Cronos Group Inc.
Q4 2019 Earnings Call Transcript

Published: 31 Mar 2020

[Operator:]

Good evening, my name is Ryan and I will be your conference operator today. I'd like to welcome everyone to the Cronos Group 2019 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 Anna Shlimak, Investor Relations. Please go ahead.

[Anna Shlimak:]

Thank you, Ryan, and thank you for joining us today to review, Cronos Group's 2019 fourth quarter and full year financial and business performance. Today, I’m joined by our Chairman, President, and CEO Mike Gorenstein; our CFO, Jerry Barbato and Xiuming Shum, EVP, Legal and Regulatory Affairs.

[Mike Gorenstein:]

Thank you, Anna, and good afternoon, everyone. These are certainly unprecedented time and we are doing our best to adapt to our current situation and make the most of the challenges we face. I hope everyone in the line is staying safe and healthy, and a little later I will address the actions we are taking in response to COVID-19. First, I want to address recent developments related to our financial reporting and internal controls as well as the remediation actions we are taking in response to our review. We completed a thorough review of our financials and controls, and we are committed to making things right and implementing the best practices of financial reporting. I want to thank our finance team and advisors who worked closely with us over the last few weeks to get this done.

[Jerry Barbato:]

Thanks, Mike, and hello everyone. I will provide specific details on our results for the fourth quarter and full year 2019. All the figures that I will review today can be found in the 10-K filed with the SEC. But first I want to reiterate some of the key points Mike provided earlier regarding the restatement. This is a matter that the Board of Directors and the entire management team at Cronos Group take very seriously. We completed a thorough review of our financials and internal controls. I'm grateful to our finance team and advisors, who work incredibly hard to complete the review in a timely manner. We are taking comprehensive action to improve internal policies and procedures and strengthen internal controls, including financial reporting and are committed to best practices. This includes implementing the following steps. First, we are ensuring the segregation of duties over sales and purchase transactions. Second, we are enhancing our controls and procedures related to non-routine transactions, especially wholesale sales and purchases. And third, we are enhancing our quarterly risk assessment and controls processes to reflect changes in our business. We have said consistently over the last year that one of our biggest priorities is attracting and retaining the right talent in the right areas, which will help us, prepare for our future growth initiatives and we will continue to do so to fortify our infrastructure. Our top priority is to enhance our internal controls and financial reporting practices. These efforts are already underway and I’m confident, we will be even stronger as a result of this undertaking. Before discussing our financial performance, I'd like to make a few comments about our transition to U.S. GAAP reporting, our filing including our press release and then generally how we do the business. As I mentioned in my remarks last quarter, Cronos started filing domestic SEC report as of January 1, 2020 and our financial results are now reported in U.S. GAAP with the U.S. dollar as a reporting currency. Historical financial information is included in our 10-K filing, which is currently available on EDGAR and SEDAR. Regarding the conversion to U.S. GAAP, the most significant change from IFRS is related to biological asset accounting, which does not exist under U.S. GAAP. Under U.S. GAAP, agricultural products are valued on the balance sheet at the lower of cost or net realizable value as opposed to IFRS which accounts for these products at fair value, less estimated selling costs. We've also updated our financial disclosures and reporting structure to reflect how we are managing the business. Going forward, we will discuss our business with two segments, U.S. and Rest of World. Lastly, we are now using operating income to evaluate performance and allocate resources across our business segments. Operating income is the metric used across many industries including CPG and consumer staples. Some of you may know this metric by other names including income from operations or operating profit. I like to spend a moment explaining this measure and why we find it useful in understanding our business performance. Operating income or loss is defined as net revenue less cost of sales and operating expenses. At the segment level, operating income excludes corporate expenses, which do not directly impact the underlying performance of the segment. We believe operating income provides us the clearest view of the segments’ core business performance as compared with other metrics, because it does not exclude depreciation or amortization of revenue generating assets. These revenue generating assets have a real economic cost and measuring the business performance through EBITDA, which excludes these items which represents results that are not reflective of our underlying business performance. Our asset-light strategy demands that our segment managers to be ever vigilant and financially disciplined regarding their capital expenditures. By measuring and discussing our performance in terms of operating income, we believe that we are holding our segment managers accountable for their investments and accurately reflecting the merits of our asset-light strategy. We review these results on an adjusted basis, which excludes certain income and expense special items, which may