Thank you everyone for joining us for Cronos' first-ever Investor Day. Thank you all for coming. I am going to read forward-looking statements. Before we kick off, you have to sit through this, so thank you for bearing with me. Before we begin, I want to remind everyone that today's discussion may include forward-looking statements within the meaning of applicable U.S. and Canadian securities laws. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. The cautionary statement regarding forward-looking information included with our Investor Day materials, together with the risk factors described in Cronos Group's public filings with the SEC and the Canadian securities regulator, applies to the fireside chat, Q&A, and other remarks made during today's event. We encourage you to review those disclosures.
You should not place undue reliance on any forward-looking statements made today. If you have any questions, please ask us. With that, we are going to kick off our panel. I have Mike Gorenstein here with me and Bert Mucci. We are just going to start off by, Bert, I do not think everyone in the room knows who you are. So if you could give us some background on yourself and Mucci Farms, that would be great.
Okay. First off, welcome to GrowCo, Cronos GrowCo, in Kingsville, Ontario. My name is Bert Mucci. At Mucci Farms, we are 800 acres of controlled environment agriculture. So we are growing 800 acres all under glass. We are the biggest growers in North America. We have one of the largest strawberry facilities, probably in the world. It is about 110 acres, and we are continually growing. We are about 3,500 employees to date. We market through every major retailer in the U.S. and/or Canada. So about 65%-70% of our production here is sold to the U.S. We have a staff, like I said, 3,500 people, and it is mostly supported through the migrant program, through Canada. I will say that Canada allows us to have the ability to bring in these migrant workers. Without them, this industry does not exist at Mucci Farms or here at GrowCo.
Labor is one of the most difficult things right now.
Great. Mike, just a quick background on you and how you landed in cannabis.
Mike Gorenstein, CEO. I started Cronos 11 years ago, I think. 10 years ago. I started off, I was a corporate M&A lawyer, mostly doing alcohol and healthcare. Back then, I think cannabis was an interesting discussion you would hear in boardrooms but was not a reality. I was obviously very interested in it. I moved over to the buy side and really wanted to invest in cannabis, which was very difficult to do at the time for a number of reasons. But eventually found my way to Canada. Thought there was a big opportunity to build a global platform, develop IP, and really have everything you need from a portfolio perspective, so that as other countries opened up, we can move into them.
I guess it took longer than we expected for other countries to open up and for Canada to open, but I think you'll see today, it has opened, and we're starting to realize what that vision was.
How did the partnership between Cronos and Bert, yourself, come about?
Back in 2017, I think it was right when Canada legalized, I guess. I had numerous LPs coming to Kingsville and approaching us to grow cannabis, of course. There were a lot of greenhouses in the area. There must have been 15 - 20 smaller facilities. The thing that attracted me to the Cronos Group was, most of the other LPs were all about getting to market as fast as they can. The one thing that I would say that we were like-minded with the Cronos Group is we wanted to both build a purpose-built cannabis facility. When you tour it, you will understand why, what the differences are. I am sure you have gone through other facilities. This was specifically and purposely built for cannabis. That was just one of the things.
I did not want a retro-ing vegetable greenhouse because we knew it was not the right fit.
Yeah. For me, one of the things I would think about and part of why it is, I think it is weird to have the name Group, but why is it Cronos Group? Part of the idea was, such a big industry, there are so many different verticals, so many different skill sets. Finding the right people to bring together into a group to be able to be best in class. Because if you try to be a master of everything, you become a master of nothing. That was a big early thing. It is like an internal joke I used to always worry about, like, all right, we have such a big market, what should I be scared of? What happens when the big ag guys come in? Are we going to be better growers?
The big scare, what happens if big alcohol or big tobacco comes in? My solution to it was, why do we not just partner with whoever we would want least as a competitor? The funny part about purpose-building, another part to it, I remember asking, "Why do you not want to rip out, every other greenhouse grower is saying they are going to take out cucumbers or tomatoes to grow cannabis. Why do you not want to do it?" I was like, "Well, we are profitable. Why would I do that?" It was like, "Yeah, seems like the right partner then.
I think there is a big debate in the industry on what type of environment is the best for growing. Indoor, low, or high-tech greenhouses, gaining traction outdoors. What is your perspective, and how did we settle on a purpose-built greenhouse?
I would say that, and no different than the vegetable industry, like you have field farming, you have greenhouse farming, and you have indoor farming. In the vegetable business, indoor farming, it is not profitable. We have looked at every single indoor grow, costs are just way too high. I think we have seen that right away between our facility and indoor facilities at Stayner. But field production, it is one of those things, like every one of our retailers is, what can you go grow in a greenhouse that is grown in a field? Like anything. Can you grow bananas? Can you grow pineapples? It is the cleanest product that you are going to get out there. Anything you grow in a field has to have a pesticide spray. Like I said, I believe the greenhouse that we built here, a little bit different than our vine crop greenhouses.
We are chilling, we are dehumidifying, and that allows us to give us the quality that we are putting out right now at GrowCo.
I think people underestimate, like, cost is one thing, and people always say quality obviously matters, but there are other things people underestimate. Predictability, year-round knowing that you are able to produce, not worrying about having to have one giant crop and then storing it, because obviously quality will degrade over time. You have extra storage costs. You have to think about what all the other parts in the value chain are. But I think there is always going to be a place for indoor crafts. It is not the area where we necessarily play, so I would not say that there is a right answer. For extracts, you can grow outdoors, and for pure inputs, that can certainly be attractive depending, of course, where you are.
From a flower perspective, especially when you are thinking of really tight standards and you are thinking of going overseas, you will see when you go through there from a control perspective, environmentalists, you take the flower and put it next to indoor. Then you look at the infrastructure, and it is really not that different than indoor. It is just a cost advantage, and it is way more energy efficient when you think about potential energy crisis that is looming. I think it is a much better place to be if you want to be scalable.
You mentioned you met with lots of different LPs. I know you have toured other competitor facilities. How would you compare GrowCo's facility and kind of the approach here to those other players?
Yeah, I have toured other LPs. I have operated in some of these greenhouses. I say this because I am sitting here, of course, but you will not find a facility like this anywhere. Again, this is purposely built for cannabis. A lot of the other greenhouses are retro greenhouses, so it is a much different greenhouse, and again, when you tour the facility, you understand why.
I am going to turn to talk about genetics and R&D. Obviously, Lasse is going to really talk about that. Just at a high level, Mike, could you discuss Cronos' focus on genetic R&D, on tissue culture, and the vision for how this drives value for cultivation at GrowCo?
Yeah, I think it's not that different than any other agricultural industry. If you look where value splits up, a huge part goes to genetics. I think that it's really difficult to do all the things we're trying to do and also focus on building and managing the labor in every place around the world. The big differentiator and consistency is genetics. I think that it's easy for people to see the grow, like a walkthrough here, it's obviously extremely impressive, but the part you don't see is the genetics, and the two have to fit together.
Part of why the partnership works so well is focusing on genetics on one side and having a team that's just thinking about genetics and a team that's just thinking about growing, and the data we're able to share back and forth, so you can think about how would this genetic perform in this environment. I think that just growing random genetics without breeding, it's really doing a disservice, and I think that's where you start seeing yield gains over time. You start seeing from a quality perspective, you look at what consumers want. People describe it as a commodity, but people are picking different strains for a reason. You're paying different price points for a reason, and that's really that match between the genetics and how you're actually cultivating.
What's kind of the approach here between genetics that optimize for potency, bag appeal, versus genetics that optimize for yield and cultivation efficiency at scale?
Yeah, look, I think it's a balance. I think proposition for the consumer, and ultimately, if the consumer isn't willing to pay for it, doesn't provide value, then it's not something that makes sense for us to produce for. So it's almost looking at a connect, per plant and terpene yield. You can kind of assign numbers to it and understand that. So there is a bit of a trade-off. If we lean into yield, we could, but then do consumers want it? Are you now looking at a different tier of pricing? The first and most important thing is if you have something that people want, well, no matter how cheap it is, it doesn't go anywhere. We don't want to ever have product that won't sell. So I think we start with quality, and then yield comes after.
I am going to turn to cost and efficiency. Bert, could you discuss the most significant cost items involved in operating a scale cultivation facility, and why this facility is well-situated to compete globally?
Yeah. Our number one cost, of course, is labor, electricity, and natural gas. On the labor side, we are tracking employees. We have a Priva system, is where we track all of our employees, what their output is, plants, deleafing. We can go back to that, and we give our guys incentives. Piece rate is one of the best things for migrant workers. You give them the piece rate, and these guys, their performance just doubles, instantly. Natural gas and electricity, we have probably the most LEDs I have seen in a greenhouse. We do not normally put this many LEDs in a wine crop greenhouse, but we put the latest and greatest LEDs in there for efficiencies. Less heat, so less temperatures on that crop. Then our heating costs.
We have a triple screen here, so energy efficient, and just watching our environment, very dialed in. Our growers here are very dialed in and just looking at efficiencies, again, with heating, CO2 dosing, everything.
Can you talk a little bit about just not the labor model, as well as the automation that you have been able to put in?
