Cronos Group (TSX:CRON) Q3 2020 Earnings Call

0:00 Good morning. My name is Janika, and I will be your conference operator today. I would like to welcome everyone to the Kronos Group's third quarter 2020 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laidlaw, Investor Relations. Please go ahead. Thank you, Janika, and thank you for joining us today to review Kronos Group's third quarter 2020 financial and business performance. Today, I am joined by our President and CEO, Kurt Schmidt, our Executive Chairman, Mike Gorenstein, our CFO, Jerry Barbato, and our EVP of Legal and Regulatory Affairs, Xu Mingsheng. Kronos Group issued a news release announcing our financial results this morning, which are filed on our EDGAR and CDAR profiles.

0:45 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 Mike, I would like to remind you that our discussion during this conference call will include forward-looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of the factors described in the cautionary statement and risk factors included in the company's earnings release and regulatory filings, including the company's most recent annual report on Form 10-KA and quarterly reports on Form 10-Q. by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, certain financial measures may be discussed that are not recognized under the U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures.

1:35 We believe these non-GAAP measures assist management in planning, forecasting, and evaluating business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the SEC, which is available in the press room section of our website, thechronosgroup.com. These non-GAAP measures may not be comparable to measures used by other issuers. I'd also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or minor technical issues during this call. We thank you in advance for your patience and understanding. We will now make prepared remarks, and then we will move to question and answer sessions. With that, I'll pass it over to Kronos Group's Executive Chairman, Mike Gorenstein.

2:21 Thank you, Shane, and good morning, everyone. I'm proud to speak to you today as Kronos' Executive Chairman. As many of you know, after careful planning and thoughtful consideration, we expanded our leadership structure with the appointment of Kurt Schmidt as our new President and CEO in September. And I have transitioned to the Executive Chairman role. where I will lead the board and work with Kurt to continue to drive Kronos Group's strategy going forward. I am incredibly confident that Kurt will help Kronos build on our strong track record of growth and lead us toward many more industry-defining accomplishments. Kurt is a highly experienced consumer packaged goods executive with the expertise to push Kronos even further. During his three-plus decade career, Kurt has built a track record of driving outstanding performance at some of the most respected global consumer goods companies, including Blue Buffalo, Nestle, Gerber, and Kraft Foods. He has demonstrated tremendous success partnering with founders of startups to accelerate growth, and we are excited to leverage his expertise as Kronos continues to expand.

3:28 When I met Kurt as part of my year-long search for someone to take over the CEO role, It was immediately apparent that he is uniquely suited to drive the company's next phase of growth and uphold our commitment to lead the industry forward responsibly. He is a passionate believer in our mission and potential of our incredible company. I'm excited to partner with Kurt to leverage Kronos' strength and continue to deliver best-in-class brands and products to our consumers. Our industry is new, but that doesn't mean we can't learn from seasoned executives from adjacent sectors. In addition to Kurt, We further strengthened our senior leadership team by adding Shannon Buggy as Senior Vice President, Global Head of People. Before joining Kronos, Shannon was the SVP of Global Human Resources for Nielsen, where she led HR strategy for Nielsen Media.

4:19 With over 25 years of experience, Shannon has a proven track record of leading and managing global human resources teams. As we prepare for the next chapter, ensuring our employees throughout the organization are taken care of, is of the utmost importance. We've come a long way, and the industry at large has evolved in a short period. Together, we've forged a truly differentiated business model with great brands, technology, strategic partners, a strong balance sheet, and importantly, a great team focused on driving results. As I look at Kronos today, it's clear that the opportunities before us are more exciting than ever. We look forward to continuing to launch innovative cannabinoid products in Canada, and to foster a portfolio of U.S. hemp-derived CBD brands.

5:07 Internationally, we're excited to bring our products to more pockets of the world as regulations evolve and continue to establish ourselves as industry leaders. I want to thank the talented teams at Kronos who have brought us this far and continue to push us forward. I also want to thank our investors and the analyst community for your commitment to our industry. I know that Curt is looking forward to working with all of you more closely in the future and I know all of you will be excited to hear him on these earnings calls. So, without further ado, I'll pass the call over to our new President and CEO, Kurt Schmidt. Thank you, Mike. And good morning, everyone. I hope everyone is staying safe and healthy during these turbulent times. It's rare in a career to be able to have the opportunity to join two fast-paced growth companies with very high ceilings for expansion.

