Cronos Australia Limited (ASX:CAU) is an ASX-listed cannabis company with an "asset-light" business model that is dedicated to providing high quality medicinal cannabis products to Australian patients, while also supplying global export markets abroad.
Cronos Australia is led by Rodney Cocks and Peter Righetti, and was originally established in February 2018 as a 50/50 joint venture between the global cannabinoid powerhouse, Cronos Group Inc (TSX:CRON), and a Melbourne-based private equity firm known as NewSouthern Capital.
At the time, this seemed like an odd move for the Canadian cannabis juggernaut—as Australia does not represent a large market for the Cronos Group—however it has provided the company with a gateway to the Asian Pacific region, which could be worth an estimated $5.8 billion by 2024.
The asset-light business model, where we are working with best-in-class cultivators and manufacturers to supply the product, also allows us to focus on brand and product development, sales and marketing, which we believe is a differentiated strategy in the market. Cronos Australia CEO, Rodney Cocks
Additionally, Cronos Australia has already secured all the necessary licenses to operate in Australia—including those needed for import and export activities—while its business model is underpinned by innovative products and brand development.
The company also receives assistance from its Canadian counterpart, in the form of access to intellectual property, plant genetics and territorial licenses, which Cronos Australia intends to leverage as part of its expansion plans.
And although the Cronos Australia stock only listed on the ASX in November last year, the company has made considerable headway since then.
In less than a month Cronos Australia had already managed to lock down a lucrative distribution deal with Sigma Healthcare, before partnering with A&S Branding to develop a line of CBD-based products in late December 2019.
The start of 2020 also saw the company hit another important milestone, after it received its first shipment of PEACE NATURALS branded medicinal cannabis oils from the Cronos Group. The products are scheduled for a nationwide rollout via Sigma's network of retail pharmacies, allowing Cronos Australia stock to begin generating revenue in the near term.
"The receipt of the first shipment of PEACE NATURALS medicinal cannabis oils by Cronos Australia is an important step to making quality cannabinoid products available to Australian patients and marks an important milestone in the Company's Australian medicinal cannabis operations" said Cronos Australia CEO Rodney Cocks.
The Cronos Australia stock made its debut on the ASX in November 2019, after an initial public offering (IPO) which saw the company raise $20 million at 0.50 per share.
Following the close of its IPO the company had an indicative market capitalisation of approximately $64.4 million, although this was subsequently revised to $43.7 million.
The ASX listing is a significant milestone in the life of Cronos Australia, and we look forward to delivering on our vision of being a leading health and wellness company in the Asia-Pacific Region through a portfolio of successful, premium cannabinoid brands and products. Cronos Australia Chairman, Shane Tanner
Unfortunately, this was a sign of things to come, and on its maiden day of trading the CAU stock opened 30% down—selling at just 0.355 per share—before climbing to 0.395 by the early afternoon.
However, the CEO of Cronos Australia, Rodney Cocks, stated that the company expected this outcome, as the entire cannabis sector was "taking a hit" due to the global downtown experienced during the latter half of 2019.
"But we're in this for the long haul, and we think the cannabis sector has a massive and exciting future. We think Cronos has the right strategy, board and management to deliver for our shareholders," Cocks said.
Prior IPO the Cronos Group held a 50% stake in Cronos Australia, although this was subsequently diluted to approximately 31% following the initial offering, while NewSouthern Capital will also retain 31% ownership of the company.
Funds generated by the IPO will be used by the company to bankroll a variety of expansion initiatives, including brand creation, development and launch, increasing patient acquisition and practitioner engagement, the purchase of additional inventory and the establishment of additional contract manufacturing relationships.
Distribution and Partnerships
Less than a week after listing on the ASX in November 2019, the Cronos Australia stock had already managed to lock down a distribution deal with Sigma Healthcare (ASX:SIG).
Under the agreement, the company's line of imported PEACE NATURALS medicinal cannabis products will soon be distributed throughout Sigma's nationwide retail network, including Amcal+ and Guardian Pharmacies.
"The Distribution Agreement marks a significant milestone in the Company's route to revenue, enabling the distribution and sale of PEACE NATURALS medicinal cannabis products that are expected to be imported by the Company," the company stated.
We are excited to be working with the Cronos Australia team to bring CBD products to market. There is significant potential for the inclusion of CBD into a range of products. A&S Branding Co-Founder and Director, Alison Goodger.