Well, when we started, we didn't know what automation to put in. I'm glad that we didn't go forward with the automation that was there, because it would've been all the wrong automation. We are in it now since 2020, so six years growing, and we are just starting to implement that automation today. Like I said, I'm glad we didn't do it back then because it would've been all the wrong automation. It's obviously mostly in packaging. We just bought a bagging and all of that, we put automation. I will say, a little bit different than what I've seen in all the other grow ops, is that, I say this, I still say it today, we are large-scale growers here, but we are still large-scale craft growers. Nobody was hang-drying when we started.
Everybody was doing it on the trays, trying to pump out the volume out of the dry rooms. You'll see when we go through our dry rooms, they're very expensive and very sophisticated. We could dial down to almost every bud and get it to the right conservation or whatever we have to. It's a science. I always say this, as that room, you can blow millions of CAD. Either you're drying too fast, drying too slow. It is the most important part of the business.
What do you foresee for the future of the partnership? Is there any potential for expansion or growing?
Yeah, I think we obviously work really well together. I think that it's exciting that when we feel we need to expand, we have the ability to do it quickly, efficiently, and consistently. I think, we haven't had phase two up for that long, and it's fully integrated. I know everyone always talks about the multi-year ramp-up, but the team here has done an amazing job being able to do it, and that gives us confidence that whenever we need to scale, we can do it. I think that as you see other geographies open, depending on what rules are, knowing there's also other infrastructure, if for some reason we need a different location, not really in North America specifically, we can do that together, so.
And maybe to follow up that, how about when evaluating opportunities that will emerge in the U.S., how crucial do you think this partnership is for that?
Yeah, I think that it is really important, right? Going and, he can talk about what the infrastructure is in the U.S. I think from a lot of the questions always around like, would you go to the U.S.? Would you export to other markets? And you can talk about too, but not really. Off the bat, you have a currency advantage, which is pretty nice. I think that some of the markets where traditionally people think would be better, you have to remember, humidity is extremely important. So, we are obviously very happy here from an export perspective. But when you think about the U.S., if it is not an open market and we are not bringing product down from here, there is absolutely opportunity. It is not like we have not.
You can probably tell from when we both talk about it, we extensively have planned and thought about how we would do it, where we would do it, what the timeline is. You could add to that.
Yeah. We have talked about the U.S. I have always asked Mike, "When? And if we are going, where are we going?" The U.S. is difficult. We have grown there. We have facilities in the U.S. right now, just right across the water here. It is about 55 km in Sandusky, Ohio. And climate is very important when you are growing in a greenhouse structure. I would rather be in a place where it gets to minus temperatures than be in a state where it never freezes over.
Again, I said this earlier to, I forgot who I was talking to here, but the advantage we have here is nothing over winters. So we have a fresh start every single winter. In a few weeks, frost hits here, every pest outside dies. You start going to—Sandusky, Ohio is not that bad, but California, because we have grown in California, it is difficult.
And pest pressure there with wine crops anyway, you have to spray pesticides. There is no way around it. So we have a clean start here. Probably by the time December 1st hits, everything is dead outside. It is a clean start. We have operated in greenhouses in the U.S. One thing is, I have always said this to Mike, is we have operated in one of the largest greenhouses, cannabis grower actually, and we split. We were doing the vine crops there, but I would definitely not retro a greenhouse there. There is just nothing there that you would even consider. If we went to the U.S., it would be purpose-built, just like Cronos.
Yeah, and I think people do not. The real factors go in, right? It is what is the cost of energy, right? So whether that is gas or whether it is just what it is to set up to a substation? What are the state regulations? Because that becomes pretty real. Access to water is something not everyone thinks about, but water is really, really important. What are the labor costs, access to labor, and then climate. You want a lot of sunlight. You do not want humidity. So, the areas that maybe today are the big cultivation hubs in the U.S. really just because that is where the consumer market started. But you go to places like, people would never think of New Mexico, for example, right? Or maybe I am biased because I was born in Ohio, but I love the Ohio idea.
But knowing there is infrastructure there, you already have some of the ag infrastructure similar to here. We benefit from having all the ag infrastructure and being able to add the cannabis purpose-built, but we would purpose-built. You need to have a competitive advantage and purpose-building is really going to give you that.
I think we will open the floor up for questions from the audience. We have about 10 minutes. I am going to repeat your question back just for the webcast. But yeah.
Mike, you said the facility here is fully ramped. Is that fully ramped in terms of where you expected it to be at this point in the journey with phase II? Or is there still more that could come or that you could do, just so we can better understand fully ramped relative to where you want it to be or where the end state would be if markets do open up?
I think it was pretty clear.
Oh, okay. Yeah, I think that from a planting perspective, we're fully planted. I think that there's still things in terms of automation, in terms of efficiencies that we'll get out of it. There's always going to be improvement in genetics, so you'll still see efficiency gains. But I think what we had talked about is that it was really the Q4, Q1 turn when we're planting, when we're making sure we can get everything in dry, we can get everything packaged, and get everything out in time. I think that's behind us and we're fully, I'd say, utilized, but you'll see increases. There's more we can go, but it's not like we have left 20% just wide open waiting.
Given that you're fully utilized and we're starting to see it flow into the numbers the last couple of quarters, how quickly do you think about phase III, phase IV? The first two phases have been a huge success. It's been a big differentiator. How do you think about that next one, and how quickly do you move to it?
Look, it is something that we always think about. What is the next phase? What is the timing? It is just making sure that everything aligns, that everything is buttoned up before we do something. We want to make sure that if we were to announce something, or if we are expanding, that we have everything ready to go, and we would talk about what the plans were when we start, not in advance.
You are not planning an expansion at this moment, in other words?
We have not announced an expansion.
Okay.
Yeah.
You talked a lot about the purpose-built versus retro. Maybe just talk in terms why you feel so strongly about that and maybe some of the tangible benefits that you feel you are able to get from being purpose-built versus retro.
Yeah. We operate 800 acres in the vine crop industry, and a lot of these cannabis greenhouses are retro greenhouses. You will see when you walk through here, we have dehumidification systems. We have chilling plants. We have concrete throughout the whole facility. There is no ground tarp. There is no polyfilm. Anywhere you have a polyfilm or a ground tarp like we do in vine crops, bugs hibernate under there. That is one thing that, it is the first thing, without even growing a cannabis plant, I said, "We have to bear the expense. We are going to put concrete." Nothing survives on concrete, of course, and bugs have nowhere to hibernate. Then the humidity thing is, again, I did not know anything about cannabis coming into it, but I knew humidity, bud rot was a huge problems, so we put in the dehumidification. Those are all added costs.
Very expensive to do, but I think that our quality reflects it for sure.
Just to think high-level, right? If you were to go into a retrofit greenhouse and ask the grower, "Hey, how do you benchmark your yield to performance versus that greenhouse?" They would defensively say something along the lines of, "Well, this was not purpose-built, so you cannot really compare.
Yeah.
That is the best.
Sorry, Mike, just to follow up that, though. With respect to purpose-built and yield, how would you compare the yield in this facility versus a purpose-built. This side of the border and also south of the border, because that is obviously increasingly going to be a discussion. Where do you think this would rank in terms of yield or could rank in terms of yield, whichever way you are more comfortable?
I think if we were growing purely for yield, then I think it would be number one. Again, that is a decision of a lot of that comes down. To be fair, you would also have to say, is it the same genetics or different genetics? Because there is a bit of advantage in both. If we were saying we want to grow purely for yield, I think it would be nearly impossible to beat us. I also think in the U.S., there really are not this type of scale, any purpose-built facilities, right? So it is hard to say the U.S. is a comp. There are large ones in Canada. Yeah, I do not think there is anyone that would be the same level.
Yeah.
That is the caveat of what, again, what are you going, do you think good, better, best of what are you growing for? We could have lower yields if we went all for the niche strains, and if we went purely for yield and did not factor in potency. It is just trying to get that balance and what the right balance is for what fits the brands.
Two questions. If you did announce a phase III, what is the timeline after the announcement? How quickly would you be ramped or fully ramped? Is it a six-month, is it 18-month, two years? I suppose faster than phase II. A separate question, when you think about expansions, do you think about diversifying your supply chain? Would you consider buying or building something indoor? Or indoor for you guys is off limit, generally interested.
Yeah. On the first one, it also depends time of year. I don't think that it would be on the same exact timeline as phase II, but a lot of that is getting something built before the winter and making sure it is in the I probably should let you answer this, but making sure it is enclosed.
Yeah. Listen, we know from building phase I and II here right now what to expect. I think we could probably build this facility in 12 months.
Okay.
Would we get indoors? I don't think so.
Yeah. If we wanted to do indoor, I don't think that there's a facility we would buy. We would need to get manufacturing space and convert. Basically, we already have a licensed facility that's a large purpose-built indoor cultivation. If we felt like there was ROI on converting that back, it would be expanding manufacturer space elsewhere and then growing something we already have existing. But it just doesn't feel like from today, that's where the focus would be. I think indoor fits in a craft segment a lot more. So it would really be more about the brand that's attached to it than us saying we're going to turn it on and that just hasn't been the focus. It's really more building for cultivation. We're pretty happy with what we have.
