. But we think speed to market for this product and the differentiation that's going to create is a great investment, and we'll have a long-term ROI. So there are a lot of pluses that are going to be sustained and sustainable and a lot of minuses, and I would say most of the minuses incurred in the quarter were just period expenses, and I don't consider there going to be things that carry forward long term.

[Michael Gorenstein, executive]

Thanks, Bob. And just a follow-up on the rare cannabinoid point. What you're seeing here, if you remember, last year, we amended the agreement so that if we wanted to commercialize the cannabinoid early before the productive letter was hit that we had the option to issue 1/3 of the equity upon commercialization. And so what you could see back there is we were excited about a cannabinoid that we want to get in the market early.

[Operator]

And one moment for our next question. Our next question will come from Nadine Sarwat of Alliance Bernstein.

[Nadine Sarwat, analyst]

Two questions for me. So first, you stated that you expect pre-roll innovation to be your next big driver of growth. And I know you called out those 2 products in particular. So given that, that segment is already pretty crowded, what gives you the confidence that your brands are going to win in that space and drive that growth you're talking about? And then my second question, your U.S. revenues, they continue to fall. You've explained that very clearly as part of your realignment plan. Could you give us any clarity as to how we should think about that segment a little bit more long term? Should we think of this quarter as a bottom? Is there more decline to come? How can we expect -- when should we expect it to actually start growing again?

[Michael Gorenstein, executive]

Sure. Thanks. For the first question, look, I think every category in cannabis either is crowded or will quickly become crowded until there is ultimately differentiation, and you see companies start to set apart. So when we think about the way that we're entering, taking similar approaches in other categories is about really focusing on what we think the consumer wants. It's making sure that the brand is going to perform well and that we have a really, really good product. So there's a lot of innovation to come in pre-rolls. But one of the reasons you're seeing some improvement there is there's an opportunity to differentiate, and be able to provide a lot of value to consumers as far as the complexity of the product with different terpenes and flower and the convenience.

So I think it's ultimately the same. You could have said that edibles is really crowded, and I think we performed well. And I think that pre-rolled is a very large category was a lot of runway and opportunity. We're excited about it. And I think that this is only the beginning. We have a lot that will be coming out for the next couple of years. And I think it's going to continue to take share from flower. As far as the U.S., I think it's still something that you'll see in transition. I mean we are going to be focused on continuing to skinny down and get to a place where we're focused on just the adult-use product formats.

And I think you'll then see it start to grow when we're able to get the right innovation back in the market, and we have the infrastructure proper. I think that while we would limit the formats, what we can do with our product SKUs is something where you see the growth come from. There's cannabinoids beyond CBD that we think are able to stand out and provide more growth. I think it's very hard to differentiate with only CPD. And it's similar to what we see in HD-type products. So I think being able to use a lot of different cannabinoids is what's going to drive the growth there.

[Operator]

And one moment, please, for our next question. Our next question will come from the line of Andrew Bond of Jefferies.

[Andrew Bond, analyst]

I wanted to touch -- revisit on the comments you made about the sizable dry powder you have on the balance sheet and prospects for M&A. Obviously, valuations in the industry across the board have been coming down. Can you give any more detail around what opportunities you might be evaluating valuation levels you are seeing? And can you remind us of kind of how your focus is in terms of assessing how you'd like to deploy that cash?

[Michael Gorenstein, executive]

Sure. It's a great question. I think valuations certainly are coming down. And I think that one of the things that we probably think about differently here is we're again looking at what happens in a world where state borders fold, and when there's equilibrium of supply and demand. So we're looking when what's going to stand out when you're able to always find a location you're able to go and pick up products, what does it look like in a mature market?

And for us, that comes down to branded products. So we haven't really changed in our thinking there. Still looking to see what the best opportunities are. And you see every quarter, you're seeing separation, and you're seeing that kind of maturity in a lot of the markets. So we're not as interested in, okay, here's a brand-new market. Look at the huge sizable margin spread because you'll see that, that will compress as you're able to get more supply on the market. And over time, that starts to shift, as with any other consumer product industry towards what the best-branded products are.

[Operator]

One moment, please, for the next question. Our next question will come from Matt Bottomley of Canaccord Genuity.

[Matt Bottomley, analyst]

Just one follow-up for me. Mike, just on one of your comments in the Q&A here you anticipate a lot of different product categories, particularly in Canada to eventually become saturated, which I would agree with. In the current regulatory environment, do you think a lot of the gains Cronos has done in this, particularly in the edible category, there's been 1 or 2 of your peers, which edible seems to be a category where there's been some growth here? What's your view on how that category in particular is going to trend? Obviously, dried bud kind of fell off a cliff, particularly at the value segment. Do you think kind of branded products as limited as they are in Canada or a little more protected from that? Or are you anticipating over the next 12, 16 months, there's going to have to be additional pivots even in the categories that are doing well for you right now?

[Michael Gorenstein, executive]

Yes. Sorry, just to clarify what I meant there. That's a great question. What I meant by saturated is there's not going to be an opportunity in cannabis just given how large as an industry all the potential where you're going to be the only one who moved in and say, like you're 1 of 3 companies that are offering pre-rolls, there's an opportunity you can expect everyone is going to go chase it. But what I do think what I liked about pre-rolls, and I'll just tie that with edibles is, the further you get from flower, the more differentiation you can have. I think edibles is probably about -- it's far along that differentiation curve as you can get.

So pre-roll is certainly right up there. But I don't think you're going to see a lot of change in edibles. And it's not a coincide. If you look at the U.S., edibles is probably more than other categories where we can see consistent brands that are popping up across different states, even though they aren't necessarily the traditional multistate operators. I think you'll see that with pre-rolls. So I think there's more innovation to come outside of just gummies in Canada. But I think it started off saturated if anything, that you're seeing leaders emerge, and there's much more stickiness than something like flower.

[Operator]

And this will conclude the Q&A session of today's call and will also conclude today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.