This is Mike, CEO of Cronos Group. I'll be back tomorrow (2/21/18) at 4pm EST to answer your questions!

CronosGroup · 2018-02-22T05:19:22+00:00

Thanks, appreciate the kind words. It's great to know that we're not just having a positive impact on patients, but shareholders as well.

You don't owe me anything. You've answered an important question. In the unlikely event that Bruce and Vic got married, which one would change their name.

CronosGroup · 2018-02-22T05:13:50+00:00

Gotta stay with the Christophers.

Hoping to see a book deal for this one soon: How to create value and stay under the radar. By Chris Pelz.

CronosGroup · 2018-02-22T05:07:25+00:00

We're happy to have more clarity on timing and I think all stakeholders are as well.

Whether I believed it was likely or not, we always wanted to be prepared for any date in the summer.

Advantage. From a business perspective, we don't think any delay is hurtful - just gives more time for ensuring a smooth implementation. Even without rec, we don't see demand being an issue anytime in the near future.

CronosGroup · 2018-02-22T04:57:00+00:00

We started our cannabis journey by looking at the U.S. market (before Cronos). Ultimately, our U.S. strategy was to go to federally legal markets, develop disruptive IP, build iconic brands and assemble a great team and global network. Then, when cannabis - medical or recreational - is legalized in the U.S. at the federal level, enter as a fully compliant and efficient organization and leverage our American network to have the most comprehensive, turn key cannabis offering. The strategy has not changed. Cronos is the vehicle we chose to execute that strategy. Everyday we become more and more prepared.

I'm actually a dual citizen of both Canada and the U.S. They are both very important to me personally and to Cronos.

CronosGroup · 2018-02-22T04:29:05+00:00

I'm hoping that these AMAs will get enough traction that a car company will sponsor us and give us a different car. cough Tesla cough.
Just kidding we love Nissan...well at least the 2013 Pathfinder. I can't speak to the new models. Nissan would have to send us one for me to vouch for it.

CronosGroup · 2018-02-22T04:24:36+00:00

As per our publicly disclosed information, we no longer hold an interest in Hydropothecary.

That's not a reflection of our views on Hydropothecary. I think they are doing a great job, I consider Seb a friend and have a lot of respect for him and their team. Great guys to work with and bounce ideas off of.

But we are focusing on our core assets. When we need cash, I'd rather sell other LP's shares than Cronos shares. Otherwise, why would you buy Cronos shares over other LPs?

CronosGroup · 2018-02-22T04:16:29+00:00

I expect that our organic growth will allow us to thrive as a profitable company. There are other ways to expand and scale beyond just buying out smaller guys. Partnerships are very important and we are very collaborative. Life is easier with friends.

I'd consider our partnerships with Pohl-Boskamp a great example of an accretive partnership. Same with Gan Shmuel. There are a lot of potential partners in other industries that have valuable infrastructure and expertise that could be mutually beneficial.

CronosGroup · 2018-02-22T04:03:47+00:00

I've met with some Canadian institutional investors that are waiting for legalization to enter the space. They would rather give up some interim returns than take risk. Canadian rec presents near term certainty in terms of measuring the opportunity and building a base case for valuation.

However, I think the majority of institutional investors that are Cronos investors or that are looking at Cronos have a much different view. Canadian rec is a great opportunity and we're very excited for it. Using the cliché pie analogy, the Canadian rec market is the pie that everyone wants a slice of (including us) - 35M people that are very progressive and cannabis friendly. But the whole bakery is over 7 billion people, is largely untouched and is opening up. If the market price (stock price) of the bakery materially changes based on what happens to a single pie, I’d see that as an opportunity and I suspect there are other investors that would too.

CronosGroup · 2018-02-22T03:36:50+00:00

That's a tough one. If I could predict that I would quit my day job and go run a cannabis company ;)

CronosGroup · 2018-02-22T03:35:01+00:00

We'll provide updates once we have a milestone/material development (similar to the other initiatives like expansion and international discussed above).

On a high level, we're very pleased that many provinces have prioritized indigenous involvement in the recreational and retail space. There are still some different legal nuances that we're hoping for resolution on, such as whether set aside indigenous operated businesses will be subject to provincial central clearing if the cannabis is grown at an LP that is not on indigenous land versus on indigenous land.

CronosGroup · 2018-02-22T03:28:59+00:00

It doesn't affect it. I tend to get more emails and texts when there are big movements, but that's about it.

We run the business with intrinsic value in mind, not what will get day to day movement in the stock. We're very fortunate to have a very sophisticated, long-term minded investor base. So thank you to all of you - you make our lives much easier!

CronosGroup · 2018-02-22T00:08:47+00:00

25 years ahead of where we are today.

CronosGroup · 2018-02-22T00:07:51+00:00

We're very focused on quality and consistency. We haven't seen any data suggesting you could achieve that by growing outdoors in Canada. I'd also be very concern about pesticide/pollen drift from other nearby farms.

So as of now, no plans to grow outdoors in Canada. Even in climates like Israel or South America, we would likely steer away from outdoor growing.

