Q2 2021 Cronos Group Inc Earnings Call
[music].
Good morning, My name is Phyllis and I will be your conference operator for today I would like to welcome everyone to Kronos Group's 2021 second quarter earnings Conference call today's call is being recorded at the.
Time, I would like to turn the call over to Shayne Laidlaw Investor Relations. Please go ahead.
Thank you Bill and thank you for joining us today to review Kronos group's 2021 second quarter financial and business performance today, I'm joined by our President and CEO, Kurt Schmidt, our CFO, Jerry Barbato, our executive Chairman, Mike Gordon and our EVP of legal and regulatory affairs, assuming from furnace group issued a news release announced.
These financial results. This morning, which are filed on our Edgar and SEDAR profile of 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 of 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 result.
And the differ materially from those projected in the forward looking statements, including as a result of the factors described and the cautionary statements and risk factors included and 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, which any forward looking statements made during this call are qualified.
And 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 of this management and planning forecasting and evaluating the business and financial performance, including allocating resources reconcile.
The issuance of these non-GAAP measures to the closest reported GAAP measures are included in our earnings press release furnished to the SEC, which is available on the press room section of our website and the Kronos group Dot Com. These non-GAAP measures may not be comparable to measure used by other issuers I'd also like to note that we're 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 and advance of your patients and understanding will now make prepared remarks, and then we'll move to a question and answer session with Dan and I'll pass it over the Kronos group's president and CEO Kurt Schmidt.
Thanks Jay.
Everyone and thank you for joining us today.
At the beginning of this year I noticed how critical our keen focus on building disruptive technology and innovation is to Kronos.
This past quarter, we took an important step and bringing in commercial scale cultured cannabinoids to the market.
We amended our agreement with Ginkgo bio works and order to enable us to accelerate the commercialization of cultured cannabinoids at scale.
At this stage, we of all the necessary licenses to commercialize the product using cultured cannabinoids produced and our Winnipeg facility.
And we plan to be the first remark on what the product that Leverages the technology and Canada later this year.
We will be using culture C D G and our first product introduced to the market enabled by our partnership with Ginkgo.
And we expect the final productivity target for CPG will be achieved in the coming weeks prior to September of 2021 as previously announced.
We are making strides and ensure that kronos become synonymous with innovation.
Launching the cultural rare cannabinoids as the broader long term approach to branding and product differentiation and this will not be just the single light and feature and C. B G.
We believe the spinach brand is a great platform for them to bring these rare cannabinoids and unique formulations to our adult consumers.
Canada holds many unique compounds with the wide range of potential use cases and benefit.
Kronos is focused 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 broke bringing our innovation pipeline to life by developing and commercializing new products.
And we've taken a methodical approach to product development.
Focusing on consumer insights product testing and pushing ourselves to bring best in class of products to market.
And the second quarter, our spinach brand launch towers by spinach, and Canada and exciting new line of candidates gummies with bold and unique dual port flavor combinations.
Salaries by Spanish was developed by Kronos groups experienced team of professional chefs food scientists and consumer packaged goods experts.
And I am proud of the brand's ability of rights of the challenge of creating of candidates edible products rooted and the principles of the confectionery category.
Towers delivered bold fruit flavors and the distinctive S shape with of proprietary coating designed to provide a sour and sweet flavor profile differentiate the product and elevating the consumer experience.
This product has an unparalleled tastes for adult consumers and early feedback on the practice and great.
According the high fire of data salaries by spinach has achieved the double digit market share and the edibles category during the July and August to date period.
Ocs data for Ontario sales to retailers and report that all 3 of the salaries by spinach Skus ranking and the top 10 of the edibles 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 culture CPG to market the.
Soon to be introduced spinach, gummies, utilizing cultured CPG and traditionally cultivated and extract the THC will carry the same core differentiators as our other skus, but with different flavor profiles.
The first 1 is kind of maybe stay tuned and culture CPG as planned to the pineapple star fruit flavor and early indications from selling the efforts are strong.
The spinach brand also launched the new concentrate product called spinach deaths and the 28 Grand format percentage flower called spinach, Nougat and Canada.
The Spanish brand continues to extend into new categories to dress consumer needs and build our presence on shelf at the strength series across Canada.
Along with these exciting launches into new categories.
And then interest shiny and the dry flower category.
