Good morning. My name is Andrea, and I will be your conference operator today. I would like to welcome everyone to Cronos Group's 2024 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shayne Laidlaw, Investor Relations. Please go ahead.

Thank you, Andrea. And thank you for joining us today to review Cronos' 2024 second quarter financial and business performance. Today, I'm joined by our Chairman, President and CEO, Mike Gorenstein; and our CFO, James Holm. Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and SEDAR profile. This information and the prepared remarks will also be posted on our website under Investor Relations. Before I turn the call over to Mike, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call. These forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our Web site, by which any forward-looking statements made during this call are qualified in their entirety. Information about non-GAAP financial measures, including reconciliations to US GAAP, can also be found in our earnings materials that are available on our Web site. Lastly, we will be making statements regarding market share information throughout this conference call, and unless otherwise stated, all market share data is provided by Hifyre. We will now make prepared remarks and then we'll move into a question-and-answer session. With that, I'll pass it over to Cronos' Chairman, President and CEO, Mike Gorenstein.

Thank you, Shayne. And good morning, everyone. The Canadian market has been characterized by extreme cycles of supply, demand imbalances. In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity. This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they then used to raise more capital and build even more capacity. This placed a lot of industry focus on facility size, not on production efficiency or product quality. As a result, total supply quickly ballooned and significantly outpaced demand. The industry structure and expectations were all set up with price assumptions that were 3 to 4 times what they are today and that created a market structure with high excise tax, high provincial margins and high regulatory fees. However, companies with inefficient production facilities, having already built significant capacity, had to capture significant market share for their business models to work, and attempts to get that market share led to price compression. Many of these companies continue to raise capital, albeit on much less attractive terms and hopes to survive long enough to benefit from expected tailwinds of attractive international markets opening or rationalization in the Canadian market. Some resorted to not paying excise taxes to artificially lower their cost of production and other lab shopped to artificially inflate consumers' perception of quality via higher potency label claims. However, with global macro events taking priority with policymakers, many producers were not able to survive long enough to see benefits of new markets opening. Over the last year, we have seen CRA begin to ramp up collections and enforcement against companies not paying excise tax and regulators crackdown against lab shopping, forcing more facility shutdowns and…

Thanks, Mike. Good morning, everyone. I will now review our second quarter 2024 results in relation to the prior year period. The company reported consolidated net revenue of $27.8 million, a 46% increase from the prior year. Constant currency consolidated net revenue increased by 49% to $28.3 million. The revenue increase is primarily driven by higher cannabis flower and extract sales in Canada, higher cannabis flower sales in Israel and sales in other countries, which included Germany and the UK. Gross profit in the second quarter was $6.3 million equating to a 23% gross margin, representing a $3.2 million improvement in gross profit and roughly a 600 basis point improvement in gross margin. The increase is primarily driven by higher sales in cannabis flower and extracts in Canada, higher cannabis flower sales in Israel and sales in other international markets, partially offset by an adverse price mix in the Canadian cannabis flower category driving increased excise tax payments as a percentage of revenue. Consolidated adjusted EBITDA in the second quarter was negative $11.1 million, representing a $4.9 million improvement from the prior year period. The improvement year-over-year was driven by an increase in gross profit and decreases in sales and marketing and general and administrative expenses. It's important to note that during the quarter, we incurred a $1.2 million noncash CECL charge within our general and administrative expense line associated with the additional credit facility for GrowCo's expansion, which is not adjusted for in the adjusted EBITDA figure. This charge will reverse upon consolidation in Q3. The strong OpEx controls employed to date have put us well on our way to achieving our 2024 goal of saving an incremental $5 million to $10 million for Cronos on a standalone basis. Our joint venture GrowCo continues to excel, demonstrating robust performance…

We're on the right trajectory. Growing revenue, improving margins and reducing costs, all while building our borderless product portfolio, supplemented by new and exciting innovations and opening new markets globally. With that, I will open the line for questions.

Thank you. At this time, we will conduct the question-and-answer session [Operator Instructions]. Our first question comes from Yewon Kang with Canaccord Genuity.

Just the first one here is regarding the GrowCo investment. I wanted to see if you guys can provide some color behind the cost benefit analysis that must have been conducted in terms of investing your dollars into Canadian based GrowCo versus in production facilities located in international channels that you supply to, given that the facility expansion in GrowCo is going to be heavily leveraged to increase your supplies into those channels?

So as I discussed at the beginning of the prepared remarks, we've really seen a huge shift in the supply dynamics where we've had significant oversupply in the past. For high quality flower, which we've seen GrowCo consistently produce, there really is a shortage. And I think as we see international markets expanding and we're seeing supply contract in Canada, we're seeing from both ends that gap expand and we're seeing pricing increase. So we think that it's not just what we've been able to do with achieving number one flower brand in Canada but also with the growth we're seeing in international markets, it's a really good way for us to continue to fuel growth. But also from a risk perspective, GrowCo already being profitable, looking and seeing we do own 50% and now we consolidate, we think that we're able to control. We've seen for years how they perform, it's a really good way for us to do it. We've been very disciplined and conservative and see this is a great risk award overall.

And just my second question here as a follow-up. I wanted to ask about what your plans are for PEACE NATURALS Campus going forward, getting that the sales leaseback that was previously announced has been terminated. And if this idle facility is causing any kind of drag on your guys’ operations for the past few quarters.

So PEACE NATURALS has not been idle. It's actually where we make our our edibles, number of derivative products, packaging. So it's still our center. We bring in and package flower. We ship distribution. So as we're continuing to see growth in the Canadian market, adding products, adding Lord Jones, we actually like having the ability to have space of one licensed campus that we can keep moving into. So we don't see that as a drag. We think that, especially once Phase 2 is complete, having that extra space is going to be critical to being able to achieve our objectives.

Thank you. One moment for our next question. I'm showing no further questions. Yewon, if you would like to continue, you may.

I think I'm good. Thank you so much. Thank you.

Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.