be highly variable, unusual, or in frequent and can distort underlying business trends and results. We've included a section in a press release that provides information and details on the special items for this quarter and year-end comparison periods for 2018. Also, we've included reconciliation tables in our press release and 10-K that bridged the reported GAAP operating loss to the adjusted operating loss for each of our segments. Turning to Q4 results, I will focus most of my comments on the fourth quarter's performance versus that of the fourth quarter of 2018, which is a slight change from the sequential discussion in prior quarters. The company reported net revenue of $7.3 million in the fourth quarter, a 71% increase from prior year. Revenue growth for the quarter was driven primarily by distribution of vaporizer products in Canada and the inclusion of financial results for the Redwood acquisition. In the Rest of World segment, reported net revenue for the fourth quarter of 2019 was $4.6 million, an increase of 8% from the fourth quarter of 2018. This is primarily driven by the continued expansion of growth in the adult-use business in Canada and the introduction of vaporizer products in the fourth quarter of 2019. Gross margins for the Rest of World segment were negative in the fourth quarter, a decrease from the fourth quarter of 2018, primarily driven by inventory write-downs in 2019. We incurred an inventory write-down of approximately $24 million in the fourth quarter, made up of a one-time charge of $1.9 million related to the repurposing of certain facilities at the Peace Naturals Campus and a $22.1 million write-down on cannabis oil and flower. If we were to adjust for the effects of the inventory write-downs, gross profit for Q4 would have been $2.2 million, representing gross margins of 48%. We do however anticipate inventory write-downs in the short term due to pricing pressures in the marketplace and while the company executes its operational repurposing of the Peace Naturals Campus. Operating expenses in the Rest of World segment totaled $37.3 million in the fourth quarter of 2019, representing an increase of 247% from the fourth quarter of 2018. This increase is primarily driven by higher sales and marketing costs associated with agency and market research fees connected to the adult-use markets. G&A growth was driven by an increase in headcount as well as various professional and consulting fees. The repurposing costs at the Peace Naturals Campus accounts for $5.3 million of the growth and R&D expenses increased mainly due to the cost associated with Ginkgo. The Rest of World segment reported an adjusted operating loss of $51.8 million in the fourth quarter of 2019. The loss increased significantly from the fourth quarter of 2018, primarily due to inventory write-down and higher operating costs partially offset by an increase in net revenue. In the fourth quarter, the U.S. segment reported net revenue of $2.7 million, as Redwood continues to expand the distribution of Lord Jones products in retail and through e-commerce channels. Gross margin for the segment was strong at 53% driven by Lord Jones position in the super premium luxury CBD category. The segment reported at adjusted operating loss of $1.8 million in the fourth quarter of 2019. This loss was primarily driven by higher marketing costs associated with the continued expansion of Lord Jones products and that's upcoming new products and brand launches. Overall, Cronos reported an increase in net income from the prior year, primarily due to the change in fair value of the financial derivative liability associated with Altria's investment, which is described in more detail in the 10-K. In the fourth quarter, the company recorded a non-cash gain of $118.8 million related to the change in fair value of these financial derivative liabilities. Cronos continues to expect there may be significant reported earnings volatility, primarily driven by the fair value of quarterly adjustments related to the movement of Cronos Group’s stock price. Turning to the balance sheet, the company ended the quarter with approximately $1.5 billion in cash and short-term investments, essentially unchanged from the third quarter. Capital expenditures for the full year were $39 million. This spending includes investments in our Peace Naturals Campus, Cronos Fermentation, our Israeli facility and device technology innovation at Cronos Device Labs. We remain focused on deploying capital in a disciplined manner and only in ways that align with our strategic priorities. I'd also like to provide an update on the redesign at our Peace Naturals Campus that we announced last quarter. We optimize our Peace Naturals Campus for alternative uses such as R&D facilities and derivative product manufacturing. Since our last earnings call, we have removed rooms from cultivation in a number of the buildings at the Peace Naturals Campus and began the transition of space for R&D and derivative manufacturing. During the fourth quarter, we recorded a total pre-tax one-time charge of $7.2 million related to the repurposing efforts at the Peace Naturals Campus, with $1.9 million associated with an inventory write-down and $5.3 million of operating expenses, primarily related to impairment costs. Overall, we are pleased with this strategic progress the business made in 2019. It was a year of transition and significant investment toward achieving our long-term goals. We expect to continue to invest behind our strategic initiatives in both the U.S. and Rest of World segments. We know that it won't be easy, but I'm optimistic about our plans for 2020 and beyond to achieve long-term leadership in the cannabis space. With that, I'll turn it over to Mike for closing remarks before Q&A.