The spinach GMO cookies, and 3.5 Gram flour S. K U was ranked in the top 5 skus for the 4 weeks ended August 1.2021.
Spending multiple weeks as the number 1 SKU across all product formats. According to Ocs data.
And this is a true testament to all of the hard work of 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 relaunched our CBD brand piece plus through the direct to consumer channel piece.
These pluses initial portfolio of CBD tinctures are now available on piece plus dot com with many more exciting new products on the horizon.
We are re launching the people piece plus the brand because strategically piece plus complements our other CBD brands nicely and provides future distribution opportunity for us by producing a line of CBD products for mass market consumers and the United States.
And giving us and offering out of mainstream price points.
We're looking forward to seeing all of the additional innovations yet to come from this brand and look forward to reaching another group of adult consumers with this offering.
We have so far.
The strong indications of interest and peace Bluff from some significant convenience store chains and are hopeful the start shipping to regional test markets soon to complement our direct to consumer efforts.
And July our Masstige position brand happy dance, which we co founded with actress Kristen Bell launched the new facial skincare product the look of like CBD based moisturizer the.
<unk> has the light texture and its taxes of hydrating agree and like.
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.
2 of happy dance, Dotcom and online and ultra dotcom.
And it is anticipated to be available and the Ulta beauty stores throughout the U S and the coming weeks.
Continuing to build our product portfolio is critical the attracting new consumers to the brand and providing existing consumers with options and additional products. The so they can expand their usage occasion with our brand.
And the Israeli market the number of registered cannabis patients continues to grow now nearing 100000.
Our peace Naturals brands continues to resonate well with consumers and its rapidly growing medical cannabis market.
Within the Israeli cannabis market are dry flower products continued to perform well and recent introduction of the oils and pre rolls are gaining traction.
Turning to our people I.
I would now like to take a moment to discuss and addition to our board of directors and a few key hires which highlights our commitment of building a winning team of seasoned and passion of professionals.
During our annual General meeting shareholders voted in a new board member Kendrick Ashton.
Kendrick is the cofounder and key co Chief Executive officer of the fate of chain of.
A leading developer and operator of performance wellness and lifestyle brands.
Before founding the St. James He was the founding member and managing director of Perella Weinberg partners of financial services firm.
Kendrick Smith of business acumen, and entrepreneurial experience makes him an excellent fit for our board.
And I'm pleased to welcome Kendrick accident, the the Kronos Board of directors and look forward to having his expertise and 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 the senior Finance director for Discovery, Inc.
Before I comment on discovery Carlo spent 5 years as the corporate controller for Malibu boats.
This month, we also welcomed Anthony parades eat Kronos as the new head of global order Anthony will lead our efforts to create world class internal controls by developing top tier risk management control and governance profit.
Anthony He comes to us with over 18 years of all of the experience and most recently the vice President of the internal audit for 2 NYSE listed company RPC, Inc, and Marine products Corporation.
Last but not certainly not least Thomas Keller joined Kronos as head of regulatory and product and newly formed role for Kronos Tom.
Thomas joined Us from the Avon and 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 antitrust and consumer protection of 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, the having them and the other new additions to the team contributed to the evolution of Kronos as we work to position ourselves as a leading cannabinoid company.
As we've mentioned before we have been actively evaluating opportunities and 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 the federal legalization, we want to make sure. We have a seat at the table and are well positioned to capitalize on market opportunity at the appropriate time.
In June we were pleased to announce a strategic investment and pharma can which sets the foundation for our entry into the U S market.
And our Mccann, a leading vertically integrated U S. Cannabis company has demonstrated operating expertise and is well positioned and high value limited license states.
Farmer can't strong geographic footprint and the U S includes 6 production facilities and 24 dispensaries operating under the barrel life brand across 6 States, New York, Illinois, Ohio, and Maryland, Pennsylvania, and Massachusetts were excited about our opportunity to work with farm.
Mckenna and the future because of our shared commitment to elevating product quality and consistency through science and best in class operations and manufacturing.
And pharma can we have found and investment and that checks all of our criteria, but we'll look for and the strategic investment.
Market leader unique platforms intellectual property and branding potential.
But the strategic manufacturing infrastructure kind of out of the product development team and best in class operations and multiple high growth States States, we are confident and farm of cancer 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 and deploy our products and the U S market through strategic investments and U S leaders that share our vision and commitment to responsibly distributed disruptive cannabinoid products that improve people's lives.
