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HIGHLIGHTS
  1. Cronos reports higher-than-expected Q2 revenue and net loss
  2. Cronos sees 53 per cent gross margins in Q2 2019
  3. Widening quarterly losses expected in late-2019 as Cronos invests long-term

Mixed second-quarter financial results from Cronos Group – increased product costs but higher-than-expected revenue and margins amid a quarterly loss – made analysts take neutral stances with the major Canadian cannabis producer that saw its shares turn lower on Thursday.

Toronto-based Cronos shrugged off the increased costs that it incurred during the three-month period ending June 30, and reported revenue at $10.2-million. This is roughly triple the total income generated during the same period in 2018 and well above analyst expectations of $7.3-million.

Gross margins came in at 53 per cent, in line with Bay Street estimates.

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While Cronos was expected to report a major increase in overall losses of roughly $10 million, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) reached a loss of $17.8 million.

“With losses expected to widen during (second-half) 2019, we would remain on the sidelines,” said Cowen Equity Research in a note, holding the company’s status at “perform.”

While Cowen’s biggest concern from Cronos’ second-quarter was the larger-than-expected EBITDA loss, with Cronos’ expectation for operating losses to widen in the second half of 2019 as it makes long-term investments, Cowen noted that “cannabis investors continue to reward companies who are progressing towards EBITDA profitability.”

Cronos focused on opportunites from derivative products, in particular vape products, which it is preparing to launch as they are on track to become legalized in late-2019.

“I think we’re most excited about the vaporizer category, but believe that as regulations evolve and we get clarity that edibles and topicals will also be very important categories,” said Mike Gorenstein, chief executive of Cronos.

“Overall, we think we should see accelerated demand as derivative products come online. I think it’s also easier to differentiate as we get into further categories where device technology starts to play a key role in marketing.”

Cronos’ costs per gram came in at $3.01 for the second quarter, representing a 14 per cent increase from $2.63 per gram in the first quarter, which Cronos blamed on higher processing costs as the company focused more on cannabis oil production.

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This came as the selling price of dry cannabis rose 14 per cent quarter-over-quarter to $6.19 per gram and oil rose by 7 per cent to $7.69. Cronos sold 1,584 kilogram-equivalent at an average price of $6.44 per gram versus Eight Capital’s estimate of 1,230 kg at $5.70, with overall production costs expected to decrease in the long term, it said in a note.

Mr. Gorenstein placed an emphasis on expectations for higher demand.

“In Canada, we are starting to see more favorable pricing, and given the emphasis of capital deployment in Canada has historically been around capacity, we do expect to see that accelerate,” Mr. Gorenstein said.

“I think it’s fair to estimate that the U.S. CBD market will likely be the largest contributor over the next year or two.”

Other costs at the company soared, with sales and marketing expenses coming in at $5.4-million compared with $364,000 in the year-ago period. Research and development spending totalled $3.1-million in the quarter versus zero during the same period last year. Administrative expenses nearly quadrupled on a year-over-year basis to $15.2-million.

Eight Capital maintained its “neutral” rating and target price at $19 and sees CBD sales accounting for Cronos’ biggest revenue contributor in the medium term.

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Unlike cannabis that contains THC, an excise duty is not added to CBD products, the company said.

Earlier this week, Cronos announced a US$300-million mostly cash-based deal to acquire Redwood Holdings, which manufactures, markets and distributes hemp-derived CBD products under the brand Lord Jones. In addition to an e-commerce platform in the United States, Lord Jones products are also sold in 170 Sephora locations.

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