We haven't seen anything that we're like, "Oh, we need to go get that." It's always an option. Something could be built that we would change our mind later, but an example like the Netherlands, right? That wasn't about we need cultivation capacity. If to enter the market, you need to have cultivation, that becomes a factor. But it wasn't like, "We need capacity, let's go buy the capacity." It was, we like that it's a number one market share. We like the profile, we like the program. Capacity came with it.
How has the federal government's regulatory approach over the years shaped today's cannabis industry in Canada?
I guess I'll give a positive and negative so it's really balanced. The positive is that I think because there is a regulatory approach, and it was the first G7 country to legalize, that's allowed there to be a heavy amount of investment and cultivation. I think that the negative is that because of how restrictive it is and because of some of the rules around marketing or some of the tax issues, we have not reached the potential that it could be, were some of that changed.
Sure.
I am very grateful we have what we have, but if you were designing it, there are a lot of improvements that could and I think should be made. It is frustrating that despite the amount of tax that is paid, and I guess I am going on a rant, but if you think about the contribution to GDP that cannabis delivers to Canada. Especially now when everyone in the government is trying to find a way of, well, what can we do to become more independent, to gain economic strength. This is a real industry and a real contributor that people should lean into. It is an industry, it is not this sort of side project or idea.
There is a lot of opportunities, there is a lot of uncaptured market that could be gained, just in Canada alone, but also exporting, communicating with other governments, and trying to partner to open up channels. The good news is there is a ton of opportunity. I think also an advantage has been because it has been tough, it has forced us to really, really develop skill set, really develop capabilities, because I think this is now the largest single market. I think it is also probably the most competitive market, and if you can survive here, you can thrive anywhere.
What does a license to print money?
Well, I haven't seen many people print money. Some people use as a license to print some stuff.
Okay, folks. We are going to thank Bert and Mike, and you can ask questions on the tour of them as well. We are going to bring up Lasse for his presentation. I am just going to pull one of these chairs, and Lasse, I will turn it over to you.
Okay. Welcome, everyone. We will be talking about how genetics actually result into measurable returns in this presentation. I will give a short overview, a little bit about what we do and some of the techniques that we are using. Talking a little bit about our genetic portfolio, then heading into some of the demonstrated results that we have had over the last years. I am Dr. Lasse Schulze. I am the Senior Director of Flower Product Development and Agronomics for the Cronos Group. I am a scientist by training. I have a dual PhD in plant physiology and toxicology, and I am running an R&D and horticultural team across three countries. We have four main labs situated in Stayner, Ontario, here, where we are dealing with agronomics. This is also where the breeding program is housed.
We also have a biotech lab there, where we are paving the way for future generations of genetics. We have also the scale tissue culture lab there that I will elaborate on a little bit further. We are situated at Cronos GrowCo that you are seeing on the bottom here. It is a purpose-built cannabis greenhouse. Bert and Mike have been talking about the importance of having it actually purpose-built. We are working very closely together with them, so all the plants that you are seeing actually in the greenhouse have gone through my lab. Why are genetics so important? If we are looking at adjacent industries like the horticultural industry and the agricultural industry, the producers that are most successful in these industries have access to latest and greatest genetics. Yield is a very important factor in genetics.
Every single gram that a genetic produces more, at the scale as we are growing, makes a huge economic impact. Also, potency and quality are very, very important. Especially potency is, after the price, the biggest sales factor. Flower is also an international market, the spearhead. These are mostly flower markets, and that is why we want to make sure that the flower has the quality, the right potencies for these markets. If you also have better flower quality, it also drives derivative products at the same time. The genetics program, we accepted in 2018. We are a team of about 16 employees, and we are pairing the know-how and the knowledge of the agriculture and horticultural sector with cutting-edge science. Historically, that has been working very well.
We are focusing on our breeding program on yield, THC potency, the aroma composition to differentiate ourselves to our existing portfolio but also from our competition. Also flower size and also disease resistance, which yields then also more genetics that are more disease-resistant, have a higher chance of yielding more. Over the years, we have produced more than 150,000 seeds. We screened more than 6,000 different genotypes, and we have also developed the internal capacity to produce more than 20,000 tissue culture plantlets every year. Let's go over the process. We have a very differentiated platform for genetic-led growth. We are conducting classical breeding, where we are conducting crosses that yield and have better attributes. We are also chemically profiling all of our genetics and the resulting flower. We are going to very deep analysis, looking to trait inheritance and the like.
We are also running all of our flower through sensory panels. Very important. We always keep the end consumer in mind. It's great if you have higher yields, but if the end consumer don't like it, you're sitting on a lot of flower that you cannot sell. Tissue culture is a very important platform technology from many different perspectives. As I mentioned, every single plant that you are going to see in the facility has gone through a tissue culture process, which is very important for us. We are also working on agronomics. So when we are sending genetics to GrowCo, they have been very thoroughly tested also on the agronomist side, so we can provide the growers with the knowledge how this genetic grows, so that the time of adoption, the learning, is much, much shorter. Of course, we are working also with a lot of molecular techniques.
We are looking at the DNA level of our genetics, really understanding what is doing what. How genes are interacting with one another is more on the biotech side. Overall, we have much more holistic overview of our product development. We have platform technologies that create a lot of synergies, and we also have very deep expertise within the team. But in the end, what matters is that we have a consumer-preferred product that really makes a difference in the market. This is how the process looks like. On the very left here, we have the discovery phase, where we are conducting a cross, and we are screening out hundreds and hundreds of different genotypes to identify a small subsection of that, which have attributes that we are more interested in.
That are higher yielding, that have a good cannabinoid profile, that have other interesting characteristics that might be more consumer relevant. Then we are starting to validate them. This is usually when we are also scaling up the numbers of the plants to be more representative of a commercial application. Then in the third phase, we are challenging these genetics with heat, with pests. We have assays with some of the leading institutions in the country, where we are really understanding how these genetics are reacting if they are exposed to different environments . While we are in a controlled greenhouse environment, we still have some exposure to the elements. Summer versus winter can be different, and we are testing it so that we have consistency throughout the year. Then in this fourth state, we are testing them for consumer acceptance.
We have non-consumption sensory panels where trained panelists are testing these genetics in a blind test. We are also doing that in consumption panels as well in downtown Toronto where we have a consumption sensory facility. The end results are genetics that are distinguished that have proven themselves out throughout the season. It increases our confidence that these are going to be successful before we launch, and this also lowers our risk. Overall, just a sliver, less than 1% of all the genetics that we are testing are making it to the market. It is a very rigorous testing that we are undergoing. Once we have identified these genetics, we need to propagate them and sending them to GrowCo. The current standard of propagation is depicted here where we have a genetic. We are then taking cuttings from the genetics, and then we are growing commercial plants.
In the vegetative phase, we are taking a subsection of that, and we are continuing the cycle. This process is very prone to diseases and also genetic drift and requires a lot of space. What we are doing different, we are propagating completely from tissue culture. What is tissue culture? Tissue culture is a technique, comes more from the biotech side, where we are taking plant materials, and we are growing them in sterile environments. When we are doing that, we are also stripping out all the diseases, all the viruses, all the viroids, and also a lot of that bioburden from the plants that are inherently accumulating in this cycle. It creates a lot of benefits. We have an increased plant vigor. We have no diseases, no pests, and also less labor, less pesticides that we need to apply. It is also very hard to scale.
That creates that technological moat around our company that gives us also competitive advantage. This is how it looks like in practice. This is part of our tissue culture lab in Stayner, and here is an example of a Green Crack that this has been propagated from a cutting. This is propagated from tissue culture, and they are the same age. You can really see how much faster plants grow when they are going through the tissue culture process. Let us look at our genetics portfolio. Everything that we are doing, approaching the development of genetics from a scientific lens as well, while having the consumer in mind. We have a situation in the markets that we operate in where we are competing against hundreds and hundreds of different genetics around the world. Our genetics are consistently ranked very, very high in sales.
On the top left, we have our Wedding Cake and GMO. They are for quite a while number 1 and 2 in the Israeli market, and also our other genetics are fairing very well in every market that we are entering. Let us talk a little bit about some of the results that we have had in the past years. We talked about how important yield is when you are growing at scale. On the left side, you are seeing the yield per plant that I indexed to 2022, and how we have improved yields over the years. It is a very, very important metric, an economic metric that cannot be overstated. On the right side, you are seeing the GrowCo yield per plant per year. Every year, we have increased the output of this facility, which has significant economic impact. This graph shows the cannabinoid improvement over time.
Every time when we are developing genetic, we are looking at yield, we are looking at cannabinoid content and other metrics as well. Cannabinoid content, given that it has such a big impact on sales, has a lot of our attention. We are breeding specifically for this trade, and we have been improving almost every year. Now we have record cannabinoid contents this year and much more to come in the future. Taking all of that together, how does that actually look like in terms of net revenue for our company? We have had a very good trajectory of flower products sold. This is the quarterly net revenue graph, where we had a record quarter just in 2Q 2026 of $39.2 million . Our market position of our flower products is very strong as well.
In Israel, we have 10 consecutive quarters of record quarterly net revenue and the number one market share for quite some time. In Canada, we were ranked as number one in 2024. Then we ran into supply problems that we could actually not produce as much as we wanted to, so we dropped a little bit in ranking, but we are slowly recovering, especially with phase II being online now. On the international side, without Israel, we are also increasing our footprint. These are all flower markets or predominantly flower markets. In the first half of 2024, we were at $1 million net revenue, and this year in the first half, we increased that 15x to $15 million in revenue. With that, I am at the end of my presentation. I open the floor up to any questions you might have.