5:56 I had my first shot with Buffalo, which worked out very well. and I think we have a similar opportunity here with Kronos Group to take it to the next level. What Mike and the team have achieved in a short period of time is truly impressive. Kronos is an incredible growth opportunity, a new exciting industry. I couldn't pass up the chance to join the fantastic team to help write the next chapter. I want to thank Mike and the board for bringing me into this family. I appreciate Mike's trust in me to lead this company. He and the team have worked so hard to build. literally from the ground up. Mike has embraced his new role as executive chairman, and we are lucky to be able to leverage his vision and expertise as we navigate this continually evolving industry. You know, everyone told me that the industry moves at an incredible pace and that one week would feel like one month, and I must admit that is true in the best possible sense.

6:51 Over these past two months, I've had a crash course in the industry, its challenges, and opportunities, as well as things that matter most and how my expertise can help push us forward. For those of you who do not know me well, I want to share some of my key beliefs and leadership principles. I believe in creating high-quality products for consumers and the importance of building brands that exceed consumer expectations. I've seen companies rally around products and feel immense pride in bringing quality products to consumers. Kronos' mission is to improve lives by unlocking the full potential of cannabis aligns with my core beliefs in the power of innovation. To thrive and continue to be successful, we need to lead change and support our innovation practice to be at the forefront of this emerging industry.

7:41 I also believe in a winning team and the work ethic and accountability that comes with them. I believe in the power of people within an organization to foster a culture that is focused on quality, innovation, and supporting and recognizing each other. I'm a brand builder at heart and have extensive experience working in regulated and upstart markets. I'm passionate about brands and I'm inspired by Kronos. I see joining a CEO as an opportunity to bring my skills as a brand builder to the organization to nurture our existing portfolio and the high-performance teams that support them to drive results. What I've learned in my first few months is that we have remarkable potential with our brands. our Chief Innovation Officer, Todd Abraham, and his team backed by marketing, sales, and many other groups throughout the organization on doing incredible work to bring new and innovative products to markets in which we operate around the world.

8:38 Todd and I have similar backgrounds working at large-scale CPG companies. I look forward to working with him to continue building a CPG infrastructure for innovation and brand marketing at Kronos. In the Canadian market, I look forward to sharing my More details soon on innovation launches to the adult use market. Our innovation team has been working diligently under Todd to hone our next generation of product for our brands. Bringing them to more consumers is a focus of mine as the Canadian market continues to grow in sophistication and size. In the U.S. hemp derived CBD market, I look forward to sporting our luxury CBD brand Lord Jones. And despite recent performance, we remain confident we can build out the brand portfolio and the US hemp-derived CBD market.

9:25 We have an opportunity to improve this brand's performance as we work to bring innovative products to adult consumers across both DTC and brick-and-mortar channels. I've started to dig into this business, evaluating both its strengths and opportunities, and believe I can pull from my experience to help navigate this business to further success in the future. Last month we launched Happy Dance, a new CBD skincare and personal care brand co-founded with actress and New York Times best-selling author Kristen Bell. This new collection features a body butter, a coconut milk, and a bath bomb, all formulated with Kristen Bell's favorite ingredients and high-quality, full-spectrum hemp-derived CBD extract. Offered initially through the DTC channel, we have plans to enter the brick-and-mortar channel in the future.

10:15 Happy Dance products are perfectly suited for the CBD enthusiast and anyone experiencing CBD for the first time. Although it's in its early innings, our U.S. team has done a phenomenal job in the launch phase. And additionally, we are encouraged by the positive reaction consumers are having towards Happy Dance. Moving to our operations in Israel, following the launch of dry flower in the Israeli market under the Peace Natural brands in the second quarter, I'm happy to report that Kronos Israel has received all necessary certifications required for cultivation, production, and marketing of pre-rolls and oils as well. And as of October, Kronos Israel is in market with Peace Naturals branded dried flower and oils. Although I've not been able to get to our Israeli operations due to COVID, we have had extensive virtual team meetings, and I look forward to working with them in person. We have an excellent opportunity to be leaders in this rapidly growing medical market, as well as the potential adult use market when it opens up.