Growth is also anticipated to be achieved through of granted opportunities utilizing the existing brand and IP developed in house most notably.
Woken about earlier are cultured cannabinoid capabilities.
We are also encouraged by the thoughtful and serious legislation brought forward by Senator Schumer, Booker and widening which provide 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 and approaches that's that support responsible adult consumption.
Limit harm for consumers bucket, the tailing the illicit market and create a legal and well regulated federal claim framework for the cannabis industry and the U S.
We encourage congress stack swiftly the past the candidates the administration and opportunity Act into law.
In addition of reporting on their business results today, we announced the appointment of Bob made or as our next Chief Financial Officer.
Bob the we officially joining the company on Monday, and things and succeed Jerry Barbato.
Bob is the senior executive with over 30 years of financial and operational experience and a number of well known global consumer brands.
He served as CFO of American Eagle Outfitters, and prior to that he served in a variety of roles of increasing responsibility at Ralph Lauren and including our CFO from 2015 to 20 and 16, yes.
The reputation for developing high performing teams and achieving outstanding results.
And I look forward to working together I look forward to working together as we continue to execute our strategy and accelerate our growth of Kronos. Please join me and welcoming Bob to his new role.
I also want to thank Jerry first kind of contributions to our company over the last 2 years.
During Jerry's tenure with Kronos he played an instrument.
And the state finance and procurement functions.
Driving the SAP.
Implementation of both Canada, and the U S and building out our information system and capabilities with the new focus on cyber security.
On a personal note. He helped me tremendously as it got my feet wet and.
And Kronos I've enjoyed working with them and I appreciate his partnership and wish him all of the best.
Now I'll turn the call over to Jerry to say a few words on his announcement before getting into 2 of the 2020, 1 second quarter financial results.
Thanks, Kurt and good morning, everyone.
It has been a privilege to work with the Kronos team and.
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.
I will now move to a discussion of our 2021 second quarter financial results.
The company reported consolidated net revenue and the second quarter of 2021 of $15.6 million of <unk>.
58% increase and the prior year period.
Revenue growth year over year was primarily driven by the continued growth and the adult use Canadian cannabis market.
And increased sales and the Israeli medical market.
Consolidated gross loss for the second quarter of 2021 was $15.8 million.
The $12.9 million increase and losses from the second quarter of 2020 the.
The increase of losses versus prior year was primarily driven by an increase and inventory write downs and the rest of world segment, which totaled $12 million and the second quarter of 2021 versus $3.1 million and the second quarter of 2020.
And the impact of strategic price reductions on various adult use cannabis products and Canada taken and the second half of 2020.
And as well as startup costs associated with new product development and the rest of World segment.
Adjusted EBITDA loss for the second quarter of 2020, 1 was $49.8 million representing.
Representing a $22.8 million dollar increase and losses from the second quarter of 2020.
The increase and losses year over year was primarily driven by an increase in gross loss as previously explained.
And increase in sales and marketing spend do the brand development and the U S segment and.
The increase in R&D, driven by spending on product development and developing cannabinoid IP and the rest of World segment.
Turning to our reporting segments and the rest of World segment, We reported net revenue and the second quarter of 2021 of $13.4 million of 74% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth and the adult use cannabis flower market, and Canada and sales and the Israeli medical cannabis market.
Gross loss for the rest of the World segment for the second quarter of 2021 was $16.4 million of 12.
$1.9 million increase and losses from the second quarter of 2020 the.
The increase and losses versus prior year was primarily driven by an increase of the inventory write downs the impact of strategic price reductions on various of adult use cannabis products and Canada taken and the second half of 2020 as well as startup costs associated with new product development.
Adjusted EBITDA loss and the rest of the World segment for the second quarter of 2020, 1 was $32.6 million.
Renting of $14 million increase and losses from the second quarter of 2020.
The increase and losses was primarily driven by an increase in gross loss and an increase in R&D costs.
Turning to the U S segment, we reported net revenue and the second quarter of $2.2 million and gross profit of <unk>.
$6 billion, most of which were roughly flat to the prior year period.
Adjusted EBITDA loss and the U S segment for the second quarter of 2021 was $10.7 million, representing a $5.9 billion increase and losses from the second quarter of 2020.
The increase and losses was primarily driven by an increase in sales and marketing costs related to brand development.