Going back to genetics, do you work with what might be called that pure terminology, but a pure line, like a landrace? Do you go back to that to get Because genetics now of a marijuana plant is all over the place? Any one given plant, or maybe I am wrong. How do you do your initial breeding?
We have a very large portfolio of different genetics. What we are having in the market are genetics that have gone through very rigorous selection, but that does not mean that we do not have landraces and other genetics with very important consumer traits in our portfolio that we can also then cross into our elite lines. We are very aware of genetics that have very important traits, like disease resistance, that we can always bring into our commercial lines when we need to.
When you cross something and then you get 1,000 different plants or
If the crossing parents are genetically very diverse, we call it heterozygosity.
Oh, yeah.
Then the progeny of it will be very diverse as well. This is why we are needing to conduct these heavy selections.
Oh, okay. Then there's material that's less diverse in itself.
That is correct, yes.
Yeah.
We can see that on a DNA level, how genetically diverse they actually are, and that results then also in a more or less diverse generation after that when we conduct a cross.
Okay.
Question. Back to the genetic breeding and improvements pathway. Apologies if I missed this on the slide, but how long does the process take and how many times does it have to be repeated approximately?
The process repeats itself constantly. As we get better genetics that we have been also pushing to the market, we have already conducted many crosses with this genetic before it even came to market. This process takes anywhere between one-two years at least. That is a very long process, but we also want to have the assurance that we have gone through that very rigorous testing, have grown the plant throughout the seasons as well so that we are lowering the risk before we are moving it to market.
Yeah. I think even however controlled the green assets, you are still going to have variation between the different seasons. So understanding how that works before you fully scale up. A lot of it is, if we were starting today, it would not be one or two years, but I think it is probably about a four-year lead time of all the foundational work breeding. You kind of have some predictability of what different strains are when you are going to cross them and then maybe talk about phenotyping has probably got relevance for that too.
Yeah. It is important in breeding that you have a long pipeline in place. So the phenotyping part also across the seasons is a very important part. The validation part is probably the part that takes the longest. But again, we do not want to skip that. If we are developing genetics that suddenly you identify that consumers actually do not like, but we have already scaled it up and put everything into the pipeline to commercialize it, we are getting in trouble. So we want to make sure that we lower the risk as much as possible and that we have all the consumer attributes consistent throughout the growing season, so that the consumers always get the same product. Whether it has been grown in summer or in the winter, it has to always be the exact same.
Yeah. One of the things that is helpful here also, in the context of how Canada demand works, because for most of the markets, you do not have the ability to just when you want to launch something, launch it. You have listing dates. If you can only launch something twice a year, you have to really plan, make sure it is going to be successful, and make sure that you can fill whatever that quantity is. Switching genetics can be an issue. A lot of what you have not seen us launch is, it is like, well, do we want to take something that performs really well in market off the market? Do we have enough capacity to sort of switch?
It does make it so when we launch a new genetic because of just the Canadian model, you are going pretty big and you want to make sure it is a success when you launch something.
I think in Canada we have seen that the consumer starts to graduate away from flowers into other products. Are you finding that consumers in Europe have different preferences relative to the North American cannabis consumer? Would you be trying other genetics in Europe given that sort of launch cycle timeline restriction you have here?
I think, honestly, from a preference perspective, I would include Israel with Europe. I think the biggest difference is when you think about pre-rolls versus flower, and you see that trend in North America, consumers just prefer, relative to the U.S., mixing cannabis and tobacco, which is why I think flower will likely have a longer share. That is not something that you really see as much here. Maybe with price compression that will change, but it is just the way the product is used. Even cigarettes overall versus people rolling their own, it is just more a part of the culture there. I think another thing is what is going to happen with the medical markets, it is harder to do pre-rolls. If you are looking at a mature adult use market, I think the biggest difference will be pre-roll share because of that.
Sometimes you can see things like it is not just consumer preference, it is how tax policy affects it. I know this was not exactly the question, but if you think about California versus Canada, right, or generally in the U.S., it is not necessarily a different consumer preference. It is that if you look at pricing for an infused pre-roll versus a base, like just a pure flower pre-roll, because of the way excise tax works, it is going to make it actually more expensive on a per-gram or basis for an infused pre-roll. Which would make the value proposition for consumer relative to other markets be higher for base flower, and that is where you see the difference. If you go to California, almost everything is an infused pre-roll.
It is not necessarily consumer preference, but if you were to then discount infused pre-rolls here, you would probably see a huge shift on a relative basis. A lot of that just comes down to regulatory structure, and I think the biggest difference is how people mix cannabis and tobacco in Europe.
The consumers are also different in the different jurisdictions that we are operating in. The Israeli consumer is a little bit more, let's say, sophisticated. They are looking at different aroma profiles much more than they would in Canada, for example. We are also tailoring our genetics for these markets and also for the growing within these environments as well.
Can I know it is a very simplistic question, right? But we hear several large Canadian LPs talk about their genetics program. Sometimes for me as a layman, it is hard to differentiate, right? It sounds like it is something that you have to have. So it is valuable, but is it so unique? I am sure there is something unique here. But can you explain that, because sometimes on the surface, again, I do not want to generalize, but it is like we made the argument, many people talk about their genetics program. How do we differentiate? Then the second part of the question, is there a market for genetics? Are you also supplying other people? Do you buy genetics from others, or is it all proprietary and all produced in-house?
To answer the first part of your question. Licensed producers are sometimes talking about a genetics program, but if you are really looking at what that actually means, most licensed producers are buying seeds from someone, and they are germinating them and looking whether there is something good coming out of it. But they do not have the scientific lens. They do not have also that long foresight to build an actual program. What I have shown you here, this has been years and years in the making. This is not something that you can just start from scratch. You need significant resources and also the expertise to pull something like that off. In the industry right now, there is not even a handful of groups that I can name that get even close to what we do.
There are obviously things that we do to differentiate, but the tough thing about IP and R&D is giving the details kind of works against you. I think anyone you talk to is going to tell you that they are great at cultivation. It is hard to show you genetics outside of results, right? You can just see the end market performance overall, how we do. At this point, if we had unlimited capacity, I think you would see us have way different numbers in markets. We never have a problem with selling the product. It will be easy for me to tell you we think we have the best greenhouse. You will be able to see it, and it can in some ways be subjective, if there was an easy way we would explain it.
It comes down to a mix of yield quality, and it is ultimately, if you think the results we have had on a comparative basis have been successful, then that is due to a mix of the genetic program and cultivation. If we are less successful, that is a mix of genetics and cultivation.
Yeah. There is a second part to the question. Do you buy anything from outside? Do you supply third parties, or is it all owned and used internal?
I would say, more than 99% of all the genetics that we have are internal. Reason is, it is not that we are not testing external genetics. Every good genetics program, if you look also in adjacent industries, you want also to have external germplasm coming into the program so that we are not getting genetically also bottlenecked. That is always a big danger in every genetics program, that if you breed, that you are bottlenecking yourself. So we have an interest in also having external genetics coming in.
I can answer the third part. On sales, that is something that there are a few things we want to have in place before it makes sense. I think in Canada, it is because on the cultivation side, it is consolidated enough and there are breeder's rights that are complicated, and then you do get into a question of, are you gaining more than you are losing by basically increasing someone else's yield so much of their quality, and does that affect you?
So it is probably more of a when other markets or bigger markets open up, and it is likely more with, not to jump ahead or give more details on breeding. I think we talked before, stable seeds being important, but it is likely something where you are doing more on seed sales than it would be in tissue culture, where you need to be able to directly serve.
But that is likely in future markets or something that is a contract grow where we are able to control the distribution of our own genetics because it is just key to the brand.
So you are operating in a kind of silo, like the larger players, because you do not want to share too much, I imagine. Is that what you plan to tell us?
Today, yes. I think that.
All right.
Depending on market structure, that can change. I think today it hasn't made sense for us. The revenue from selling genetics versus what the trade-offs are, it doesn't really feel like it's there. It is a tool to use for potential contract grows in other markets to be able to. Today, you'll see we're pretty happy with the arrangement we have for cultivation. It is the Netherlands acquisition, where it's a closed market for us being able to take the genetics, send them over, and then actually have the same genetics being grown there. We can transfer that advantage for this idea of borderless products.
It's almost like a reverse center deal, but it's you go and you buy something and then, all right, we can bring our genetics the same way we can bring our edibles, we can bring our base genetics.
What happened in the beginning of the industry, you had to go buy genetics from somewhere.
No, actually. Having the fun story, Peace Naturals was the first commercial license issued under MMPR, which is, this is going back a long time, but it was one of the reasons it was such a sought-after license. Initially, the whole program was set up, and I think there was about 3,000 applicants, something like that. I think it was maybe first eight, I think after eight, there was a big bottleneck to get a license. What the rule was if you're applying for a license and you're in the illicit market and you want to be able to have genetics when things are open, you need to send it to one of the LPs. The original owner of Peace Naturals, I think, was viewed as very trusted.
