Cronos Group Announces Expansion of GrowCo to Fuel Global Growth
Cronos Group announced an expansion of its joint venture, GrowCo, a cannabis cultivation company. Cronos will provide a $51 million secured non-revolving credit facility to fund the expansion of GrowCo's facility.
The expansion aims to meet growing global demand for high-quality cannabis. The GrowCo board will add two new Cronos appointees, increasing its size to five members. Additionally, Cronos will have the option to purchase up to 70% of the production from the expanded facility.
Financial consolidation of GrowCo's results into Cronos' financial statements begins in Q3 2024. In 2023, GrowCo showed strong performance with $21 million of biomass sales to Cronos and $20 million to third parties. The expansion targets markets including Canada, Israel, Germany, the UK, and Australia, with potential for further international growth.
The credit facility has a 10-year maturity, with repayment starting after sales from the new facility areas, expected in H2 2025. The agreement includes customary covenants and permits requirements for construction and operational licenses.
- Cronos provides $51 million secured non-revolving credit facility for GrowCo's expansion.
- GrowCo sold $21 million of biomass to Cronos and $20 million to third parties in 2023.
- Cronos to consolidate GrowCo’s financial results beginning in Q3 2024.
- Expansion supports Cronos' ability to supply markets including Canada, Israel, Germany, the UK, and Australia.
- GrowCo demonstrated strong gross margins, positive net income, and cash flow in 2023.
- The credit facility will mature in 10 years, extending financial obligations.
- Principal repayment only starts after sales from the new facility areas, which are anticipated in H2 2025, delaying immediate returns.
Insights
The expansion of GrowCo, facilitated by a $51 million secured credit facility from Cronos, is a significant financial maneuver. This move enhances Cronos' production capabilities to meet rising global demand, particularly in markets like Canada, Israel and Germany. The credit facility's terms, with an interest rate of Canadian Prime Rate + 1.25% and a 10-year maturity, are favorable, providing GrowCo with ample time to ramp up production and sales before substantial repayments kick in. Furthermore, the consolidation of GrowCo's financial results into Cronos' statements starting Q3 2024 indicates that positive net income and cash flow from GrowCo will soon enhance Cronos' overall financials, potentially boosting investor confidence.
Short-term benefits: Expect positive sentiment due to increased production capacity and financial consolidation. Long-term benefits: Sustained revenue growth from expanded market reach and higher production. The strategic decision not to overbuild initially is paying off, as growth is now aligned with proven market demand.
The decision to expand GrowCo is driven by significant market demand for high-quality cannabis. Cronos' brands, Spinach® and Peace Naturals®, have shown robust market performance, with Spinach® ranking as the top flower brand in Canada. This indicates a solid customer base and brand loyalty, which bodes well for the expansion. The new supply agreement, allowing Cronos to purchase up to 70% of production from the expanded facility, ensures a steady supply of premium cannabis. This strategic supply agreement could mitigate risks related to supply chain disruptions and quality control, giving Cronos a competitive edge in the market.
Market-wise, this expansion positions Cronos to capitalize on emerging international markets and increase its market share. The potential for international expansion is significant, given the growing acceptance of cannabis products globally. Investors should watch for regulatory updates and market entry announcements, which could further drive stock performance.
The expansion plan hinges on obtaining relevant building, occupancy permits and appropriate licenses under applicable law. These regulatory aspects are critical as any delays or issues here could impact the expansion timeline and subsequent revenue projections. The secured credit facility is well-structured with customary conditions, safeguarding Cronos' interests. However, the legal landscape for cannabis remains complex and varies by region, which Cronos must navigate carefully.
The inclusion of enhanced governance, expanding the board to five members with three appointed by Cronos, ensures stronger oversight and alignment with Cronos’ strategic goals. This move could enhance operational efficiency and compliance, reducing legal and operational risks.
TORONTO, June 20, 2024 (GLOBE NEWSWIRE) -- Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) (“Cronos” or the “Company”), an innovative global cannabinoid company, announced an expansion of Cronos Growing Company (“GrowCo”). GrowCo is a leading cannabis cultivation company that Cronos owns
Key Highlights of the Investment:
- Investment in Expansion: Cronos will provide an approximately
$51 million ($70 million CAD) secured non-revolving credit facility to GrowCo to fund facility expansion, enabling growth opportunities in the markets Cronos operates in today as well as enabling future growth into new markets that open. - Enhanced Governance: On July 1, 2024, the GrowCo board of directors will expand to five members, three of whom will be appointed by Cronos.
