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Shareholders of Cronos Group Inc. appear to have given company a pass on the first quarter of recreational cannabis sales in Canada. Despite reporting fourth quarter revenues considerably lower than its peers, Cronos stock remained largely flat on Tuesday, ending the day down slightly more than 1 per cent.

The Ontario producer sold $5.6-million of cannabis in the last three months of 2018, around 10 per cent of sales done by Aurora Cannabis Inc in the same quarter. It posted an adjusted EBITDA loss of $7.9-million.

The market did not seem particularly bothered by the performance. That suggests Cronos is being evaluated by a different set of criteria following Altria Inc.’s $2.4-billion investment in the company in December, said Matt Bottomley, an analyst with Canaccord Genuity Corp.

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“There’s justification for that in ways, considering that they are one of only two LPs that has a significant equity investment from a global strategic player," Mr. Bottomley said.

“But when you look at just the quarter itself, $5-million plus of net revenue compared to Canopy in the 80s and Aurora in the 50s, they're clearly well behind what their peer group is doing in Canadian recreational market, on basically all metrics.”

On an analyst call on Tuesday, Cronos CEO Mike Gorenstein doubled down on the narrative casting his company as a CPG player focused on research and intellectual property as much as cultivation in Canada.

"Product development and R&D is, after human capital, the biggest priority. When we think about Canada, the value that we see is having the opportunity to develop processes and products that ultimately will be spread globally,” Mr. Gorenstein said. “Our original vision for Cronos was to come up to Canada, develop a turnkey solution that we could ultimately bring down to the U.S. once it’s federally legal, and that really hasn’t changed.”

Here are a few of the takeaways from the call:

Cronos is facing logistical challenges

Cronos is currently selling recreational cannabis in five provinces: Ontario, British Columbia, Prince Edward Island, Nova Scotia and Saskatchewan. When asked if Cronos would expand to other provinces, Mr. Gorenstein said he wants “to make sure we can get everything right and dialed-in in terms of automation before we on board and spread across the entire country."

“We think we’re doing well in terms of being able to access the cultivation capacity, but each time you’re adding a province, you’re adding complications to the other parts of the supply chain. You have to multiply your set of SKUs each time you add a province because of tax stamps. So making sure we can manage the downstream logistics, is really the biggest factor in when we’ll add those provinces," he said.

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Juul’s technology not immediate priority

Altria invested US$12.8-billion in e-cigarette maker Juul, around the same time it invested in Cronos. There’s no immediate plans, however, to bring Juul’s e-cigarette technology into the cannabis space, Mr. Gorenstein said.

"We look at the cannabinoid category as a very unique and distinct category from nicotine. While we both have Altria as a partner, and access to resources that Altria has, we think that the leading and winning device will be specifically tailored to cannabinoid formulations and target very nuanced cannabis consumer need states. We’re working on bringing a proprietary product to market, but we are excited to benefit from years of expertise and infrastructure at Altria in that regard.

M&A targets

With $2.4-billion of cash on its balance sheet, Cronos has considerable capital to deploy through M&A activity. Given the company’s short-term supply problems, Canadian cultivation assets may seem like the natural buy. The focus, however, is “on assets that we think will contribute to scalable value that we can take and transfer across borders and across regulated channels, whether that’s adult use, pharmaceutical/medical, or the general CPG channel," Mr. Gorenstein said.

The Ginkgo partnership depends on scientific milestones

One of the company’s main R&D plays involves U.S. biotech firm Gingko Bioworks, which is developing a process of growing THC, CBD and other rare cannabinoids in a lab using yeast. The partnership is focusing on eight cannabinoids, Mr. Gorenstein said, and Ginkgo’s stock compensation depends on them reaching certain scientific milestones.

“Cronos common shares will be issued to Gingko when each of the eight cannabinoids can be produced for less than US$1,000 per kilo of pure cannabinoid, at a scale of greater than 200 litres," Mr. Gorenstein said.

Scepticism about medical market

Because Cronos did not separate medical and recreational sales when reporting revenue, it’s impossible to tell how the company's medical sales were impacted by the new recreational market. Mr. Gorenstein acknowledged however, that he expects medical sales to drop rapidly.

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“Over all what we’re seeing is likely going to be a larger decline in Canada than you saw in some of the U.S. states… There are different incentives in the market in Canada than there were in the U.S. states. For one, we haven’t seen excise tax really apply to medical patients in the U.S., but we’re seeing it here in Canada. And from a regulation and a distribution perspective, there’s additional incentives for the government to push demand toward the recreational channel, because they play a part in the distribution. Given that, in the short to medium term we would expect to see that decline faster than how it declined in the U.S. That said, we do think there’s a long term opportunity in more of a pharmaceutical market.”

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