Cronos Group Inc

TSX:CRON

Earnings Call Transcript 2021-Q4

[Operator]

Good

morning.

My

name

is

Myra,

and

I'll

be

your

conference

operator

today.

I

would now

like

to

welcome

everyone

to

Cronos

Group's

2021

Fourth

Quarter

and

Full-Year

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.

Sir,

please

go

ahead.

[Shayne Laidlaw]

Thank

you,

Myra,

and

thank

you

for

joining

us

today

to

review

Cronos

Group's

2021

fourth

quarter

and

full-year

financial

and

business

performance.

Today,

I

am

joined

by

our

President

and

CEO,

Kurt

Schmidt;

our

CFO,

Bob

Madore;

and

our

Executive

Chairman,

Mike

Gorenstein.

Cronos

Group

issued

a

news

release

announcing

its

financial

results

this

morning,

which

are

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

Kurt,

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

risk

and

uncertainties

that

could

cause

the actual

results

to

differ

materially

from

those

projected

in

the

forward-looking

statements,

including

as

a

result

of

the

factors

described

in the

cautionary

statements

and

risk

factors

included

in

the

company's

earnings

release

and

regulatory

filings,

including

the

company's

most

recent

Annual

Report

on

Form

10-K,

by

which

any

forward-looking

statements

made

during

this

call

are

qualified

in

their

entirety.

In

addition,

during

this

during

this

call,

certain

financial

measures

may

be

discussed

that

are

not

recognized

under

the

US

Generally

Accepted

Accounting

Principles

referred

to

by

the

Securities

and

Exchange

Commission

as

non-GAAP

measures.

We

believe

these

non-GAAP

measures

assist

management in

planning,

forecasting

and

evaluating

business

and

financial

performance,

including

allocating

resources.

Reconciliations

of

these

non-GAAP

measures

to

their

most

comparable

reported

GAAP

measures

are

included

in

our

earnings

press

release

furnished

to

the

SEC,

which

is

available

in

the

Press

Room

section

of

our

website,

thecronosgroup.com.

These

non-GAAP

measures

may

not

be

comparable

to

measures

used

by

other

issuers.

I'd

also

like

to

note

that

we

are

conducting

our

call

today

from

our

respective

remote

locations.

As

such,

there

may

be

brief

delays,

crosstalk,

or

minor

technical

issues

during

this

call.

We

thank

you

in

advance for

your

patience

and

understanding.

We

will

now

make

prepared

remarks

and

then

we'll

move

on

to

a

question-and-answer

session.

With

that,

I'll

pass

it over

to Cronos

Group's

President

and

CEO,

Kurt

Schmidt.

[Kurt T. Schmidt]

Thank

you,

Shayne,

and

good

morning,

everyone.

We

appreciate

your

patience

and

for

joining

us

for

the

second

time

in

about

two

weeks.

We

are

pleased

to

share

our

2021

fourth

quarter

and

full-year

results

and

business

updates

with

you.

As

I

touched

on

during

our

call

on

February

18, we've

started

this

year

by

undertaking

a

realignment

of

the

business

to

position

Cronos

to

drive

profitable

and

sustainable

long-term

growth.

This

realignment

puts

our

products

and

agility

at

the

focal

point.

I

view

the

realignment

in

three

distinct

pillars.

First,

we

have

realigned

the

organization,

removing

redundancy

and

centralizing

functions

under

common

leadership.

Second,

we

are

reducing

complexity

and

continuing

our

asset

light

model.

As

part

of

that,

we've

decided

to

exit

the

Peace

Naturals

Campus.

I'll

elaborate

more

on

these

plans

in

a

minute.

We're

also

continuing

to

perform

product

reviews

and

pricing

optimization

scenarios

across

our

brands

and

products.

And

finally,

we

have

implemented

a

cost

reduction

initiative,

expected

to reduce

operating

expenses

by

approximately

$20 million

to

$25

million

in

2022.

When

we spoke

two

weeks

ago,

we

brought

you

updates

primarily

on

the

first

and

third

pillars

of

our

realignment initiative.

Today,

we'd

like

to

provide

a

further

development

on

the

second

pillar.

This

morning,

we

announced

in our

earnings

release

that

we

are

exiting

our

Peace

Naturals

Campus

in

Stayner,

Ontario.

Extensive

analysis

went

into

this

decision.

And

while

we

know

this

will

mean

transition

and

change,

we

also

know

this

is

the

right

decision

to

help

ensure

Cronos'

long-term

growth.

Our

goal

has

always

been to

operate

an

asset-light

business,

focused

on

brands

and

R&D.

This

transition

aligns

us

to

that

vision.

We

have always

maintained

that

cultivation

will

shift

to

large-scale

agricultural

specialists

as

the

industry

matures,

which

is

why

we

focused

on

building

joint

ventures

and

partnerships

around

the

world

with

best-in-class

offerings.

We

now

feel

confident

that

the

industry

and

our

supply

chain

in

Canada

are

at

a

maturity

level,

where

we

can

implement

this

approach.

We

have

consistently

focused

on

having

a

diverse

supply

chain,

aided

by

contract

manufacturers

and

third-party

producers

to

supplement

our

cultivation

and

manufacturing

needs.

In

addition to

building

those

relationships

over

many

years,

we

have

the

development

capabilities

with

our

JV

partner,

Cronos

GrowCo,

in

order

to

execute

this

move.

We

are

very

pleased

with

their

premium

flower

cultivation,

which

has

increasingly

become

an

important

component

to

our

biomass

supply.

And

we

know

their

capabilities

in

efficient

downstream

processing

will

enable

our

goal

of

improved

profitability.