11:17 I've had the opportunity to spend time with Todd and our partners at Ginkgo regarding our fermentation work. As a former pharma executive, I have significant experience in the fermentation of key ingredients, and I am encouraged by this project and how transformative it can be. I'm pleased with the progress to date and look forward to sharing more updates in the future. I share my sentiment about how transformative this project can be for our business, both on margins and on the innovation side. We remain confident in our original target of achieving commercialized scales of cannabinoids by September 2021, which will allow fermented cannabinoids to be utilized in future finished products. Lastly, regarding the U.S. election, our organization, like many of you listening to this call, is interested to see what unfolds from a cannabis regulatory legalization standpoint.

12:09 Regardless of the party controlling various branches of government, it was clear during this election that cannabis is gaining popularity across the United States, which is a continuation of the positive momentum for the industry. We are pleased to see that in both red and blue states. All adult, youth, and medical cannabis ballot initiatives are moving forward, and that is a win for the industry. We are watching it closely and crafting plans for us to be ready for different potential scenarios. Like Mike, my focus is on creating long-term shareholder value by developing disruptive intellectual property and building iconic brands. And just like Mike, I want to encourage long-term thinking, especially in today's economy. Kronos is building for the future. Our value will come from technology breakthroughs and branded sales that will help establish relationships with our consumers.

13:03 There is top-tier talent across this organization. and I'm excited to lead this impressive team into the next phase of growth. With that, I'll turn the call over to our CFO, Jerry Barbato. Thanks, Kurt, and good morning, everyone. Turning to our financial results, the company reported consolidated net revenue in the third quarter of 2020 of $11.4 million, a 96% increase from the prior year period. Revenue growth year-over-year was driven primarily by the continued growth in the adult-use Canadian cannabis market, the inclusion of Redwoods Financial Results, our U.S. hemp-derived CBD business that was acquired in September of last year, and the sale of Peace Natural's branded cannabis products to the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 of 2019.

14:02 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces in the third quarter of 2020. Consolidated gross loss for the third quarter of 2020 was $1.5 million, a $1.6 million decrease in losses from the third quarter of 2019. The improvement versus prior year was primarily driven by the increase in revenue and incremental gross profit contributions of the Redwood acquisitions. offset by an increase in cost of sales primarily driven by a higher volume of adult youth sales and the associated third-party purchase flower and a decline in wholesale sales. Reported operating loss for the third quarter of 2020 was $41.2 million, representing a $10.5 million increase in losses from the third quarter of 2019.

14:55 The increase year-over-year was primarily driven by increased share-based payments related to separation agreements with Redwood employees, impacts from a full quarter of U.S. segment results, increased G&A expenses inclusive of review costs and costs related to the company's restatement of our 2019 interim financial statements, higher sales and marketing costs primarily related to brand development, and R&D spending, partially offset by the improvement in gross loss. Turning to our reporting segments, In the rest of world segment, we reported net revenue in the third quarter of 2020 of $9.7 million, a 90% increase from the prior year period. Revenue growth year over year was driven primarily by the continued growth in the adult youth Canadian cannabis market and the sale of Peace Naturals branded cannabis products to the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019.

15:59 and strategic price reductions on various adult use products in certain Canadian provinces in the third quarter of 2020. Looking briefly at the expansion in the Canadian cannabis market, we are encouraged to see the continued growth of new retail locations in provinces such as Ontario, providing more convenient options for consumers to purchase cannabis products responsibly. Gross loss for the rest of the world segment was $2.2 million, A $1.4 million decrease in losses from the third quarter of 2019. The improvement year-over-year was primarily driven by an increase in revenue, partially offset by an increase in cost of sales, driven by a higher volume of adult-use sales and the associated third-party flower purchases, and a decline in wholesale sales.