[Mike Gorenstein:]

Thank you, Jerry. Cannabis is a young industry with a lot of potential opportunities in front of it. For the last few years, capital has been cheap, assets have been expensive and the available product formats as well as distribution was limited. 2019 was really the first year of widespread industry adversity. In 2020 that trend has continued adding macroeconomic headwinds around the world that require adjustments to the way people interact with one another and do business. Now in our industry today, capital is more expensive and assets are cheaper, even though distribution is beginning to open up and new product formats are becoming available for sale. Our long-term thesis on cannabis has not changed. And we believe with our strong balance sheet, investments in disruptive intellectual property and the flexibility provided by our asset-light model, we are well positioned to be opportunistic and aggressively seize on opportunities in the near, medium and long term. With that, let's now open the line up for questions.

[Operator:]

And we do have our first question coming in from the line of John Zamparo from CIBC.

[John Zamparo:]

Thank you. Good afternoon. I wanted to touch on business disruption at Lord Jones, presumably SoulCycle and Sephora locations across the U.S. are closed. But it seems like there may be some restrictions on the Lord Jones website. So just wondering, will that be in place as long as the shelter-in place rules are in effect in California? And just can you talk broadly about how large the DTC business is at Lord Jones versus brick-and-mortar stores?

[Mike Gorenstein:]

Sure. Thanks. It’s a great question. Recently, our business has been declared as essential. So those from a supply chain perspective, we're still able to keep things open. Of course, it's something that we need to monitor how potentially things roll out and how they develop. But as of right now, we're able to continue getting product made and shipped. As far as, DTC versus retail, these really are unprecedented times and there – it’s just pretty early to be able to actually conclude anything from the data we’re seeing. Obviously with retail, and a lot of categories being closed off, we’re seeing what we think is some shift from retail to DTC as people are self-quarantined. but also it’s probably too early to be able to determine whether any sales trends or pantry loading versus sustained changes in the way that consumers are making purchases. So, I think it’s something that we’ll continue to monitor, but we do expect as long as the nationwide trends that we’ve seen continue that there’s more likely to be a shift to online purchasing versus brick-and-mortar.

[John Zamparo:]

Okay, thanks. And then my follow-up is on PEACE+, can you talk about the regulatory environment for CBD right now? Have you seen any encouraging signs on that front? It seems like the FDA was pretty cautious in its statement in December, but have you had any conversations with the FDA that’s led you to any conclusions on what the final outcome might be here, whether it’s maximum potency or preference to allow certain products or just any commentary there would be great. Thank you.

[Mike Gorenstein:]

Sure. I think U.S. CBD and the FDA stance is something we continue to monitor, and as with any regulatory environment, we welcome open dialog, collaboration, and look forward to working with our industry peers, regulators, and governments to make sure that we’re providing for a reasonable regulation and prevail. I think that a lot of -- some of the trends that we were focused on as far as which way regulations have been going, recent events with COVID has certainly changed, I think where the focus from a lot of government organizations are, so many developments there to be changed depending on how COVID is dealt with and where regulators feel they need to shift their attention.

[Operator:]

At this time, we do have another question on the line. This is from the line of Tamy Chen from BMO Capital Markets.