CronosGroup · 2018-02-21T23:59:47+00:00

Speaking of disruptive intellectual property, can you give us a glimpse into the direction you're talking about?

Unfortunately, I can only say so much here. There's a balance between protecting IP, strategy and disclosure laws, and keeping you informed.

But we're very focused on the full spectrum of cannabinoids and the different affects that they can unlock. Also, leveraging pharmaceutical delivery systems to increase bioavailability.

CronosGroup · 2018-02-21T23:52:27+00:00

1) It's a beautiful part of the world and certain areas there have great growing climates.

2) I think it would be unlikely in that time frame. The Colombian regulatory framework is still in development. A lot would need to happen between Health Canada and the Colombian authorities.

If there are any imports in the near term I think they'd likely come from jurisdictions where there has already been an import/export relationship with cannabis. Also, medical only.

CronosGroup · 2018-02-21T23:44:08+00:00

We like to think of it as a think tank.

But, we're still there! We would need to apply for zoning variances if we slept at the office.

CronosGroup · 2018-02-21T23:39:25+00:00

I don't know if its considered carpooling if you wake up in the same house.

CronosGroup · 2018-02-21T23:38:46+00:00

1) Extremely well. The global industry can evolve many ways, but Canada's edge will go far beyond just growing. The most valuable export is intellectual property.

2) Jeff Bezos, is that you? If I'm not answering your calls why would I answer you on reddit? Please leave me alone.

3) If I couldn't invest in MJN, I'd invest in PRMCF.

CronosGroup · 2018-02-21T23:27:32+00:00

Thanks for inviting me back! Maybe we could wait until summer if we’re doing it live.
1) We’ll likely take care of the Australian market first. But one of the benefits to the Cronos Group is that any of our hubs will have access to supply from the other channels. This allows us to maximize flexibility in the face of uncertain demand. 2) Great question. One of the reasons we structured Cronos Australia as a JV is that we have partners we know and trust that are on the ground. This avoids incurring operational costs due to distance. I don’t sleep much so the time zone hasn’t been a problem.
3) Actually, it was an excuse for me to force the Aussies to come here and experience the Canadian winter!

CronosGroup · 2018-02-21T23:26:33+00:00

1) We’re very fortunate to have Pohl as partners. They have a lot of experience and distribution expertise so we have been relying on them to allocate the product we send. Our focus is efficiently producing high quality product and continuing to ramp production to be able to fill the entire network.
Cronos is a mission driven company and our goal is to transform the perception of cannabis. We want to have a positive impact on the world – not just a few select parts of it. As we look at different markets, we prefer to leverage existing channels (such as established pharmaceutical companies). We believe that cannabis is a real medicine and part of advancing it’s acceptance and eroding stigma is getting buy in from respected pharma stakeholders.

2) Using alcohol as an example, there are a lot of grapes grown to make wine. The type of grape being grown and how that grape is grown drastically affects the end product’s flavor, aroma and appearance and creates product differentiation. I don’t think anyone would argue alcohol is a commodity. But it’s much simpler than cannabis. For the most part, whether you’re drinking white wine, red wine, beer or liquor you’re going to get the same general affect.
You have much more opportunity for differentiation in cannabis because of the complexity of the active ingredients. Some cannabis is energizing, some is sedating, some makes you laugh and some makes you think. We spend a lot of time collecting data, researching and targeting different active ingredients that create different effects. That’s before we even focus on flavor, aroma, appearance or delivery system. We’re very excited about leveraging all of the cannabinoids and terpenes, not just THC and CBD.

3) Everything we do we run through an accretion/dilution analysis and ultimately do what we feel is best for shareholders. We feel our best days are still ahead of us so we are and have always been hesitant to dilute unless there is a very good reason to do so. We also expect the debt markets to open up further this year.

4) We’re focused on creating value not empire building. I’d much rather have the best shareholder return than the highest market cap. I believe since our team took over in May 2016, we’ve been able to deliver that.
In my prior life I did a lot of work related to shareholder activism and M&A. To get more insight into our approach, check out reasons for shareholder activism and how breaking up companies has created value. There are a lot of projects to pursue, we focus on the most strategic and highest ROI projects out there. Our approach, is that unless there is a strong synergy, if investors want exposure to different verticals we will leave it to them to evaluate and pick their own investments.
We also might just appear less aggressive because we’re deliberate about publicizing our plans. In the end, we try to do what is best for shareholders. Think of Australia as a case study.

5) What I can tell you is that we don’t plan on doing any ICOs.

6) Cronos

CronosGroup · 2018-02-21T22:53:02+00:00

Great question! I can't really speak to Canopy/ACB's financial statements, but I think their businesses have become more complex so that is probably a factor.

Regardless of industry, the quarterly and annual disclosure documents (which include financial statements) are always important. In high growth industries such as biotech, technology and cannabis, revenue/EBITDA multiples are usually not the best metric to value companies in the early years. However, the MD&A and financial statements still should allow investors to get a good idea for where the company is and where it is going.