16:52 As we work to create an efficient global supply chain through 2020 and beyond for our rest-of-world segments, We anticipate that gross margin will continue to fluctuate as price and mix change from quarter to quarter. Reported operating loss in the rest of world segment for the third quarter of 2020 was $18 million, representing a $3.2 million decrease in losses from the third quarter of 2019. The improvement was primarily driven by a decrease in general and administrative costs, driven by a reclassification of $4.6 million The corporate expenses in the third quarter of 2020, which had no effect on the company's consolidated statement of net income and an improvement in gross loss, partially offset by an increase in R&D spending.

17:39 Turning to the U.S. segment, reported net revenue in the third quarter of 2020 was $1.6 million, a 143% increase from the third quarter of 2019. The increase year-over-year is primarily driven by a full quarter of results in the third quarter of 2020 as opposed to 25 days in the third quarter of 2019. Despite some weakness due to COVID restrictions, we won't accept that as an excuse, and we aren't pleased with our performance in the U.S. As we look into Q4 and beyond, we have revamped our advertising and promotional efforts. Having Kurt be part of the plan for Q4 and laying out what we need to do in 2021 is has been helpful to the team. Todd's organization has also taken a bigger role in the U.S. business, which we think will yield positive results over time.

18:30 And as Kurt mentioned, we launched our new brand, Happy Dance, in October. We are excited to bring this new brand and its great products to a broader audience. Gross profit for the U.S. segment was $0.7 million, representing a gross margin of 41%. reported operating loss in the U.S. segment for the third quarter of 2020 was $12.2 million. The loss was primarily driven by an increase in share-based payments related to separation agreements with Redwood employees. Sales and marketing costs incurred in relation to the development and launch of the Happy Dance brand, as well as new products under the Lord Jones brand, and an increase in general and administrative expenses driven by salaries and wages to support growth initiatives across a variety of functions, partially offset by an increase in gross profit.

19:24 Overall, Kronos Group reported a decrease in net income versus the prior year period, 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-Q. In the third quarter of 2020, the company recorded a non-cash gain of $105.3 million dollars, 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's stock price. Turning to the balance sheet, the company ended the quarter with approximately $1.3 billion in cash and short-term investments, which held relatively flat from the second quarter of 2020.

20:13 Capital expenditures for the quarter were $8.3 million. This spending includes investments related to Kronos Fermentation, the Peace Naturals Campus, our Israeli facility, and our new ERP system. We remain committed to deploying capital in a disciplined manner and only in ways that align with our strategic priorities. Now I would like to provide an update on our remediation efforts in relation to the material weaknesses that we disclosed in our fourth quarter of 2019 filings. We as a company are committed to instituting best practices for financial reporting. Our management, with oversight from the Audit Committee, has completed internal testing on all of the eight controls identified in its remediation plan. The testing by our independent auditor is in process on certain controls and will progress on to testing the remainder of the controls throughout 2020.

21:08 Thank you, Jerry. Over the course of my first two months with Kronos, I've been encouraged by the talent throughout the organization. I look forward to bringing my experience and learnings gathered throughout my career and applying them to this industry as I help to make Kronos a long-term leader in the cannabis space. Kronos is built on a foundation to drive bold change in the industry. We'll continue to lead in innovation while taking calculated risks to drive this industry forward responsibly.

22:05 We have the team, leadership, Organizational capabilities and the financial strength to be a leader in the cannabis industry. And I'm excited to be leading Kronos on this journey. With that, let's now open the line for questions. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You will be allowed one question and one follow-up question. We will pause for a moment and check out the Q&A roster. And your first question comes from the line of John Zappero of CIBC. Thanks. Good morning.

22:52 I was hoping you'd give us a better understanding of the puts and takes on gross margin and when you ultimately see that turning positive, either consolidated or by region. Yeah. Thanks, John, and good morning. I think you've really got to separate those two between Canada and the U.S. So in the Canadian market, what you're seeing is continued price deflation across the Canadian cannabis market where a lot of the producers are lowering their net prices and offering larger format size offerings. We've done our own internal review and looked at our brands and compared them against our competitive set by product type and have lowered some of our prices different in each of the provinces So quite strategic in nature.

