Categories Consumer, Earnings Call Transcripts

Cronos Group Inc (CRON) Q1 2023 Earnings Call Transcript

Cronos Group Inc Earnings Call - Final Transcript

Cronos Group Inc (NASDAQ: CRON)Q1 2023 Earnings Call dated May. 09, 2023

Corporate Participants:

Shayne LaidlawInvestor Relations

Mike GorensteinChairman, President and Chief Executive Officer

James HolmChief Financial Officer

Analysts:

John ZamparoCIBC — Analyst

Andrew CarterStifel Nicolaus — Analyst

Michael FreemanRaymond James — Analyst

Nadine SarwatBernstein — Analyst

Matt BottomleyCanaccord Genuity — Analyst

Viktor MeierTD Cowen — Analyst

Presentation:

Operator

Good morning. My name is Tanya, and I will be your conference operator today. I would like to welcome everyone to Cronos Group’s 2023 First Quarter Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Shayne Laidlaw, Investor Relations. Please go ahead.

Shayne LaidlawInvestor Relations

Thank you, Tanya, and thank you for joining us today to review Cronos’ 2023 first quarter financial and business performance.

Today, I am joined by our Chairman, President and CEO; Mike Gorenstein; and our CFO, James Holm. Cronos issued a news release announcing our financial results this morning which is filed on our EDGAR and SEDAR profile. This information, as well as the prepared remarks will also be posted on our website under Investor Relations.

Before I turn the call over to Mike, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call. These forward-looking statements are based on management’s current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.

Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our website, by which any forward-looking statements made during this call are qualified in their entirety.

Information about non-GAAP financial measures, including reconciliations to US GAAP can also be found in the earnings materials that are available on our website. Lastly, we will be making statements regarding market share information throughout this conference call. And unless otherwise stated all market share data is provided by Hifyre. We will now make prepared remarks, and then, we’ll move into a question-and-answer session.

With that, I’ll pass it over to Cronos’ Chairman, President, and CEO, Mike Gorenstein.

Mike GorensteinChairman, President and Chief Executive Officer

Thank you, Shayne, and good morning, everyone. Building off our strategic realignment in 2022, our 2023 strategy is focused on launching innovative, borderless products, improving the gross margin of our overall business and driving cost out of the P&L as we move towards being cash flow positive in 2024.

During our last earnings call, we announced an additional $10 million to $20 million of projected operating expense savings in 2023. I’m happy to report that we are tracking towards achieving the high-end of this range. This follows our over achievement of savings in 2022 of approximately $29 million versus a target of $20 million to $25 million. James will go into more detail on the financial results during his remarks. But I want to comment on the improved trajectory of our gross margin.

2022 was a transformative year for Cronos which put us on better footing for the future, but given the quarter-to-quarter volatility of our gross margin performance driven by the timing of certain activities associated with our intended changes at the Peace Naturals Campus, we prefer to look at the year in totality. As a reminder, our gross margin for full year 2022 was 13%, but we ended the year in Q4 with a negative 1% gross margin.

Turning to Q1, we posted a 12% gross margin on a consolidated basis. Now that we’ve solidified our decision to stay at the Peace Naturals Campus, and reorganized our business to optimize our supply chain, we intend to build on this momentum to have a smoother gross margin that will improve from Q1 performance as the year progresses. We are also keenly focused on margin accretive innovations to further diversify our product mix in a higher margin derivative products such as our number one ranking edibles.

In Canada, during the first quarter, we continue to execute our plan to create a robust portfolio of borderless products highlighted by several new launch items [Phonetic] across critical categories such as pre-rolls and vape. Our Spinach brand is the only brand that holds the top ten market share position in all categories they participate in, which are flower, pre-rolls, vapes and edibles.

Our award-winning Spinach gummies became the number one gummy in Canada in Q1. Spinach completed the quarter with a 15.3% market share in the edibles category, growing retail sales by 49% year-over-year versus category growth of 25%. When focusing on just gummies, Spinach had a 21.9% market share. We are thrilled that our gummies have become an integral part of so many adult consumer’s life, and we’d like to thank them for showing brand loyalty and enthusiasm for our products.

Winning in the Canadian edibles category against the top US brands gives us additional confidence that this borderless product platform can win in any market. Despite our strong performance the edibles category has been negative impact — negatively impacted by chewable extracts which are products that purport to take advantage of a regulatory loophole to sell at a higher potency per pack than compliant edibles.

Health Canada has recently notified producers that these products are incorrectly classified as cannabis extract and has announced steps to remove these products from market. For reference, four of the top ten edibles are non-compliant edible extracts and as a result, we anticipate a more robust back half performance for our edible portfolio.