Overall Kronos group reported an increase of net income versus the prior year period, primarily due to the change in fair value of the financial derivative liabilities associated with the L..3 as investment which is described in more detail in the 10-Q.
And the second quarter of 2021, the company recorded a noncash gain of $115.2 million.
Related to the change in fair value of these financial derivative liabilities.
Kronos continues to expect there may be significant reported earnings volatility, primarily driven by the fair value of quarterly adjustments related to the movement of Kronos group stock price.
Turning to the balance sheet. The company ended the quarter with approximately $1.1 billion and cash and short term investments, which.
Which is down roughly $142 million from the first quarter 2020.1.
As a reminder, as Curt discussed during his prepared remarks, we deployed approximately $110 million to acquire and option for a $10.5 stake and farm again during the second quarter of 2021, which drove a significant portion of the sequential decrease and cash and cash equivalents.
Capital expenditures for the quarter were $2.1 billion with the spending focus across our global strategic priorities.
We remain committed to deploying capital and a disciplined manner and only and ways that align with our strategic priorities.
Continue to be encouraged by the work our teams are doing globally with that I'll turn it over to Kirk for closing remarks before Q&A.
Thank you Gerry despite the ongoing challenges posed by the pandemic our industry continues to show resilience.
Against this backdrop, we continue to bring high quality and novel products to market under our brands and the U S, Canada, Israel and Germany.
Our balance sheet existing CBD infrastructure, our strategic investor along with our success and insights ready to be leveraged from all of the markets. We are confident we are well positioned to be of best in class cannabis company and any market we compete.
With that let's open the line for questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
I ask that you please limit yourself to 1 question and 1 follow up.
Your first question comes from the line of Andrew Carter with Stifel.
Hey, Thank you good morning, I guess I wanted to ask and maybe of beating a dead horse asking about the gross margin here. It's.
And it continues to be underwhelmed. So I just wanted to ask what kind of signs we should see to start to see stronger performance and as long as the innovation going to be margin accretive are you in a position on your kind of third party cost of where that can be the profitable or do you have the right price price points anything you can help help us on on this gross margin line.
Hey, Thanks, Andrew.
The way, we think about it.
We definitely had inventory write downs this quarter of $12 million and we continue to evaluate the competitive landscape in concert with consumer preferences to drive product innovation and I think that's what really hampered our margins and the quarter.
As Kurt talked about the prepared remarks, we're definitely seeing green shoots in terms of our revenue and innovations with GMO cookies, and the flower category and our salaries and the edibles and obviously the ginkgo fermented cannabinoid products that we're going to be launching.
Later in the year.
Okay second question switching gears, a little bit I mean, the headset data. We've seen has validated of very strong performance by spinach, and and Ontario, and Alberta, and particularly sort of I guess 1 question I have we know, it's a volatile supply chain and Canada.
Or are the reorder and with the strength of the Reorders, keeping up with your expectations or the retailers able to reorder and get it from the provinces and the provinces coming to you could you kind of help us out with that thanks.
Yeah.
Right Sours is doing really well the.
You know, we have 2 skus and the top 5.5 and 3 of the top 10.
Yeah. The early 2 sets of its been very good and we are where we feel confident.
We can handle and handle the demand.
Again, we weren't first in market with the gummies and we spent some time trying to get this thing right, but the early results speak for themselves as far as spring and this high quality product and and and that confidence is let us test that we believe.
Our first rare candidate of cannabinoid launch of this with TPG will be under the flowers brand under the.
The edibles brand.
Yeah, but my real question is I get the strength of my real question is is the supply chain are you really seeing the commensurate reorders or is it just kind of more of the same volatility like we kind of see from the supply chain. Thanks I'll pass it on after that.
Yeah, well, it's early days.
But.
Clearly the feedback from the the of the trade is excellent and also.
And that's that.
And that's the surest indicate an indication that there the reorders should be strong as we bring these consumer consumers and into the category and more of them experienced and what the marketing programs that we're doing there to educate on the products and we feel pretty bullish because of products delivering I mean, we get very good feedback that the products delivering and.
That's a really good sign for repeat.
And I'll pass it on.
And it's Mike just to add to that you know I think things and certainly improved and Canada as the Covid restrictions have been lifted so kind of a lot of the supply chain challenges of you've heard about the provinces were related to the the more intense lockdowns and Canada versus the U S.
Yeah.