23:39 And as we continue to refine our global supply chain throughout 2020 and into 2021, we expect gross margins are going to continue to fluctuate as price and mix can change from quarter to quarter. In our U.S. business, I think it's a little bit different, right? We've had heightened promotional activity related to COVID. We've decreased that promotional activity in the third quarter. Margins did improve sequentially, and we remain confident in the long-term viability of this U.S. CBD market. And I think the other thing that you saw was we had some premium pay as COVID started in the second quarter that was phased out over the third quarter. But I think you have the same situation where we've launched a new brand, and you'll see continued fluctuation in the margins based on mix.

24:35 Yeah, John, this is Kurt. Just to add a point to that, I think, you know, what you're saying is the deflationary pricing is really driven by the inventory situation. So I think that's something that people are working through, and I think once that alleviates, that's to me a short-term problem versus anything that's long-term. Okay, got it, thanks. And then my second question is more broad, and it's more about your M&A strategy, and in particular on the U.S. We're still kind of unsettled on the election, but if there is a split between White House and Senate, maybe we don't get that transformational reform that you'd need to get cannabis off the Controlled Substances Act. So if that's the scenario, does that make you think differently about M&A?

25:22 Do you start maybe looking at other countries with more... More urgency, or do you maybe push the gas pedal a little more on C to D? Just would like to get your sense on how potential regulatory reform or lack of it changes your strategy in the next 12 to 18 months. Yeah, good question. I think on the first half, obviously, our balance sheet certainly provides us some flexibility. And, you know, regardless of the political changes in the U.S., the regulatory landscape is evolving. and we're evaluating. I think one of the really important things about the changes we've done is elevating Mike to the chairman role as Mike's focus, and he can speak to this, is going to be on our strategy with the U.S. And I can't think of a better person to have in this role to be able to guide us on this. So I think that's important, and I think that's important in strategic markets versus looking at alternative markets right now.

26:23 So, Mike, I don't know if you want to add anything. Yeah, no, no, I think exactly what Kirk's saying. You know, our focus and my focus has always been sort of endgame. Number one priority is the US THC market. We expect that's the, you know, biggest profit pool. And, you know, looking at different scenarios and different structures, for us it's about how we enter, not whether, you know, whether we enter. And, of course, the regulatory environment will certainly dictate that. when and how that is, but it's top of mind for us. Got it. Thank you very much. Your next question comes from the line of Andrew Carter of Spiegel.

27:10 Hey, thank you. Good morning. So I want to double click on that gross margin question because I think we all see the price competition on flour and understand you're kind of lowering the prices kind of to keep your gas in line. But what I'm unclear on is kind of the third-party cost. You mentioned a lot of inventory. Is it an issue where the third-party high-quality flour costs are not decreasing at the same rate? I guess I would ask if that's just for are you upside down on prices? And how do you see that alleviating kind of like the high-quality flour and being able to kind of get your supply chain in line to where you have the cost to serve the Canadian adult use market? Yeah, I'll let Jerry comment as well, but this pricing issue is from a couple quarters ago, so I think going forward you're seeing better raw material pricing, but we've got this inventory can pass.

28:08 So I see that alleviating itself as we move forward as supply gets more in sync with demand size. Yeah, Andrew, just to add a little bit more to that, we are seeing that our third-party purchases, the price per gram is coming down, even for the high-quality, high THC, but you really have to separate that inventory based on flour and oil and where it's going, and we use a weighted average cost, so that cost will go down over time, but like I talked about and Kurt has said, in the short run, there's just A lot of deflationary pressures in the Canadian market that we have to work through.

28:56 Okay, got it. And then second, I wanted to ask about Israel because I think you reported 500,000 sales outside of North America. So I wanted to understand, I think Israel's kind of, my estimate is about a $250 million annualized market. What could that business look like for next year? And could Israel actually be a bigger driver of growth potentially next year than Canada? Thanks. Yeah, this is Kurt. Yeah, we're really positive on Israel. I mean, it's early stages yet, but the patient count continues to grow. So we see that growing at a pretty good clip. And then we are, I think, positioned very well there. You know, we just received our certifications required for cultivation and production and marketing of dry flower free rolls and oil drops in Israel.

