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Cronos Group reports $11.6 million net loss, CEO warns of 'big shortage situation'

FILE- This Sept. 11, 2018, file photo shows a marijuana plant in San Luis Obispo, Calif. Curiosity from one the world's largest tobacco companies about the marijuana business sent shares of a Canadian cannabis company higher at the opening bell Tuesday, Dec. 4. Cronos Group confirmed talks late Monday with Marlboro maker Altria about a possible investment. (AP Photo/Richard Vogel, File)

Cronos Group Inc. (CRON.TO) booked a net loss of $11.6 million in its fourth quarter as revenue surged on recreational cannabis legalization in Canada.

The Toronto-based licensed producer said on Monday the loss amounted to six cents per share for the quarter ended Dec. 31. Cronos blamed an increase in research and development expenses, talent acquisition, and professional and consulting fees for pushing up costs.

The company reported profit of $2.1 million or a penny per share in the fourth quarter of 2017.

Toronto-listed shares fell 4.46 per cent to $26.19 at 10:57 a.m. ET.

Net revenues for the fourth quarter climbed to $5.6 million, as compared to $1.6 million for the fourth quarter of 2017, an increase $4 million or 248 per cent.

Cronos once again did not disclose how much revenue came from the recreational market, as has been customary among its peers, leaving analysts to speculate.

“We are still in a situation where we are trying to manage how we allocate between medical patients, provinces, private retail partners, and international partners in a pretty big shortage situation,” CEO Mike Gorenstein said on a conference call with investors Tuesday morning.

He said the company may one day break out the numbers for its sales channels, but will leave things as disclosed for now.

Cronos reported gross profit before fair value adjustments of $2.5 million in Q4 of 2018, compared to $0.4 million for the fourth quarter of 2017, an increase of $2.0 million or 449 per cent.

Reflecting the company’s focus on value-added products, Gorenstein said Cronos will focus on the cost of goods sold rather than the cost of grams sold.

“Expect our focus to be making the cheese, rather than raising and milking the cow,” he said on the call.

“Cronos Group has diligently focused on our strategic objectives, which culminated in our transformative partnership with Altria Group, Inc.,” Gorenstein said in a news release on Tuesday. “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.”

Marlboro cigarette maker Altria Group Inc. (MO) holds a 45 per cent stake in the Canadian cannabis producer that it acquired for $2.4 billion. Altria has the option to boost its stake to 55 per cent of Cronos under the agreement.

Cronos announced that an Altria director will join the company as chief financial officer in mid-April. Jerry Barbato was most recently Altria’s senior director of corporate strategy.

Asked if Cronos will leverage Altria’s US$12.8 billion investment in the controversial e-cigarette maker Juul to develop a cannabis vape pen, Gorenstein said he sees the cannabis category as distinct from nicotine.

“We think that the leading and winning device will be specially tailored to cannabinoid formulations,” he said. “That’s something we are working on, bringing a proprietary product to market. We will, and are excited to benefit from years of expertise and infrastructure at Altria in that regard.”

Gorenstein said the company plans to expand cannabis distribution to new Canadian markets, and updated investors on the progress of production facilities in Canada and Israel.

He said Cronos is also forging ahead with research on acne, psoriasis and wound healing with Israel Institute of Technology.

Cronos reported full-year revenue of $15.7 million, compared with $4.1 million a year earlier.

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