Your next question comes from the line of Ragu, Okay, and so with Raymond James.
Good morning, Kurt Jerry Mike. Thanks, So much and taking our questions and I don't feel a lot of big welcome to Bob.
And so this is terrific news the Kronos from patients called the CPG will be included and the finish coming before the end of this year, particularly given the ginkgo itself has been highlighting the partnership front of us and its own upcoming of public listing. So my first question is how is the ginkgo ginkgo Kronos partnership of evolving towards the development of additional cultured cannabinoid and when do you expect this broad and.
The portfolio to be fungible molecules to be included and from those products and hit the Canadian or potentially even the U S sales.
Yeah.
And again, we shifted our strategy.
<unk> talked about and the last call the focus on the rare cannabinoids.
And you're saying, we're progressing our first 1 CPG with the.
Launch coming up coming so we feel very good.
And that we're on track.
To deliver these products as we go over time so.
Again, you've seen the thing and the way of us, beating the kind of milestone time lines. We have 4 of launch plant, we reorders to focus on the rarest first versus the common CBD and THC.
And the.
And we're really bullish and they're gonna see those coming over the next.
18 to 24 months Youre going to see these products coming on line.
And and so you know.
Again, it's the strength of this this joint venture and the partnership and the innovation we're spending on.
Yeah, we're really really confident Mike and I don't want of I don't know if you want to add anything on that since you've been instrumental in the the ginkgo.
Agreement and process.
Sure Yeah, Thanks, Matt and I think that's right, you'll you'll see us continue the <unk>.
Include cultured cannabinoid, specifically the the rare ones.
And the CPG and we're starting off with the with.
The sours, but you'll see that also spread.
Spread to other formats, and we're making great progress with with ginkgo and and it'll be similar to how we're launching CPG. When you start seeing some of the other rare cannabinoid added the specific formats and then depending on the consumer insights spread into other formats as well so that will just be sequenced and.
Over the.
The next couple of months and quarters.
Great and I look forward to that so on and I'm moving to the U S. It's great. It's great to hear that the peace talks have been relaunched.
And if you're able to share of anymore color on how the partnership with Altria on they enable penetration, particularly of the C store channel across the U S and how we should be looking at that adoption ramp.
Right so yeah.
Yeah. We believe the addition of piece plus the at this time it is really nice component too.
A tiered pricing strategy.
And again, we've got 4 tincture of excuse that we're launching.
We're starting on our D to C website.
That will expand we are working with C stores and convenience stores.
And we hope to announce something and the not too distant future on that 1 as far as out of 3.
And that that is certainly value added that we could have now that would require some things we've talked about before is as far as getting the F. D. A to on the edible side on the regulatory side, but as you know as soon as there is clarity there that that leverage point of <unk> trio, we can take advantage of immediately.
Great. Thanks, Ken I'll pass it on.
Your next question comes from the line of John's empower all with CIBC.
Yeah.
Thanks, Good morning, I wanted to start with the the spinach brand as well it doesn't seem like it's capturing more market share and price is certainly a part of the picture there but has there been any other strategic shifts.
And that you can share the that's helped cause of that whether it's promotions or marketing or interaction with retailers or something on the cultivation side.
And I could get a sense of what's causing that brand to move so meaningfully when when most of the other large brands are fairly stagnant and then related to that do you think you've found the right level of pricing on expenditure or are there more investments to make.
Yeah, I think it's the combination of things innovation certainly clear.
A clear driver that we've talked about that.
And our new flower launch.
Which is doing exceptionally well and that that is science behind the genetics of that plant sours, which is just the combination of fantastic some proprietary.
The parts of that product, but really trading at like a confectioner like non delays with true launching a product and it's a fantastic product and carrier. So innovation is going to play a big part of this.
Extending the brand and certain areas will play a part of it we talked about the Nuggets, and the 28 Gram and dabbs coming and their souls and round out of portfolio. The second part of its focus.
And really focus on the spinach brand and I'd, rather have 1 power brand and then 28 brands.
And that are all kind of doing something we believe and the spend brand resonate resonates with.
And with consumers and it's got a great brand positioning and we worked very hard on that I think there's a lot of the blocking and tackling execution and that's probably the third point of that which include some of that marketing.
And those 3 elements.
I think a really really.
Strength going on and the future will continue to be the innovation and carrier for us.
