VIDEO: Cronos Group Inc (TSE:CRON) Partnership to Create Lab-Grown Cannabis

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Cronos Group Inc (NASDAQ:CRON) (TSE:CRON) (FRA:7CI) CEO Mike Gorenstein states Cronos “try to take the high road, which is why we got into cannabis in the first place” after the release of the controversial Citron Research report. The CEO counters critics describing the company’s recent newsflow, specifically with their deal with Ginkgo Bioworks, the market leader in terms of DNA printing, to produce cultured CBDs. Gorenstein envisions culture CBDs as the direction the cannabis industry is going, instead of CBDs produced from plants. Cronos has also announced operations in Latin America through an affiliate, Agroidea SAS, Colombia’s leading agricultural services provider. Gorenstein believes Agroidea SAS is the perfect fit to be Cronos’ flower-based global exporter because of climate, labour costs, and expertise. Gorenstein shares his thoughts on the increase in institutional investors in the cannabis space and what this means for Cronos going forward.

Transcript:

James West:   Hey, welcome back. My guest in this segment is Mike Gorenstein, CEO of Cronos Group, trading on NASDAQ and the TSX under the symbol CRON. Mike, welcome back.

Mike Gorenstein:   Thanks, thanks for having me.

James West:   Mike, let’s just get this one little piece of housecleaning out of the way. You know, obviously Andrew Left and the Citron research report is now, as demonstrated by the market, deemed un-credible and the guy’s choice of, you know, weaknesses to address were actually just more demonstrative of his inexperience in the cannabis industry more so than it was any sort of smoking gun, red flag. But just in a single statement, how was that whole experience for you?

Mike Gorenstein:   I’d say Cronos, we try to take the high road, which is why we got into cannabis in the first place.

James West:   [laughter] I knew you were going to come out with something like that. Great. Recently you announced a partnership with Ginkgo Bioworks to produce cultured CBDs. Now, I’ve been following the company that’s producing cultured CBDs on the east coast called Hyacinth, that uses genetically modified yeast to create the full range of CBDs and micro-CBDs, including THCs. And is this – how is yours different from that, and how is it similar?

Mike Gorenstein:   Yeah, so I think the concept is similar, and it’s actually not a – you know, the concept of using yeast just as, generally, call it a vector or a mechanism to create different products, is very old. Insulin is generally created that way, kombucha, beer…this is common. I think the difference, Hyacinth has always been a cannabinoid-focused company. It’s a startup that, you know, they had the idea that’s what they’re going to go after.

Ginkgo is somewhat of a different animal. They’re the market leader in terms of DNA printing, and the way that they’ve approached this has been, you know, pretty large-scale. So just for background, when we looked at the model, we were like okay, this is the partner for us. They raised $430 million USD to date, they’ve got over 100 PhDs there and a lot of robots, they say, but the early investors and, you know, all the way up to where they are now: Bill Gates, Cascade, Behr, who we think knows a few things about agriculture and pharma, Viking Global, General Atlantic…we looked at their other partnerships and clients and also Behr has a big relationship there. DARPA, which is the advanced research program for the US Department of Defense, Ajinomoto, Cargill, ADM, Robertet…and so this is a large company. What they’re really doing, when you think overall about, when you think of a website and you can take a website and white label it, or you can write it from scratch using HTML code; what Ginkgo does is, they look at the whole world, and they say you and I are just websites, and the code that’s used is DNA.

So rather than just taking the yeast and seeing can they do this, can they copy a pathway, they’re actually overall doing genomic sequencing, figuring out what’s the most efficient way to do this, and they are writing, base pair by base pair, they’re writing the DNA code to produce it sufficiently.

James West:   Whoa. This sounds like rocket science. [laughter]

Mike Gorenstein:   It’s science, but look – that’s, I think, the disruption. And what they did with the rose industry is what caught our attention. So if you look at the price of roses and what’s happened, you know, roses were very important for fragrance. You’re extracting terpenes from these huge fields of roses, and they’re grown in Ecuador, Colombia, you know, as cheap as possible, and you’re looking for that rare compound. It’s very similar to cannabis, what you’re doing – you’re growing flower, and then you’re looking to extract something.