In the base category, we achieved a 4.4% market share in the first quarter, up 230 basis points year-over-year climbing to number seven. We will build on that momentum in ’23, with a continued push to include flavor-forward profile and rare cannabinoids in our base, driving innovation, while leaning on our winning formulations that consumers love across the portfolio.

We launched a new Mango Kiwi Haze CBC vape under the Spinach FEELZ brand with 32% THC and 5% CBC. Our CBC gummies performed well in the early innings of their launch in the Canadian market, and we are excited for consumers to try CBC in the vape format. We’ve also introduced our Spinach FEELZ Blackberry Kush THC:CBN vape which has helped contribute to our outsized 155% growth in retail sales in the category year-over-year in Q1 versus category growth of 22% for the same period.

Pre-rolls are one of the fastest growing categories in the cannabis market. The category increased 38% year-over-year during the first quarter and infused pre-roll accounted for approximately 24% of the dollar share in pre-rolls during the same period. Using our success in edibles category as a blueprint for other formats, Cronos continued to elevate and differentiate the consumer experience by bringing a portfolio of infused pre-rolls to market utilizing our best-in-class potent genetics, our flavor-forward and terpene-rich formulations and sought-after rare cannabinoids.

In Q1, we launched two new rare cannabinoid-focused pre-rolls: The Spinach FEELZ Mango Kiwi Haze THC:CBC pre-roll and Spinach FEELZ Blackberry Kush THC:CBN pre-roll. Since revamping the portfolio last year, Spinach pre-rolls have gained market share moving up to the eighth most popular brand in Q1, up from 16th in Q4. With the right base pre-roll portfolio in place and the recent launches of four infused pre-roll offerings three of which utilized rare cannabinoids, we aim to build off this momentum to drive continued market share gains in this critical category for us.

We closed the first quarter by maintaining our number three market share in the flower category equating to a 5.2% share of retail sales. Flower in the Canadian market continues to be heavily weighted to 28 gram bag, encompassing nine of the top ten SKUs. Despite this, we continue to defend market share across pack sizes leading with our 3.5 gram GMO cookies SKU and their 28 gram wedding cake.

GrowCo’s performance continued to be strong in Q1. GrowCo reported us preliminary unaudited revenue of approximately $3.2 million to non-Cronos customers. Additionally, the credit facility that Cronos previously provided to GrowCo currently has $73.2 million outstanding following the principal repayment of $0.7 million by GrowCo in Q1. In addition, GrowCo made $5.5 million in interest payment in Q1. The strong financial performance of GrowCo yielding equity pickup, interest payments and loan pay back to Cronos is a vital component of our overall financial picture.

Turning to Israel. The growth of the medical cannabis industry slowed in Q1 driven by geopolitical factors and government appointment disruptions which has led to multiple changes in the health ministry causing a slowdown in patient permit authorizations and increased competitive activity. Following recent news from the Israeli Health Ministry, we have renewed optimism about the prospects of regulatory change impacting how medical patients can access cannabis.

A government committee recommended that Israel transition to issuing prescriptions via public health care services from its current model which issues personnel patient licenses and it’s a more complex process. The new proposal would enable a more streamlined approach to obtaining a cannabis prescription, potentially increasing patient count by multiples. As a reminder, the current number of medical patients in Israel is approximately 125,000, or just 1.3% of the population. This compares to certain mature medical markets such as Florida in the US were 3.7% of the population is approved to purchase medical cannabis.

If Israel were to reach 3.7% of their population, that would equate to 346,000 patients, a near tripling of the current market size. This is a realistic scenario we think is possible over the next couple of years, especially given the changing result in a favorable regulatory environment such as pharmacy distribution in a federally legal jurisdiction.

We are confident in the long-term potential of our position in the Israeli market, as it’s still one of the world’s largest federally legal medical programs today. We have the top performing brand in the market, PEACE NATURALS, and we continue to invest for growth in this market.

In the US, we have nearly completed the transition away from the beauty category and are moving forward by returning Lord Jones to its roots as an adult-use brand featuring high-quality cannabinoid products. We are assembling a portfolio of borderless products with strategic infrastructure and global partnerships combined with an industry-leading balance sheet, allowing us to execute effectively in any market.

With that, I’d like to pass it on to James to take you through our financials.

James HolmChief Financial Officer

Thanks, Mike, and good morning, everyone. I will now review our first quarter 2023 results in relation to the prior year period.