Patients will be able to access the PEACE NATURALS range under the Australian government's SAS scheme—or through an Authorised Prescriber—while further products and brands are expected to receive distribution under the agreement in future.
This was followed in December by an announcement that the company had partnered with A&S Branding to develop a new range of cannabinoid (CBD)-based products.
In anticipation of the agreement both companies also elected to establish a joint venture company—known as CBD Joint Venture Pty Ltd—in December 2019.
The joint venture will see both companies collaborate on an exclusive basis for an initial period of two years, with the long-term goal of facilitating market entry by exploiting CBD's lack of regulatory supervision.
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The agreement was described as a major milestone for both companies by the Co-Founder and Director of A&S Branding, Simon O'Conner, as it will leverage Cronos Australia's knowledge of the medicinal cannabis and CBD space, while A&S will handle branding, product development and marketing duties.
"We see a great deal of value being created by A&S Branding combining forces with Cronos Australia to develop CBD products and brands to bring to market. We are looking forward to a successful partnership in the years ahead," O'Conner said.
This view was echoed by Cronos Australia CEO Rodney Cocks, who touted the deal as a chance to harness the synergistic potential of both companies.
"The collaboration with Alison Goodger and Simon O'Connor of A&S Branding is an exciting milestone for Cronos Australia and will enable us to harness the collective expertise of both parties for the development of branded CBD products," Cocks said.
The market also reacted positively to news of the deal, which saw shares in Cronos Australia stock spike in value by almost 5%.
In February 2020 Cronos Australia announced that it had acquired a 51% equity interest in a Melbourne-based cannabis clinic operator, Cannadoc Health Pty Ltd, for $300,000.
The acquistion was made through one of the company's wholly owned subsidiaries, Medical Clinic Holdings Pty Ltd, pursuant to a Share Transfer & shareholders agreement with Cannadoc founders Kevin Brabazon and Dr David Feng.
We are excited about the opportunity to bring Cannadoc into the Cronos Australia group. We also look forward to working closely with David and Kevin to expand the Cannadoc business. Cronos Australia CEO, Rodney Cocks
Cannadoc has operated a medical practice in Melbourne for approximately one year, offering its patients a range of cannabinoid-based treatment options.
Cronos Australia also intends to work with Cannadoc to expand their clinical network, which will involve working with additional healthcare providers and opening further medical practices in future.
Under the agreement, founders Brabazon and Feng were paid $300,000 in cash and are also entitled an additional two earn out payments on the first and second anniversaries of the deal's execution.
Brabazon and Feng also received a further one million Performance Rights—with each Cannadoc founder being issued half—over ordinary shares in Cronos Australia. However, the Performance Rights have a vesting date of 1 September 2023 and will only be conferred if certain obligations are met, such previously agreed upon growth targets.
As part of the deal, Cannadoc will also have access to a secured loan facility of up to $1 million, which will be used for working capital and expansion purposes. Additionally, the company has contributed $102,000 in equity to Cannadoc, while the Brabazon and Feng contributed a combined total of $98,000.
"We are pleased to join forces with Cronos Australia and to continue to build our vision for an innovative approach to delivering significantly improved patient outcomes through cannabinoid-based therapies and other treatments," said Cannadoc founder Dr David Feng.
To represent the company's interests, Cronos Australia have also appointed two representatives to the Cannadoc board, who will sit alongside the two founders.
As of 31 December 2019, Cronos Australia had funding in excess of $17 million in and cash equivalents, despite the $1,534,013 "cash loss" recorded during the latter half of last year.
The loss was attributed in part to several outstanding non-recurring payments related to the company's former business model, along with an additional two payments to conclude obligations from a previous financial period.
However, Cronos also managed to raise a total of $23.5 million in new equity during the same six-month period.
As a result, the company is now well capitalised to execute on its planned "asset-light" strategy, which means that revenue is likely to begin increasing in the near term.
The company's estimated cash outflows are also forecast to increase during the coming quarter, as additional personnel are recruited by Cronos Australia to help bolster its cannabis expertise and assist with further operations expansions in 2020.
Reason to invest in Cronos Australia stock
Cronos Australia is well-funded and operates with an asset-light business model.
- The company currently has more than $17 million in cash and cash equivalents.