And that pipeline is being worked on and it's you know we're staging that as we go along Mike already alluded to the culture of cannabinoids, where that could possibly go so we feel the.
We feel this is this is our power brands and and and the I'd rather have 1 Coca Cola and 55 different bottle of water brands right. So we're going to really focus on that brand and I think we're seeing the.
That pay off that strategy pay off.
Okay. That's great I appreciate the color and then my second question is on the farmer Mccann investment are you exploring other incremental investments of that nature of how would you characterize the attractiveness of the M&A landscape and the U S. At the moment and and how do you think about targeting brands versus the operators and cultivation of retail.
Yeah, I'll I'll kick off and on a you know.
I'll, let Mike jump in because he's really the leading us and the this adventure first of all we think farm cans of great 1.
We are of a set of criteria and we look at what we would want to be part of and far Mccann.
And really check the checked all the boxes for us.
So you know, it's a fantastic strategy of their best in class operator.
And we've talked about before all of this I 80 strategy they have and limited.
Limited license states from Illinois to Massachusetts.
We think they have capacity to grow organically and through M&A.
So it really kind of checked all of those boxes, but we've been pretty consistent saying you know we're not finished.
And we looked at you know of criteria is.
The breadth geographic beachhead items, but brands is also very important so it's not out of the rounds of possibility that we may focus on something else that brings a different set from the party, but I will tell you we look at it and it has to be complementary to your overall strategy.
Mike.
Yeah, Mike.
You should probably weigh in on this a little bit.
Sure and thanks.
John You know I think I think the M&A landscape certainly is attractive.
1 of the things that I think being focused on by a lot of potential targets is and and really was amplified by the language and the humor bill around the Interstate commerce is what benefits it could be from a potential partnership and how things may change once things are federally legal and that really aligns with the way that we're we're looking at them. So.
Brands are suite, and that's certainly going to be reported we think ultimately that's where the value of shifts the long term, we understand the there's a balance between where value shifts long term within brands and sort of over the medium term, how you build those brands and get the Mt.
So I.
I would say that there could be similar structures with other structures that we've looked at but we're still very very excited and we think there's a lot of attractive opportunities that will fit very well for us and the U S.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Vivien <unk> with Cowen.
Hi, good morning, and.
On the you actually I was hoping we could dive and a little bit on on the C. D D.
And to get your of his current assessment of of the market from the sizing perspective, and then specifically on happy dance, if you could comment on any intra quarter trends and whether you're seeing.
And all of a recovery or and uplift as consumers get vaccinated and go back into the stores.
Yeah, I'll kick it off and then let the Jerry and Mike comment.
We're starting to see weight of lot of hopes of Covid recovery, but as you know lately.
And we seem to be of going back into the scope of the delta. Thanks. So we don't know how of that one's going to swing out.
We were hopeful because you do see bricks and mortars coming back, but we'll need and.
See that instead of it I have to say, where you know overall, we're not happy with the results of the U S CBD market.
We don't break down our performance by brand.
But we are taking the Ah.
<unk> strategic review of the brands.
We've got some good things, but you know certainly I'm not happy I would like to see faster growth and so we're kind of reviewing everything on this 1 you know that that could close the portfolio.
And the price gap price management, and what we're doing there.
Product offerings, and we're looking at the marketing mix.
We don't have the full.
The results, yes, we're getting where we're trying to complete that but we have a couple of may of 2 markets that we've been testing advertising and a more aggressive marketing that's on the product and now that looks.
Encouraging, but we'll have to see how that how that ends up but we need the review of everything and make sure that we can get the pace because generally speaking.
We were we were not happy.
With the results this quarter, but again some of that is related to the cold, but it's true some of it's related to some changes and some of the the D C capability, especially with Apple's New security that's been has S. As certainly had and.
And on impact.
But.
You know again you know.
We believe we get the elements right and we get the investment right.
The brand.
Resonates very well.
With consumers that are.
We will get us out of the trajectory we want.
Okay perfect. Thank you very much of that and so on your candor in particular just the.
With the U S and my follow up question. Please on on farm of can can you comment at all around any opportunities around the I T or trademark exchanges are sharing thank you.
Yeah, and I'll, let Mike O'hare and on this because it's good to have them and there's also the lawyer and the room with me.
Yeah, we're looking at those types of things, but all of those have to be managed under the guise of path of investment and the lack of federal legalization, but certainly if you look at.