Protecting

top

line

growth

and

continued

momentum

on

R&D

is

of

the utmost

importance

for

our

go-forward

strategy,

and

they

are

top

priorities

for

the

transition.

To

ensure

smooth

execution,

Cronos

will

continue

to

operate

the

Peace

Naturals

Campus

with

a

phased

reduction

and

transition

of

activities

throughout

2022

with

a

planned

exit

by

the

end

of

2022.

In

addition,

we

are

focused

on

maintaining

our

relationship

with

our

Canadian

customers.

We

intend

to

obtain

a

sales

license

from

Health

Canada

at

GrowCo's

facility

to

ensure

that

continuity.

Regarding

our

R&D

efforts,

all

initiatives will continue

as planned

across our

various

facilities. There

will

be

many

moving

pieces

and

complexity

to

manage

during

this

transition,

but

we're

focused

on

staying

as

close

to

our

timeline

as

possible

while

maintaining

our

eye

on

growing

revenue

and

bringing

innovative

products

to

market.

We

are

grateful

to

our

Stayner

associates

for

their

hard

work

and

contributions

to

Cronos

Group.

And

we

appreciate

those

associates

who

continue

to

work

at

our

Peace

Naturals

Campus

to

provide

a

seamless

transition

out

of

the

facility

throughout

this

year.

I

now

want

to turn

to our

business

and

walk

you

through

some

highlights

from

the

fourth

quarter

and

full-year

2021.

While

this

year

had

its

challenges,

it's

also

important to

note

our

wins.

All

the

fundamental

work

we

have

put

into

making

our

brand

successful

and

win

with

the

consumer

is

starting

to

shine

through

in

our

results.

The

Spinach

brand

continues

to

win

in

the

Canadian

market.

In

the

fourth

quarter,

SOURZ

by

Spinach

gummies

continue

to

strengthen

its

double-digit

market

share

in

the

category.

All

three

SOURZ

by

Spinach

flavors

were

in

the

top

10 in

the

edibles

category

nationally.

And

within

Ontario,

Blue

Raspberry

holds

the

number

one

spot.

Our

market

share

for

Spinach

in

the

flower

category

ended

the

quarter

in

the

high-single

digits.

The

strength

in

the

flower

category

is

a

result

of

years

of

R&D

work

in

breeding

and

genetics.

Importantly,

we

have

shared

a

lot

of

the

[ph]



genetics

profile (00:07:24)

and

look

forward

to

continuing

to

help

them

elevate

their

flower

portfolio

over

time.

We

also

launched

our

sub-brand,

SPINACH

FEELZ,

a

brand

designed

to

deliver

unique

and

enhanced

experiences,

made

possible

through

proprietary

blends

of

rare

cannabinoids

alongside

more

common

cannabinoids

like

THC and

CBD

with

a

wide

variety

of

products

and

formats.

In

October

2021,

we

launched

our

first

cultured

cannabinoid

product

under

SPINACH

FEELZ

Chill

Bliss

gummies,

which

is

making

significant

inroads

within

the edibles

category.

And

although

our

base

launch

utilizing

cultured

CPG

is

early,

we

are

happy

with

the

trends.

The

success

of

our

Spinach

brands

and

products

to-date

is

a

testament

to

getting

the

fundamentals

right.

We

will

continue

to

invest

in

our

innovation

to

bring

consumers

the

products

they

want

and

other

products

that

haven't even

thought

of.

We're

starting

to

see

success

in

the

Canadian

market

with

Spinach

while

[ph]



waiting (00:08:24)

ourselves

to

utilize

our

innovation

and

key

market

learnings

in

other

markets

as

they

emerge.

As

we

restructure

the

organization

to

match

our

go-forward

strategy,

the

primary

focus

of

our

energy

will

be

towards

elevating

our

brands

by

utilizing

rare

cannabinoids

and

focusing

on

adult

use

products.

We

have

always

viewed

the

Canadian

market

as

a

region

of

fine

tune

our

innovation

and

product

development

initiatives.

We

bring

most

of

our

adult

use

products

to

consumers

in

Canada,

but

we

continue

to

conduct

extensive

consumer

insights

work

in

all

the

regions

we

operate

in,

with

an

eye

towards

adult

use

in

the

United

States.

The

United

States

remains

a

great

place

to

learn

more

about

the

evolution

of

consumer

preferences

while

we

focus

on

creating

those

turnkey

solutions

within

the

markets

we

operate

in

today.

Turning

to

Israel,

we

continue

to be

delighted

with

the

results

of

our

medical

business.

We

started

selling

our

PEACE

NATURALS

brand

to

medical

patients

through

participating

pharmacy

in

the

second

quarter

of

2020. We

have

increased

our

distribution

to

participating

pharmacies

to

nearly

all

pharmacies

that

sell

medical

cannabis.

And

we will

continue

to

expand

as

more

pharmacies

come

on

line.

Total

patient

count

in

Israel

has

also

increased

substantially

to

approximately

190,000, which

is

up

40%

versus

the

same

period

last

year

with

a

long

runway

for

continued

growth.

As

of

a

recent

survey

conducted

by

cannabis

magazine

naming

PEACE

NATURALS

as the

most

recognized

cannabis

brand

in

Israel.

We

have

a

lot

to

look

forward

to

as

we

work

towards

meeting

our

patient

demand

in

this

market.

Given

the

growth

of

our

business,

we

thought

we'd

take

some

time

to dive more

into

the

Israeli

market

and

how

we

positioned

ourselves

as

a

leader there.

Israel

has a

population

of

just

over

9

million

people

and

boasts

one

of the

world's

highest

cannabis

usage

rates.