He was on the gray side of things?
He was very trusted by the legacy market.
Yes. Okay.
A lot of genetics were sent there, but at a certain point, like all those seeds in the seed bank, if you didn't get a license, you just abandoned and gave up. A lot of people gave up.
What's different now compared to then? What's different?
Oh, my, everything. It's very, very different. Back then, we were growing in a, when I started, we were growing in a 100-year-old horse barn, and there were eight of us living in a house in Mississauga, and we had mattresses spread everywhere and whiteboards. There was one time when we were working on trying to, we had the first GMP inspection, and we were like, "I think we're done. I think we're getting close." A raccoon busted through the wall.
It's a great barn. It's a great barn.
I like the barn, but a lot has changed. A lot has changed.
You are talking about your own experience.
Okay, but back to the genetics part, what ended up happening was we ended up basically getting 20,000 seeds into a seed bank as a head start because people did not get the licenses. It was really hard to get a license early. You would have public companies that were valued at over $100 million with no license, and it would trade based off of like, "Oh, we are getting close to Friday. Health Canada might make an announcement," and they get a license, and they could gain $10 million-$20 million in market cap. It was really hard to get. But now it is like, "Oh, you have a license? Sorry that you just got it.
The illegal market is still there.
Yeah.
It's not as much now, is it? Is like what, 20% of the market?
It depends who you ask, and we don't really focus that much on what the, other than knowing it's a competitor.
It's the backyard growers, too.
Yeah, and it's probably different. I think for us, it's part of why we aren't the value or the cheapest tier where it's going to be hard to be cost competitive. But for us, it's focusing on innovation, and there are products that you're not getting from there. But I think it's like, I would maybe focus on it more if we were like, "Oh, we have all this capacity we can't sell," or having problems. But I think if you focus on a consumer and you understand they have options, whether it's from someone growing in their backyard, whether it's someone growing down the street or someone in another province, there's always going to be multiple options, and we just focus on giving the best possible experience. And if that we can control, they don't have to deal with taxes or labor laws.
We have the ability to do R&D and be out in the open and not worry about getting shut down. There are pros and cons, and I think it has worked out well for us. It obviously could be a more favorable overall market, but it is better for us to just focus on how do we give someone the best possible product.
I think that is great, maybe a great. Oh, I am so sorry. I do not want to cut you off if you have a question.
No, sorry. I was just going to ask, what is the lifetime of the average genetic receive in the market in terms of how long you generate sales versus some of your most successful launches?
Still climbing GMO is the—
Still climbing.
Yeah. I don't think we're there. The market has matured, but I don't think we're at that point where we see that stuff. Yeah. We've been, there are sometimes smaller strains that for other markets.
I think there's a strain that may not work in Canada but may work in another market. Although I do, I probably over repeat this, my favorite genetic ever, it's one I've learned, we'll let focus groups and overall pick things. My favorite genetic is not as popular because it's not high potency. It's a balanced strain and that doesn't maybe work as well, but the top genetics are pretty resilient, and again, it's tough to say we're going to take off a top genetic to launch another one because you have such lock -in sales. But if you look at GMO Cookies, and it's been Wedding Cake is so strong in Israel. The top ones are pretty sticky.
I think the ones that aren't as popular at first, if we had a portfolio of 30 genetics, that's where you see people that are saying, "New, new is all that matters. Keep launching, keep launching, keep launching." If you take a pretty focused approach and you find something people like, people are pretty loyal to it.
That's a great segue to talk about brand and our other consumer products.
Thank you. I get to hear about these projects every week and every day, and it's just wild to me because the amount of time I've been doing this and we've been doing this, it's exciting because for so long we've been at it, there's still so much opportunity to unlock and it's really motivating when I get to hear this. I'm Jeff Jacobson, I'm the Chief Growth Officer at Cronos Group. I have been doing this for quite a while. I started in the legal cannabis industry in 2012, and I was one of the co-founders of Peace Naturals. The site that, it's not the GrowCo site, but about three, four hours from here. We were rolled up into Cronos Group in about 2016. I oversee our sales, marketing, and operations.
My business unit really covers everywhere except for Israel, so that includes all of our brands and our operations outside of GrowCo. Our brands, our operations, and all of our sales for Canada, for Europe, for Australia—so everywhere that we're doing business, again, with the exception of Israel, where I have a counterpart who manages that market. My team works in tremendous partnership with the team at GrowCo here. All planning together, looking at all of the global demand and how we can work together to ensure that we meet that demand.
What you are not going to see today is that all the product that comes out of here in a bulk state goes to our other factory that I oversee, where we are doing manufacturing. That manufacturing is into the vapes, the edibles, the pre-rolls, and it is a centralized hub for more finished goods distribution, both for the domestic market and the international market. You have got to see a bit of insight into the really far upstream, and I know everybody is really excited. I am excited for you to go and see how all of that comes to life. You take all of this, knowledge, experience and time, and you try to cram it into a few slides. I will do the same so you can get out there.
Between the incredible work that Lasse's team does and the experience, just the general expertise, the execution at GrowCo, I get to benefit from that by bringing all of those great things to life in the markets that we are in and different products. I am going to go over high level of our brand strategy. I am going to talk to you about how we think about insights and our audiences of interest. Then I will give you a couple case studies on more of our recent successes.
I will start with our brand portfolio. We have seen a few different approaches to brand building. I am going to specifically focus on the Canadian market because that is where we are today. Thank you for coming here. I will focus on that for the bulk of the discussion. We have seen a number of approaches. I will break them into really two buckets.
We see some companies with an approach that I refer to as a house of brands. What I mean by that is launching a number of brands either at an overlapping time or shortly after one another, really going after multiple or oftentimes overlapping audiences of interest, trying to see in real time how consumers and different audiences react to those brands. Ultimately, what you end up seeing is that when you do that, it is always the 80/20 rule. You will have a brand or two that are driving most of your volume, and the rest of it is something that you are just keeping alive. We did not take that approach. You hear a lot of people say purpose and focus, and I believe that is one of our biggest differentiators from our competitive set, really in everything that we do.
I believe, and we believe in a philosophy of hero brands. What I mean by that is we spend, and I will talk a lot about it, a tremendous amount of time trying to understand who the audience is. If my job and my team's job is to bring great products to market, I need to know who my audience is. I need to know what that audience believes great products to be. We talk about brand positioning on this slide. Everything here, like I said, is very purposeful. Mainstream to me is really about the audience of interests, and in this context, it is the largest audience, be it that kind of mainstream, and I will talk about what that means to me, but the largest opportunity.
You will see a couple brands there, and then I will speak to how we supplement that and look at additional, call it incremental opportunities, trying our best to limit cannibalization. I think that is the key for me. Spinach is our mainstream brand in the adult use markets you hear about today. That is our hero brand within adult use. It is in Canada only today. We are number two overall, and I will show you some of those stats later in terms of retail sales. There was a point in time where we were number one, who I like to believe that we will get back there. But we are number two today. But within that, we are number 1 in multiple categories. This brand is really about great products, targeted to the largest size of prize or largest opportunity at fair pricing.
It is a consistently good product at a great price. Lord Jones is a brand that we use to complement that, and we do this in, Lord Jones is in Canada as well as Israel, where we see that there are consumers or audiences who are looking for an elevated product with elevated inputs, and elevated experiences. That doesn't always mean that it is priced dramatically higher or anything like that within premium, but we are putting more elevated inputs into these products, different forms of extraction, things like that go into the blends and the formulations. Mainstream for Peace Naturals. This is our medical proposition. We try really hard not to cross or blur the lines between the markets we are in. We are in medical markets, we are in adult use markets. Peace Naturals was the first medical brand in Canada, I call it the Peace Naturals site.
That was the name on the license. Today, it is a brand for us. But that was Canada's very first medical brand when the legislation changed in 2013. So it has a nice heritage story when we take it to other parts of the world. But that brand for us, in those medical markets, we treat similarly in terms of positioning to how we think about Spinach. We look at the largest opportunity in terms of audience of interest, then we try to target everything we do in that brand to that audience. LIT is a brand that, today you will see only sells flower in Israel, Germany. It is also in the U.K. And for there, we know that there is an audience of interest that wants a more affordable product, maybe with a bit of a compromise on quality or size or things like that.
Typically for us, because of the expertise here and the consistency we output, we are able to deliver a great quality product, but we know there is this audience that wants something more affordable. You are going to hear me talk a lot about insights. I sometimes joke, but in a very positive and meaningful way, that we have a complementary business that is consumer research and insights. I believe this is one of the biggest differentiators for our company. I have been doing this a long time. I know all or most of our competitors. We put a tremendous amount of focus, and resourcing into understanding our audiences. Then we think about, and again, specifically Canadian brands and positioning, how we understand those audiences and how our brands make sense to those audiences.
When recreational started in 2018 or adult use started, we have an internal insights team and it is spread across my organization and marketing as well as our R&D and product development teams. We also worked with some leading external market research groups. This is early on, and we really wanted to understand who the audiences are. Everybody loves music, but people like different types of music. We developed a questionnaire, and we spent a ton of time in stores running focus groups. The questionnaire covered things like lifestyle, current cannabis consumption patterns, habits, products people like. What we realized in doing that is that you start to really see a pattern, and you can see the different consumers fit within the different segments of the market. This is one view of how we think about who our different audiences could be.