The Company reported consolidated net revenue in the first quarter of $20.1 million, a 20% decrease from the prior-year period. Constant currency consolidated net revenue decreased by 14% to $21.7 million. The revenue change was primarily driven by lower cannabis flower sales in the Rest of World segment and a decline in the US segment due to its strategic repositioning. Consolidated results were additionally impacted by the weakened Canadian dollar and Israeli Shekel against the US dollar during the current period. These results were partially offset by growth in cannabis extract sales in Canada.

Consolidated gross profit in the fourth quarter was $2.4 million equating to a 12% gross margin, representing a $4.5 million decline from the prior year period. The decline was primarily driven by a reduced gross profit in the Rest of World segment due to lower cannabis flower sales in Israel, an adverse price mix shift in cannabis flower sales in Canada, increased returns, and a reduction in gross profit in the US segment. These results were partially offset by higher cannabis extract sales in Canada with a higher margin profile than other product categories and lower cannabis biomass costs.

As Mike mentioned, our results in 2022 were volatile quarter-to-quarter driven by the realignment of our business, which makes the comparison on a gross margin line in Q1 difficult. With that in mind, looking at both the full year 2022 where we had positive 13% gross margin, and a sequential progression from Q4, which had a negative 1% gross margin to Q1 2023 where we had a positive 12% gross margin, you can see encouraging signs of improvement and stability, and we intend to build off this momentum throughout 2023.

Consolidated adjusted EBITDA in the first quarter was negative $16.8 million representing a $2.1 million improvement from the prior year. The improvement was primarily driven by a decline in general and administrative and research and development expenses. As Mike mentioned, we are tracking towards the high-end of our previously announced $10 million to $20 million in operating expense savings in 2023.

Turning to our reporting segments. In the Rest of World segment, we reported net revenue in the first quarter of $19.5 million, a 14% decline from the prior-year period. Constant currency net revenue in the Rest of World segment decreased 7% to $21 million. Revenue change was primarily driven by a decline in cannabis flower sales in Israel due to increased competitive activity, the slowdown in patient permit authorizations and political unrest, while sales in Canada were impacted by adverse price mix shift in the flower category driving increased excise tax payments as a percent of revenue and increased returns. These results are partially offset by growth in cannabis extract in Canada driven by edibles and vapes.

Gross profit for the Rest of World segment for the first quarter was $2.9 million representing a $3.8 million decline from the prior year period. The decrease was primarily due to lower cannabis flower sales in Israel, adverse price mix shift in the Canadian flower category driven by the consumer transition to 28 gram bags from 3.5 gram box. These results were partially offset by higher cannabis extract sales in Canada, which carry a higher margin profile than other product categories and lower cannabis biomass costs.

Adjusted EBITDA in the Rest of World segment for the first quarter was negative $10 million, representing a $6.6 million decline from the prior year period. The decrease versus the prior year was primarily driven by a decline in gross profit.

Turning to the US segment, we reported net revenue in the first quarter of $650,000, a 72% decrease from the prior year period. The decline year-over-year was driven by a reduction in promotional spending and SKU rationalization due to the strategic realignment of our US business. Gross profit for the US segment for the first quarter was negative $550,000 representing a $760,000 decline from the prior year period. The decrease year-over-year was primarily due to lower sales volumes and increased inventory reserves.

Adjusted EBITDA in the US segment for the first quarter was negative $2.9 million, representing a $4.2 million improvement from the prior year period. The improvement versus the prior year was primarily driven by a decrease in sales and marketing and General & Administrative expenses.

Turning to the balance sheet. The Company ended the quarter with approximately $836 million in cash and short-term investments. In addition to maximizing the return on our cash, we received an interest payment on our GrowCo senior secured loan of $5.5 million, which combined with the regular quarterly principal payment of $0.7 million. Total cash paid by GrowCo to Cronos is $6.2 million in Q1. Having the best balance sheet in the cannabis industry enables us to take calculated strategic bet, while we remain steadfastly focused on reducing cash burn.

Last year, we made significant strides to reduce spending and improve our cash burn rate. And in February, we committed to an additional $10 million to $20 million in savings across operating and expense categories in 2023. And we are currently tracking towards the high-end of that range.

Moving to cash flow. Adjusting for the cash outflow of approximately $32.8 million in income taxes payable, associated with the one-time Altria warrants relinquishment, free cash flow in Q1 2023 would have been negative $15.7 million representing a 55% improvement year-over-year. We anticipate recouping most of the tax payments associated with the one-time Altria warrant relinquishment over the next three years.