Unlike

the

North

American

cannabis

market,

Israel

is

much

less

competitive

illicit

market

given

Israel's

stringent

border

controls

and

security

infrastructure.

The

rapid

growth

in

Israeli

medical

market

reminds

us

of

the

early

days

in

cannabis

medical

market,

with

demand

outpacing

supply

and

the

stigma

associated

with

the

product

quickly

fading

away.

With

our

manufacturing

footprint,

established

local

team,

strong

brand

and

product

portfolio,

we

are

very

well

positioned

to

succeed

in

the

Israeli

market.

As

we

realign

the

organization

to

match

our

go-forward

strategy,

the

primary

focus

of

our

energy

will

be

towards

elevating

our

brands

by

utilizing

rare

cannabinoids

and

focusing

on

adult

use

products.

I

want

to

conclude

by

outlining

our

four

core

business

priorities,

all

of which

are

focused

on

driving

initiatives

aligned

with

our

vision

and

designed

to

deliver

sustainable

growth.

In

2022,

we

look

to,

one,

accelerate

growth

by

focusing

on

the

core

business,

leveraging

our

top

selling

products

to

deliver

on

each

brand's

potential,

while

maintaining

a

disciplined

approach

to

investing

our

time

and

resources

and

the

opportunities

we

believe

will

provide

the

most

significant

returns.

Two,

diligently

evaluate

our

manufacturing

strategies

to

ensure

that

we

only

move

forward

with

new

products

and

processes that

add

incremental

value

and

contribute

to

our

strategic

vision.

Three,

creating

a

robust

platform

for

innovation

across

Cronos'

group

portfolio

of

global

brands,

supported

by

our

belief

that

rare

cannabinoids

will

drive

differentiation.

Four,

keep

US

market

entry

as

our

north

star

by

managing

our

internal

capital

spend

and

external

capital

allocation

to

maintain

the

flexibility

to

capitalize

on

opportunities

that

will

position

Cronos

as

a

leader

in

the

US

market.

We have

a

lot

of

work

ahead

of

us,

but

I

feel

confident

that

the

actions

we've

outlined

today

will

improve

our

business

and

set

us

up

for

success

in

the

long

term.

With

that,

I

would

like

to

pass

it

to

our

CFO,

Bob

Madore.

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Thanks, Kurt,

and

good

morning,

everyone.

Before

getting

into

financial

results,

allow

me

to

provide

further

details

on

our

planned

exit

from

our

Peace

Naturals

Campus.

As

a

result

of

the

company's

planned

exit

from

the

Peace

Naturals

Campus,

the

company

has

incurred

a

$119.9

million

noncash

impairment

charge

on

long

lived

assets

in

the

fourth

quarter

of

2021.

In

addition,

the

company

expects

to

incur

charges

of

approximately

$4.5

million

in

connection

with

the

planned

exit,

all

of

which

impact

the

ROW

segment.

These

charges

include

employee-related

costs

such

as

severance,

relocation,

and

other

termination

benefits,

as

well

as

contract

termination

and

other

related

costs,

which

are

expected

to

be

incurred

primarily

in

the

second

half

of

2022.

In

addition,

the

company

anticipates

capital

expenditures

of

approximately

$2.5

million

to

modernize

information

technology

systems

and

build

distribution

capabilities.

Cronos

Group

looks

forward

to

leveraging

GrowCo's

capabilities

in

premium

flower

cultivation,

an

efficient

downstream

processing

with

the

intention

to

improve

profitability

of

the

company's

Canadian

operations.

In addition

to

further

leveraging

its

joint

venture

with

GrowCo,

Cronos

Group

will

continue

to

maintain

a

network

of

third-party

licensed

processors

to

supplement

cultivation

and

manufacturing

needs.

Now,

getting

into

the financial

results

filed

today.

In

2021,

on

a

consolidated

basis,

we

increased

revenue

59%

year-over-year

to

$74.4

million

with

strong

performance

in

the

rest

of the

world

segment

highlighted

by

Canada

and

Israel.

Our

rest

of

the

world

segment

recorded

net

revenue

in

2021

of

$64.6

million,

representing

a

73%

increase

year-over-year.

The

United

States

segment

increased

4%

year-over-year

to

$9.9

million.

In

light

of

slower

growth

in

the

US,

we're

committed

to

rightsizing

the

US

segment

to

realign

it

with

our

go-forward

strategy

with

a

focus

on

improving

profitability.

Now,

turning to

the

fourth

quarter

of

2021

results.

The

company

reported

consolidated

net

revenue

in

the

fourth

quarter

of

2021

of

$25.8

million,

a

51%

increase

from

the

prior

year

period.

Revenue

growth

year-over-year

was

primarily

driven

by

the

continued

growth

in

the

adult

use

Canadian

market

and

increased

sales

in

the

Israeli

medical

market.

Consolidated

gross

profit

for

the

fourth

quarter

of

2021

was

$1.9

million,

representing

a

$16.8

million

improvement

from

the

fourth

quarter

of

2020.

The

improvement

versus

prior

year

was

primarily

driven

by

a

decrease

in

inventory

write-downs

and

increased

gross

profit

in

the

rest

of

the

world

segment.

Consolidated

adjusted

EBITDA

in

the

fourth

quarter

of

2021

was

negative

$27.4

million,

representing

a

$25.8

million

improvement

from

the

fourth

quarter

of

2020.

The

improvement

versus

prior

year

was

primarily

driven

by

an

improvement

in gross

profit

and

a

decline

in

sales

and

marketing

and

research

and

development

expenses.

Turning

to

our

reporting

segments.

