Edited Transcript of CRON earnings conference call or presentation 26-Mar-19 12:30pm GMT

As I mentioned before, the Canadian government's leadership in implementing a federal legal framework is the reason we chose to operate in Canada. When we set out on this journey 3 years ago, we knew the value of operating in a legal environment would allow us to learn, build and create a company that has the potential to be a global industry leader. We take pride in leading the industry forward responsibly and are motivated to create meaningful products that excite our consumers and bring happiness and an improved quality of life.

The growth opportunities in the cannabis industry are vast. With our differentiated brands, global footprint, growing production capacity and supply chain, commitment to cannabinoid innovation and the strategic investment from Altria Group, Cronos Group is well positioned to realize these opportunities.

To set the stage for our earnings call today, I want to briefly review the 4 aspects of our strategy.

At Cronos Group, we are establishing an efficient global production footprint and supply chain, developing a diversified global sales and distributional network. We are creating and monetizing disruptive intellectual property and growing a portfolio of iconic brands that resonate with consumers. During this call, we'll discuss each of these strategic pillars and will provide an update on what we are going to do to grow our business globally.

I'll start with our production expansion.

In August 2018, Peace Naturals, our center of excellence, received authorization from Health Canada to cultivate cannabis in an additional building, Building 4. This 286,000 square foot facility is GMP-certified and is ramping its production of cannabis. The facility produced its first harvest in December 2018, and we still expect all flower rooms to be populated in the first half of 2019. The cultivation in Building 4 runs under a perpetual harvest cycle, similar to a manufacturing facility. Like other large-scale agriculture facilities, we expect that with each cycle, our yields will continue to improve as we dial in controls. We're very proud of this facility, our Peace Naturals campus as a whole and what we were able to build in such a short period of time.

While yields and cost per gram have been the standard unit cost metrics for the cannabis industry to date, we think this is starting to evolve. We still think that COGS will be an important measuring stick, but by that, I mean cost of goods sold, not cost of grams sold. Efficiency and downstream processing and packaging in categories such as pre-rolls will be a differentiator and an area we will increasingly focus on. And as the value-added products come online, the relevant cannabis costs will shift from grams of cannabis flower to milligrams of cannabinoid. And we've already seen the shifts begin in the proposed excise tax regulations in Canada from weight of dried flower to active ingredient. With this shift in mind, we will continue working to optimize our supply chain towards final products.

As supply catches up to demand, we believe that having experienced large-scale agricultural expertise and labor management practices will be extremely important. This is why our approach to further scaling our capacity involves taking our genetics, growing methodologies and best practices that we developed at Peace Naturals, our center of excellence, and then creating co-manufacturing relationships with sophisticated agricultural operators around the world. We are confident and committed to our cultivation partnerships.

In Canada, we launched a joint venture, Cronos GrowCo, with a group of investors led by Bert Mucci, a leading Canadian large-scale greenhouse operator. As discussed during our previous earnings call, Cronos GrowCo is constructing an 850,000 square foot, purpose-built greenhouse which is expected to produce up to 70,000 kilos of cannabis annually. Construction of the greenhouse has begun, and we expect to complete the superstructure of the greenhouse in the second half of 2019. And similar to how we're bringing Building 4 online, we expect this greenhouse to become operational in stages in 2020.

We are also making progress on our international production footprint. First, turning to our joint venture, Cronos Israel, with the Israeli agricultural collective, Kibbutz Gan Shmuel.

Cronos Israel is focused on the production, manufacture and distribution of medical cannabis and is in full construction. We anticipate the construction of the 45,000 square foot greenhouse will be complete in the first half of 2019, and construction of the manufacturing facility will be complete in the second half of 2019. Cronos holds an effective 90% economic equity ownership across the entities in Cronos Israel.

In January 2019, the Israeli government approved the export of medical cannabis from Israel, which will allow license holders to export to countries that have explicitly approved the import of medical cannabis. We intend to pursue the licensing for and export of medical cannabis products from Cronos Israel through our European and global distribution partners once production operations are up and running.

In 2018, we also brought our production model to Latin America. Cronos announced a JV with a leading Colombian agricultural services provider with over 30 years of research and expertise managing industrial-scale horticultural operations. This partnership established the newly formed entity, NatuEra, in Colombia that will develop, cultivate, manufacture and export cannabis-based medical and consumer products for the Latin American and global markets. NatuEra was granted a license to cultivate non-psychoactive cannabis plants to produce seeds for planting and the manufacture of derivative products.

We understand that many investors are modeling cannabis companies off of capacity. However, our business model is not to be the former. We think that there will be value created across many verticals in the cannabis industry value chain, including cultivation and wholesale supply, research and development, branded products manufacturing, marketing and retail. We see tremendous opportunity across the whole industry but recognize that we can't be all things to all people. Rather, we will focus on areas where we see long-term, sustainable value like developing and marketing innovative branded products, and then work with experts in the other verticals. This focused approach has proven successful in analogous industries, such as consumer packaged goods in pharmaceuticals, and we think it will prove successful in the cannabis industry as well. In other words, you can expect our focus to be on making the cheese rather than raising and milking the cows.

Moving on to distribution.

Canada became the first G7 country to legalize cannabis sales for adult use. Cronos participated in the launch of this new market through our 2 adult-use brands: COVE and Spinach. Currently, these brands are distributed in Ontario, British Columbia, Nova Scotia, Prince Edward Island and Saskatchewan. As our production capacity grows, we intend to expand distribution into additional Canadian provinces and territories.

In 2018, we also announced a joint venture with MedMen Enterprises to create MedMen Canada. The private retail landscape is evolving and changing, so we continue to review and analyze the situation as it develops in each province. We think this is a valuable relationship with a large, recognizable brand.

Additionally this year, we announced that Cronos GrowCo entered into a new supply agreement with Cura Cannabis. Cura signed a 5-year take-or-pay supply agreement to purchase a minimum of 20,000 kilos of cannabis annually from the date it receives its licenses. We believe partnering with companies like Cura and MedMen set Cronos proved up for strong relationships as new and large markets open and regulations evolve.

Internationally, Cronos Group made strides in 2018 to expand its global reach with a distribution agreement to supply the medical market in Poland. In June 2018, we entered into a 5-year exclusive distribution partnership with Delfarma, a pharmaceutical wholesaler with a distribution network of over 5,000 pharmacies and more than 200 hospitals, to supply Peace Naturals-branded cannabis products. We also have a 5-year exclusive distribution agreement with Pohl-Boskamp, an international European pharmaceutical manufacturer and distributor, for the German market, which was signed in 2017.