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Cronos Group Execs Talk About Cannabis Co., Recent 'Bought Deal' And Expansion Plans

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Cronos Group Execs Talk About Cannabis Co., Recent 'Bought Deal' And Expansion Plans
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A few days ago, Benzinga had the chance to chat with Cronos Group Inc (CVE: MJN) (OTC: PRMCF)’s president and CEO Michael Gorenstein and its head of marketing and communications Eric Klein. The execs went into their business, the challenges of exporting cannabis, recent corporate news and more.

Time To Meet Cronos

The Cronos Group is a fully and vertically integrated Canadian cannabis producer and distributor. It is also one of the largest ones, outranked only by a handful of companies like CANOPY GROWTH CORP COM NPV (OTC: TWMJF), APHRIA INC COM NPV (OTC: APHQF) and AURORA CANNABIS IN COM NPV (OTC: ACBFF).

According to Gorenstein, this is the only Canadian producer with facilities and operations in multiple provinces. Their product lines include:

  • Peace Naturals, a medicinally focused LP in Ontario. “It is actually the first non-incumbent license to be granted under the federally legal program,” Gorenstein said.
  • In The Zone Produce, a British Columbia LP focused on the recreational market.

Other ventures include:

  • A partnership with Pedanios to export cannabis to Germany.
  • Indigenous Roots, a joint venture to create a brand with Canadian First Nations. “The group is led by Phil Fontaine, the former National Chief of Assembly of First Nations,” Klein added. “We’re really focused on producing products for indigenous people and communities that have been historically underserved from a medicinal standpoint,” he said. “We’re really focused on taking social entrepreneurship to the next level. It’s about job creation and infrastructure building, and also wealth creation for a group that’s traditionally been underserved,” Gorenstein went on.
  • A 21 percent stake in Whistler Medical, “the only currently licensed organic producer that sells 100 percent end products,” according to Gorenstein.

The $17 Million Bought Deal

Last week, Cronos announced a bought deal public offering of approximately $17.3 million.

A bought deal “is in fact a true underwriting where an investment bank actually takes the entire transaction for itself and then goes out and re-sells it to its clients,” Viridian Capital Advisors’ Scott Greiper explained. “That’s not typical in any industry, and it shows the bullishness of Canadian investors in cannabis,” he noted in relation to another bought deal announced in December, where Supreme Pharmaceuticals Inc (CNSX: SL) (OTC: SPRWF) raised almost $41 million.

“In terms of institutional investors, I think one of the things that is unique about the way our company started is that our actual initial funding was coming from institutional investors primarily in New York,” Gorenstein noted.

On this occasion, however, “We wanted to make sure that we were being inclusive and acting like a public company, creating liquidity,” Gorenstein explained. “So, rather than doing another purely internal round of financing [like we had done last time], we started having conversations with banks.”

Spending Millions Of Dollars

Javier Hasse: So, why did you seek this deal? What do you plan to use the proceeds for?

Gorenstein: There was a heavy amount of demand for a bought deal and for investment. We had essentially been receiving indications of interest probably since October or November of 2016.

We just thought that the time was right to open an investor base and start to create liquidity and tell the story of what we’re doing.

Part of why we really wanted to do this investment is [...] a license in Canada isn’t limited to plants, it isn’t based on patients, it isn’t based on kilograms produced; it’s for an address. The opportunity we saw was really one of the largest land packages that is available in the program.

We could build over 5 million square feet of production space on our land and not have to apply for any additional licenses. So, we wanted the capital really just to start developing more of the land, building additional infrastructure and capacity because the demand we’re seeing is extremely significant.

Hasse: Who would you sell all the extra cannabis to?

Gorenstein: I think if we were producing 10 times more product than we’re producing now, we would be able to sell it really without any issues. Between Canada, Germany and other jurisdictions that we’ve been speaking to, there is a heavy amount of demand.

Globally there is estimated to be a $200 billion revenue industry that already exists, and the consumer purchasing habits are already there. We’re one of the first international suppliers to come online, so we want to build very quickly and very aggressively to meet that demand.

Hasse: Are you planning to buy land adjacent to your licensed area to expand?

Gorenstein: We have 125 licensed acres, so we have plenty of space. I don’t believe anyone has more land than that, that is zoned and licensed for cannabis production in Canada. We don’t really need to make any other land acquisitions.

Once we have 5 million square feet built, if at that point we think we still need to produce more, we could either do two stories of production or we could look at land acquisition. But right now we’re focused on building out our footprint in Canada. I think it’s unlikely we would make any very significant land acquisitions in Canada just because we are putting a lot of attention on being a global supplier and distributor.

We think it’s very likely that by the end of the year we will have or will start to break ground on an international producer, outside of Canada.

Hasse: Why would you be interested in producing outside of Canada?

Gorenstein: There are various reasons for that. I think that in terms of establishing (and really cementing) your presence in another country it’s good to have a base of operations there; it’s good to create jobs and awareness of your brand in the community. But also, there are some countries, that because of the nature of where they’re located in the world, the humidity and sunlight profile, the climate, the water, the labor costs [...] you actually can produce cheaper in those locations than you would be able to anywhere in Canada.

Hasse: Are you planning on making investments in verticals, like clinics or agtech companies, as well?

Gorenstein: We haven’t invested in clinics because we’ve just seen there is a shortage in Canada. We’ve focused our investments and our efforts on having the highest product quality, so that we would have organic patients come through. Even if we were to lose every single patient we had in Canada, we’re pretty confident that we could ship all of our product internationally and have nothing leftover.

As far as technology, agriculturally, we absolutely are investing in that, but we’re not investing in external companies; we’re really investing in that in house.

Klein: You don’t see a lot of the larger pharmaceutical companies, the Pfizer Inc. (NYSE: PFE)’s of the world, owning their method of distribution and owning retail locations. So, as we expand our footprint and our distribution channels, we think we can do that focusing on our operations and production, without necessarily owning the retail centers and locations at this point in time.

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