[Tamy Chen:]

Yes, thanks. First question is just wanted to understand with respect to revenues, just how do you think about it? When will it begin to grow meaningfully? It seems like things in the U.S. may still be some time away given the regulation. So, specifically in Canada, I’m just trying to understand what the challenges may be, it doesn’t seem like there’s a supply issue anymore, so just wanted to get a better sense of when we should think about revenues will really start to pick up there. Thanks.

[Mike Gorenstein:]

Yes. With new form factors in Canada and sales from U.S. hemp-derived CBD products in the U.S., we believe that this will result in a sales mix weighted more towards adult-use sales and less towards opportunistic sales that we had in Canada. And as we launched 2.0 products and our vape launch in late 2019, we believe will help accelerate growth in Canada.

[Jerry Barbato:]

Yes. I think when we’re looking specific to Canada, obviously, store growth and 2.0 are big impacts. But also I think what impact COVID may or may not have is going to be important. In Ontario, we’ve seen new cannabis dispensaries continue to open even during the – call it the COVID Era. But while cannabis dispensaries have been deemed an essential business in Ontario, we don’t really have visibility on how the pace of future store growth might be affected by other potential delays like from trades or macroeconomic headwinds. But also, I think that’s counterbalanced by increase in recent online sales. I think that you’ve seen Ontario discuss again, though I think we still need more time and data to be able to evaluate just how much is due to pantry loading versus sustained changes in purchasing habits and how consumers will be shopping as they self-quarantine. Overall though, when we think about the position that we’re in and the macroeconomic environment, the way that we look at it is, there’s distribution points continuing to open up, we expect competition will consolidate and we think that provides more opportunities for us to be aggressive in growing the business.

[Tamy Chen:]

Got it. Okay. And my follow up is with respect to Ginkgo. So, Mike, I just wanted to confirm one of the comments you made earlier. So, at this point, has Ginkgo largely done the formulation work? Are you just waiting for the facility to receive its production license and then you can move into the commercialization part or is the R&D formulation, there’s still more work to be done there? Thanks.

[Mike Gorenstein:]

Sure. So, the formulation work is work that we do at Cronos with -- the work that ginkgo is doing is giving us strains that are able to ferment cannabinoids. the work of how we combine those cannabinoids, what type of consumer products we put them into, it’s something that’s specific to what we’re doing in-house at Cronos, and of course a difference would be just rare cannabinoids being able to get those in any type of commercial quantity from cultivation extraction is difficult, but the THC and CBD, for example, it’s the same cannabinoid we formulate with that we would be getting from supply today. Essentially, the separation between what’s done at Cronos Fermentation versus Ginkgo, you could think of that as comparable to setting up a cultivation facility and then putting in the processes of how you grow the product, how you harvest, how you – and how you ultimately care. at Cronos fermentation, we’re going through those processes while the genetics, which is – if we think about cultivation, the genetics are being developed same way you would breed a new plant strain. Ginkgo was essentially breeding and designing those strains that we will cultivate or ferment at Cronos fermentation. Is that helpful?

[Operator:]

Our last caller seems to have fallen off time, but we do have another question on the line from the line of Andrew Carter from Stifel.

[Andrew Carter:]

Hey, thanks. Good afternoon. Just wanted to ask and you mentioned that kind of growth starting to accelerate meaningfully in Canada, obviously you mentioned that kind of the challenges were unveiled in 2019 and now, we have kind of an accelerated shakeout will – if you will. How kind of are you thinking about Canada now versus how you’ve thought about it historically in your portfolio? Is there an opportunity to invest more in this market now? Is there an –is it acquisitions? Just any help and how you’re looking at the landscape right now?

[Mike Gorenstein:]

So, I think certainly trends as far as the way that things are setting up with having less access to capital across the space and having at least in the last few months in near-term, limited opportunities for distribution albeit increasing, we do expect, certainly consolidation will hit. I think M&A; we haven’t really changed our view that what we’re looking for is ultimately something on the brand side or something on the intellectual property side that’s ultimately scalable. How consumers end up building relationship with different brands would ultimately dictate in Canada specifically whether or not we – we’re looking for growth organically or through acquisition. But we do expect that the competitiveness for organic growth is something that will become easier as a lot of the capital reserves going to be depleted with competitors, with marketing. So, ultimately, opportunities that may have looked at in the past that we were to revisit them today would certainly look more accretive, but it really comes down to does it help us with our relationship with the consumer to make an acquisition and would it be more accretive to look at it through organic growth versus acquisition.