They went in, they sequenced the rose – they understand which fragrance matters – and since then, if you look at what’s happened, you know, the client they have is now able to produce more consistently and at a much more efficient clip, everything you need for fragrance.

James West:   So, has the bottom fallen out of the rose industry in Latin America?

Mike Gorenstein:   I would say an opportunity has opened for Latin America to start cultivating cannabis.

James West:   I see, okay. Great. [laughter] So if this technology is successful, and it sounds like it’s going to be, if it’s got this level of investment in it, sounds to me like cannabis as an ingredient for things like beverages, medicines, even vapes, is not going to be derived from a plant in the future; it’s going to be grown in a biological setting.

Mike Gorenstein:   Yeah, I mean, well right now it’s grown in a biological setting, right? It’s just that what you’re using is cannabis, what we think of now, to grow the cannabinoids, and this is just a more efficient way of doing it. But yeah, I think that’s right.

James West:   But without the cannabis plant.

Mike Gorenstein:   That’s right. So think about what’s happened in the US if you look at some of the vapes. You know, it started off that the premium products, the big differentiator is how do you get the terpenes. And then people discovered, well, wait: we can get food-grade terpenes that are the same as cannabis. So you have a Lemon Haze? The reason that that Lemon Haze has the lemon scent and flavour is limonene. But the question is, do you have to get the limonene from cannabis if it’s also present in lemons? So the same thing happens, but that’s the big reason we focused on putting up a big indoor facility, to have premium flower. You know, we do think that there is some types of oils that will make sense to come from the plant. You know, it’s like fresh-squeezed orange juice versus orange juice from concentrate.

But yeah, I think that this is, especially in the pharmaceutical area, but for anything where you need consistency and you’re focusing on those discrete cannabinoids, that’s where we see it going.

James West:   Okay. So the obvious question is, is this that much cheaper a way to produce cannabinoids than is growing elaborate plants in elaborate greenhouses?

Mike Gorenstein:   Yeah. So the way – there’s a few things to look at. First, just the CapEx of putting up all these facilities, from cultivation, extraction, is very, very expensive, and especially if you need to do them all around the world. But yeah, the way we structured the deal, our equity only is actually given, like their compensation, if they’re able to produce at less than $1,000 per kilo of pure cannabinoid. And that’s for each cannabinoid.

So you know, to put that in perspective, if you’re cultivating for 1,000 kilo for flower, you know, let’s assume you can do it at 20 percent THC. So just off the bat, that puts you at 5,000 kilo. Now let’s go a step further: if you’re extracting it, what’s your cannabinoid yield? You know, there are companies that are aspiring to have 90 percent cannabinoid yield, right? So you’re going to start getting up, now you’re getting higher to 6,000. Well, what’s the cost of processing – $0.40 or $0.50 a gram? So you start getting up and you’re looking at over 10,000 a kilo, you know, aspirationally. So yeah, I think it’s a fraction. And that’s a minimum floor; that’s a level where they’re willing to say ‘we won’t even take compensation if we can’t do it below that’. That’s not the target.

James West:   Wow. So that implies, then, that this massive buildout of cannabis cultivation capacity is really already overdone. If this is the way that we’re going to obtain all of the ingredients, ex of the premium flower-smoking experience, I mean, how big is that market going to be as a percentage of the whole?

Mike Gorenstein:   You know, I think they’re both huge markets. I think the applications will be bigger, but you know, the idea that all of the infrastructure that we’re seeing going up was going to actually work – you know, if you weren’t able to, if you had infrastructure for, say, a tomato or cultivating cucumbers, and it wasn’t enough to stay alive there, retrofitting it for cannabis, which is going to be just as competitive, you know, I don’t think it works. But I’d say, yeah, you can ask the same question – a lot of people thought how would a Blockbuster store ever be unnecessary, overbuilt or irrelevant? This idea of Netflix makes no sense.

James West:   Right. Okay, so then, you’ve also announced that you’re rolling out in Latin America through an affiliate, Agroidea SAS, Colombia’s leading agricultural services provider?

