Cronos Group expects heftier core losses as costs rise

Mike Gorenstein, marijuana firm Cronos Group's founder and CEO, speaks during an interview in New York, U.S., September 4, 2018. REUTERS/Brendan McDermid

Canadian cannabis company Cronos Group Inc. (CRON.TO)(CRON) expects wider core losses in the second half of 2019 as spending on next generation products continues to rise.

The Toronto-based company reported second-quarter financial results on Thursday, posting a three-fold year-over-year revenue increase to $10.2 million. Revenue rose nearly 60 per cent over the previous period.

Cronos Group said the boost was primarily driven by increased dry flower and CBD sales. Cannabis sales were three times higher at 1,584 kilograms for the period ended June 30.

Cronos Group reported a $17.8 million EBITDA loss in its second quarter, up from $2.4 million a year earlier, as the company struggled with rising costs.

The cost of sales before fair value adjustment ballooned 280 per cent year-over-year. The company reported total operating expenses of $26.3 million, compared to $5.9 million for the second quarter of 2018, a more than 300 per cent increase.

Speaking on a conference call with analysts on Thursday morning, chief financial officer Jerry Barbato blamed higher research and development costs, fees for professional services and marketing spending for soon-to-be launched derivative cannabis products.

The notoriously research-focused company is placing big bets on cannabis vape products developed with assistance from Altria Group Inc. (MO) The maker of Marlboro cigarettes, and stakeholder in the popular e-cigarette company JUUL, acquired a 45 per cent ownership interest in Cronos Group in a $2.4-billion deal last year.

Cronos Group is also spending on technology to produce cannabis through fermentation, as well as assets to address the U.S. hemp-derived CBD market.

Last month, the company announced an agreement to buy an 84,000 square-foot fermentation facility in Winnipeg from Apotex Fermentation Inc. Last Friday, the company announced a deal to acquire U.S. hemp-derived CBD manufacturer Redwood Holding Group for approximately US$300 million.

“As we continue to invest in our business, our brand, and R&D initiatives, we believe our adjusted EBITDA loss will increase in the second half of the year compared to the first half,” Barbato said on the call.

“We believe the investments we are making today will position the company for accelerated growth in the future.”

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