At the at the announcement, we made theres opportunity there is tremendous opportunity once federal legalization comes but that doesn't mean, we're thinking about what happens if prior.
Prior to federal legalization of bunch of things happen and I just can't commit to anything.
Because of.
We have that restriction of ensuring that we can do this and doing this and a way that is.
And sensible for us and the and the guidance of the regulatory environment.
And I don't know if you want to add anything to that.
Yeah sure living and you know, we certainly see this as something that's very strategic for us as far as pushing the brands out I think the way that we really focused on on getting that advantage was and.
Setting up distribution agreements that we can sort of trigger of it our own option.
And so we're going to continue monitoring and making sure that whatever it is that we do to get our brands out is done and and a way that wouldn't.
And our view of affect anything with the CSA AR, but we feel that theres a strong partnerships and we can use the leverage brands too early to speak about any imminent trademark swaps, though.
Understood. Thank you.
Your next question comes from the line of Tammy Chan with BMO capital markets.
Thanks, Good morning, everyone on the first question and on the day category I would call practices moving about 2 years ago and when you talk about your initial launch of the product and the Canadian market would be a sort of first chang and but that you'd be working on nextgen and proprietary products.
Category. So I just wanted to see if I can get an update on how that's going on with respect to on the innovation work for the day category and I think you're right.
Yeah. This is Kurt thanks for that question, Yeah, we are working on it and you're going to see something in the not too distant future, but you know I don't want to talk about the the actual dates or anything on the innovation, but.
You know where we are.
And are working and and that on the basic.
The segment right now.
Okay got it on and then my follow up and I'm going.
And going back to the first you know coach and CPG product under the sours format and Canada. Later this year I was wondering if you could talk a bit.
On how you're going to position the product.
And I presume I like from a marketing perspective, and making sure that staff and stores are educated on that on the differentiation. So that they can communicate with the consumers because with respect of product launches and general in Canada, and I recognize because of the unique product but it.
It is a very crowded market theres, a lot of different products and brands on shelf and to what degree of coffee and so you have that there's going to be strong uptake for our CPG products in particular, and what sort of work you're doing to ensure you know getting the shelf space and I kind of get the <unk> turned our attention and positioning.
Yes.
Yeah Yeah.
Good question, well, we have a full team from developers innovation to the research we've done to the product developers to the marketing teams.
We don't view this as a product we view this as a concept.
A business concept and we think we have something really.
Interesting a sub brand under the finish line and we believe that's the way to do it that's my background Blue Buffalo and built a billion dollar business on a single brand called Blue Buffalo, but we had life protection. We had wilderness, we had freedom sub brand on Blue Buffalo, and we had basics there and we built.
This concept and we spent a lot of working on how to communicate with consumers. So.
Obviously, we're rolling out we have to get to each 1 of these rare cannabinoids till it takes time you can't make all 6 at once but we are not thinking about this as the product. It's just not of product. This is a brand concept lifestyle positioning against the consumers.
Resonating with consumers and and that's the way, we look at that strength and and we're confident we're on the road to creating that and whatnot and and yeah. We think that's really what this whole thing is about.
Yeah.
And can and Tamara just to add I think you know.
If you think about edibles in the crowded space, even without rare cannabinoid, which as you know where we've seen a lot of excitement from from retailers and for them.
On the provincial boards, and we launched finished showers and and immediately had great success and we saw that as the way that preceded the launch of the the rare cannabinoid edibles. So we've had great success without them and we expect that's only going to.
The stronger once we have the you know the key differentiator added to those.
And again as Mike said, we're going to grow the business edibles of great start force, but other 2 point on what products are great vehicles for the us and so we've got innovation along the concept, we got innovation, along where we can move the the brand to the products too so it's exciting.
And I you know I think like I said, it's been a hell of a lot of work done by the teams and I think we've got it and I'm looking forward to you'll start to see a little bit of that when we launched the.
The first 1 here on September.
Great. Thank you.
Your next question comes from the line of Heather Bosky with Bank of America.
Hi, Thanks for taking my question and I'm, just curious it's going back to 1 of the questions at the beginning of the Q&A around gross margins.
Right and do you think needs to happen and what sort of scale of what other I guess mix shift maybe that you need to get back to positive gross margin of it.