For example, I will not go through all of them, but status-seeking noobs you can see. Then we also take all of that data and the results from questionnaires, we can extrapolate out to what we believe that would be on a larger scale, in terms of percent of the market. Status-seeking noobs, young, affluent, like to go out. That is definitely a core brand based on its positioning, its visual identity. You have other groups like ethical homebodies who are an older demographic who consume at home. You think about extroverted achievers, don't necessarily love going out all the time and doing all that.
We are trying to understand exactly who our audience is, what percent of the market we believe those audiences make up, and then when I talked earlier about our brand positioning and trying to position the identity of the brands, but as well the portfolios within those brands, within I will give you a very high level, and this will go into sort of where we play in the different categories of the market. This is the total market in Canada, just in terms of percents, retail sales, and what categories are making up the overall market in Canada. Flower historically was the largest category in the market. I think as affordability came to pre-rolls, convenience and innovation came into pre-rolls, we started to see that shift maybe one or two years ago, to now the point where pre-rolls overall is a bigger event in terms of retail sales.
But regardless, pre-rolls and flower input make up a significant portion of the market, vapes being next, then edibles. Concentrates continue to be really small in Canada. Things like shatters, waxes, like true-to-form concentrates, and others will be tinctures, accessories and things like that. For us, when we are thinking about positioning our brands with the audiences of interest to where we want to be successful, where we see the opportunity, we do the same thing with the categories. Talking about our specific performance, we have really focused on those largest opportunities. Flower is foundational for us. We have been doing it the longest. Obviously, we hit our stride between Lasse's organization and our partnership with GrowCo to get to the success that we have had. We were number one for quite a while in flower, but as mentioned, we ran into supply constraints.
We are continuing to see our share climb back up. We are number four, number three now, and I think we will continue to see that as we continue to ramp. Edibles was the first area of focus for us when we thought about innovation. We had a baseline of products in every category, but we wanted to spend the time. You will see at the top one of our real mantras is, we want to be better. We do not need to be first. Creating a baseline got us a presence in stores, and we were on shelves. It was like, how do we really lean into categories? We cannot do everything at once. Let us start where we think it makes sense to be a better product. Edibles out of the gate, and this is one of the case studies I will get into, is our SOURZ.
Edibles, we since launch, have been in this number one position, held consecutively for eight quarters. There were some products that came into the market that were non-compliant, so we had a bit of a dip. The government took those out, we went right back up. We have really been in this kind of leadership position in the edibles category with SOURZ by Spinach since its inception. From edibles, we then focus on our vape business, the introduction of things like liquid diamonds, new hardware performance. We will talk a bit about that. The introduction of Spinach PUFFERZ, that is the other case study I will get into. It is one of our more recent successes. With the innovation and renovation we have done in vapes, we have achieved a number 1 retail share position in that category. Pre-rolls, start flower foundation.
Let us work on edibles, where we knew we could truly innovate and differentiate with formulation, then to vapes, and now on to pre-rolls. Our trend in the pre-roll category continues to grow as we renovate our existing products, applying the same playbook that I will get into in how we think about bringing great products to life. Flowing right into that, there is a couple of things that we think about in our development journey. The first is understanding who that audience of interest is. Once we believe that we have a handle on that and we have a brand portfolio that positions within that, we want to understand what drives purchase intent.
We spend a ton of time in stores at retail, talking with not just customers but actual consumers on their shopping journey from the point of entry to a store, all the way to the point of purchase, listening, asking questions, and trying to understand what they are buying and why. What we learned from doing that, and this may not be that much of a surprise, but this is the pyramid of the purchase intent. People are looking for cost-effective products. I want to say that I do not believe that that always means it is the lowest price.
I do not think that that is what we are saying. I think that it is affordability, at the tier of quality that the consumer is looking to purchase. Effect is incredibly important, is, I am looking for a certain effect. Can I feel it, I think is critical to the decision.
Always flavor, so you can say "flavor" and "aroma" for strains, but always flavor. It comes up in every discussion we have with every customer, with every consumer, so it is a key point of interest for us in consideration and development and quality, right? Consistently, people find something they like, they want to get it all the time. To me, if I go back to that number one item, that is the intersection of these three. If you can figure out the harmony between these three tiers, that is where people are looking to say, "Okay, well, you have covered me in this area. I just want to pay a fair price for that product." That is why I say it is not always can I get the lowest price product. It is a combination of these things and where they intersect.
Once we feel that we have a handle on the purchase intent, now we go to the next layer, which is, all right, what is the development journey for a product? Similar to Lasse's slides, I am going to try to take a tremendous amount of time and knowledge and work and cram it into this one slide, but hopefully you can appreciate there is a ton of detail and granularity that goes into every single element of what is on the screen. Generally speaking, our approach to bringing new innovation to the market starts always with exploratory research. Again, I will get into some examples. If we think about SOURZ by Spinach, we have, Lasse mentioned, a sensory space in downtown Toronto. It is just a space that we use in the city center where we can bring in consumers constantly.
I would say that there is not a week that goes by that we do not have some level of research being conducted in these sensory spaces. It is just, again, such an area of focus and differentiation for us. For something like edibles or vapes or even flower, we will start by bringing in every product we can get our hands on in the general market. I think about edibles, we were bringing in competitor products. For gummies, we were bringing in confection, general confection, non-cannabis products, and we were bringing in rounds and rounds of focus groups to try to see what people gravitate towards, and asking a lot of questions, what drives your interest in that specific item. We learned things like shape and color, and I will get into how that led to our SOURZ product.
But we were trying to identify just in the early stage what people are gravitating towards. We learned, and really these buckets will apply upstream to the things here, but again, flavor, texture. We started to ask questions in the exploratory research, which flavors, we can see which flavors people are gravitating towards. Things like berry, people seem to really love no matter what category you are in. We started to map out all the different flavors that people were talking about, and then we started to identify based on the number of individuals who like a certain profile of flavor, these sort of primary flavors, and then secondary and tertiary flavors. What we have is what we call a TURF analysis that lays out a mapping sort of desired flavors across different categories of product.
Then we can position the secondary and tertiary where we believe is incremental. What is your baseline flavor lineup for that category, and then where do you think you can find incrementality? That is where the exploratory research will lead us into delivering on that consumer need. Then from there, we will get into things like concept testing. Think about edibles again. We learned, like I said, color, shape, size were really important to people. Then we started to prototype, and we started to bring different shapes, different molds. For our edibles, we looked at different colors, vibrance, less vibrance, whatever it was, and we brought those out and we started to get results from consumers, again, just looking at what they gravitate towards. Then once we believe we have a concept that wins, then we are going into quite literally a simulated shelf shop.
We are actually setting up our space to look like a store. Things are unmarked, unbranded, and we have people come in and we see, again, I will keep saying it, but where they gravitate to in that environment. Then from there it is, are we market ready? When we deploy this pathway for our products, it is pretty well the same no matter the category with some nuances, but we are leaning in to understand the flavors and textures. We are leaning into the visual appeal, same thing with hardware, what people like, colors, shapes. Then performance is incredibly important, like I said, effects. Is the product stable? What is the manufacturability? Can you automate it?
This is not necessarily something novel, but I think it is unique to our company, and I think that we spend a tremendous amount of time compared to our peer groups doing this type of work, and I think that leads to a lot of our successes. I will get into two case studies for you. SOURZ by Spinach is probably one of our greatest successes to date. I am sure we will have many more. But through all of that journey of development, it led us to this product. We learned that unique shapes were incredibly appealing to people. Then we, after exploration, what kind of shapes can we do? We landed on our S with an embossed inner, and people really loved it. We knew color was critically important. We also identified that nobody in the market was doing this dual-color, dual -flavor concept.
That allowed us to really lean into the insight and deliver it twice. We were able to come up with not just unique colors on each side of the gummy but also unique flavors. We hit those two attributes with this product. Then flavor masking was incredibly important in the edibles category. For this audience of interest, this mainstream audience, people did not want to taste cannabis. The way that we do that is not one magic ingredient. It is really a combination of multiple approaches. We are leaning into to try to complement certain flavors that are natural in the cannabis extract and then marrying that with how we can mask and cover the things that we find are not desirable. It is not one ingredient or one process that does the masking.
It's a combination of things that we've developed, including how we do our sugaring on the outside. We learned that that was very important. I won't go through everything here, but when you take that development pathway and that journey to really understand your audience and what they're looking for, it led us to SOURZ by Spinach. How do we bring that concept to life? This is something that's reasonably consistent no matter the category for us. We really work with our customers in terms of how we can reach that audience. The majority of our work is done in-store. That's where the purchase decision is made. Plus, regulations don't allow us to do all the things you may traditionally do in out-of-home marketing, but at the end of the day, it's that store experience. It's the budtender.
These are the interactions that drive the sale. We want to understand the path to purchase, like I said, from the moment they walk in the door to the point of sale, the actual transaction, we want to make sure that we're present along the way. So it's a combination of in-store displays, education with budtenders is critical. We do a lot of it, budtender events and things like that, plus in-store. We are doing store takeovers where we're actually demoing. For SOURZ, we had squishy versions, but not actual edible that people could touch and feel and put in their hand, and that led them to the counter to purchase. Then we do a little bit of out-of-the-store work, which is mostly on social media and digital media.