In

the

rest

of

the

world

segment,

we

reported

net

revenue

in

the

fourth

quarter

of

2021

of

$22.7

million,

a

68%

increase

from

the

prior

year

period.

Revenue

growth

year-over-year

was

primarily

driven

by

growth

in

both

the

adult

use

extracts

and

flower

categories

in

Canada

and

sales

in

the

Israeli

medical

market.

Gross

profit

for

the

rest

of the

world

segment

for

the

fourth

quarter

of

2021

was

$2.4

million,

representing

a

$19.1

million

improvement

from

the

fourth

quarter

of

2020.

The

improvement

versus

prior

year

was

primarily

driven

by

a

reduction

in

inventory

write-downs

and an

increase

in

sales

volume

of

cannabis

extracts

in

the

Canadian

market,

which

carries

a

higher

gross

profit

than

other

product

categories.

Adjusted

EBITDA in

the

rest

of the

world

segment

for

the

fourth

quarter

of

2021

was

negative

$14.6

million,

representing

a

$21.8

million

improvement

from

the

fourth

quarter

of

2020. The

improvement

versus

prior

year

was

primarily

driven

by

an

improvement

in

gross

profit

and

a

decrease

in

research

and

development

expenses.

Turning

to

the

US

segment.

We

reported

net

revenue

in

the

fourth

quarter

of

2021

of

$3.1

million,

an

11%

decrease

from

the

prior

year

period.

The

decline

year-over-year

was

driven

by

a

reduction

in

volume

due

to

competitive

pressures.

We

spoke

at

length

approximately

two

weeks

ago

that

the

US

CBD

business

is

not

where

we

want

it

to

be.

The

strategic

review

of

this

business

including

the

potential

for

price

optimization,

SKU

rationalization

and

modification

in

the

distribution

channels,

remain

top

of

mind

and

we

intend

to

share

material

updates

with

you

at

the

appropriate

time.

Gross

profit

for

the

US

segment

for

the

fourth

quarter

of

2021

was

negative

$0.5

million,

representing

a

$2.3

million

decline

from

the

fourth

quarter

of

2020.

The

decline

year-over-year

was

primarily

due

to

increased

production

costs

and

increased

inventory

valuation

adjustments

to

reflect

net

realizable

value.

Adjusted

EBITDA

in

the

US

segment

for

the

fourth

quarter

of

2021

was

negative

$8.3

million,

representing

a

$3.5

million

improvement

from

the

fourth

quarter

of

2020.

The

improvement

versus

[audio gap]

(00:19:18)

primarily

driven by

an

increase

sales

and

marketing

and

general

and

administrative

expenses.

Now,

turning

to

the

balance

sheet.

The

company

ended

the

quarter

with

approximately

$1

billion

in

cash

and

short-term

investments,

which

is

down

approximately

$35

million

from

the

third

quarter

of

2021.

Capital

expenditures

for

the

quarter

were

$0.6

million

with

the

spending

focused

across

our

global

strategic

priorities.

Capital

expenditures

are

down

approximately

95%

year-over-year,

driven

by

reduced

spending

on

enterprise

resource

planning

implementation

and

capital

improvements

across

our

facilities.

We

remain

committed

to

deploying

capital

in

a

disciplined

manner

and

only

in

ways

that

align

with

our

strategic

priorities.

Lastly,

I

would like

to

provide

you

with an

update

on

our

remediation

efforts

in

relation

to

the

material

weakness

that

we

disclosed

last

quarter.

We

as

a

company

are

committed

to

instituting

best

practices

for

financial

reporting.

Our

management

with

oversight

from

the

Audit

Committee

has

initiated

a

plan

which

we

are

working

diligently

to

phase

in

over

the

course

of

2022.

In

addition,

I'm

happy

to

state

that

the

material

weaknesses

previously

disclosed

related

to

inventory

verification

have

been

remediated.

With that, I'll turn it back to Kurt.

[Kurt T. Schmidt]

Thank

you,

Bob.

It's

not

lost

on

us

that

our

recent

challenges

are

overshadowing

our

results.

But

I

want –

what

I

want

to

leave

you

with

today

is

that

despite

of

all

that,

you

are

starting

to

see

the

strategy

and

execution

show

up

in

our

results.

We

are

building

a

great

brand

in

Canada

from

Spinach

and

have

demonstrated

sustainable

market

share

gains.

We

are

seeing

incredible

growth

in

Israel,

a

robust

medical

market

we

worked

hard

to

win

it.

We

are

making

decisions

to

realign

our

organization

and

move

quickly

to

help

our

business

improve

[ph]



efficiently (00:21:24)

and

profitably

in

rapidly

changing

markets.

We

are

the

first

company

to

release

a

cultured

cannabinoid

product

using

breakthrough

science

and

technology,

and

we're

the

leading

company

to

market

rare

cannabinoids

in

a

way

that

resonates

with

consumers.

We're

on

the

right

path

and

we're

rising

to

the

challenges

in

front

of

us.

With

that,

I'll

open

the

lines

for

questions.

[Operator]

At

this

time,

we

would

like

to

take

any

questions

you

might

have

for

us

today.

[Operator Instructions]



And

please

note

that

participants

are

allowed

one

question

and

one

follow-up

question

only.

Thank

you. Please

stand

by

while

we

compile

the

Q&A

roster.

We

have

our

first

question

comes

from

the

line

of

Andrew

Carter

from

Stifel,

your

line

is

open,

you

may

now

ask

your

question.

[W. Andrew Carter, Analyst, Stifel, Nicolaus & Co., Inc.]

Hey,

thanks.

Good

morning.