[Andrew Carter:]

Okay. And then second question, just kind of on your vaporizer business that you’ve launched, you’ve obviously jumped out to a pretty nice start given your supply chain, maybe wanted to ask – you obviously mentioned COVID-19 disruption and a lot of questions on kind of the Chinese supplies issues. So, first question and there, and can you kind of give us an idea on these device sales, how accretive they are to your gross margin overall and the profitability of your business? Thanks.

[Mike Gorenstein:]

Yes, I think there’s, we could separate that into two categories. I think the actual – the device meaning the battery and then the cartridge, which has the actual cannabis oil in it. So, I think we look at the batteries really is more of a marketing opportunity, not something that’s supposed to drive gross margin. But we do think that the cartridges, especially given pressure in the flower side over the long-term, we expect that that’s going to be accretive especially, if we continue with the progress of ginkgo and being able to take that that technology and put it into vaporizer products. We think would change the way that we look at our business.

[Jerry Barbato:]

Yes. While we have healthy margins on our base today, we decided to outsource the manufacturing to CMOs really to make sure that we get the product format, the product type right before bringing it in-house, so we can dial it in and improve margins over time as well as the market continues to fluctuate in terms of pricing. And so we’ll see how that plays out over the course of 2020.

[Operator:]

And there are more questions on the line. This next question is from the line of Rahul Sarugaser from Raymond James.

[Rahul Sarugaser:]

Good evening, Mike and Jerry. thanks so much for taking my questions. So, my first question really is with respect to the PEACE+ brand is the launching of the first thousand stores get started at all and now that the product line is on hold when do you expect to re-launch it?

[Mike Gorenstein:]

Sure. It did not. I mean there are certainly steps in the process that we took, but ultimately, we decided to pause and reassess the landscape. I think when a different product might be launched is something that will depend on how we do the landscape and ultimately, what gives us the opportunity to meet consumer needs. But when we think of things right now, retail – launching a new brand in retail, given the environment of COVID is something that we’re going to have to think through as far as timing and when we start seeing a return to normalcy is one we would start thinking about taking a product and putting it into a new retail location, but I think supporting a new brand on shelf in the kind of social distancing world we’re in is something that would be pretty difficult.

[Rahul Sarugaser:]

Great. That’s really helpful. Thanks. And then my second question is when do you expect the tech transfer of the first couple of strains developed by Ginkgo to happen over to the Winnipeg facility? And do you have any visibility on when you anticipate commercial production of those first couple cannabinoids to happen?

[Mike Gorenstein:]

Sure. I think it’s something that we’ll be able to give more color on as time goes on. What I can – what I can say is that we’re still very confident in the timeline that we gave when we announced the deal being September of next year.

[Operator:]

And there are more questions online. This next question comes from Chris Carey from Bank of America.

[Chris Carey:]

Thanks, guys. good evening.

[Mike Gorenstein:]

good evening.

[Chris Carey:]

So maybe, a big picture, we’re a little over a year from the close of the Altria transaction. And I guess I’m struggling a little bit just to understand where Cronos is going in the near to medium-term. Lord Jones was a big price tag, but it’s obviously, small contribution now maybe, that improves over time, but certainly not yet. The U.S. CBD launch is getting delayed potentially indefinitely. It sounds like there’s a repivot back to Canada adult-use, not that there never was a focus there, but certainly, it seems like more of an emphasis given that’s going to be the market for you in the near-term. And so I guess I’m trying to understand where all those works that we’ve been talking about, it starts to get commercialized or 2020 is another year where kind of swatches the cash balance while many others don’t focuses on the long term and it comes this very long-term type story or if there’s some of this work that maybe comes through fruition sooner. So maybe, if we could just talk about kind of where things are going in the near to medium-term, it would be helpful for me. Thank you.

