VIDEO: Cronos Group Inc (NASDAQ:CRON) CEO Mike Gorenstein Talks Growing Marijuana
The Cronos Group Inc (NASDAQ:CRON) (CVE:CRON) (FRA:7CI) CEO Mike Gorenstein Talks growing their indoor vs greenhouse grow. They are building state-of-the-art facilities for both methods based on their projections of supply vs demand and premium flower vs extracts. The Cronos Group are planning to grow in separate rooms based on the stage of growth for the plants. He argues that the traditional metrics used in the cannabis industry of growth per SqFt should really be what cannabinoid are you growing per square foot. He believes margins are the most important metric and that it’s better to consider cost of goods rather than cost per gram. Finally Mike talks about their new partnership with MedMen a recognized dispensary brand with strategic locations in the USA.
James West: Hey, welcome back to Midas Letter Live. My guest this segment, as promised and only two minutes late, is Mike Gorenstein. He’s the CEO of Cronos Group. Mike, thanks for coming back.
Mike Gorenstein: Thanks for having me again.
James West: Mike, you put out a press release today – I don’t know whether you did that to help today’s content, but you have now closed the $100 million bought deal which we were talking about the last time you were here. We also sent Fraser out with a camera crew to shoot you guys out in Staynor, Ontario, and so, what’s going on with Cronos now that you’ve been on NASDAQ for almost, what is it, two months?
Mike Gorenstein: Yeah, I don’t think it’s even been two months – probably about five weeks.
James West: Five weeks.
Mike Gorenstein: Time flies.
James West: Okay, because I noticed right away, as soon as you went on NASDAQ, that your stock volume on NASDAQ was 3 million shares versus 2 million shares on the Canadian Exchange. So is that still the case? Are you still trading at a substantial increase in volume on NASDAQ versus Canada?
Mike Gorenstein: I’d have to check, to be honest. I focus more on the business than where the trading activity is.
James West: Well, that’s good to hear. Not watching your share price?
Mike Gorenstein: I’d say probably – yeah, you know, it’d be pretty tough if I stared at the screen all day, so I’m not sure, and I think it might depend on the day, but I just imagine, given that it’s another avenue and you have a lot more institutions that are able to trade, it’s probably going to be a higher volume. But I don’t know what the difference is between the two.
James West: Cool. So you’ve got the, is it 230,000 square foot facility that you’re completing right now?
Mike Gorenstein: It’s 286.
James West: 286. And at what point will that be full of plants?
Mike Gorenstein: Plants will start going in the summer, so about June-July.
James West: Okay, and how much of a crop do you expect to get out of that facility?
Mike Gorenstein: So in total apiece, the first year, full run rate, about 40,000 kilos is what we’re projecting. So roughly 33,000 kilos coming out of that facility.
James West: Hmm, wow. And so, what portion of that do you anticipate selling as dried flower versus extract?
Mike Gorenstein: You know, I think it’s going to really depend on timing. So I think you’ll see a lot more derivative products once the regulations open up, so the form factor matters a lot. A lot of also what we were doing or projecting at how we were going to expand is, premium flower tends to come from indoor facilities, and we’ve seen that a lot already in the industry. But focusing on premium flower out of that facility, and as we see the form factors sort of open up and we’re able to start making vape pens, edibles, that’s when you’ll see an increase in greenhouse capacity to feed those channels.
James West: Okay. So you anticipate, then, that the premium dried flower will continue to be an indoor product versus what you produce in the greenhouse, which will be diverted towards extracts?
Mike Gorenstein: I think that’s right, and I think you traditionally see that.
James West: Okay. Let’s talk about yield per square foot, annualized. What are you looking at in terms of the greenhouse facility that you’ve got now, and what are you looking at in terms of the indoor facility that you’ve got?