Since the launch of SOURZ, as I mentioned, I think we're just incredibly proud of the successes that we've had and that we've been able to maintain. You can see that since its launch in 2021, it very quickly climbed to being the leading edible. We're number one in this category for eight consecutive quarters. I mentioned we hold over 20% market share. We have a number of SKUs in the top 15, even in the top 10. We're just incredibly proud of this product line. Now we continue to innovate within it. Multi-packs, larger pack sizes are coming to the Canadian market, so that's something that we're in and that we're continuing to develop. We're also continuously developing new flavors and doing limited -time offer programs to see if there are new flavors that people like that may perform better than our other flavors.
Constantly iterating and innovating within the category, even at this leadership position. The next one that I'll touch on is Spinach PUFFERZ. This is our newest success. This was our first entry into the all-in-one category in Canada, or subcategory. Originally, there wasn't that much interest in the all-in-ones with our provincial customers in Canada because, and in their defense, there wasn't that much brand equity established at that point. Are people really going to buy into things like pods and things like all-in-ones? The 510 cartridges have always been a baseline because people can buy multiple cartridges with one battery and switch them around. But a couple of years ago, the interest started to grow into getting into disposables, and a couple of competitors entered. For us, we wanted to take that same playbook and apply it to the vape category.
We went right back to that exploratory research. We bought every device we could get our hands on of what was currently in the market, reached out to vendors overseas. We brought hundreds of devices into rooms, and we had multiple rounds of people doing the same thing. Gravitating towards. You have stick style, palm style. You have all kinds of form factors, all kinds of features, lights, screens now. You can play games on these devices. It is like, but what are people really looking for? We learned a lot. One of the things that came out of that for us was obviously rounds of concepts and prototyping. But we were looking at everything from the curvature, the feel in your hands, the sharpness of edges. Every detail to the millimeter of the size of this device was considered.
It is completely custom, including things like the size of the window. Then getting into features, again, I think a lot of that stuff is very gimmicky, but what people really want is they just want to understand the battery life. There are often times where if a cartridge is left sitting, you need to warm it up a little bit. So we introduced what we call a pre-heat or a boost feature that people can click on the side, and that will do a warm-up of the distillate or the extract inside. We really leaned into that same pathway of development, and it led us to our Spinach PUFFERZ device. What you have is, again, amazing flavors. We have used our TURF analysis to determine which flavors to go to market with, and we have a lineup of flavors to come behind it.
We introduced liquid diamonds into our formulation. That was incredibly important in driving velocity for us. The puffer panel was just this satisfying sensory kind of aspect of the device. I mean, you will have some samples in your bag there, but you will see the way it feels in your hand. It is soft and it is satisfying. Then there are a lot of performance considerations in the device. We have done things like epoxy coating of boards to be extra safe. I mean, there is some off-the-shelf stuff that does not work for us. So we spent a lot of time on just general safety and performance of these devices. We have an entire lab at that other site where we are doing what we call puff testing. We are putting devices on machines. We are replicating human consumption.
We are trying to make sure that it does not clog, that it does not burn all the way through after only 10 pulls on the device. We want to know that this device will perform over time and meet up to consumer expectations. Then with that, we bring the product to life in a very same way. So we had a ton of in-store displays and assets, a ton of education with stores and customers, with provincial boards as well. A lot of activations where we were letting consumers hold the devices and then just layering on with some of our digital and paid social.
But again, I mean, this kind of culmination of all of these efforts, this product gets introduced, and almost immediately we climb to the ranking we have today, where we are over CAD 20 million in retail sales, over 10% share of just the disposables category, in multiple SKUs in the top 20 for all-in-ones as well. We feel very strongly that we have this development journey and pathway that helps really drive and lead to our successes. I love this slide personally, and I think it speaks a lot to what I opened with around brand strategy. When you look at the competitive set, you can see that house of brands approach that I am talking about.
Then you can clearly see that there are only a handful of us, I mean, really us, when you look at, again, you may have a few less buckets or boxes within the core, but for us, we are really the standout where that approach to focusing on audience, not trying to do everything all at once. Not needing to be first, but trying to be better, has really resulted in Cronos being really the only LP that has a winning brand that is in every category. Not many other LPs can say that about any of their brands, be it that we are number one in edibles, number one in vapes, top three in flower. Yeah, it is remarkable, and I think this attests to that strategy that we deployed.
We are currently the number two brand in Spinach by retail share, but growing at a faster rate, at least last four weeks over last year's same period, growing at a faster rate than the number one. We have been in that spot before, so my goal is to get us back there. Then this slide always is something that I track very closely. I want to know that the output of all of this resourcing and all of this investment and all of this work, am I growing faster than the market? What you can see based on the last four-week period versus the same period a year ago, is that in every category or major category that made up that pie, Cronos continues to grow at a rate faster than the category itself.
This is something that my team and I are incredibly proud of, and we cannot do without the efforts of everything that happens at this site that you are going to get to see shortly, and everything that happens from our R&D teams. With that, I think we can open it up to Q&A.
Yeah.
And then get you out of there.
Is it hard to find volunteers for those research groups?
There is a sign-up sheet outside. I would say this, it was difficult when we were trying to do it at the There is some efficiency that could be gained if we do it at the site. It is a bit too rural. I will tell you, the short answer is no, not now when we are
It is also really funny.
Yeah.
Get some of the comments.
Yeah, please.
Pre-rolls, up and to the right, obviously always a good thing in this business. Separate to that, though, it is still number seven. It remains a drag. Tracking very well. Is there a path to that being similar to you have in other categories, the top 3 products? Are there structural barriers there in terms of certain brands and certain players that just are and will continue to dominate pre-rolls? Or is that something with a credible path to whether it is top 5 or top 3? However you want to answer it.
I am going to start it, you jump in, but I would certainly like to believe that we are going to make this thing a top 3 brand, if not a number one brand when we can get there. For us, it is really about just now that is our area of focus. We were at a baseline offering. It was not anything special, but we were in it, so we had some loyalty from some smaller segment of the consumer group. We chose to focus on edibles first and then vapes, and now we are on to pre-rolls.
What you are seeing with that up and to the right in our current performance is just that we started really leaning into it and pulling it on this development pathway or the journey, I mean, about a year and a half ago, maybe. The renovations we have done, we took existing products, we improved them.
We improved the flavors and the aromas of the inputs based on the work that Lasse does and that the GrowCo team does here. That certainly enables that category for us to have differentiation and strong consumer appeal. We have leaned into visual appeal on those products. I think it is important. If you look at what is in the market, you have really short pre-rolls, you have long pre-rolls.
We are focused on how you do it consistently at scale. I think for me, I do not believe that there is anyone in any category today that we cannot achieve a greater position or greater market share. For ourselves, I do not see anybody that has that strong of a foothold on the category. I think this is just us now putting our focus on it, and you are going to see that in the results, as I think you are.
Yeah. One thing also is the way we think about it is probably different than a lot of peers. It is not like who can have the. Obviously you want us to have the biggest market share, but sometimes I put restrictions on, which is like, we are not going to operate in an unsustainable way to say, "Hey, we have number one market share." That is not what the goal is. It is how y ou have a better product, a right value proposition, something sustainable.
Then, I think that what naturally happens if you try to have the best product and the best offer to consumer you end up being number one, but we do not want to do it by , like, "Okay, we are going to just do this and hope someone buys us. That was the old model that a lot of companies did. It just does not work long -term.
I think a lot of the work that we do when you talk about genetics, right, is pretty foundational. So there has been a lot of steps you are seeing incremental before you will see a big commercial launch and also part of it has been how much biomass do you have, right? That has been a bit of the sort of constraint on it. But, no, I think it is an area that we have a lot of focus on. There is probably three parts that really matter for it. One is obviously what your input is, like base flower, the minerals for infusions and other things, and I think we understand how to do. The third is what is the actual methodology, technique of rolling is, understanding, there is clogging, what the puff is, and what the filter is.
There are other partners, I am sure everyone is aware we have good expertise, and we can tap when we need stuff. So, yeah, a lot of areas to pull from in the group. But the great thing about the genetics program, about everything with insights is it all sort of adds value to the platform and it kind of compounds.
For the breakdown of the consumers that you laid out, I think those two that were heavy consumers add up to about 28%. When you think about the 80/20 Pareto principle, have you looked at those two heavy consumer demographics and seen how much they are making up, maybe in consumption or sales? The second part to that question would be, what level of brand loyalty are you seeing with those heavy consumer demographics, and is it greater than maybe the other ones? How do you look to address and target those?
Yeah, sure. The two that are the largest on that slide, in the way we break down the data is the status-seeking noobs and the tuned-out tokers, and that is who we sort of position as this mainstream bucket. These are consumers who, like I said before, want great products at fair prices. We absolutely see, we refresh this data quite often, maybe not annually, but every couple of years we go back out to see if this, and we have also seen people adopt this model. Even some of the provincial boards have something similar now, in the way that they do their consumer segmentation. We absolutely see that those groups continue to purchase greater volumes in the market, and that is why we identify that as our size of prize opportunity for specific brands. It is why we deploy that hero strategy specifically to those segments.