First

thing

I

wanted to

ask

is,

how

long

has

the

kind

of

exit

of

Stayner

been

contemplated

in

terms

of

an

option

to

kind

of

save

funds

and

also

kind

of

creating

some

of

the

[ph]



redundancy

– the

redundancies

have (00:22:35),

because

I

would

think

like

you

would

not

– you

would

not

want

to put

any

risks

to

slowing

down

the

revenue

momentum.

So,

maybe

if

you

could

just

help

us

with

that.

Thanks.

[Kurt T. Schmidt]

Yeah.

This

is

Kurt.

This

has

been

ongoing

for

quite

a

while.

Again,

the

whole

idea,

the

whole

GrowCo

initiative

was

all

about

our

belief

that

cultivation

will

move

towards

the

agricultural

sector.

That's

why

we

created

the

GrowCo

JV

initially

and

we're

bearing

that

out.

So,

through

construction,

through

start-up

and

through

follow-up,

we

hit

every

milestone

we

want.

So

that

has

been

ongoing

for

a

while.

And

we're

very

pleased

with

where

we're

at

right

now.

We're

delivering

high

quality

and

well-priced

cannabis

out

of

the

GrowCo

supply

chain.

And

we

have

enough

redundancy

in

our

supply

chain

as

we

talked

about

in

the

upfront

remarks

that

we

feel

very

good

that

this

is

the

right

time

for

this

move.

[W. Andrew Carter, Analyst, Stifel, Nicolaus & Co., Inc.]

Okay.

Thanks.

And

then,

just

kind of

second,

speaking

on

kind

of

the revenue

momentum,

great

in

the quarter,

it's

been

a

great

build

for

the

edibles

brand.

Spinach

brand

really

stood

out.

Just

released

the

headset

data

for

February

this

morning,

it's

taken

a

step

back,

both

the

edible

and

the

Spinach.

Is

that

kind

of

a –

do

you

see

that

as

kind

of

a

seasonality?

Anything

you're

seeing

in

kind

of

reduced

shipments?

And

could

kind

of

Canadian

adult-use

revenue

take

a

step

back

sequentially

here

in

the

calendar

first

quarter?

Thanks.

[Kurt T. Schmidt]

Yeah.

I

think

it's

part

of

a

little

bit

of

that

seasonality

and

some

of

COVID

that

came

roaring

back

temporarily

in

the

first

quarter,

created

some

disruption.

But

again,

I

think

we're

seeing

overall

the

momentum

in

the

first

quarter

to be

quite

positive.

And

the

world's

getting

back

to

normal,

I

think,

in

the

second

quarter

here.

So,

we

think

that

will

ride

itself.

We're

really

confident

about

the

way

Spinach

is

developing

on

the

consumer

side.

[W. Andrew Carter, Analyst, Stifel, Nicolaus & Co., Inc.]

Thanks.

I'll

pass

it

on.

[Operator]

Our

next

question

comes

from the

line

of

Rahul

Sarugaser

from

Raymond

James.

Your

line

is

open.

Please

go

ahead.

[Michael Freeman, Analyst, Raymond James Ltd.]

Hi

there.

Good

morning,

Kurt,

Bob

and

Shayne.

This

is

Michael

Freeman

on

for

Rahul

Sarugaser

this

morning.

I

have

one

question.

My

first

one

is

on

sort

of

the

downstream

effects

of

this

exit

from

the

Peace

Naturals

site,

I

guess.

I

wonder

if

you

could

describe

for

us

the

implications

on

head

count

implications

on

where

your

topnotch

R&D

facilities

might

be

moving

to

with

this

move,

and

then

just

broader

implications

on

cost

structure

as

you

go

through

this

[indiscernible]



(00:25:19)

through

2022.

Thanks

very

much.

[Kurt T. Schmidt]

Okay.

There's

three

things

to

unpack

there.

The

first

one

is

I

won't

go

in

an

exact

number

of

the

head

count,

but

undoubtedly

as

we

go

to

shut

down

this

facility, there'd

be

changes in

the

size of

the

organization, no doubt

about

that.

But

we're

equally –

we're

really

committed

and

we've

really

planned

this

by

ensuring

that

we're

treating

our

employees

the

right

way

and

we

do

this

in

a

high

quality

fashion

as

we

move

through

this

process.

But

it

will

have

the

effect

of

reducing

the

standard

facility

including

how

many

employees

we

have.

The

second

one

in

R&D,

it's

important

to remember

we

have

multiple

facilities

across

the

supply

chain

that

the

R&D

works are.

Winnipeg

has

a

facility.

We

do

R&D

work

there.

We

will

eventually

move

some

stuff

into

GrowCo.

And

this

has

no

effect

on

our

R&D

scope.

So,

as

we

talked

about,

our

key

driver

is

brands

and

R&D,

and

R&D

is

around

margin

accretive

innovation.

And

winning

in

rares,

we'll

see

no

effect.

It's

going to

have

no

effect

on

the

innovation

we're

developing

and

the

timelines

we

are

driving

towards.

Then

your

third

one

I

think

was

about

margin

profile

in

the

business

process.

We

don't

give

specific

guidance,

but

obviously

making

this

decision

we

obviously

believe

there's

a

significant

opportunity

to

prove

the

profitability

of

our

business.

The

Peace

Naturals

Campus

carries

a

real

heavy

complexity

and

a

heavy

overhead

burden.

So,

removing

that

from

our

cost

structure,

right,

coupled

with

a

lower

cost

of

production

and

the

more

efficient

downstream

processing

at

GrowCo,

which

are

experts

in

cultivation,

we

think

there's

a

significant

opportunity

to

expand

gross

profit

in

both

dollar

and

percentage

terms.

