Cronos Group Announces Q4 Revenue Growth

• Closed C$2.4 Billion Strategic Growth Investment from Altria Group, Inc.
• Completed first harvest in Peace Naturals expansion to Building 4
• Launched Two Recreational Brands: COVE™ and Spinach™
• Announced Landmark Partnership with Ginkgo Bioworks to Produce Cultured Cannabinoids
• Became first Pure Play Cannabis Company to list on a Major U.S. Exchange

Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON), today announced financial results for the fourth quarter and full year ended December 31, 2018.

“We are proud of all we have accomplished in 2018 and in the fourth quarter. Over the past year, Cronos Group has diligently focused on our strategic objectives, which culminated in our transformative partnership with Altria Group, Inc.,” said Mike Gorenstein, CEO of Cronos Group. “We’ve expanded our production footprint domestically and internationally, developed our distribution with global partnerships, launched iconic brands for the Canadian adult-use market and grown our IP portfolio with landmark research and development initiatives.”

“At Cronos Group, we take pride in leading the industry forward responsibly and are motivated to create meaningful products that excite our consumers and bring happiness and an improved quality of life. We are very excited to partner with Altria to help us realize our goals. Altria’s investment and the services they provide will enhance our resources and enable us to scale our product development and commercialization capabilities. The growth potential in the cannabis industry is vast and we are only just beginning. With our differentiated brands, global footprint, growing production capacity and commitment to cannabinoid innovation, together with Altria’s partnership, Cronos Group is well positioned to realize this opportunity. We’re heading into 2019 energized and ready to execute on our strategy.”

Corporate Milestones and Updates

             

Cronos Group became the first pure play cannabis company to list on a major stock exchange in the United States. The Company’s common shares began trading on the NASDAQ Global Market (“NASDAQ”) under the trading symbol “CRON” in February 2018. Another milestone came in May 2018, as the trading of Cronos Group’s common shares in Canada was up-listed from the TSX Venture Exchange to the Toronto Stock Exchange (“TSX”). In May 2018, the Cronos Group board of directors (the “Cronos Group Board”) approved the appointment of KPMG LLP as independent auditor of the Company. These major corporate milestones reflect the significant progress Cronos Group has made in strengthening our corporate governance structure.

In March 2019, the Company closed the $2.4 billion equity investment in the Company previously announced in December 2018 (the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. At closing, Altria also received a warrant to acquire additional common shares of the Company (the “Warrant”) that if fully exercised at closing, would provide the Company with approximately $1.4 billion of additional proceeds.

As of the closing date of the Altria Investment, Altria held an approximately 45% ownership interest in the Company (calculated on a non-diluted basis) and, if exercised in full on such date, the exercise of the Warrant, would result in Altria holding a total ownership interest in the Company of approximately 55% (calculated on a non-diluted basis). This strategic partnership with Altria provides Cronos Group with additional financial resources, product development and commercialization capabilities, and deep regulatory expertise to better position the Company to compete in the global cannabis industry.

In connection with the closing of the Altria Investment, the Cronos Group Board expanded from five to seven members. The Cronos Group Board now consists of Cronos Group CEO, Mike Gorenstein as Chairman, Jim Rudyk, Chief Financial Officer of Roots Corporation, who will serve as lead director, and Jason Adler, Founder and Managing Partner of Gotham Green Partners, LLC. Four new directors nominated by Altria were also appointed to the Cronos Group Board in connection with the closing of the Altria Investment, including Kevin “K.C.” Crosthwaite Jr., Senior Vice President, Chief Strategy and Growth Officer of Altria; Bronwen Evans, an independent consultant; Murray Garnick, Executive Vice President and General Counsel of Altria; and Bruce Gates, former Senior Vice President of External Affairs at Altria. These new directors to the Cronos Group Board bring additional experience and expertise as Cronos Group continues to grow globally.