Lastly, we anticipate the cash flow defined as the net change in cash and cash equivalent excluding the impact of the purchase or proceeds of short-term investments for the remainder of fiscal year 2023 will decline by less than $25 million. The Company also expect that cash flow will be positive in 2024. The improved cash flow trajectory will be driven by, among other items, net revenue of $100 million to $110 million for full year 2023, continued gross margin improvement, operating expense reduction efforts and anticipated interest income of $30 million for the remainder of fiscal year 2023.

With that, I’ll turn it back to Mike.

Mike GorensteinChairman, President and Chief Executive Officer

Thank you, James. We are winning in Canada and Israel due to all the hard work our employees do to bring best-in-class borderless products to market. Our Spinach brand is the only brand that holds a top ten market share position in all categories they participate in, which are flower, pre-rolls, vapes, and edibles. We are confident that as regulations change, we will be among the best-positioned cannabis company to capture additional market share in any market.

Before getting into questions, I want to level set what’s under the Cronos Umbrella and where things stand today. We closed Q1 with $836 million in cash and equivalents and zero debt. And we generated $11.2 million in interest income with an anticipation to generate an additional $30 million interest income for the remainder of 2023.

Our spinach brand has the following market share ranked for Q1. Overall, Spinach is a number three cannabis brand, and it’s number one in edibles, number three in flower, number eight in pre-rolls, and number seven in vapes. We have a leading medical brand, PEACE NATURALS in Israel which posted $5 million in net revenue in Q1 with a 6.3% stake in PharmaCann, one of the largest private US MSOs currently on our books for $49 million.

We have an approximate 10% stake in Vitura, a leading publicly-traded Australian medical cannabis provider worth approximately $13.8 million as of the end of Q1. We own 50% of the equity in Cronos GrowCo which is profitable and paid a $6.2 million in principal and interest payments in Q1. We ended the quarter with a remaining balance of approximately $87 million on our combined loans to GrowCo and its partners. We own real estate and multiple licensed facilities free from any encumbrances.

And last, but certainly not least, we have an exclusive partnership with Altria on a global basis. At the close of the market yesterday, Cronos traded a market cap of approximately $780 million in an enterprise value of approximately negative $56 million.

With that, I’ll open the line for questions.

Questions and Answers:

 

Operator

Certainly. [Operator Instructions]. And our first question will come from John Zamparo of CIBC. Your line is open.

John ZamparoCIBC — Analyst

Thank you. Good morning. I wanted to start on Israel and would like some additional color there, and apologies if I missed it, but I’m curious what it is you think that market needs to do to get back to growth? What is that you’re seeing on competition, and historically you’ve been somewhat protected versus your peers on the Israeli market because of your brand. I wonder exactly what needs to change to get you maybe more optimistic for the back half of the year in Israel?

Mike GorensteinChairman, President and Chief Executive Officer

Sure. Thanks, John. I think the biggest thing that we are seeing in Israel related to competition is, it has to do with patient growth. There’s been some unrest politically, and that’s really stalled a lot of the regulatory process. But there have been announcements especially recently on progress for announcement — sorry, for a regulation to actually change the way that the prescriptions are issued, and which pharmacies are able to carry cannabis.

So this would essentially move from the special process they have now where you have to get all these different steps that are barriers for patients entering the systems, to opening it up to being treated like another controlled substance. And what we talked about in the prepared remarks, we could see that really increasing the patient count by multiples. And if you think about look at Q1 last year, we’ve seen that when there is a favorable regulatory change in Israel, you can see really, really rapid growth. And given the announcements or indications are that, that is something that can happen this year.

So, we are looking at that over the next couple of months sticking more to Q4, and I think that would really just open up the entire market and return to what we saw at the beginning of last year in terms of growth.

John ZamparoCIBC — Analyst

Okay, understood. And then, my second question is on gross margins, in particular on Rest of World. You saw a nice uptick in Q1 versus Q4, but I wonder at what point, and maybe we are at the point now, but will gross margin in Rest of World somewhat stabilize, I assume there’s some moving parts with the switch back to Stayner, obviously there’s a decent amount of fixed costs in that line. So you’re not able to completely predict it, but, are we at the point now where gross margins should somewhat stabilize, or is that likely back half of the year development?

James HolmChief Financial Officer

Hey, John. Thanks for the question. So, I guess the answer I would say yes, we are somewhat stable, but we do expect further improvements from here. So, we are continually optimizing our supply chain as you highlighted, right. We are evaluating moving certain activities back to Stayner and so some of those are in process. And so we would expect further improvements as we see some of those flow-through COGS. And so, we would expect a potential margin pickup right throughout the remainder of the year. But we are coming — kind of coming back to more of a normalized state versus a lot of the volatility you were seeing in the prior year.