And

remember,

you've

got

to

couple

that

with

the

–

during

our

third

quarter

earnings

call

where

we

announced

the

first

phase

of

the

restructuring,

which

will

reduce

operating

costs

by

between $20

million

and

$25

million.

So,

we

believe

all

these

initiatives

put

us

on

a

really

strong

path

to

improve

profitability

while

maintaining

our

clear

focus

on

two

very

important

things,

which

is

margin

accretive

innovation,

winning

in

rares,

and

of

course,

sustainable

growth

and

building

our

brands,

particularly

Spinach.

[Michael Freeman, Analyst, Raymond James Ltd.]

That's

very

helpful,

Kurt.

Thank

you

very

much

for that

color.

My

follow-up

is

perhaps

for

Bob,

we

noticed

beginning

in

the

third

quarter

some

impairments

related

to

the

Ginkgo

exclusive

license,

and

we

see

those

again

appearing

on

the

4Q

financials.

I

wonder

if you

could

just

unpack

these

impairments

and

perhaps

relate

them

to

the

way

you're

valuing

this

Ginkgo

exclusive

license.

Thanks.

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Yeah.

One

of

the

bigger

challenges

with

going

after

the

rare

cannabinoids

and

developing

the

different

milestones

is

that

under

the

accounting

rules

– and

I

won't

bore

everybody

with

the

rules –

but

with

the

type

of

valuation

methodology,

the

relief

of

royalty

from

royalty

method

in

a

space

where

you

really

don't

have

any

history,

operational

history.

And

from

a

projection

perspective,

you

really

kind

of

limited

a

little

handcuffed

in

the

valuation

exercise

and

the

level

of

growth

you

can

put

in

the

projections.

Just

from

a

valuation

perspective,

that

– these

valuations

are

not

indicative

of

the

commercial

opportunities

that

we

think

these

– development

of

these

rares

has

for

us,

it's

just

an

implication

of

heavily

discounting

future

projections

in

a

space

that

is

very

new

rarefied

air.

Over

time,

as

we

get

more

experience

in

history

around

commercializing

the

opportunities

as

we

developed

additional

rares

with

six

more

milestones

to

go

after

the

two

we've

already

completed,

we

think

that

that

history

of

commercialization

and

what

the

market

represents

and

better

visibility

to

that

will

help

in

that

valuation

exercise.

But

by

no

means

is

it

what

we

think

it's

worth,

what

we

think

we

could

sell

it

to

a

third

party

if

we

wanted

to,

we

don't.

It's

just

an

accounting

valuation

method

implication.

[Michael Freeman, Analyst, Raymond James Ltd.]

Okay.

Thank

you,

Bob.

I'll

pass

it

on.

[Operator]

Our

next

question

comes

from

the

line

of

John

Zamparo

from

CIBC.

Your

line

is

open.

Please

go

ahead.

[John Zamparo, Analyst, CIBC World Markets, Inc.]

Thank

you

very

much.

Good

morning.

I

wanted

to

start

on

GrowCo.

Can

you

say

approximately what

percent

of

your

current

sales,

are

they

Q1

to-date

or

in

the

Q4

being

supplied

by

GrowCo?

And

can

you

remind

us

what

the

terms

are

of

purchasing

from

the

JV?

Are

you

paying

fair

market

value

or

is

there

discount

embedded

in

that?

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Yes.

So,

our

initial

GrowCo

purchases,

we

actually

really

started

in

2021

where

a

relatively

small

amount.

Prior to

that,

Stayner,

our

Stayner

facility

could

not

complete

all

of

our

supply

and

demand

requirements.

So,

in

addition

to

GrowCo,

which

has

really

just

been

up

and

running

for

the

last

8

to

12

month

period

of

time,

we

also

utilized

other

third-party

cultivators

to

fulfill

our

biomass

and

dry

flower

needs.

Now,

moving

forward,

we

obviously

are

looking

to

leverage

just

based

on

GrowCo's

success

in

the

harvest

that

they've

already

had

in

sourcing

quite

a

bit

more

from

them.

From

a

pricing

perspective,

it's

a

competitive

market

pricing,

relatively

speaking

but

much

more

efficient,

effective

and

lower

cost

than

what

our

costs

were

to

produce

it

ourselves

internally.

Hence,

the

reason

for

the

announcement

this

morning

around

Stayner.

We

just

think

large

agri

growers

like

GrowCo,

that's

where

we

always

kind

of

thought

the

action

was

going

to

be

and

what

the

future

most

effective

and

efficient

way

of

doing

it.

And

we

felt

we

feel

like

we've

selected

one

of

the

best

partners

out

there.

So,

we're

excited

about

the

opportunity.

[John Zamparo, Analyst, CIBC World Markets, Inc.]

Okay.

That's

helpful,

thank

you.

And

then

my

second

question

is

on

the

Israeli

market.

And

I

wonder

when

you

take

a

step

back

how

you

think

this

country

will

evolve

over

time.

Will

it

continue

to

be

served

entirely

by

Canadian

producers

or

do

you

think

it

eventually

shifts

to

a

domestic

supplied

market?

And

I

know

you've

got

some

exposure

through

Cronos

Israel

if

and

when

that

time

comes,

but

I

just

would like

to

get

your

thoughts

on

how

that

market

will

evolve.

[Kurt T. Schmidt]

Yeah.

Well,

a

lot

of

it

will

depend

on

the

regulatory

market

in

Israel.

So

right

now,

the

way,

again,

like

we

do

everything,

our

cultivation

is,

we

have

a

lot

of

redundancy

built

in.

So

we

import

from

Canada.

We

produce

ourselves

on

our

own

cultivation

with

our

joint

venture

on

the

Kibbutz,

and

we

buy

from

third

parties

from

Israel.