- Cronos Australia's asset-light strategy will allow the company to begin generating revenue without the need to construct cultivation or manufacturing facilities.
- If the market—or the regulatory environment—should pivot suddenly, then company will be well-equipped to reposition its overall commercial strategy.
The company is targeting the highly lucrative CBD market.
- According to a recent study conducted by Grand View Research, the global CBD market was valued at $4.6 billion in 2018 and is expected to experience a staggering 22% CAGR over the next five years.
- The CBD industry is considerably less regulated than the medicinal cannabis space—as the products lack the psychoactive effects caused by THC—which should allow for a rapid market entry.
- CBD is legal in an increasingly large number of jurisdictions worldwide, greatly increasing the company's potential addressable market.
The Cronos Australia stock has already made rapid progress in the three months since its ASX-listing.
- The company locked down a distribution agreement with Sigma Healthcare less than a week after it began trading on the Australian Stock Exchange.
- This was followed a month later by the announcement of a product development partnership with A&S Branding.
- The start of 2020 also saw the arrival of the first shipment of PEACE NATURALS cannabis oil, which will soon be rolled out to more than 1,300 pharmacies throughout Australia.
Disclaimer: Past performance is not an indicator of future performance.
The Forward Outlook for Cronos Australia
Cronos Australia's current business strategy involves targeting a path to early revenue growth via the importation and sale of medicinal cannabis products sourced under supply agreements, such as its in-market brand, Peace Naturals.
To supplement this, the company will also be developing its own range of branded THC and CBD products, with planned distribution throughout Australia, New Zealand and certain jurisdictions in the Asia Pacific region.
In fact, Cronos Australia already has a team set up in Hong Kong, who are hard at work tracking the evolving legislative landscape of key Asian markets that the company intends to target.
According to the CEO of Cronos Australia, Rodney Cocks, the company will also be employing an "asset-light" business model.
Cronos Australia is excited to join this fast-emerging sector as Australia's newest listed medical cannabis company. Our asset-light business model, backing of Cronos Group and Asia-Pacific focus give the company a unique proposition in our market. We look forward to providing future updates to the market as the funds raised are deployed to accelerate the development and commercialisation of our portfolio of medicinal cannabis products. Cronos Australia CEO, Rodney Cocks
This means that the company's cultivation and manufacturing activities will be outsourced to both domestic and international service providers—specifically MediPharm Labs Australia and Mile High Labs—giving Cronos the, "flexibility and agility to respond to a rapidly evolving market and allow us to focus on the development of a range of medicinal brands and products."
"We listened to the market in terms of what was happening with cultivation, what was happening with manufacturing. Obviously we've got a lot of capacity within the Cronos Group broader network for cultivation and manufacture, and moving to an asset-light model was the best way to position the company to create long-term, sustainable shareholder value."
"So, we decided to pursue a strategy that very much focused on branded product, which is very much in the downstream part of the value chain. Secondly, we are obviously partnered with the largest global cannabinoid company, Canadian-based Cronos Group, and thirdly, we have an Asia-Pacific focus," Cocks said.
The company believes that employing this business model will provide Cronos Australia with the ability to change direction—or even reposition themselves entirely—in response to changes in either the market or the local regulatory environment.
However, there are several questions that still linger about the company.
While Cronos Australia managed to cover impressive ground following its ASX-listing in November last year—locking down the Sigma Healthcare deal and A&S Branding partnership in short order—the company has remained relatively tight-lipped when it comes to the material effect this will have on revenue levels and its ongoing expansion plans.
And while it's true that quality is always better than quantity, the market also tends to abhor uncertainty, which may have caused investors to react negatively to the dearth of information regarding its recent business deals.
As a result, the Cronos Australia stock has been on a steady downward decline for the last three months, plummeting from 0.360 a share in November to just 0.190 by 5 February 2020.
Similar concerns have also been raised over the company's partial acquisition of Cannadoc, which has a significantly smaller market presence compared to more established players, such as Cannabis Access Clinics (CAC) or Emerald Clinics.
Despite Cronos Australia's claims that the acquisition would lead to immediate revenue generation, investors were still spooked, and the share price subsequently dropped to a historic low of 0.180.
While this does not bode well for the company's chances in 2020, only time will tell if Cronos Australia's "asset-light" business model is really capable of breaking through the grass ceiling.
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