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Why Cronos Group shares are plunging after the company topped first quarter estimates

FILE- This Sept. 11, 2018, file photo shows a marijuana plant in San Luis Obispo, Calif. (AP Photo/Richard Vogel, File)

Shares of Cronos Group Inc. (CRON.TO) plunged on Thursday after the Toronto-based cannabis producer eked out a small profit and reported higher revenue in its fiscal first quarter.

However, chief financial officer Jerry Barbato said the company expects adjusted earnings before certain items to decline into 2019.

The company reported net revenue of $6.5 million, a 15 per cent increase over the previous quarter that was attributed to increased sales of CBD oil. Revenue climbed 120 per cent from $2.9 million year-over-year, driven by recreational legalization in Canada.

Analysts surveyed by Zacks Investment Research expected first-quarter revenue of $4.9 million.

The company reported net income of $427,812, or 48 cents per share, in the first quarter after reporting a loss of $1,085, or one cent, a year ago. Analysts expected a loss of two cents per share.

NASDAQ-listed shares fell 8.44 per cent to $14.16 at 11:19 ET. Shares in Toronto dropped 8.20 per cent to $19.02.

Cronos reported an adjusted EBITDA loss of $8.9 million the first quarter, an increase of 14 per cent versus the previous quarter. Barbato blamed higher operating expenses that were partially offset by increased net revenue.

“Our adjusted EBITDA will likely decline over 2019, but position the company for accelerated growth in 2020,” he told analysts on a post-earnings conference call on Thursday.

CEO Mike Gorenstein said the business performed “in line with our expectations.”

“We continue to stay laser-focused on our strategy of building our supply chain, distribution, intellectual property and brand portfolios,” he wrote in a news release on Thursday. “We’re delighted to have officially closed our transaction with Altria and to kick off a relationship we expect to lead to significant growth and value creation.”

Cigarette-maker Altria Group Inc. (MO) invested $2.4 billion in Cronos, gaining a 45 per cent stake in the Canadian cannabis producer with the option to boost its stake to 55 per cent under the agreement.

Cronos said it sold 1,111 kilograms in first quarter 2019, a seven per cent quarter-over-quarter increase from the 1,040 kilograms sold in fourth quarter 2018. Kilograms sold climbed 22 per cent from the 501 kilograms sold in first quarter 2018, primarily driven by increased cannabis production and the launch of the adult-use market in Canada.

The cost of sales before fair value adjustments declined by 14 per cent on the year to $2.69 per gram.

The company said cannabis oil sales accounted for 23 per cent of net product revenue in Q1, a nine per cent year-over-year increase.

CBD TO TAKE THE LEAD

Gorenstein sees the global market for CBD outpacing psychoactive cannabis, and plans to leverage the company’s Colombian joint-venture to drive margins through lower-cost production.

“We see borders falling much faster for non-intoxicating products, primarily CBD-based,” he said on the call. “I think that market globally is going to expand probably more rapidly than the THC market, just based off of the ability to import and export.”

Last August, Cronos announced a 50-50 joint venture called NatuEra with an affiliate of Agroidea SAS, Colombia’s leading agricultural services provider.

“You've got a pretty big advantage in Columbia overall,” Gorenstein said, noting cost benefits on agricultural products and labour, as well as better growing climate.

LOADING FOR THE VAPE LAUNCH

Gorenstein said he believes vape will be the fastest-growing product category.

Earlier this week, Cronos announced the opening of a device lab in Israel to produce vaporizers specifically designed for cannabis that will leverage resources from Altria.

Gorenstein said the company is expanding its growing capacity while balancing the need to stockpile for the rollout of new product categories against a Canadian recreational market still hungry for supply.

“Vapes, the category is very important to us, and making sure we’re able to launch with significant inventory is something that we’re continuing to prioritize,” he said on the call. “I think right now it’s certainly a balance between selling everything you have and making sure that you can load for launch.”

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