Cronos : 2021 – Q2 Transcript

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EDITED TRANSCRIPT

CRON.TO - Q2 2021 Cronos Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 06, 2021 / 12:30PM GMT

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AUGUST 06, 2021 / 12:30PM, CRON.TO - Q2 2021 Cronos Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Jerry Filomena Barbato Cronos Group Inc. - CFO

Kurt Thomas Schmidt Cronos Group Inc. - President & CEO

Michael Ryan Gorenstein Cronos Group Inc. - Executive Chairman

Shayne J. Laidlaw Cronos Group Inc. - Director of IR & Strategy

C O N F E R E N C E C A L L P A R T I C I P A N T S

Heather Nicole Balsky BofA Securities, Research Division - VP

Howard Wells Penney Hedgeye Risk Management LLC - MD & Sector Head of Restaurants

John Zamparo CIBC Capital Markets, Research Division - Associate

Rahul Sarugaser Raymond James Ltd., Research Division - MD and Equity Analyst of Healthcare, Biotechnology & Cannabis Tamy Chen BMO Capital Markets Equity Research - Analyst

Vivien Nicole Azer Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

William Andrew Carter Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP

William Joseph Kirk MKM Partners LLC, Research Division - Executive Director

P R E S E N T A T I O N

Operator

Good morning. My name is Phyllis, and I will be your conference operator today. I would like to welcome everyone to Cronos Group's 2021 Second Quarter Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Shayne Laidlaw, Investor Relations. Please go ahead.

Shayne J. Laidlaw - Cronos Group Inc. - Director of IR & Strategy

Thank you, Phyllis, and thank you for joining us today to review Cronos Group's 2021 second quarter financial and business performance. Today, I am joined by our President and CEO, Kurt Schmidt; our CFO, Jerry Barbato; our Executive Chairman, Mike Gorenstein; and our EVP of Legal and Regulatory affairs, Xiuming Shum.

Cronos Group issued a news release announcing these 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 risks and uncertainties that could cause actual results to differ materially from those projected in these 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 and quarterly reports on Form 10-Q by which any forward-looking statements made during this call are qualified in their entirety.

In addition, during this call, certain financial measures may be discussed that are not recognized under the U.S. 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

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AUGUST 06, 2021 / 12:30PM, CRON.TO - Q2 2021 Cronos Group Inc Earnings Call

measures to their closest 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, cross-talk or minor technical issues during this call. We thank you in advance your patience and understanding. We will now make prepared remarks, and then we will move to a question-and-answer session.

With that, I'll pass it over to Cronos Group's President and CEO, Kurt Schmidt.

Kurt Thomas Schmidt- Cronos Group Inc. - President & CEO

Thanks, Shayne. Good morning, everyone, and thank you for joining us today. At the beginning of this year, I noticed how critical a keen focus on building disruptive technology and innovation is to Cronos. This past quarter, we took an important step in bringing commercial-scale, cultured cannabinoids to the market as we amended our agreement with Ginkgo Bioworks in order to enable us to accelerate the commercialization of culture cannabinoids at scale.

At this stage, we have all the necessary licenses to commercialize a product using cultured cannabinoids produced in our Winnipeg facility, and we plan to be the first to market with a product that leverages this technology in Canada later this year. We'll be using cultured CBG in our first product introduced to the market, enabled by our partnership with Ginkgo, and we expect the final productivity target for CBG will be achieved in the coming weeks prior to September 2021, as previously announced.

We are making strides to ensure that Cronos become synonymous with innovation. Launching cultured rare cannabinoids is a broader long-term approach to branding and product differentiation. This will not be just a single item featuring CBG. We believe the Spinach brand is a great platform to bring these rare cannabinoids and unique formulations to our adult consumers. Cannabis holds many unique compounds with a wide range of potential use cases and benefits.

Cronos' focus on rare cannabinoids will drive significant market knowledge and consumer insights that are expected to help deliver novel and innovative products. Our cross-functional teams have been busy bringing our innovation pipeline to life by developing and commercializing new products. We take a methodical approach to product development by focusing on consumer insights, product testing and pushing ourselves to bring best-in-class products to market.

In the second quarter, our Spinach brand launched SOURZ by Spinach in Canada, an exciting new line of cannabis gummies with bold and unique dual flavor combinations. SOURZ by Spinach was developed by Cronos Group's experienced team of professional chefs, food scientists and consumer packaged goods experts. I am proud of the brand's ability to rise to the challenge of creating a cannabis edible product rooted in the principles of the confectionery category.