[Jerry Barbato:]

Sure. So, I’ll take the first part of that and in relation to our Redwood acquisition. So, we’re very excited about the future potential for Redwood and we anticipate significant growth across our new U.S. platform and we believe that the U.S. provides significant opportunity for redwood to deliver value to Cronos. We selected redwood as our U.S. platform, not only to the strength of Lord Jones, but more importantly, the talented team that Rob and Cindy, the cofounders have assembled. While I won’t share our plans for competitive reasons, we believe that through the combination of the Redwood team and front offices, existing resources that the acquisition of redwood will deliver significant returns to shareholders over the medium to long-term.

[Mike Gorenstein:]

Thanks Jerry. And yes, as far as medium and long-term, I’ll take that part. I don’t think our view has changed that similar to other consumer categories. ultimately, differentiation in a product is what’s going to lead to long-term value and there are ways that we look at doing the research. Ultimately, things that we find from consumer insights research inform what we do in product development. And that certainly takes time, but we don’t want to rush products to market unless we feel that we have winning, winning product. But we do see that a technology breakthrough is ultimately what’s going to lead to us being able to generate a long-term value. So, there are a number of initiatives we have that once we think the product is ready and we think that we can meet consumer expectations and I think that’s the first step. And certainly, financial results will follow that.

[Chris Carey:]

Okay. And Mike, I’ve asked you this before, how you would envision the breakdown of revenue between the U.S. and I guess it’s rest of world, but more or less Canada in 2020 and I think previously the U.S. was seen as likely bigger, but it seems to me now that perhaps, it’s switched again, where the Canadian business is going to be bigger and I wonder if you can confirm it, that’s the case in your projections and maybe, offer some insight on how things develop from here. it’s just the type of thing, where the vape rollout gets commercialized quicker, where wholesale pricing has obviously collapsed and now you can really deploy this strategy of bickering, a subordinated raw material to sell under your own branded products on the flower side. So, maybe, help understand how the geographic split looks like and also what the cadence is going to look like over the course of 2020. Thanks for that.

[Mike Gorenstein:]

Sure. Yes. So, I think, my previous expectations of the U.S. outpacing the rest of the world. the key to that is going to be being able to access brick-and-mortar stores and while I think in October, we’ve seen some shifts from brick-and-mortar sales to online, I think it will be difficult as long as we’re in the current environment to still outpace what we’re seeing rest of world. But ultimately, the opportunity, we still think given the size of the market, over time can be better, but cadence is really going to depend on the overall environment of being able to take different types of CBD products and put them on shelf. As far as Canada, I think a few things have changed. A lot of it is based off of where the competitive set would be, what products we’re able to bring forward and we think that there’s likely going to be some challenges not just across our sector, but across the – all sectors given what’s happening with COVID. But given the way we structure ourselves, we think that we should emerge from the COVID crisis, whenever that timing is in a position of strength to be able to be a little bit more aggressive and continue to invest behind growth opportunities. But I think specific timing is it’s really difficult to predict, because of the way that COVID could impact when those opportunities for new growth and bringing existing projects into the market would be.

[Operator:]

and there are have more questions on the line. This is next question comes from the line of Vivien Azer from Cowen.

[Vivien Azer:]

Hi. Thank you. Good evening. So, I just wanted to dig in a little bit more on the inventory write-down. This is obviously, a phenomenon that we’ve seen in place in the broader landscape for many months now. And so I was just hoping to get a clear understanding of how you guys are thinking about the price compression in the marketplace, because it seems to me that at least from a retail standpoint, like that’s really only starting to hit the market, certainly kind of calendar 1Q giving the timing of the announcements of value priced introductions in the marketplace. So, when you took the inventory write-down, is the price deflation a backwards look, a forward look and any kind of color you can offer on like what underpins the rate of price deflation that informs the inventory write-down would be helpful. Thank you.