29:48 and we're now selling dry flour and oils in the Peace Natural Grants, which has been well received. So we're really bullish on the market. You know, I don't want to get into where I see how big it will get. The one thing about this industry I learned is estimates are, you know, forecasting is not an easy thing to do. But we like where it's going. We like where the legal environment is going. We like the active nature of the Israeli government. in the industry and support. So I think this is a very good opportunity, and we have a very good organization on the ground. Thanks. I'll pass it on. Just a layer on that. I'll say directionally things are extremely positive in Israel. So you're seeing great momentum, not just in the medical market, but also in regulatory progress. So I think in the framework we have today, there's a great growth opportunity, but Part of what Kurt spoke about and why it's forecasting so hard, if CBD is descheduled or if adult use opens up, that certainly makes it an exponentially larger growth opportunity.

31:02 Your next question or comment comes from the line of Zazine Avir of Cohen. Thanks. My first question is a follow-up to one of the earlier questions. Just a clarifying case, if you will, Mike, I think for you. What was your basic case expectation, assuming a blue wave? Because certainly our House view was not a deschedule, even if the Democrats took the Senate and the White House. I'm curious whether you guys share that opinion or if you were more optimistic. Well, I think that's a timing issue. I think that one of the important things, and I've always maintained this, was getting past the election and allowing, from just a political process perspective, everyone to sit down and look at what's the best way to put in regulations and put in policies, whether that's a stimulus or building up industries that can help You know, rebuild some of what the economy lost over the last year. And it's very difficult to do that when you're in an election year.

32:16 So, you know, for us, it wasn't something that happened immediately after. I think that that always sounds better than, you know, what the actual practice is. But getting past the election was the big catalyst, regardless of who won blue waves, split. You know, and I think we'll see that starting with stimulus. And I think, you know, the cannabis you see with the ballot initiatives, whether it's red or blue, you know, where the popular opinion is, We need tax revenue. We need social justice reform. And there is just a very simple and elegant solution, and that is advancing cannabis legislation. And the other good part that's important to me about this company is our group in Washington is very much engaged on these issues. So, you know, we're very confident will be able to see the directions as fast as we can go.

33:15 Okay, I appreciate that clarification. And my actual question is about the strategic pricing adjustments that were made in the quarter. Can you expand on that a little bit? And in particular, I'm curious about how you guys were thinking about the magnitude of those pricing adjustments and what you were using as a reference point. Was it competitive pricing, managing price gaps, price elasticities? Price gaps relative to the illicit market. Any incremental call would be helpful. Thank you. Go ahead, Jerry. Yeah. What I would say, you know, as is typical of most CPG companies, we perform a regular strategic review of the landscape and look at differentiation amongst our brands, both Cove and Spinach, by product format and price point. and during that we found that we wanted to better align our pricing versus our desired competitive set so we adjusted to better fit into the group for our respective brands.

34:15 The pricing adjustments have only been in place for a few months and we have some early positive results but we'll continue to evaluate the situation and adjust as we see fit. Terrific. Thank you very much. And your next question comes from the line of Rawul Sarugasar of Brandon James. Great. Thanks so much. Morning, Kurt, Mike, Jerry. Thanks for taking my question. So I guess my first question is really around Goren Jones and Happy Dance. And, Jerry, you know, you alluded to the fact that you guys are not super happy with the RAMP CBD product. So given that the U.S. market for CBD is, you know, relatively disambiguated, most of the products are are really kind of these cottage industry brands.

35:07 So, you know, what is your strategy to really drive differentiation of what I assume are your big brands versus these cottage industry brands? And, you know, when can we start to see sort of an inflection point in that U.S. revenue? Yeah, this is Kirk. Thanks for that question. Yeah, I think fundamentally we believe in our brands. I think Lord Jones You know, we're not happy with the results, obviously, of the past quarter, but we feel confident we have the right plans to correct that. We're really focused on the branding and the branding experience. Obviously, COVID has hit the CBD sector heavier than on the THC side. We have an innovation, we're building an innovation funnel. We're looking at our marketing mix model to make sure we're hitting the right touch points.