Along with new appointees to the Cronos Group Board, Cronos Group bolstered its management team with the addition of Jerry Barbato, who has been appointed Chief Financial Officer (“CFO”) of the Company, effective April 15, 2019. Mr. Barbato most recently was the Senior Director of Corporate Strategy at Altria and will assume the CFO role from William Hilson, who will transition to a new role as Cronos Group’s Chief Commercial Officer, also effective April 15, 2019. As Chief Commercial Officer, Mr. Hilson will report to Mike Gorenstein and be responsible for further enhancing the commercial strategy as well as the product and research development priorities of the Company.

Global Production Footprint

Cronos Group is committed to building a global network, with partnerships, joint ventures, production and distribution across international and domestic markets. In the Canadian market, the Company’s wholly-owned licensed producer and center of excellence, Peace Naturals Project Inc. (“Peace Naturals”), yielded its first harvest in December 2018 in the newly completed Building 4 (“B4”) at the Peace Naturals campus. B4 is Cronos Group’s 286,000 sq. ft. purpose-built indoor production facility, which was built to Good Manufacturing Practice (“GMP”) standards. In 2018, the Company not only constructed B4 but also completed construction of the Peace Naturals greenhouse. Peace Naturals engages in the cultivation, production, and research and development of cannabis, cannabinoids and cannabis-based products.

Additionally, the Company announced a venture with a group of investors led by Bert Mucci, a leading Canadian large-scale greenhouse operator. The entity created by this new partnership, Cronos Growing Company Inc. (“Cronos GrowCo”), expects to construct an 850,000 square foot, purpose-built, greenhouse on approximately 100 acres of land, owned by Cronos GrowCo in Kingsville, Ontario.

Cronos Group’s joint venture, Cronos Israel, with the Israeli agricultural collective settlement Kibbutz Gan Shmuel (“Gan Shmuel”) for the production, manufacture and distribution of medical cannabis, is currently under construction. The Company anticipates that construction of the 45,000 sq. ft. greenhouse will be complete in the first half of 2019 and construction of the manufacturing facility will be complete in the second half of 2019.

In January 2019, the Israeli government approved the export of medical cannabis from Israel, which would allow medical cannabis license holders who meet certain quality standards to export medical cannabis, under tight supervision of the Israeli authorities, to Single Convention of Narcotic Drugs signatory countries that have explicitly approved the import of cannabis. The Company intends to pursue the necessary licensing for and export of medical cannabis products from Cronos Israel once production operations have commenced.

Internationally, Cronos Group announced a joint venture with an affiliate of Agroidea SAS , a leading Colombian agricultural services provider with over 30 years of research, development and production operations and expertise managing industrial scale horticultural operations in Colombia.

This partnership establishes a newly formed entity, NatuEra S.à r.l. (“NatuEra”), in Colombia that will develop, cultivate, manufacture and export cannabis-based medical and consumer products for the Latin American and global markets. NatuEra is the cannabis industry’s first Contract Manufacturing Organization (CMO) in Latin America, with plans to allow the growing number of cannabis brands to outsource cultivation and manufacturing. NatuEra plans to develop its initial cultivation and manufacturing operations with a purpose-built, GMP-standard facility located in Cundinamarca, Colombia.

NatuEra was granted a license to cultivate non-psychoactive cannabis plants to produce seeds for planting and the manufacture of derivative products. Commencement of operations at the facility will be subject to obtaining the remaining appropriate licenses under applicable law.

The Company also announced a joint venture in Australia at the start of 2018 (“Cronos Australia”) for the research, production, manufacture and distribution of medical cannabis. The Company owns a 50% equity interest in Cronos Australia and believes that Cronos Australia will serve as its hub for Australia, New Zealand and South East Asia, bolstering the Company’s supply capabilities and distribution network in the Australasia region. 

Global Sales and Distribution

On October 17, 2018, Canada became the first G7 country and the second country in the world to legalize cannabis sales for adult use. Cronos Group participated in this new market through the launch of its two adult-use brands COVE™ and Spinach™. Currently, these brands are distributed to the following provinces: Ontario, British Columbia, Nova Scotia, Prince Edward Island and Saskatchewan. As Cronos Group’s production capacity grows, the Company intends to explore expanding its distribution into additional Canadian provinces and territories by entering into agreements with the appropriate parties.