So,

we're

very

well

resourced.

We

think

the

biggest

driver

is

just

going to

be

the

market

as

it

continues

to

grow

and

develop.

Demand

is

certainly

going

up

and

we

feel

fully

–

we

are

well

positioned

to

be

able

to

grow

with

that

demand.

So

we're

in

a

very

good

position

in

our

mind.

[John Zamparo, Analyst, CIBC World Markets, Inc.]

Understood.

That's

all

for

me.

Thank

you.

[Operator]

Our

next question

comes

from

the

line

of

Gaurav

Jain

from

Barclays.

Your

line

is

open.

Please

go

ahead.

[Gaurav Jain, Analyst, Barclays Capital Securities Ltd.]

Hi.

Good

morning. Thank

you

for

taking

my

questions.

So,

here,

you

have

reported

a

$27

million

EBITDA

loss

this

quarter.

Would

it

be

fair

to

assume

that

almost

80%

of

that

losses

in

the

US

segment

and

20%

is

in

the

rest

of

world

segment?

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Could

you

– I'm

sorry.

Could

you

repeat

that

last

sentence,

the

percentage

you're

saying?

[Gaurav Jain, Analyst, Barclays Capital Securities Ltd.]

Of

this

$27

million

loss,

is

it

fair

to

assume

that

approximately

$20 million

of

the

loss

will

be

in

the

US

segment

and

$8 million

will

be in

the

rest

of

the

world

segment?

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Yeah.

We

don't

break

down

EBITDA

losses

at

that

level.

[Gaurav Jain, Analyst, Barclays Capital Securities Ltd.]

Sure.

[indiscernible]



(00:34:55)

on

your

US

business,

so

the

commentary

that

you

had

that

you

are

right-sizing

the

business,

it was

not

at

the

right

place

and

you

have

made

that

comments

number

of

times

over

the

last,

I

would

say,

couple

of

years

and

still

the

business

is

only

$10

million

of

sales.

How

do

you

fix

it?

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Its

part

of

the

strategic

alignment.

[Kurt T. Schmidt]

Well...

[Robert L. Madore, Chief Financial Officer, Cronos Group, Inc.]

Oh,

go

ahead,

Kurt.

[Kurt T. Schmidt]

Yeah.

I was

just going

to

say,

yeah,

well,

clearly,

we're

unhappy.

We're

looking

at

–

we

still

think

– there's

still

strong

strength

in

those

brands.

One

of

the

things

we're going

to

be

focusing

on

more,

as

we

said

previously,

is

the

adult

use

side

of

the

business.

We're

going

through

that

now.

We

just

announced

new

leadership

at

the

last

earnings

call,

which

was

just

two

weeks

ago.

So,

we're

doing

that.

We're

still

doing

a

strategic

review.

With

that

said,

it's

–

we'll

come

to

the

right

conclusions

as

we

go

forward.

But

again,

there's

still

strength

in

those

brands.

They

still

resonate.

And

that's

what

we're

about.

We're

just

not

ready

to

announce

anything.

We'll

do

that

as

we

get

closer.

[Gaurav Jain, Analyst, Barclays Capital Securities Ltd.]

Sure,

Kurt.

Here,

my

next question

is

just if

I

look

at

your market

cap,

it's like

$1.3

billion,

your

net

cash

is

about

$1

billion.

So,

how do

you

think

of

Cronos?

Like,

could

you

use

that

$1

billion

to

invest

in

the

spaces

outside

of

cannabis

where

you

could

generate

economic

value?

Because

you and

all

your

peers,

I

think

everybody

is

struggling

with

the

same

issue

that

returns in cannabis

businesses

have

been

pretty

weak.

So,

should we

look

at

something

outside cannabis?

[Kurt T. Schmidt]

Well,

I'll

let

Mike

chime

in

as

well,

our

Chairman,

because

he's

leading

it.

Well,

what

– all

the

things

we

announced

today

are

focused

on

brands,

are

focused

on

growing

the

business.

It's

been

an

eye

on

the

focus

of

the

US

and

giving

us

the

financial,

you're

right,

we

have

a

pretty

strong

balance

sheet

to

make

those

kinds

of

investments

that

we

want

to make

that

potentially

we

can

make

in

the

US,

which

Mike

actually

has

been

leading

for

us.

A

good

example

is

the

PharmaCann.

They

just

announced

this

morning

that

they

closed

down

their

LivWell

acquisition,

and

the

reason

why

we

invested

in

the PharmaCann

was

the

confidence

we

had

in

their

management

and

their

ability

to

strategically

grow

both

organically

and

M&A,

you're

seeing

that,

and

we

have

a

partnership

with

them.

And

this

is

the

kind

of

investments

with

our

balance

sheet

we

can

make.

Mike,

I

don't know

if

you

want

to add

anything

to

this.

[Michael Ryan Gorenstein, Executive Chairman, Cronos Group, Inc.]

Sure.

Thanks,

Kurt.

Yeah.

Yeah, the

way

we

think

of

it

is

making

investments

that

we

think

can

have

a

really

good

ROI

globally

over

time.

So,

things

like

the

Spinach

SOURZ,

rare

cannabinoids,

the

FEELZ

line,

that

as

markets

open

up,

we'll

be

able to

take

those

products

in

as

adult-use

opens.

So,

things

that

we

invest

in

in

Canada,

we don't

look

at it

as

just

Canada-standalone,

but

how

can

you

take

those.

