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Ever since Altria Group, Inc. invested $2.4-billion in Cronos Group Inc., the company has looked more like a U.S. cannabis investment fund with a Canadian cultivation business on the side, than a typical licensed producer.

That appearance was solidified on Tuesday, when the company announced in an earnings call that, come January, it will be a U.S. issuer, reporting under GAAP rules and in U.S. dollars. There will be two business segments: “United States” and the “rest of world.”

The company’s US$300-million acquisition in September of Redwood Holdings Group, which owns the CBD brand Lord Jones, set up the pivot. On Tuesday, Cronos announced another U.S. CBD brand, Peace+, which it plans to test run in 1,000 convenience stores.

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The shift towards the U.S. is not surprising, given the immature state of the Canadian market. On Tuesday, Cronos announced that it doubled the amount of cannabis it sold in Canada in the last quarter, but only saw sales increase by 24 per cent, with the difference due to a steep drop in the wholesale price of cannabis.

Industry-wide oversupply, combined with a lack of retail stores, is causing a serious problem. As CEO Michael Gorenstein put it: "The number of retail stores as well as warehousing and logistics needs are in the process of catching up to meet the demand of consumers. As a result, we're still not able to fully reach the long-term total addressable market represented by this population."

Cronos reported quarterly sales of $12.7-million, up from $10.2-million in the preceding quarter but short of analyst expectations. The company sold 3,142 kilograms of product in Canada, compared to 1,584 kilograms in the preceding quarter. However the net product revenue per gram dropped to $3.75 from $6.44.

Here are some takeaways from Cronos’ conference call:

Production pivot – Peace Naturals retrofit

Cronos has long spoken of its asset-lite approach to cultivation, saying that it intends to source the inputs for its branded products largely from third-party producers. The company doubled down on this on Tuesday, saying that it will no longer report its production capacity.

As part of the shift, it’s transforming its Peace Naturals facility – the company’s original indoor growing operation – into a space for R&D and manufacturing. The transition will entail a write-down of up to $15-million on some of the cultivation assets, said CFO Jerry Barbato.

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Cronos will still, however, continue building out Cronos GrowCo., a massive greenhouse facility that is a 50/50 joint venture between Cronos and a group of investors led by greenhouse grower Bert Mucci. Mr. Gorenstein justified the continuing investment in terms of the facility's ability to compete on cost as cannabis prices drop.

Cronos plans to focus its Canadian production efforts on Cronos Fermentation, a drug production facility in Winnipeg that it acquired from Apotex last summer. Cronos plans to use the facility to commercialize the cannabinoid biosynthesis technology being developed by its research partner Ginkgo Bioworks.

How to spend Altria’s money

With $1.46-billion in cash on its balance sheet, Cronos has significant firepower for M&A activity. When asked what the company planned to do with it, Mr. Gorenstein was circumspect.

“Whereas a year ago everyone was focused on speed, I think the focus is going to quickly shift to survival, and we want to be in an advantageous position to be able to capture that market when it comes online," he said.

“There's been a lot of capital that's poured into cultivation, and ingredient supply. When you look at most of how capital is deployed and allocated in CPG, typically you would think about researching and addressing different consumer needs, and we actually think that there's been an under allocation of capital there,” he added.

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Holding off on guidance

Casting Cronos as a long-term IP and R&D play, Mr. Gorenstein offered little guidance on what the company’s results will look like in the coming quarters.

“We have an idea of where things end long-term, but considering we're about a month away from the first derivative product launch, how things will play our over the next few months is difficult to really assess," he said.

Cannabis 2.0 – Vapes first, edibles later

Mr. Gorenstein said Cronos would launch its first vape products in late December or early January. The timing is less clear for other products.

"We certainly have formulations around topicals and edibles. But specifically with edibles, what we haven't been able to see is how are the packaging rules, specifically around single serve versus multi-packs, going to resonate with consumers,” Mr. Gorenstein said.

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“We have formulations that have been tried and tested and very successful with consumers in markets where you can see multi-packs. But we want to make sure before we launch that we have a little bit of market data on how best to satisfy consumer needs," Mr. Gorenstein said.

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