- New Supply Agreement: Cronos will have the option to purchase up to
70% of the total production from the expanded facility. - Financial Consolidation: Cronos will be consolidating the joint venture’s results in its financial statements beginning in the third quarter of 2024.
GrowCo has consistently demonstrated exceptional cultivation performance, contributing significantly to Cronos’ portfolio. In 2023 Cronos purchased approximately
“This investment enables GrowCo to increase its production of high-quality cannabis which supports our ambition to expand across the markets we operate in, and add new international growth opportunities where they arise,” said Mike Gorenstein, Chairman, President, and CEO of Cronos. “At the onset of cannabis legalization, we deliberately chose not to overbuild our facilities, focusing instead on quality and meeting consumer needs first and scaling later. With the Spinach® brand achieving the number one flower brand in Canada1, strong international demand for Peace Naturals®, and GrowCo’s proven track record of success - now is the right time to expand as there is a clear need for high-quality flower. This investment sets us up well to meet the increasing demand and seize the right opportunities as they arise.”
Transaction Details
Cronos will provide an approximately
The credit facility contains customary representations and warranties and operating covenants. Advances under the credit facility are subject to customary conditions.
Pursuant to a supply agreement between Cronos and GrowCo, prior to the first sale of products from the newly constructed area, Cronos will have the option, but not the obligation, to purchase approximately
Completion of construction of the facility expansion is subject to obtaining the relevant building and occupancy permits and other customary approvals. Commencement of operations in the additional areas at GrowCo will be subject to obtaining the appropriate licenses under applicable law.
1HiFyre POS Retail Dollar Sales Data P12M June 2023 - May 2024, Ending May 31, 2024. Accessed June 19, 2024.
About Cronos
Cronos is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos is building an iconic brand portfolio. Cronos’ diverse international brand portfolio includes Spinach®, PEACE NATURALS® and Lord Jones®. For more information about Cronos and its brands, please visit: thecronosgroup.com.
Forward-looking Statements
This press release may contain information that may constitute “forward-looking information” or “forward-looking statements” within the meaning of applicable Canadian and U.S. securities laws and court decisions (collectively, “Forward-looking Statements”). All information contained herein that is not clearly historical in nature may constitute Forward-looking Statements. In some cases, Forward-looking Statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “plan”, “anticipate”, “intend”, “potential”, “estimate”, “believe” or the negative of these terms, or other similar expressions intended to identify Forward-looking Statements. Some of the Forward-looking Statements contained in this press release include statements about the Company’s future plans and relationship with GrowCo, the changing size of the GrowCo board of directors, expectations around GrowCo’s supplying of products to Cronos, the expected consolidation of GrowCo’s results of operations in Cronos’ publicly reported financial statements, the expansion of Cronos’ ability to supply markets it operates in as well as new markets in the future, increasing demand for cannabis, conditions to the completion of the construction of the new facility and the commencement of operations and Cronos’ intention to build an international iconic brand portfolio and develop disruptive intellectual property. Forward-looking Statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive risks, financial results, results, performance or achievements expressed or implied by those Forward-looking Statements and the Forward-looking Statements are not guarantees of future performance. A discussion of some of the material risks applicable to the Company can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, each of which has been filed on SEDAR+ and EDGAR and can be accessed at www.sedarplus.ca and www.sec.gov/edgar, respectively. Any Forward-looking Statement included in this press release is made as of the date of this press release and, except as required by law, Cronos disclaims any obligation to update or revise any Forward-looking Statement. Readers are cautioned not to put undue reliance on any Forward-looking Statement.
For further information, please contact:
Investor Relations Contact:
Shayne Laidlaw
Investor Relations
Tel: (416) 504-0004
investor.relations@thecronosgroup.com
Media Relations Contact:
Emily Whalen
Communications
Tel: (416) 504-0004
media.relations@thecronosgroup.com
FAQ
What is the recent investment by Cronos Group in GrowCo?
When will Cronos Group begin consolidating GrowCo's financial results?
How much biomass did Cronos Group purchase from GrowCo in 2023?
What is the maturity period for the new credit facility provided to GrowCo?
Which markets will the GrowCo facility expansion target?
What percentage of GrowCo's production can Cronos Group purchase under the new supply agreement?
When is the sales commencement expected from GrowCo's newly constructed area?