SOURZ delivers bold fruit flavors in a distinctive "S" shape with a proprietary coating designed to provide a sour and sweet flavor profile, differentiating the product and elevating the consumer experience. This product has an unparalleled taste for adult consumers, and early feedback on the product has been great. According to Hifyre data, SOURZ by Spinach has achieved a double-digit market share in the edibles category during the July and August-to-date period.

OCS data for Ontario sales to retailers reports that all three of the SOURZ by Spinach SKUs ranking in the top-10 of the edible category during the 4-weeks ending August 1, 2021.

Building on the strength of our Spinach gummies portfolio, we plan to leverage this brand and product format to bring cultured CBG to market. The soon to be introduced Spinach gummies utilizing cultured CBG and traditionally cultivated and extracted THC will carry the same core differentiators as our other SKUs, but with different flavor profiles. The first Spinach gummy featuring cultured CBG is planned to be pineapple starfruit flavor, and early indications from sell-in efforts are strong.

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AUGUST 06, 2021 / 12:30PM, CRON.TO - Q2 2021 Cronos Group Inc Earnings Call

The Spinach brand also launched a new concentrate product called Spinach DABZ and a 28-gram format for Spinach flower called Spinach Nuggetz in Canada. The Spinach brand continues to extend into new categories to address consumer needs and build our presence on shelf at dispensaries across Canada. Along with these exciting launches into new categories, Spinach is shinning in the dried flower category. The Spinach GMO Cookies 3.5 gram flower SKU was ranked in the top-5 SKUs for the 4 weeks ended August 1, 2021. Spending multiple weeks as the #1 SKU across all product formats according to OCS data. This is a true testament to all the hard work our cross-functional teams have put into the brand and the product, which we are now seeing paid dividends on shelf.

Turning to the U.S. market. We are excited to officially relaunch our CBD brand, PEACE+, through the direct-to-consumer channel. PEACE+'s initial portfolio of CBD tinctures are now available on peaceplus.com with many more exciting new products on the horizon. We are relaunching the PEACE+ brand because strategically, PEACE+ complements our other CBD brands nicely. And provides future distribution opportunities for us by producing a line of CBD products for mass market consumers in the United States, and giving us an offering at a mainstream price point.

We are looking forward to seeing all the additional innovation yet to come from this brand and look forward to reaching another group of adult consumers with this offering. We have so far received strong indications of interest in PEACE+ from some significant convenience store chains. And are hopeful to start shipping to regional test markets soon to complement our direct-to-consumer efforts. In July, our masstige position brand, Happy Dance, which we co-founded with actress Kristen Bell, launched a new facial skin care product, the Look Alive CBD Face Moisturizer. The moisturizer has a light texture and is packed with hydrating ingredients like avocado oil, hyaluronic acid and high-quality CBD. The product is now available online to U.S. consumers through the brand's direct-to-consumer website, doahappydance.com, and online at ulta.com. And it is anticipated to be available in ULTA Beauty stores throughout the U.S. in the coming weeks.

Continuing to build our product portfolio is critical to attracting new consumers to the brand and providing existing consumers with options and additional products so they can expand their usage occasion with our brand. In the Israeli market, the number of registered cannabis patients continues to grow, now nearing 100,000. Our PEACE NATURALS brands continues to resonate well with consumers in this rapidly growing medical cannabis market. Within the Israeli cannabis market, our dry flower products continue to perform well and recent introductions of oils and pre-rolls are gaining traction.

Turning to our people. I would now like to take a moment to discuss an addition to our Board of Directors and a few key hires, which highlights our commitment to building a winning team of seasoned and passionate professionals. During our Annual General Meeting, shareholders voted in a new Board member, Kendrick Ashton. Kendrick is the Co-Founder and Co-Chief Executive Officer of The St. James, a leading developer and operator of performance, wellness and lifestyle brands.

Before founding The St. James, he was a founding member and Managing Director of Perella Weinberg Partners, a financial services firm. Kendrick's mix of business acumen and entrepreneurial experience makes him an excellent fit for our Board. I am pleased to welcome Kendrick Ashton to the Cronos Board of Directors, and look forward to having his expertise help us as an organization.

Last month, Carlos Cortez joined the organization as VP and Controller. Carlos leads our global accounting, shared services, cost accounting and financial reporting team. Carlos comes to us with 18 years of experience, including serving as a Senior Finance Director for Discovery, Inc. Before his time an Discovery, Carlos spent five years as the Corporate Controller for Malibu Boats.