John ZamparoCIBC — Analyst

Okay. That’s helpful. I’ll pass it on. Thank you.

Operator

[Operator Instructions]. And our next question will come from Andrew Carter of Stifel. Your line is open.

Andrew CarterStifel Nicolaus — Analyst

Hey, thanks. Good morning. Just wanted to ask, first-off on the revenue guidance for the year, the $100 million to $110 million. I’m getting 19% to 34% for the remainder of the year, which looks like its spot rate is 24% to 39% constant currency. Could you give us the cadence of phasing, and if I heard your answer to John’s question right, you don’t really expect an improvement in Israel until the fourth quarter. Just help me square all that. Thanks.

James HolmChief Financial Officer

Okay. Andrew, can you maybe reframe the question? So, are you talking about when we are expecting the revenue for each period for each quarter?

Andrew CarterStifel Nicolaus — Analyst

A little bit. I mean, I’m just, so to back up, $100 million to $110 million in revenue for the year to start there, it means the back-nine [Phonetic] has to grow 19% to 34% and that means constant currency. Is my math just on spot, 24% to 39%. So I’m asking, kind of what’s the phasing of that revenue growth acceleration?

And within that, what about — if I heard John’s question, right, Israel doesn’t improve till the fourth quarter?

James HolmChief Financial Officer

Got it. Okay, that’s fair. So yeah, we are confident in the revenue guidance of $100 million to $110 million for the full year 2023 right driving some of that back-half improvement you’ve highlighted, we’ve introduced a meaningful number of new innovations over the last six months, but we have also the strong pipeline of innovation launches planned for the remainder of the year to help fuel that additional growth, right.

And we also have announced today that we are on track to achieve the top end of our opex savings targets right for $10 million to $20 million, all of that will work together to drive the overall cash flow improvement. But we do expect kind of continued revenue improvements right throughout the duration of the year.

Mike GorensteinChairman, President and Chief Executive Officer

And just to layer on that. I think when we are talking about Israel in that — that Q4, that’s really for you to see a huge step change in what I think would be meteoric growth. When we are talking about that, we are not relying in guidance on the regulatory change, but we do think it’s something that’s more likely than not, and that we are very optimistic about it.

James HolmChief Financial Officer

Yeah, it would be additional upside.

Andrew CarterStifel Nicolaus — Analyst

Got it. And then, the second — kind of to clarify, number one in 2024, I think you said positive free cash flow. Is that based on current interest rates? And I guess going back to your — kind of your comments at the end of the script, Mike, you talked about kind of where the enterprise value is right now. Does that become a hindrance in terms of what you’re trying to do here and overall, in terms of having an equity value, that’s a negative enterprise value or is it just, hey you have enough capital to allocate, you’re going to continue to allocate or do you feel some kind of impetus to get the shares moving to your direction obviously helpful for M&A? Thanks.

Mike GorensteinChairman, President and Chief Executive Officer

Sure. James, I’ll let you go first on guidance, and then I can jump to the balance sheet where we are positioned.

James HolmChief Financial Officer

Yeah, and I apologize Andrew. I’m having a little bit of issues on my line. If you could reframe or restate the guidance question?

Andrew CarterStifel Nicolaus — Analyst

Yeah. Just the cash flow guidance for next year. Is that based on current interest rates and kind of your cash flow projections?

James HolmChief Financial Officer

Got it. So, no, so interest rates, we definitely are assuming right some stability there, right. But there is a little bit of flexibility, let me put it that way. We are also assuming same qualifying. We are assuming no significant degradation right in general economic or regulatory environment, right. So — but I’ll say, we’ve got some flexibility on all of those. So, we are very comfortable of the interest rate, the guidance we’ve given is reasonably conservative as well, right. So, I would say if there’s material changes right, then obviously that could impact the guidance.

Andrew CarterStifel Nicolaus — Analyst

Let me try it one more time to be absolutely clear. So, the free — positive free cash flow in 2024, is that based on core operations, or does that include an assumption for interest income, kind of similar to how interest income is providing, I guess $40 million of cash this year?

James HolmChief Financial Officer

Yeah, so, yeah, I’ll maybe dig in a little bit more, right. So, we are talking net cash flow, right, so it does include interest income. So, we are saying this is a combination of improved COGS, improved opex savings, right, in that $10 million to $20 million range. We are tracking towards the high-end, right. Improved topline that we are projecting throughout the year, which we highlighted that the guidance of $100 million to $110 million, right. And then obviously the interest would be a significant component of that as well.