Mike Gorenstein: So we’re looking at bench space. This is where it gets tricky, because as you’ll see when you play the video tour, the way that we’ve actually set up cultivation, you have separated rooms for vegetative space, for flower space, the propagation; so it can be skewed. So we’re looking at how many turns are you getting and what’s the yield per square foot. Depending on the cultivar, you can get anywhere from 40 to 75 grams per square foot.
James West: Per crop.
Mike Gorenstein: Per crop, and right now we’re on 5.7 turns; we’re hoping to get that up and over six. So again, it varies –
James West: 500 grams per square foot per year.
Mike Gorenstein: Right, but then you have to factor in, so you’ve got vegetative space and propagation. So it’s not always apples to apples, and it’s a tough thing with comparing all the producers.
James West: Right, right. That’s one thing that I’m having a hard time gauging, is because when you ask somebody about their yield per square foot, the question is, well, are you incorporating just the grow space that’s under cultivation, or are you including the aisles? Are you including the processing space, the storage space, the entire facility? I mean, that’s what I have a hard time.
Mike Gorenstein: You know, I think it’s a metric. A lot of these metrics that have evolved as sort of an early thinking of just capacity, capacity, capacity. But again, if you look at a mature industry and you’re trying to value a company, there’s really no – you’re not looking at ABI or Diageo or Novartis, it’s how much can you produce. And again, it goes into, let’s say if you believe that flower isn’t the biggest part of the market, you think derivatives are bigger, the yield per square foot is less important than what cannabinoids are you yielding per square foot. That’s really what drives it, because you’re not selling extract based on the weight of the flower; how many cannabinoids are contained in that, which cannabinoids were there, what does that spectrum actually produce as far as an effect?
So I think it’s – we’re not really selling corn.
James West: Right. Yeah, it’s interesting, because from an investor perspective, I mean, who cares about how much yield per square foot? It’s all about earnings per share at the end of the day, right? And that stems from sales and cost of sales and the multiples there from.
So what, in your mind, is the most valuable, as the CEO of the company, what’s the most important metric for you?
Mike Gorenstein: I think margin is very important, and I think looking at it as cost per gram versus cost of goods is a big mistake. A lot of new investors look at is COGS thinking it means cost per gram; that’s not what it should mean. It should be about the actual products.
So for me it’s making sure we’re innovating on the product side, we’re always improving quality; because long term, when you look at the global demand, supply will eventually catch up, and it’s going to be, do you have products that people want, how efficient are you at making those products, and being able to ultimately deliver quality product and having a positive gross margin is going to be very important.
James West: Great. So then from Cronos’ standpoint, you’ve got, Staynor is coming online fast.
Mike Gorenstein: Yeah.
James West: When we spoke, I guess it was probably over a year ago, you had a couple of other projects going, and what’s the status of those, how important are they going to be into 2018?
Mike Gorenstein: There’s a lot of projects going, and you know, we think they’re all very important or we wouldn’t have started them. So Israel is moving along; I was just in Israel a few weeks ago, very excited. Every time –
James West: Should we send a film crew?
Mike Gorenstein: I think you should. You know, you start to really understand when we talk about how much climate matters, when you show up there and you realize you can’t stare up at the sky because of the abundance of sunlight. It’s a great climate for growing, but we also are starting to see that there’s going to be a real domestic market. So that’s going really well.
One of the new initiatives we have is a partnership with MedMen, and we’re really excited about being able to bring that here. It’s, you know, we’ve looked around; it’s the best retail experience we’ve seen. I think it’s the most recognizable cannabis brand in the world today, and being able to have brand leverage coming out of Los Angeles, Manhattan, Vegas, and really have a dominant presence there, is something we’re excited to be able to bring and expand into Canada.
James West: Okay, well that should be very interesting. Let’s leave it there; we’ll come back to you again in a quarter’s time and catch up with you again.
Mike Gorenstein: Sounds good.
James West: Thanks for coming in today.
Mike Gorenstein: All right, thank you.
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