This month, we also welcomed Anthony Parisi to Cronos as the new Head of Global Audit. Anthony will lead our efforts to create world-class internal controls by developing top-tier risk management, control and governance profit. Anthony comes to us with over 18 years of audit experience. And most recently, the Vice President of Internal Audit for two NYSE-listed company, RPC, Inc. and Marine Products Corporation.

Last but certainly not least, Thomas Cohn joined Cronos as Head of Regulatory and Product, a newly formed role for Cronos. Thomas joined us from The Avon Company, where he served as General Counsel and Corporate Secretary. Thomas also spent 18 years with the Federal Trade Commission, where he was responsible for, among other things, managing any trust and consumer protection investigation and law enforcement actions. Kendrick, Carlos, Anthony and Thomas are a subset of the talent we've added across the organization. We look forward to having them and the other new additions to the team contribute to the evolution of Cronos as we work to position ourselves as a leading cannabinoid company.

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AUGUST 06, 2021 / 12:30PM, CRON.TO - Q2 2021 Cronos Group Inc Earnings Call

As we've mentioned before, we have been actively evaluating opportunities in the U.S. cannabis market as legalization efforts and the regulatory process continues to evolve. As more and more states legalize cannabis, and there is a clear momentum of federal legalization, we want to make sure we have a seat at the table and are well positioned to capitalize on market opportunities at the appropriate time.

In June, we were pleased to announce a strategic investment in PharmaCann, which sets the foundation for our entry into the U.S. market. PharmaCann, a leading vertically integrated U.S. cannabis company has demonstrated operating expertise and is well positioned in high-value limited license states. PharmaCann's strong geographic footprint in the U.S. includes 6 production facilities and 24 dispensaries operating under the Verilife brand across 6 states: New York, Illinois, Ohio, Maryland, Pennsylvania and Massachusetts.

We are excited about our opportunity to work with PharmaCann in the future because of our shared commitment to elevating product quality and consistency through science and best-in-class operations and manufacturing. In PharmaCann, we have found an investment that checks all our criteria for what we look for in a strategic investment: market leader, unique platforms, intellectual property and branding potential. With its strategic manufacturing infrastructure, talented product development team and best-in-class operations in multiple high-growth states, we are confident in PharmaCann's potential.

Our U.S. growth strategy remains focused on delivering long-term shareholder value by assembling a portfolio of best-in-class brands and intellectual property, while simultaneously positioning to deploy our products in the U.S. market through strategic investments in U.S. leaders that share our vision and commitment to responsibly distribute disruptive cannabinoid products that improves people's lives.

Growth is also anticipated to be achieved through organic opportunities, utilizing the existing brand and IP developed in-house. Most notably, as spoken about earlier, our culture cannabinoid capabilities. We are also encouraged by the thoughtful and serious legislation brought forward by Senator Schumer, Booker and Wyden, which provides some measure of restorative justice for those individuals and communities harmed by the war on drugs. We firmly believe that policymakers and regulators must invest in approaches that support responsible adult consumption, limit harm for consumers by curtailing the illicit market. And create a legal and well-regulated federal framework for the cannabis industry in the U.S. We encourage Congress to act swiftly to pass the Cannabis Administration and Opportunity Act into law.

In addition to reporting on our business results today, we announced the appointment of Bob Madore as our next Chief Financial Officer. Bob will be officially joining the company on Monday and succeeds Jerry Barbato. Bob is a senior executive with over 30 years of financial and operational experience at a number of well-known global consumer brands. He served as CFO at American Eagle Outfitters, and prior to that, he served in a variety of roles of increasing responsibility at Ralph Lauren, including as CFO from 2015 to 2016.

He has a reputation for developing high-performing teams and achieving outstanding results. I look forward to working together as we continue to execute our strategy and accelerate our growth at Cronos. Please join me in welcoming Bob to his new role.

I also want to thank Jerry for his contributions to our company over the last two years. During Jerry's tenure with Cronos, he played an instrumental role in strengthening our finance and procurement functions, driving the SAP implementation, both in Canada and the U.S. And

building out our information system and capabilities with a new focus on cybersecurity. On a personal note, he helped me tremendously as I got my feet wet at Cronos. I've enjoyed working with him, and I appreciate his partnership and wish him all the best.

Now I'll turn the call over to Jerry to say a few words on his announcement before getting into the 2021 second quarter financial results.

Jerry Filomena Barbato - Cronos Group Inc. - CFO

Thanks, Kurt, and good morning, everyone. It has been a privilege to work with the Cronos team, and I'm proud of all we have accomplished over the last several years. I know that under Bob's leadership and with support of the outstanding teams across the organization, the company is well positioned to lead the global cannabis industry and capture the significant opportunities ahead.

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