Mike GorensteinChairman, President and Chief Executive Officer

Thanks. To jump in on the second part of your question, Andrew. Okay. I don’t think that there is a hindrance. I think that we feel that we have a lot of flexibility, but also, I think it’s important, and it’s time for us to make sure that we are self-sustaining. So that’s really the importance of being cash flow positive for us. That doesn’t preclude us, if we see something that’s accretive we will continue to be opportunistic. Of course, my preference will always be way towards anything that is accretive to cash flows, but ultimately we’ll keep turning over every stone and looking for something that’s value creative and not just relying on the interest income. So, I still think we have plenty of flexibility.

Andrew CarterStifel Nicolaus — Analyst

Thanks. I’ll pass it on.

Operator

One moment for our next question. And our next question comes from Michael Freeman of Raymond James. Your line is open.

Michael FreemanRaymond James — Analyst

Hey, good morning, Mike, James, and Shayne. Thanks for taking our questions. I wonder given interest payments are becoming — have become an increasingly important part of your Cronos’ revenue picture, I wonder if you could just describe your strategy for investing cash and yielding returns from it?

James HolmChief Financial Officer

Sure. Thanks, Michael. So, we are constantly looking for how to maximize our return on our available cash. And so we work with, I’ll say large stable top-rated financial institutions right, especially in the current environment, right, we are extremely focused on ensuring safety and security for those funds. But then obviously making sure we maximize the return on those. So, we are looking at vehicles that are typically a year or less, right. So we implemented a laddering strategy, three months, six months, nine months, 12 months vehicle, but again with the intent that its large stable financial institutions with top rates of return there.

Michael FreemanRaymond James — Analyst

All right. All right. Great. That’s helpful. So second question, we’ve seen your rare and cultured cannabinoids portfolio proliferate through your product set. I wonder looking ahead a couple of years, what are some under-penetrated products or markets you can see rare cannabinoids playing an important role in?

Mike GorensteinChairman, President and Chief Executive Officer

Sure. Great question. I think as you see consumer preferences shift from flower towards derivatives, I think you’re also going to see more awareness of what those derivative products are, and that’s where rare start to come in. I would keep pointing to pre-rolls. You’ve seen just the general rise in popularity of infused pre-rolls, and you’ll also notice a lot of our launches including in infused pre-rolls. We still think that is one of the biggest growth categories over the next few years. One of the best opportunities to differentiate and similar to what you see in edible further that you get from flower, the more we believe there’s an opportunity to differentiate.

So, I think that’s going to be huge, and we still have a lot of opportunity across the rest of our portfolio that — in the format that are in market today in terms of edibles, vapes, pre-rolls. And then, looking out a few years, I think that there are some interesting things that we’ll be able to do with concentrates which you haven’t seen us launch to-date, but we are — we do think there’s opportunity there.

Michael FreemanRaymond James — Analyst

All right. That’s great. And if you could — if I can just throw in one more. On the — given pre-rolls and infused pre-rolls specifically, it seems to be an area of focus for Cronos. Wonder how you just — how you’re seeing the price action in that market? We’ve been hearing some talk of price compression, and I’m wondering how Cronos is able to — how Cronos is going to manage that going forward?

Mike GorensteinChairman, President and Chief Executive Officer

Yeah, you know, look I think pre-rolls is a very big category, and I think that you’re going to see real segmentation in how the product develops. I think that on one end of the spectrum there is an opportunity to actually have pre-rolls that you can sell cheaper than flower. You aren’t going to be as worried about making sure the flower is well managed there because it’s going — processed into the pre-roll. So you will have a segment that’s more value-oriented, that’s more about automation. And then I think on the other end of the spectrum, you get into something that’s almost more cigar-like, that is much more premium that I think will be at a significant premium than flower. So, I think it’s really about innovation, it’s about understanding exactly what consumer needs you’re targeting. And that’s one of the reasons that I keep talking about why it’s such a big opportunity there. But I think you have to make sure that you know exactly where your products fits and have a very narrowly tailored products for that segment in order to win.

Michael FreemanRaymond James — Analyst

Okay. Thank you very much. I’ll jump back in the queue.

Operator

One moment for our next question. And our next question will come from Nadine Sarwat of Bernstein. Your line is open.