Additionally, for the Canadian market, Cronos GrowCo, entered into a supply agreement with Cura Cannabis Solutions (“Cura”) in August 2018. Cura signed a five year take-or-pay supply agreement to purchase a minimum of 20,000 kilograms of cannabis per annum from Cronos GrowCo after Cura receives all necessary licenses from Health Canada.

In March 2018, Cronos Group announced a joint venture with MedMen Enterprises USA, LLC. The Company owns a 50% equity interest in the joint venture MedMen Canada Inc. (“MedMen Canada”).  MedMen Canada is focused on branded products in Canada and creating a Canadian branded retail chain in provinces that permit private retailers. MedMen Canada is in the process of reviewing and analyzing the evolving regulatory retail landscape in provinces where private retail is permitted under applicable law.

Internationally, Cronos Group made strides to expand its footprint with a distribution agreement to supply the medical market in Poland. In June 2018, Cronos Group entered into a five-year exclusive distribution partnership with Delfarma Sp. Zo.o (“Delfarma”). Delfarma, pharmaceutical wholesaler with a distribution network of over 5,000 pharmacies and more than 200 hospitals, reaches approximately 40% of the Polish domestic market. Under the five-year exclusive distribution agreement, Cronos Group will supply Peace Naturals™ branded cannabis products to Delfarma for distribution within Poland. The Company also has a five-year exclusive distribution agreement with G. Pohl-Boskamp GmbH & Co. KG entered into in October 2017, an international European pharmaceutical manufacturer and distributor, for the German market.

Intellectual Property Initiatives

Cronos Group’s vision to transform industries through cannabinoid innovation has resulted in two key research and development initiatives with Ginkgo Bioworks, Inc. (“Ginkgo”) and Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”).

In September 2018, Cronos Group and Ginkgo announced a landmark partnership to produce cultured cannabinoids through fermentation that are identical to those extracted from the cannabis plant. The research and development partnership is focused on producing large volumes of eight target cannabinoids, including rare cannabinoids, from custom yeast strains by leveraging existing fermentation infrastructure without incurring significant capital expenditures to build new cultivation and extraction facilities.

The Company will fund certain research and development and foundry expenses expected to be approximately US$22.0 million, subject to the achievement of certain milestones. In addition, tranches of Cronos Group’s common shares will be issued to Ginkgo, upon Ginkgo’s demonstration that the microorganisms are able to produce the target cannabinoids for less than US$1,000 per kilogram of pure cannabinoid at a scale of greater than 200 liters.

In November 2018, Ginkgo received from the U.S. Drug Enforcement Agency (the “DEA”) a DEA Researcher Controlled Substance Registration Certificate and a Researcher Controlled Substance Registration Certificate from the Massachusetts Department of Public Health for the conduct of research involving cannabinoids. The Company intends to produce and distribute the target cannabinoids globally and has received confirmation from Health Canada that this method of production is permitted under the Cannabis Act.

In October 2018, Cronos Group announced that the Company had entered into a sponsored research agreement with Technion to explore the use of cannabinoids and their role in regulating skin health and skin disorders. The preclinical studies will be conducted by Technion over a three-year period and will focus on three skin conditions: acne, psoriasis and skin repair. Research will be led by Technion faculty members Dr. David “Dedi” Meiri, Head, Laboratory of Cancer Biology and Cannabinoid Research, and Dr. Yaron Fuchs, Head, Laboratory of Stem Cell Biology and Regenerative Medicine, two of the world’s leading researchers in cannabis and skin stem cell research, respectively.