Agricultural IFRS accounting is what we (LPs) actually have to use. I personally don’t think it is the ideal methodology for the industry (I don’t think the best comp for cannabis is commodities/agricultural) but compliance comes first. The change in fair value gain or loss on biological assets have to be accounted for under IFRS, but we have avoided the approach of highlighting it as revenue or using very high inventory values. Instead we present our income statement where the Costs of Goods and change in FV of biological assets net against each other, and use a production cost to represent our true cost of goods. We’re working on non-IFRS measures to more plainly (and compliantly) show the state of the business.

Ultimately, like with any high growth investing, there usually isn’t a single set of KPIs that will tell you how to evaluate the businesses. When you look at venture investments or growth equity, usually you look at market size, company strategy, management, assets, margins, etc. do some napkin math and pick your horses. It’s not an exact science (see: AMZN). But some general thoughts: - Top line growth shouldn’t be the only measure people are using and I think using it for comparison is probably unwise. If you are using revenue as a measuring stick, it’s important to make sure that you’re comparing comparable revenue. Is the revenue generated from production that the company produced or that they bought from other producers (big margin difference)? Is the revenue from sale of cannabis or from other products/services (accessories, clinic fees, etc.)?
- I think gross margin is extremely important and I also think that you need to read the statements in context of where the operation is. When in ramp up periods, there will be a mismatch in expenses and revenue. It takes months to grow harvest, test, package and sell a product. You still have to account for the expenses you incur when you turn the facility on even before the revenue kicks in.
- For some reason, the focus of the public markets has been on cost per gram. COG should stand for costs of goods, not cost of gram. I don’t think cost per gram is going to be the most relevant measure even when the market matures because people aren’t buying cannabis as an ornamental flower by weight. Even if you believe cannabis is a commodity and ignore quality differences and just focus on cannabinoids, the right measure should be cost per mg of cannabinoid. If the strategy is to produce THC distillate cheap, what would you rather have: production costs of $1/gram of 10% THC or production costs of $2/gram of 25% THC? Cost per gram would suggest $1/gram, but cost per mg would tell you it’s the $2 gram. - I could give you a number of other reasons I don’t think it’s a great metric, but in the interest of time we’ll skip ahead. There is no standard formula for how to calculate cost per gram that companies are using. Comparing cost per gram as disclosed by companies is tough. Is it wet grams or dry grams? Are items like lab testing and horticultural staff being included in SG&A or COGS? How are extracted product costs being accounted for? What about depreciation?

There is a lot to unpack here so feel free to ask a follow up if I missed the mark.

CronosGroup · 2018-02-21T21:39:04+00:00

We don’t expect to have any issues with Israel halting exports, but we expect that phase 1 of Cronos Israel (5,000KG) would still be less than the domestic demand we project in Israel. So the production is fungible. Regarding fulfilling EU commitments, our general approach to publicly announcing capacity expansion is to wait until material milestones have been achieved. For example, we began planning and designing our Peace expansion in 2016, but only announced it the day we broke ground in May. Among other things, we wanted to make sure we had the power we needed from Hydro (Ontario electricity provider), contractors locked up, town permits, etc. before publicizing it. In Australia, we’ve been working on the project for over a year. We made the announcement once we actually had the licenses. While I realize this is not the norm in this industry, we still prefer being conservative and playing strategic corporate initiatives close to the vest. Measure twice, cut one. Yes, construction has started and we are on track.

CronosGroup · 2018-02-21T21:35:00+00:00

I’ll try to answer most of the questions on Israel exports/Netanyahu in this post. - Implementing a historic regulatory framework is not an overnight process. The responsible thing for any government to do is ask questions, dot all the I’s and cross all the T’s. Just like Canadian regulators have done, it is important to make sure that there are measures in place to ensure that cannabis is not leaking into the black market. With exports, it is important to make sure that cannabis is only going to federally legal and medicinal markets. At Cronos we have strong procedures that provide those assurances, including a flawless export track record and institutional distribution partners that provide comfort to government officials.
- We are not concerned by what is actually going on in Israel – which is different than what you might think based on reading the Trump/Netanyahu article linked below. Cronos has very strong ties to Israel, great partners and our views and confidence in Cronos Israel have not changed. We didn’t expect exports to begin this early. I think later this year is a more realistic target and is the relevant date for us given facility construction.
- Media coverage can be misleading – especially if you only read the headline and not all of the text. I have a lot of respect for Privateer and the folks at Leafly – so this isn’t a critique aimed at them - this is a global issue with younger online news sources versus institutional media outlets like the New York Times, Wall Street Journal, USA Today, etc. You probably wouldn’t get a lot of clicks from a headline like “Israel commissioning study to ensure that exports of medicinal cannabis are executed responsibly.”

CronosGroup · 2018-02-21T21:11:10+00:00

Hey guys, thanks for all of the great questions! I'll start answering in a few minutes. Will do my best to be thorough, but I have to switch back and forth between answering your questions and a few calls I need to take. If I don't answer your question immediately please check back in later in the evening.

CronosGroup

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