Cronos Group Inc. (CVE:MJN, OTCMKTS: PRMCF, FRA: 7CI) President and CEO Michael Gorenstein talks about his company’s continuing Growth and their plans for the future. He also comments on the Cannabis landscape currently for the USA and Canada.

TRANSCRIPT:

James West: Hey Mike, welcome back.

Mike Gorenstein: Thank you. It’s great to be back.

James West: Mike, let’s talk a bit about Cronos in an overview. Like, where are you at right now with the whole evolution of everything you’ve got going.

Mike Gorenstein: Yeah, everything… we’re in great shape. So I think the story last year or so was sort of building, getting a platform ready, and this year, where we are now is execution. So it’s been we’re expanding, we’re expanding; now the expansions, a few of them, are online, and we’re seeing great yields, great quality and great reviews from patients. So continuing growth in international markets, making sure we can fill distribution channels. We’re having Israel, continuing to have great progress there.

We’re very happy with where we’re at.

James West: The announcement by Jeff Sessions that he’s going to kill the Cole Memo in the United States – that doesn’t have any effect on Cronos, you don’t have US operations?

Mike Gorenstein: No, it doesn’t. You know, it’s actually interesting, so I came from New York and moved up here, I started on the investment side, and the thesis I had a few years ago, which I think has since been validated, was that investing in US cannabis assets would be very challenging. For us, it’s always come down to IP. So we wanted to move to Canada where it’s federally legal, build up our IP, understand how to have capacity, scalable, have product quality that’s beyond what we’ve been able to have access to without real long-term going concern businesses.

So the plan was always to come to Canada to build, to go rest of world, and when the US finally does become federally legal, we would move back down. So this is really just, I think, a validation for our model. I think it actually strengthens us. That’s, I guess, as a CEO. As a citizen there, I mean, a dual citizen, I think…I have a lot of friends that have businesses there. I think it’s really unfortunate. I think that at a minimum, we should see some type of research opened up in the US to allow for furthering of health care. But as far as the business, it doesn’t affect us negatively; if anything, I think it’s a positive.

James West: Okay, enough about Jeff Sessions and the US. Let’s talk about happier things. What’s your production profile looking like right now? How many strains are you growing, what’s your patient count, what’s the revenue picture look like for 2018?

Mike Gorenstein: Sure, so it’s great. We’ve, I’d say, we have a sku rotation, so what we like to do is about eight to twelve strains that we always keep, we always have them in stock; patients want consistent medicine. And then I’d say at any given time over the next six months we probably have 43 total strains that we’ll have available. So we have limited editions that we, on a continuous basis, rotate; people that want a variety, want to try new things, if you have a different ailment, how do you know what works for you? So it’s a lot of tinkering, a lot of R&D.

We’ll probably, over the next few years, have about 150 that we put through the rotation, and as we get feedback, we’ll decide to keep them for longer or make them more limited. You know, patients, I’d have to start tracking Germany, because we’ve got quite a few shipments there. We can track by pharmacies. But we could send 10 times our production to Germany and still the feedback we get is –

James West: It would all be taken up.

Mike Gorenstein: Please send more.

James West: Right.

Mike Gorenstein: Could you send more? Canada, you know, we’re seeing great upticks in revenue. Yeah, we’re excited. In terms of production, we’ve got three buildings all firing now, the greenhouses coming online.

James West: How many square feet in total growing space?

Mike Gorenstein: In actual growing space, that gets us to 68,000.

James West: Sixty-eight thousand. And do you have plans of – I mean, the trend seems to be heading towards million-square-foot-plus greenhouses. Is that something that Cronos has in the plans for the future?

Mike Gorenstein: Yeah. I mean, there’s two different things you look for, and on the greenhouse side, you have to think about what you’re ultimately getting, and if – one of our priorities, especially for the adult use market and for pharmaceutical flower, is having premium, indoor production. So eventually, there will be a scenario where supply does catch up to demand, and that’s when the focus on quality is there. And we never want to sacrifice quality just to announce we have capacity.

I also think there’s this idea, like, funding capacity, there’s a magic capacity store. I’ve yet to find out where this is, where you know, you’re currently growing 500 kilos, or maybe you’ve never harvested at all, and since you’ve just done this convertible debt bought deal, suddenly you have 100,000 kilos. Someone tells me where it is, that’s great, but…

James West: Funded capacity, yeah, that’s a new metric.

Mike Gorenstein: As far as million square foot greenhouses, you know, the way we look at it is, at least half of the market will be derivative products, and you can grow for derivative products, and there are advantages to greenhouses. You don’t have the same control that you have indoor, but we certainly think that – I wouldn’t look at it as a million square feet, two million square feet; a lot of it is what you do with the space. But there is a lot of agricultural infrastructure out there where the products are lower margin today. There’s already labour in place.

And that’s – you know, the kibbutz we went to in Israel, that was a big factor. It’s 5,000 acres, they grow food and export to 35 different countries there. A million square feet is not difficult; it’s 1,000 onsite members that are skilled agricultural labourers there. We could build way more than, or even convert, more than a million square feet; it wouldn’t take us long at all. We already have the team that can build it. So I think leveraging that infrastructure, rather than trying to do everything greenfield, is a huge part of our strategy, and we certainly need a lot of capacity to fill the international channels we have.

James West: Sure.

Mike Gorenstein: So you’ll probably see some of that.

James West: Okay. So are you concerned at all that the Canadian government’s commitment to increase the licenses for ACMPR growers by a factor of 3X up to, by that math, call it 240 licenses within the next – in the near-term time frame – is that in any way a concern for you and what you’re doing?

Mike Gorenstein: No. I actually think if you were just to, say, remove all licenses and everyone just has to be compliant with the regulations, I still don’t think it would affect in any way the scenario we’re in. when I think of where most of the capacity is likely to come from, I would say that there is probably six to eight LPs that are going to make up 80 to 90 percent of the capacity.

If you look at the trajectory of expansion, of being able to actually get to some scale, over the first two years the licenses were issued, look at where the scale is. The total amount of production that’s available online today, after four years of the license program, we still don’t have 100,000 kilos being harvested, right? So eventually, is it possible? Sure, but I still think that the new licenses, most of them are eventually going to pivot and end up focused on being a craft producer, focused on value-added products.

We plan our business model with the expectation that there will be enough supply. If you were to ask Diageo or AB InBev, are you worried that other people may be able to start breweries or liquor companies…

James West: They don’t care.

Mike Gorenstein: Is your product good? Do people want your product over the next? Not, is the product available.

James West: Sure.

Mike Gorenstein: Huge advantage today that there’s a shortage, but still, if your product’s not good, someone will go to the black market.

James West: You bet.

Mike Gorenstein: So what it comes down is not who else is allowed to produce, it’s, can someone produce as well as you can produce? Are you keeping your customers happy? That’s the important thing. If you are building your business on a regulatory barrier, you’re going to fail.

James West: All right. We’ll leave it there for now, Mike. Thanks for joining us today.

Mike Gorenstein: Thank you.