35:59 and Happy Dance. We're very excited about, you know, it's an early, you know, it's early days, but that launch was very, very exciting and well executed. And, you know, the beginnings were in the early innings, but it has really been positive momentum and we're going to carry that forward. Terrific. Thanks very much for that clarity. And then so my follow-up would be around the fermentation, of course. So We're now three quarters from what you're projecting in terms of Kronos' first product coming from the fermentation facility. Are you on track with that? Are there specific product formats that we should be thinking about? And how is Kronos planning on plugging these products into the Canadian market versus the U.S. market, given the different regulatory paradigms of cannabinoids beyond CBD in each of these markets?

36:52 Thank you for the question. Yeah, we are on track. you know we're getting close we think that we'll be producing our first CBGA product which you know exhibits similar characteristics to CBD and we're going to be our target has and remains to produce fermented cannabinoids at commercial scale in September of 2021 and after that we're going to follow with the fermented cannabinoids to be utilized and finished products. Obviously, Canada first, but we'll have to figure out the regulatory environment, but this is a key strategic underpinning, and so we're looking forward to that, and we are on track, and you should start to see that in September of 21.

37:47 And just to follow up on that, I think it's important to reiterate that we do see the from a supply chain perspective, you know, fungibility. So when we think about the derivative products and how we'll use the fermented cannabinoids, you know, it doesn't necessarily have to be a completely new product format. That product format, without kind of showing our hand on our 2.0 product pipeline, that product could be something that you see before we're using fermented cannabinoids. It could be something that's launched later. You know, we see it as something that we can fully integrate in our supply chain. And on the U.S. side, you know, I would say that the main division that we will be thinking of is whether or not, you know, the cannabinoid, you know, we're thinking of is subject to the Controlled Substance Act or not. So, you know, some of those cannabinoids, THC, THC-B, we think would be, but, you know, of course, CBD, CBG, we think would not be.

38:54 Great. That's very helpful, and thanks for taking my question. Your next question comes from Tammy Chin of BMO Capital Markets. Thanks. Good morning. Most of my questions have been answered, so I just have one. I'm just curious if at this point, you know, relative to some of your peers in Canada, you do have a smaller presence. So I'm just curious if at this point you're seeing anything interesting emerge in that market to invest more in or to acquire? You know, we believe in the brands we have and the brands, you know, I think of Performance of Spinach, for example.

39:40 We think they have a lot of runway in the growth in our brands and we'll be driving that through in-market presence and the innovation funnel we have I'm not really going to speak to M&A. I'm not going to speak to that on the phone, but we always look for opportunities, and if something makes sense for us and it fits with what we're trying to do, we have the capability to do it. Okay, thank you. And your next question comes from the line of Graham Kubler of 8 Capital. Hi, thanks for taking the question. This is actually Patrick Sullivan on the line for Graham.

40:26 Most of mine have been answered already, but I guess I just wanted to touch on the CBD side of business again. You said that you guys were refreshing. The Marketing Campaign, and with direct input from Kurt Schmidt. I'm wondering if you could just elaborate on that a little bit more. What exactly are these strategies you're trying, or what are some of the things that are in the pipeline for that? Thank you. Yeah, I think it's just accelerating what the team has been working on. So, again, that'll be marketing investment side. It'll be distribution side, and it'll be innovation side as we lay out the innovation funnel, which will be an important piece, and you'll see that develop over the next 12 months.

41:15 Okay, thank you. And your final question comes from the line of Bill Kirk of MKM Partners. Hey, thanks for taking the question. Mine relates to reporting adjustments, just to clarify some things. Was the U.S. separation equity comp adjusted out of the U.S. segment adjusted operating loss? To me, it doesn't appear so, but then I see the share-based comp adjustment to a consolidated EBITDA. So I guess, can you help me understand how that U.S. separation comp was treated in the adjustment segment number versus the adjusted consolidated EBITDA number?

42:00 Yeah, sure, thanks for the question. No, we did not adjust it out, so it's included in that adjusted operating loss in the U.S. segment. And to be consistent, we adjust share-based comp out of our adjusted EBITDA number. Okay, so not adjusted to segment, but adjusted to consolidated. Adjusted to the consolidated EBITDA number, yes. Okay, that was the clarification needed. Thank you. And there are no further questions in queue. Do we have any additional closing remarks? No. Just thanks, everybody. I look forward to working with all of you in the future. This concludes today's conference call. You may now disconnect.