[Jerry Barbato:]

Sure. So, we’re comfortable that our balance sheet reflects the most accurate valuation of the inventory as of the end of the year and the write-down was driven by downward pressure on market prices and these prices have fallen below the cost of producing that inventory. Most notably on dry cannabis, the value of future write-downs is a bit uncertain. Therefore, we’re not disclosing a number of currently and in line with U.S. GAAP standards, we review our inventory balances quarterly to ensure that it reflects the lower of cost or net realizable value. And I think what we’re seeing in the marketplace is as you pointed out a trend lower both in the dry flower as well as the oil and resins.

[Vivien Azer:]

Okay. That’s helpful. So, just to summarize then, if that was your kind of view of the marketplace as of December 31, it would be fair to assume that if there has been more price deflation in the marketplace in calendar 1Q, which wraps tomorrow then that could potentially result in further inventory write-down?

[Jerry Barbato:]

Correct.

[Vivien Azer:]

Okay. Thank you. And then a quick follow-up from me, it just seems like; it was months ago that I was at CAGNY with the Altria team. In fact, that was only four plus weeks ago that one of the questions that I posed to Howard Willard during the breakout was Altria’s appetite to further to distribution. the PEACE+ CBD offering in the U.S., I recognize, Mike, of course, it sounds very sound that you wouldn’t want to do a large scale rollout now, given what we know today about COVID-19, the unfortunate reality is that that wasn’t really a big consideration, four to five weeks ago. So, I am curious if you could offer whether there had been any discussions with Altria about expanding the distribution. That’s my follow-up. Thank you.

[Mike Gorenstein:]

Sure. Yes. We remain an active discussion and we’re both very committed to the partnership. I think ultimately, a lot of the discussions and the thinking comes from making sure that we can find the right product formats for the current environment and given all the changes, just making sure that we’re taking a responsible and long-term view as to what the product format is and ultimately, how that proceeds by all of our stakeholders before launching and expanding distribution.

[Operator:]

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

[Matt Bottomley:]

Yes. Good evening. Thanks for taking the questions. Just wanted to follow up from a couple of questions ago on sort of taking a step back on more of a macro level strategy for Cronos, obviously, you guys are one of two companies in the Canadian sector that has a defensible balance sheet in these troubling times with increased uncertainty. But again, sort of 7 million of revenue in the quarter, certainly, lagging a lot of your peers, certainly in the Canadian sector. And Mike, I appreciate the viewpoint of having a longer-term view versus a shorter-term view. But maybe, if we could just dig a little bit deeper with respect to where your capital allocation is going to go and how investors should judge Cronos sort of in the next four quarters or so. Given the fact that with all the things you have going on between Ginkgo and Israel, the Hampton, the U.S. obviously everything that’s happening in the Canadian market, the top line still is very modest. So, should we be expecting this to be a continued trend as you allocate capital towards the longer-term initiatives, although there’s more unknowns and risks there, or is there anything we can look at in the next couple of quarters that that can be definitive things to assess performance for Cronos in the more near-term than long?

[Jerry Barbato:]

Yes. We don’t give forward-looking guidance on our revenue projections and as far as the capital allocation; I would say we continue to monitor our capital allocation to determine the appropriate level for reinvestment in our business as well as external growth opportunities. And we believe we’ve been very active in deploying that capital in a relatively short period of time considering that the Altria investment closed last March. We’ve acquired Redwood Holdings, we acquired Cronos fermentation. We’ve launched derivative products including vaporizers, and we have a credit facility out for our GrowCo joint venture. So, we remain focused on scaling the business for the future success and we’ll continue to evaluate external growth opportunities to deploy that capital.

[Mike Gorenstein:]

And thanks Jerry. I think, one of the things that we certainly balance between external growth opportunities is also evaluating organic growth opportunities. And vaporizers is a category we really believe in leaning into as we continue to get more information and data on how some other formats in Canada have been received and we can sort of learn from what products have been put out in the market. We’re leveraging some of our IP that we got from Redwood and we’ll look at other things we have in development that I don’t think we’re talking about years before. I will start getting other product formats out and lean into them. But we do see that even over the next few months, the opportunity that we have to really grow revenue or I think, better than they were in the past, but ultimately, we’re still making sure that we take a long-term view and we’re doing things that are accretive. So, we feel that the cost of revenue entering any specific opportunity isn’t something that generates long-term value. It’s something that will pass on. But again, given where the cost of capital for most industry participants has shifted to and looking at the pricing of different assets, we think that picture started to change and because that’s opportunity for us to move over the near to medium-term.

