TORONTO – Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON), a global cannabinoid company, today announced a $51 million investment to expand its 50% owned subsidiary, GrowCo, a prominent cannabis cultivation company. This investment, funded by a new credit facility from Cronos, is aimed at scaling up GrowCo's cannabis facility to meet growing global demand.
GrowCo will utilize the credit facility to enhance its Leamington, Ontario, facility. The expansion is expected to reinforce Cronos's supply capabilities in existing markets such as Canada, Israel, Germany, the United Kingdom, and Australia, and facilitate entry into new international markets.
On July 1, 2024, GrowCo's governance will strengthen with a board expansion to five directors, three appointed by Cronos. Additionally, Cronos secures the option to purchase up to 70% of the production from the expanded facility. Financially, Cronos plans to consolidate GrowCo's results in its financial statements starting in the third quarter of 2024.
GrowCo has a history of robust performance, with significant contributions to Cronos's portfolio. In 2023, Cronos bought approximately $21 million worth of biomass from GrowCo, which also sold about $20 million to third parties. GrowCo's strong gross margins are anticipated to be accretive to Cronos on a consolidated basis, having delivered positive net income and cash flow in 2023.
The credit facility provided to GrowCo carries an interest rate of the Canadian Prime Rate plus 1.25%, payable quarterly. Repayment of the principal is deferred until after sales commence in the newly constructed area, anticipated in the second half of 2025, with maturity 10 years post-sales commencement.
The terms of the previous $105 million CAD credit facility made available to GrowCo by Cronos remain unchanged. The new credit facility is secured by all present and future properties of GrowCo and its subsidiaries, subject to customary representations, warranties, and operating covenants.
Construction of the facility expansion is contingent on obtaining necessary permits and approvals, with operations in the new areas pending appropriate licensing. The information in this article is based on a press release statement from Cronos Group Inc.
InvestingPro Insights
As Cronos Group Inc. (NASDAQ:CRON) commits to a $51 million investment to bolster its subsidiary GrowCo, a closer look at the company's financial health and market performance offers valuable insights. According to InvestingPro data, Cronos holds a market capitalization of $883.03 million USD and has been navigating through a challenging financial landscape with a negative adjusted P/E ratio of -42.56 as of Q1 2024. Despite these hurdles, the company's recent revenue growth is noteworthy, with an 11.37% increase over the last twelve months leading up to Q1 2024, and an even more impressive quarterly revenue growth of 29.72% in Q1 2024.
GrowCo's expansion is set against the backdrop of Cronos's financial strategy, which includes maintaining a balance sheet where cash reserves surpass debt—a strategy highlighted in one of the InvestingPro Tips. This prudent financial management may provide Cronos with a buffer against market volatility and fund future growth endeavors. Additionally, Cronos is trading at a low revenue valuation multiple, suggesting that the market may not fully appreciate the company's revenue potential—a tip that could be of interest to value-oriented investors.
While analysts are not expecting profitability this year, as per another InvestingPro Tip, the company's strategic investment in GrowCo indicates a focus on long-term growth and market expansion. For those interested in deeper analysis, InvestingPro offers more tips that could shed light on Cronos's performance and potential. Subscribers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of information including 8 additional InvestingPro Tips for Cronos Group Inc.
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