I think it also helps us when we think about, and again, the way to build, it does not mean we are like, we want to have a small number of brands forever. It is just how do those brands fit together, and making sure you really build out and focus on a brand before you look at another area. Being able to have segmentation and say, all right, we are not currently addressing One I always remember because I am cursed by it was ethical homebody and had a midlife crisis when I tested that way that was like, it was all three months and then I went and took this test again. Before you go to the other segments, you really want to finish building the brand equity where you started and then keep innovating. It just goes back to, you probably imagine I say no a lot.
That is why I always say earlier, sort of half of my job is like, "Oh, that sounds really interesting." "Not now. We need to keep winning here, keep winning here." When we go and we add something, making sure that it is incremental and not cannibalizing.
So it wouldn't be an Investor Day without some financial slides.
Yeah.
That was fun, JJ, but I need my co-host. He needs coffee. Okay. Give him that again.
Now this isn't a fun section.
Now that you're back, it's going to be more fun. All right. I'm just going to level set and then I'll turn the mic to Mike Gorenstein. Oh my God, Hannah. All right. Okay. So, very simple slide. Looking at our revenue trajectory. Last quarter we had record revenue across Canada, Israel, and our international markets. So up 58% year-over-year, and that's following 2025, where for the year we were up 25%, in 2024, where we were up 35%. So pretty tough comps. Our gross profit and gross margin trajectory. You'll see again we had a record gross margin, gross profit last quarter. Look, this is a big driver of our overall success. Between GrowCo consolidation, international markets, and getting into product categories with higher margins like vapes, like the Spinach PUFFERZ, you're seeing kind of all this success hit. Trend going in the opposite direction are OpEx.
We've continued to be very disciplined on OpEx over the years, and now we're really focused, like we know we need to grow our revenue on this stable OpEx base. All of that culminates into our EBITDA and cash flow generation. Since 1Q 2025, we've had positive adjusted EBITDA. That's six straight quarters in a row of profitability. The growth is accelerating, not plateauing.
What's an EB? What is that? EBI.
EBIT-
EBITDA?
EBITDA.
EBIT is taxes.
Yeah. Earnings before interest, taxes, depreciation, amortization.
Oh, it's a net figure then, sort of.
Right. Okay. While interest income, which isn't included in adjusted EBITDA, is a tailwind to free cash flows, I would say even adjusting for this, our conversion of adjusted EBITDA to free cash flow is best in class, and Mike's going to talk about that in some of our other slides. I think, finally, our CAD 827 million of cash on the balance sheet, zero debt, and that's all here to fund growth, fund M&A, buybacks, all of that without dilution or leverage risk. Click.
All right. This is, I guess, for everyone that's live streaming, the long, short guys are going to have this in the background. These will be the slides to pay attention to. Look, I think a big thing here that's important is how are we growing organically? That's kind of like the measure. While M&A can be important, once you own something, are you growing that as well and what value are you getting out of it? Just because of how competitive Canada is, and it's a relatively mature market, you hear people often ask, "What do you do outside of Canada because there's no growth in Canada?" I mean, for us, we feel like organically there is growth. I think, that's a really, really important metric for us.
We do have kind of blinded peers, but overall, I don't think anyone's really coming close on the growth. So pretty happy with how that's doing. Next slide. All right. I think that another one, and we didn't go as far as to say, "All right, what about debt as well?" But it's not just organically; are you growing on a per share basis? The fact that we have a declining share count, that we aren't increasing enterprise value by adding debt, that's a big thing for us. It's really staying disciplined and being able to overall grow and grow on a per -share basis. So, you can see kind of against peers, the gross profit basis, we are doing extremely well. Over 9 x higher and on a three-year basis, and that's certainly been accelerating with the buybacks lately. I think that's extremely important.
All right. Yeah. Same thing here. It is not surprising gross profit is growing. We are keeping our expenses stable that, overall, EBITDA is growing on a per -share basis as well. I think, despite talking about, we feel like a lot of the M&A in the space has not been accretive. When we look at opportunities, I think, with the analysts here, I think everyone has called the question for a while, "What do you think we are going to buy?" We just look, can we do better organically or acquire something? To date, a lot of that, especially in Canada, has been all about organic. Go here. All right. The reason I am skeptical about adjusted EBITDA, it is great we are that, there is a question about it. A lot of times it can be meaningless.
What really matters is, are you actually turning that EBITDA or adjusted EBITDA into money? If you take out the interest income, because obviously, that i s not really what we should be evaluated on. It is sort of nice to have. Still, what are we doing in terms of converting adjusted EBITDA into free cash flow is really important. We are not using these heavy adjustments. We are actually generating cash flow. It helps us be able to buy back shares, be able to invest in growth and continue looking for accretive opportunities. I think this slide is really important because I think when people are comparing us to other companies, it can be difficult to just say, "Okay, here is the headline, adjusted EBITDA number." It really is not all created equal.
There are a lot of things we do not understand why are adjusted out other places, but we try to be as conservative as we can. Really, it is meant to give an idea of smoothing things out. I think that is what it was originally meant as like a private equity leverage and what leverage can you tolerate. That is something I think we are pretty confident in that we are not trying to do that. I think with that, probably can start questions if you want.
Well—
Yeah. Any questions?
I do want a little time check.
Just a few more.
Okay.
Mike, you called out your performance and growth in Canada relative to your peers. A lot of that is obviously recouping of the share lost in flower when you were capacity constrained.
If we were to normalize for you being back to where you were in flower, with some of the growth initiatives you have called out, do you think you can and will still be growing faster than the market?
Yeah. If you look at vapes, edibles, depending on which year you are looking at, grown or maintained share. Pre-rolls is a big focus, huge opportunity. I think absolutely, and that is specific to Canada. What we did not show, Israel, Europe, where we also have a lot of growth ahead of us. Yeah. I think obviously that can make it dramatic, and it can lead to a little bit of a step change in growth, right? Like the flower for Canada, right? It does not mean overall the company is in growth, but flower is dropping in Canada because we are servicing other markets, and you can have a pause where we need to go get more capacity. We need to find another way to get more flower, and then once we have it, we will see a big acceleration for growth again.
Might not be as smooth, but I think that the opportunity is still there.
Are you guys thinking about capital allocation just in terms of share buyback, organic growth, and M&A opportunities? Just breaking those.
I would say it is really about opportunistic, right? We are in a very fortunate position. One is not stopping us from doing the other. If there is something that is in accretive acquisitions and that we like, we will go do it. If there is CapEx or automation that we see a good return on, we will do it. The thing that we are always careful about is making sure that we do not take on so much that we fail at it or we are not excellent at it. We want to be best in class in everything that we are doing. That is a big function. On share buybacks, volume is kind of restricted in how much we can do, but we still prioritize that.
Just an overall picture. I noticed some of the peers seem to be doing quite well, not all of them. There are two or three big companies that are doing pretty well, and you are one of them?
It is fair to say, yeah.
Okay. Okay.
Can you give a status in terms of this facility not being EU GMP certified yet, right? Can you give a timeline or any guidance as to when that might be?
There is a European group that could answer that. I do not want to put a timeline on for them that we have had plenty of delays, but I think that it is not something that we expect is going to affect the business or opportunities. I think it is something that is coming, something we are working on, but I do not have an exact. I think we have learned from the Netherlands that trying to give an exact date is not always in our control.
Once it is certified, it is going to be obviously just for this facility. You are not going to have extra EU GMP capacity to process for other people, right? Like, say, for Northern Green Canada or iMedica.
It is not really a part of our model. If we were doing a contract grow or something else, then that would be related. We just try and focus on what we think long -term, like where the business is. I think those businesses short term certainly can be really profitable. I think long term, it is probably not still going to be a major business. It is really just what will help us develop our brands, help us do well in a five or 10-year period. Israel is another one, so it would not just be this facility. It is good to have that optionality. When we are thinking about third party, it is really more about how does it help our own sales versus a service provider to others.
What would you say is the major risk to your growth trajectory near-term?
Regulation always is. You never know where things go, what opens, what doesn't, what can close. That's the one that's always the answer of what is the biggest change outside of our own operations that we can't control, the regulatory. That's probably the number one. I can give you a laundry list of 20 things that we worry about, but that's probably a big driver. I think we're pretty resilient from a macro perspective. I know we get that a lot about, the last few years, you've had a weakened consumer. You've had a lot of competitiveness, and I think that as a category, if you're offering the right value proposition, that's something that you can overcome. We've been pretty pleased with being able to navigate that. That as a macro risk, we feel like is a big pressure point for us.
Mike, I don't want to take advantage of your time here, but I know it's a public setting, but do you want to make any comments on Aurora Cannabis and Cronos Group, any thoughts on Campfire or Cronos Group?
I don't really know. I wish them both. I hope they both get whatever they want out of it. I don't know. I don't want to take a side.
All white knight down here, I guess.
Those renaissance fairs, I think I did one when I was younger with the balloon on your head and the sword, and that is probably more of the most knighting I think I will be doing for a while.
Okay. On that note, why don't we take a quick bathroom break, and then we are going to split up into two groups of 11, 12 for the tour.