[Matt Bottomley:]

Got it. Thanks. And just a quick follow up, very anecdotal, but I’ve noticed in cannabis 2.0 has launched on a number of the provincial websites, the Cronos whether it’s COVE or Spinach or others. I’ve noticed those products have been a lot more relevant on those websites and it’s obviously, no one really knows by reviewing websites how much depth of supply goes behind each and every skew. But is there anything for us to read into for your next quarter that there’s been an uptick in overall penetration into this cannabis 2.0, obviously everyone’s starting from a base of zero in the prior quarter, but it’s just something I’ve noticed on a number of the provincial websites since cannabis 1.0 is that the Cronos branded products do seem more prevalent compared to what we saw just the dry bud before at lunch.

[Mike Gorenstein:]

Sure. I think what you’re seeing there is just that our focus has really been a lot on the derivative products and I think that even looking at distribution in which provinces, that we we’ve entered. We want to make sure that we can support our products in the different provinces. And so we’ve expanded distribution and making sure that we have the amount of supply necessary and the right product mix is something we prioritize for vaporizers and one of the reasons that we picked having just one 2.0 product format in market is to make sure that we’re able to service a properly. So I think, again, looking at opportunities for us, we are placing a priority on making sure that there’s more organic growth this year, now that we think the – all these markets opening up with more retail stores and with more product formats.

[Operator:]

We do have one last question on the line. This last question comes from the line of Michael Lavery from Piper Sandler.

[Michael Lavery:]

Thank you. Good evening.

[Mike Gorenstein:]

Good evening.

[Michael Lavery:]

You touched on some positives in the quarter, including obviously the bigger – much bigger sales from Lord Jones and the launch in three new provinces. Obviously, Alberta being a very developed one and then it sounds like some – early on initial vaporizer sales as well. But maybe, can you just help us with a postmortem on what then still really drove even after the adjustment in 3Q, a pretty significant decline and then maybe, with that, help us understand what has or hasn’t changed as we look and try to model ahead.

[Mike Gorenstein:]

Yes. So, after the restatement and we had some growth in Q4 versus Q3 and as I said before, we’re not giving forward-looking guidance in terms of revenue. I think there’s a lot of things at play, especially with COVID-19 and people going to brick-and-mortar. And I think we’ll be able to get a better sense as the environment changes and to see how many stores actually open up, especially in Ontario, while they’ve done, I guess you could say a fair job at beginning to open more stores. These are questions still remains, will they be able to get to their intended number and satisfy the market.

[Michael Lavery:]

And maybe, just then – just make sure I’m not confusing the numbers with the restatement in U.S. dollars, what was your 3Q revenue number?

[Mike Gorenstein:]

Well, we took a $3.8 million write-down or a change in U.S. dollars in Q3. So, the total change in the net revenue would be or was $5.7 million.

[Michael Lavery:]

Because – okay. So, I guess I still just want to understand maybe, where most of the pressure is from. Is share or pricing pressure? Is it a combination of both?

[Mike Gorenstein:]

I think there’s a few things in Q4 as far as like sort of how things landed versus our expectations. I think that we certainly had a focus on the 2.0 launch and given the leaning in the vaporizers. I’ll just give you an example of Alberta being a very developed province. Something that has certainly changed, but we expected that to be a big growth driver for us. And then temporarily vaporizers were not a product format that was accepted that certainly changed, but a lot of it was the timing of 2.0 launch, how different things or different provinces were accepting different product formats. Certainly, the – there’s probably a peak level of congestion that we’ve been experiencing for a certain types of flower, but we do expect that something that will begin to clear up, although it’s – the exact timing is difficult to pinpoint just from trends we’ve been seeing and where we naturally would follow those. Do we expect we expect congestion to clear up with more store openings and less competition?

[Operator:]

And at this time, there’s no one else in queue.

[Jerry Barbato:]

If there are no more questions, hope everyone stays healthy and safe, and talk soon.