Key Takeaways from Cronos Group’s Q3 Results

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The Cronos Group (NASDAQ:CRON), a vertically integrated Canadian marijuana company, published its Q3 2018 results on Tuesday. While revenues rose by 186% year-over-year to $3.8 million, driven by higher production capacity and better volumes in both the domestic medical and international channels, the company swung to a net loss on account of higher operating costs. Although the company’s financial results are not of much consequence yet, there were multiple noteworthy trends and developments over Q3, which could drive Cronos’ longer-term performance. We discuss these trends below.

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Updates On Capacity Expansion

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Cronos is looking to aggressively scale up its manufacturing capacity and production volumes, driven by Canada’s legalization of recreational marijuana and also by the company’s continued expansion into international markets. Over Q3, Cronos indicated that it completed its new Building 4 at its Peace Naturals facility in Ontario, adding 286k square feet of indoor growing space. The first harvest from this facility is expected by the end of this year, and the company expects it to produce as much as 40,000 kilograms of cannabis annually at peak production. Separately, the company also forged a joint venture with a group of investors, creating a partnership called Cronos Growing Company, which expects to construct an 850k square foot greenhouse that will produce up to 70,000 kilograms of cannabis annually. Construction of the greenhouse has started and is expected to be complete during the second half of 2019.

Demand Should Remain Strong

Canada legalized cannabis sales for adult recreational use in mid-October, and Cronos has been actively bolstering its distribution footprint, currently selling dried cannabis, pre-rolls and cannabis oils to Ontario, British Columbia, Nova Scotia and Prince Edward Island, which together account for more than 50% of Canada’s overall population. Cronos noted that it expects to receive additional provincial listings as more of its production capacity comes online. The company also entered into a supply agreement with Cura Cannabis Solutions, which is one of the largest cannabis companies in the world. Under the deal, Cura will purchase a minimum of 20,000 kilograms of cannabis from Cronos after it receives all the necessary licenses from Canadian authorities.

 

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