Nadine SarwatBernstein — Analyst

Hi, good morning, everybody. Two questions from me. Can you comment on what you’re seeing in terms of pricing in Canada? Any signs of reaching bottom yet, or are those oversupply and market still being the overriding factor? And then my second question, you called out the strong market share position that Spinach has developed especially within edibles. And if I look back a couple of years, people were saying that developing strong brands in cannabis could prove challenging on risks of it being commoditized category.

So, with the experience you’ve had in the sector, I’m curious to hear what factors would you say are behind the success of building a brand with strong market share in cannabis? Thank you.

Mike GorensteinChairman, President and Chief Executive Officer

Sure. So I think on the first, what we are seeing and maybe one of the bigger factors in the price compression isn’t solely about supply, but it actually has to do with excise taxes and how they’re being tamed [Phonetic]. And what — the trend you’ve noticed is that really big portion of the LPs in Canada are actually not paying the excise taxes. And I think given their capital position they are really leveraging that cost of wins to really further compress prices. So, I do think one of the things that is needed and I expect will happen will be some enforcement on how excise taxes are collected and generally excise tax reform, I think is something that’s very important and very needed for the industry, but we still see especially on flower there is compression.

And on the second part of your question. Building a brand, I think it’s understanding that it is a product-based focus that you need to have a different product. We have in cannabis consumers that are very, very focused on what are the features the actual product has, it’s less about telling a story at this stage in the industry, it’s less about trying to bring people into a lifestyle and community given the regulations that we have in brand building and marketing. So, for us, the key things there certainly the effect really, really matters.

What’s the combination of cannabinoids, and I think one of the reasons you see we have strength in edibles, it has to do with that. I think that what we can do given different experiences leading with either CBN or with CBC or CBG is part of that cocktail if you will, the big differentiator, but also flavor. Flavor is extremely important. I think that, that initial experience you want it to be something that is enjoyable for consumers, and I think most of the brands are really just focused on costs.

So, like any other product, flavor matters, experience matters.

Nadine SarwatBernstein — Analyst

Got it. Thank you very much.

Operator

One moment for our next question. And our next question will come from Matt Bottomley of Canaccord. Matt, your line is open.

Matt BottomleyCanaccord Genuity — Analyst

Good morning, everyone. Thanks for the color so far. Maybe just continuing on Mike the comments you’re just giving on some of the characteristics there. If you take a maybe a further step back and just look at the overall Canadian landscape, it still seems like it’s hard to say, but maybe only 60% of the overall market opportunity have legalized, has been converted over to the legal channels, but markets like Ontario and others already have a saturation of retail stores. And it just seems like a lot of the regulatory challenges of what you guys are able to do, are keeping some potential future customers, continuing to purchase through legit channels.

But is there anything outside of regulatory changes that you think will get the overall market TAM in Canada, which seems to be stuck in the $4 million to $5 million range for some time now?

Mike GorensteinChairman, President and Chief Executive Officer

Yeah, I think there is. I think that when you think about those regulatory challenges, a lot of those are really holding consumers back on pricing and on value. I think on the more premium side, there are things that you can continue doing. So, you’ve seen we are able to do with SOURZ in the edible platform. I think if you’re able to come out with a consistent product something that’s higher-end, and that’s transparent — a transparent supply chain, there are consumers that are willing to pay a premium over the illicit market that will come in. And so, I think that’s still a big opportunity. There is a different view as far as the sort of highest volume consumer, it’s probably a bigger part of TAM.

You can see what the regulatory change will do. I talked a bit about the chewable extracts during remarks and I think what that kind of shows is, if you can provide something that’s higher potency that larger pack size, that’s more similar to purchasing habits that a legacy consumer and the legacy market has, consumers will shift really quickly into the market. And so, I think that making sure that you can combine that when you have a better product, and you have something that’s transparent and deemed to be a much safer alternative, that’s really important for that conversion.

So I think that continues to progress. I think they’re continuing to make sure that as an industry and as a Company, specifically we are improving our supply chain, and we are able to be more competitive. That is going to help. But I think those are the two main things will drive it, is innovation on the premium end and potentially with pre-roll beginning to drive more value, and then it will be the big regulatory change.

Matt BottomleyCanaccord Genuity — Analyst

Okay. Got it, thanks. And then, just another question from me is just on your level of interest in some of these US federal headlines, you know, SAFE Banking which is reintroduced and there’s been dozens and dozens head-baked [Phonetic] in the past. So I think people are looking at it cautiously, but how important are those types of headlines to you in decisions to potentially deploy some of your capital, or do you think it will have to be something a more meaningful reform, maybe like what Joe Biden, White House is trying to do with the scheduling altogether?