Mike Gorenstein:        Yeah.

James West:   So what does that, what does all that all start, with 207 acres starting? And you’re going to be growing outdoors there?

Mike Gorenstein:   So we’ll still – we’re using greenhouses. These guys are extremely experienced; they’ve been working on it for quite a while. The infrastructure came, they, when you think of cannabis companies now saying ‘we want to get out of the cultivation business’, that happened with Dole as well, where Dole sold off their productive assets for flowers, and these guys purchased the infrastructure from Dole. So they already have a very large operation going, and you know, it’s sort of all central; they have the tissue culture, micro-crop lab, all these different services. So we’re leveraging that, but we’ll still use greenhouses, and that’s the idea. So for flower-based global export, that’s what we see as the best platform, I think, in terms of climate, in terms of expertise, in terms of labour costs, we think that Colombia makes a ton of sense, and we think we have the right partners.

James West:   Sure. I want to ask your opinion about something that’s happening in the marketplace, because you’re the other company on NASDAQ now, is Tilray has achieved this absolutely stellar valuation on what appears to me to be a subset of what more mature companies in the space have in terms of operational footprint. Is it your experience that the retail appetite for stocks in the cannabis space on NASDAQ are going to be subject to intensive accumulation by the retail side at this point, as is evidenced by what’s going on in Tilray right now? And I’m assuming that, despite an absence of credibility and effect in the Citron research piece, that it still had an effect. We saw that for a day or two, and I’m assuming that it’s just a matter of a short period of time till the momentum comes back and everybody says okay, that was a nothing, let’s accumulate Cronos.

Mike Gorenstein:   I think there’s a lot more going on. I think first, you know, given what we’re talking about, and if you think about what companies, you know, overall, whether it’s strategics or whether it’s large institutional investors, what they really place value on – I think the retail market thinks so much about what’s your funded capacity, and we’ve always kind of joked about this. But institutional investors, strategics, they’re always asking, well, isn’t the compression going to come on the cultivation side? Does it really matter? So that’s not really where most of the value is placed. And there was, I think it was Bloomberg that a few months ago did an article, breakdown, percentage of institutional investment. And we’re on the NASDAQ, we had the highest, I think the second-highest, and I assume certainly now post-Constellation it’s going to be Canopy. They were second-highest there, they’re on the NYSE.

I think a lot of it is, you’re seeing institutional money come in. there certainly is still retail, but that percentage is, I think, changing, and I think they value different things.

The other part in this is, you know, coincidental – the two companies listed on NASDAQ, we also have, sort of, over the last few years, made sure that, in answer to the question ‘what are you going to do about the US?’ we’ve had solutions that are fully legal, fully compliant, that we started setting up, I think, longer than any of the other major LPs. This whole infrastructure in the US is ready for us. So I think that’s another factor that goes in when investors are looking, how are you getting into the largest consumer market, what is your plan of attack, have you thought this through, how are you going to take your IP that you’re telling us is scalable and you’re working on, how do you move it to other markets? What are you doing globally?

So I think it’s a much different approach of looking at the company, what you’re after, rather than just saying, you know, how many kilos can you produce, and what’s the cost of producing the kilos? There are very few companies in the world I’ve ever heard of valued that way, outside of this industry.

James West:   Right. Huh. Okay, so what’s the big catalyst in the near term for Cronos Group going out, say, 6, 12, 24 months?

Mike Gorenstein:   You always ask this, and it’s usually not what you’ll expect. Maybe it will be what you’ll expect; I never know what expectations are, but it could be anything from us going and, you know, sequencing DNA and figuring out a way to produce cannabinoids, to other disruptive technology. There’s entering new product categories…you know, we look at it as not what’s the catalyst in six months, 12 months, 24 months, but what is it that sets us up the best for five years, when you’re looking out and you’re saying, okay, what is this company worth on bottom line and with a relevant multiple? That’s really where we’re focused, and we always have been.

James West:   Okay, and that’s still the bottom line. [laughter] All right, Mike, we’ll leave it there for now. Thanks very much for the update.

Mike Gorenstein:   All right. Thank you.

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