Yeah. Thanks for the question Heather I think and the U S segment, it's really about driving net revenue growth you know of revenue was down a little bit this quarter and I think with increased revenue and that will improve the margin in that segment on the Canada side. You know we are seeing some positive momentum on the Spanish brand and on.
Like I said earlier on margins were negatively impacted this quarter really due to the continued development of innovative products. So we had some heightened and startup costs within our manufacturing facility and.
In addition, you know we're lapping the price reductions that we took and the Canadian market and the second half of 'twenty, and 'twenty, which is causing a portion of the impact on a year over year basis.
Instead of the collar.
Your next question comes from the line of Bill Kirk with M. Cam.
Hey, good morning, everybody I want to go back to innovation, but tackle it a bit more philosophically I'm you know it seems the pace has accelerated rather dramatically. So what philosophically for you and now has.
Led to the strategic shift of focus you on what seems like more urgently on recreational use innovation.
Okay. Thanks for the question.
I don't think it's really been of shift I mean, we work on this.
And you know.
And yet and the accompanying with and the come from a very disciplined.
Ensuring yeah.
I think on me.
The difference.
And sometimes that takes longer I think edibles. The classic example, we kind of thrown anything out the door.
But you know we looked at from the.
And the consumer side.
You know from kind of the product build side of what kind of what we're trying to do and some of that takes longer and the case of a you know that you've cultured cannabinoids are you know that that's a pretty hefty projects, that's why new science.
And it's.
When I sit and the Gainesville and meetings and either.
The undergrad and chemistry, sometimes I can all I need.
The innovation they give me kind of day tutoring afterwards on those.
And we're working on some pacing technologies, we want bigger ideas.
Tend to take longer and in the us.
Other hand, once you get the system in place you could start to move faster once you get the fundamental building blocks and place between marketing the product development teams.
And the research side and you start to go and a lot of that was built so I think we're at the point now where we we've got the right. We've got the right machinery and people to get this done but we believe again, we believe the you know the cheetah.
The key for US is to become a branded player and the branded players, bringing great profit, except if at all.
And the delight, the consumers and platforms, and our new and new and unique.
And so that's what we're about and we will not lose the focus on utilization and I think that's really critical to us as the company.
Thanks Bill.
So I think what you're seeing and.
And quite a bit of work that you know.
It's not us.
And with the urgency on product development, we just now have quite of bit of products and developed and are being very mindful about how we launch them, but having the supply chain and place and now with the.
The retail opening back up in Canada, We think it's a good time.
Thank you Mike Thank you Kurt.
Your next question comes from the line of Howard Penney with hedge and I.
Hi, Thank you so much of the question and I was wondering if you could expand on the farm Mccann and investment in particular, the commercialization and distribution agreement that you signed and why that's important as you look the entered the U S and Chris.
Yeah, Yeah, I'll kick it off and then Mike can jump then yeah. We're in it for the long haul. We're not you know this is not on an investment for us and trying to build the partnership and the partnership.
So that concludes the bunch of things and access for our brands and distribution and access for our you know eventually for our technologies and we have a great and I'll tell you personally I love the guys there and we've got a great relationship with farm of can we really see eye to eye on it and we're really trying to.
Built for the long term for the for what can we build the leading cannabis company and the and the U S. So all of those things we want on mutually share or what we do really well what they have so that we really get we really try to drive this thing and so that's why the some of these commercial terms and distribution terms.
Are so important for us and.
Again, we'd loved the move faster, but from obviously because of the regulatory environment and we'd have to move out of different pace on some things, but you know we want of commitment because we see this even though we only have 10%.
Get into this.
As an investment we got in and of 2 it is a long term partnership that's going to help drive both of our businesses. Mike I don't know if you want to add anything to that.
Thanks, sure Yeah, and I think that's right. We see we see 2 drivers of value here and 1 is we think and they have a great core business and so we like the investment and just purely on an investment basis, but the other is.
And it's it's really important depending on on how the regulatory environment shapes up and how things progressed that we do and these key restrictive markets as far as retail like New York. For example, there's currently 10 licenses just knowing that we have a trusted partner, where the close relationship to be able to launch our disruptive products.
True.
And it's something that really excites us and I was just the keep investing behind innovation and knowing that we'll be able to reach consumers the right when we need to.
Thank you so much.
Yeah.
At this time, there and no further questions ladies and gentlemen. This does concludes today's conference call. We thank you for participating you may now disconnect.
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