Mike GorensteinChairman, President and Chief Executive Officer

Yeah. I think that SAFE Banking is really probably the biggest thing there has to do with just getting progress. I think it’s important and it’s sort of a bellwether for sentiment capital market-wise. But as far as what it means big picture, I think it’s just showing that we have some type of regulatory catalysts in the US.

But if you think of the big things you need, right, any one of the biggest the [Indecipherable] right what you can do as far as getting capital markets, getting some of the larger banks involved, all of that would be solved with the appropriate rescheduling.

And I think it’s an under-appreciated, and the most significant piece of regulatory news that we have in the pipeline. That’s really what I look towards. I think it’s something that’s moving.

SAFE Banking, I know, everyone is focused on it, and I’m not going to make prediction on whether or not it happens, but I think as currently drafted, it’s really more just incremental progress.

Matt BottomleyCanaccord Genuity — Analyst

Okay. Thanks for that.

Operator

One moment for our next question. And our next question will come from Viktor Meier of TD Cowen. Your line is open, Viktor.

Viktor MeierTD Cowen — Analyst

Hi, good morning. Viktor Meier for Vivien Azer, and thank you for the questions. So first, based on Hifyre data ex-Quebec, there were some sequential share losses in vapes and edibles. Can you offer any more color on what is driving these trends? And also comment on the defensibility in Spinach’s product differentiation? Thank you.

Mike GorensteinChairman, President and Chief Executive Officer

Sure. So I’m sorry, I missed the last part of the question.

Viktor MeierTD Cowen — Analyst

Just comment on the defensibility in Spinach’s product differentiation.

Mike GorensteinChairman, President and Chief Executive Officer

Sure. So I think the biggest thing that we’ve seen here has to do with chewable extract. So, we were, I think doing very well in defending and winning against it, and once this announcement was made by Health Canada that essentially anyone with chewable extract with four out of the top ten SKUs right now, would not be able to sell at the end of May. And you did see a fair amount of pantry loading. So, that might continue for a few more weeks, but given that there has been demand that sort of ramped up for a few weeks, I would expect though that not only we’ll be able to gain that share back in the back half of the year as that inventory is depleted, but also anything that we might have given up, I think there’s more opportunity gained just with that shift.

And looking longer term as far as defensibility, and I think a bit more offensively is, I really do hope that the government take this opportunity to look and see the world didn’t fall apart with higher potency edibles, it’s something that is certainly in demand with consumers, and we will be very ready if there is any change there to still to put a compliance offering on the same quality that we have out today.

And I think you know absent regulatory shifts and we always do take the approach of making sure our innovation budget goes into things that are long-term, making sure we do things the right way. But we do believe that, that is a big moat that product differentiation will be there. I think we’ve been relatively consistent in defending on the product side and being able to take share.

So, I think, it’s a temporary blip, and ultimately the circumstances around the tube extract [Phonetic] blip is more bullish for us than otherwise.

Viktor MeierTD Cowen — Analyst

Great. And then can you just add some color on the share losses for vapes? I think share was down sequentially as well in that category.

Mike GorensteinChairman, President and Chief Executive Officer

Yeah, I think vape is probably a bit more nuance. It has to do with the size of the actual vape part and potency which are updates that we’ve made and when you make those updates you can see, relatively small fluctuations, and that have to do a bit with what the ordering patterns are like and especially when you are doing changeovers. But I don’t think that there is any trends that I’ve been concerned about there. And you can see that hit [Phonetic] back up.

Viktor MeierTD Cowen — Analyst

Great. Thank you. And then just on my second question. So on Israel, can you comment on the increased competitive activity over the quarter? Are you seeing more discounting or [Indecipherable] how enduring do you think are these competitive activities? Thank you.

Mike GorensteinChairman, President and Chief Executive Officer

Sure. Yeah, I think there’s been more discounting, there is consolidation similar to what we’ve seen in Canada with some of the market participants. You’ve seen, and you’re starting to see more consolidation, and you’ll see more companies actually in the market. I think that there is a lot less investment capital in Israel than there was in Canada. And you’re seeing more companies in Canada look to try to enter Israel. But ultimately, this is something I think we are used to, and something I think we can certainly defend against. I do think the biggest release and the biggest opportunity is related to a regulatory change, but like we’ve seen in Canada as there is access, I think there is opportunity, and we’ve been able to, with our flower products and other innovations separate and take share and so we will continue focusing on Israel.

Viktor MeierTD Cowen — Analyst

Great. Thanks for the color. I’ll jump back into queue.

Operator

[Operator Closing Remarks].

 

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