We

see

the

performance

head

to

head

with

the

top

US

brands, with

other

Canadian

brands

in

Canada,

transitioning

those

into

markets

like

Israel

and

US

as

they

open,

and

in

addition,

looking

at

opportunities

for

brands

or

IP

that

we

see

in

other

markets

or

infrastructure

distribution

partners

in

the

US.

[Gaurav Jain, Analyst, Barclays Capital Securities Ltd.]

Thanks

a

lot,

Mike.

[Operator]

We

have

our

next

question

comes

from

the

line

of

[ph]



Andrew

Bond

(00:38:36) from

Jefferies.

Your

line

is

open.

Please

go

ahead.

Hey,

good

morning.

[ph]



Andrew

Bond (00:38:41)

on the

line

for

Owen

Bennett.

Thanks

for

taking

our

questions.

So,

maybe

just

digging

a

little

bit

into –

deeper

into

Israel,

I

know

we

touched

on

it

before,

but

maybe

closer

to

near

term.

Wanted

to

get

your

expectations

on

how

the

strong

momentum

we

see

in

third

and

fourth

quarter

might

continue,

perhaps

some

stickiness

there

with

the

PEACE

NATURALS

brand.

So,

just

wanted

to get

your

thoughts

on

how

Cronos

might

be

advantaged

versus

other

[ph]



LP (00:39:07)

selling

in

Israel

and

how

we

should

be

thinking

about

the

momentum

moving

forward

as

we

look

into

2022.

Thanks.

[Kurt T. Schmidt]

Yeah.

Thank

you

for

the

question,

[ph]



Andrew (00:39:14).

Yeah,

I

think

we

have

great

momentum.

There's

the

market,

which,

as

we

talked

about,

is

really

doing

well.

We

see

that

continuing

as

more

pharmacies

come

on

and

more

patients

come

into

medical

cannabis.

So,

that

is

a

strong

carrier.

We

think

we're

competitively

advantaged

because

we

have

great

series

of

brands.

We

cover

all

the

segments

we

need

to

cover.

As

I

said,

we

were

rated

as

the

most

–

the

highest

brand

in

Israel,

and

we

have

a

great

organization

on

the

ground.

So,

we

are

–

we

have

our

own

organization

on

the

ground.

They're

doing

a

great

job

in

terms

of

sales

and

marketing,

customer

relationship,

doctor

relationship

in

the

market.

So,

we

feel

we

have

a

very

strong

organization

on

the

ground

with

great

brands.

And

finally,

we

talked

about

our

ability

to

serve

the

market.

We

are

very

well

placed

to

serve

the

market.

We

use

the

same

kind

of

strategy

we've

used

in

Canada.

And

we

have

the

ability

through

the

Kibbutz

joint

venture

third

parties

in

what

we

do

in

Canada.

So,

we

think

we're

well-placed

on

it.

And

you

know,

again,

this

is

just

going to

be

a

market.

We

see

great

momentum

in

the

start

of

the

new

year

and

we

don't

see

anything

stopping

us.

It's

all

about

being

focused

on

building

great

brands

and

great

products,

which

not

only

for

the

PEACE

NATURALS

brand

highly

rated

but

a

lot

of

our

products

are

highly

rated

in

the

top

prescribed

products.

Great.

Fantastic.

Thanks

for

the

color.

[Operator]

Our next

question

comes

from the

line

of

Michael

Lavery

from

Piper

Sandler.

Your

line

is

open,

please

go

ahead.

[Michael S. Lavery, Analyst, Piper Sandler & Co.]

Thank

you.

Good

morning.

I

joined

a

little

late,

sorry.

I

hope

this

isn't

repetitive,

but

can

you

just

give

an

update

on

your

relationship

with

Altria

and

how

– if or how

that

can

help

impact

your

US

operations?

Is

there

some

opportunities

there?

[Kurt T. Schmidt]

Well,

Altria

as

a

strategic

investor in

the

company.

They

have

board

seats

in

there.

They

are

represented

on

the

board.

And

again,

they've

been

great

as

supporting

us

as

we

develop

our

business.

As

far

as

the

US,

one

of

the things

we've

done

is

the

PharmaCann

investment.

So

that

is

–

that's

a

great

example

of

the

strength

we

have

from

the

entire

board,

both

our

independents,

our

representative from

GGP

and

of

course

Altria.

[Michael S. Lavery, Analyst, Piper Sandler & Co.]

Okay.

Thanks.

And

can

you

just

also

maybe

give

an

update

on

edibles,

how the FEELZ

brand

is

doing?

[Kurt T. Schmidt]

Oh,

yeah.

We

did

talk

about

that.

Yeah.

The

FEELZ

brad

is

doing

fantastic.

As

we

said,

according

to

the Hifyre

data,

we

achieved

double-digit

market

share

in

edibles

during

the

fourth

quarter

period.

We

see continued

growth

in

2022.

If

you

look

at

our

SOURZ

portfolio,

there's

three

products

in

that

line.

They're

in

the

top

10

according

to

[ph]



LCF

data (00:42:25).

So

we

are

performing

extremely

well.

And

as

we

said

in

October,

we

launched

under

Spinach

we

launched

the

FEELZ

edible,

which

is

our

first

rare

cannabinoid

using

CBG

and

THC

and

the

progress,

early

progress

but

we're

really,

really

pleased the

way

that's

developing.

And

along

with

that,

we

also

launched

our

first

rare

cannabinoid

based

product

with

CBG

that

was

done

in

January.

[Michael S. Lavery, Analyst, Piper Sandler & Co.]

Okay.

Great.

Thanks

so

much.

[Operator]

And

there

are

no

further

questions.

That

does

conclude

our

conference

for

today.

Thank

you

all

for

participating.

You

may

now

disconnect.

Have

a

great

day.