Brand Portfolio

Cronos Group is building an iconic brand portfolio designed to meet the needs and exceed the expectations of our consumers. In May 2018, Cronos Group previewed its premium recreational brand COVE™. COVE™ was born in the Okanagan Valley in British Columbia, which is known for producing some of the world’s finest cannabis. COVE™ products are terpene-rich and hand-trimmed using only the best results from each harvest. By avoiding shortcuts like harsh refining processes, COVE™ maintains the natural balance of the plant across all the brand’s terpene-rich cannabis extracts and brings the highest quality products to its consumers.

In September 2018, Cronos Group launched its other adult-use brand, Spinach™. This mainstream adult-use brand is fun, lighthearted and playful. Spinach™ is focused on offering Farm-To-Bowl™ products that bring friends together and make experiences more enjoyable. This brand has High Expectations™ and is geared towards a wide range of consumers that don’t take life too seriously and are looking for entertaining, fun ways to enhance activities.

Financial Highlights Fiscal Year 2018 and Subsequent to Fiscal 2018

Cronos Group reported net revenues of $5.6 million in the fourth quarter 2018 as compared to $1.6 million for the fourth quarter 2017, representing an increase of $4.0 million, or 248%. The increase in revenue was driven by shipments to the Canadian adult-use market and growth in cannabis oil revenue. For full year 2018, the Company reported net revenue of $15.7 million as compared to $4.1 million for full year 2017, representing an increase of $11.6 million, or 285%. The increase in revenues was driven by increased production capacity, commencement of shipment into the Canadian adult-use market, growth of the Company’s medical client base and growth in cannabis oil revenues.

The Company reported gross profit before fair value adjustments of $2.5 million in the fourth quarter 2018 as compared to $0.4 million for the fourth quarter 2017, representing an increase of $2.0 million, or 449%. The increase in gross profit before fair value adjustments was largely driven by an increase in kilograms sold over the comparable prior year period. Gross margin before fair value adjustments was 44% in the fourth quarter of 2018. The Company reported gross profit before fair value adjustments of $8.0 million in the full year 2018 as compared to $2.0 million for the full year 2017, representing an increase of $6.0 million, or 294%. This increase driven by the increase in kilograms sold during the period. Gross margin before fair value was 50% in the full year of 2018.

Cronos Group reported total operating expenses of $12.4 million in the fourth quarter 2018 as compared to $2.9 million for the fourth quarter 2017, representing an increase of $9.5 million, or 328%. The increase in operating expenses was driven by an increase in research and development expenses, talent acquisition and an increase in professional and consulting fees for serves rendered in connection with various strategic initiatives, including the Altria Investment. For full year 2018, the Company reported operating expenses of $29.4 million as compared to $9.3 million for full year 2017, representing an increase of $20.0 million, or 215%. The increase in operating expenses was driven by an increase in research and development expenditures including the Ginkgo Strategic Partnership, talent acquisition and an increase in professional and consulting fees for services rendered in connection with various strategic initiatives.

In 2018, Cronos Group strengthened liquidity by raising $100.0 million and $46.0 million of gross proceeds through two separate bought deal offerings of common shares in April 2018 and January 2018, respectively. In March 2019, the Company’s liquidity position was further strengthened by the closing of the Altria Investment.

In January 2019, the Company entered into a credit agreement with Canadian Imperial Bank of Commerce, as administrative agent and lender, and the Bank of Montreal, as lender, in respect of a $65 million secured non-revolving term loan credit facility (the “Credit Facility”). In connection with the closing of the Credit Facility, the Company used the funds available under the Credit Facility to fully repay its $40.0 million senior secured construction loan with Romspen Investment Corporation. In March 2019, the Credit Facility was repaid in full by the Company with a portion of the proceeds from the Altria Investment.

In March 2019, the Company sold all of its approximately 19% equity interest in Whistler Medical Marijuana Corporation (“Whistler”) to Aurora Cannabis Inc. (“Aurora”) in an all-share transaction (the “Aurora Acquisition”). At closing of the Aurora Acquisition, the Company received approximately $24.7 million in value of Aurora common shares. Subject to the satisfaction of certain specified milestones, the Company expects to receive an additional $7.6 million in value of Aurora common shares.

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