Cronos Group Falls as Pot Producer's Prices, Margins Decline

(Bloomberg) -- Cronos Group Inc.’s average selling price and gross margin fell in the third quarter as it geared up for recreational marijuana sales, sending its shares lower Tuesday.

The fifth-biggest Canadian pot company said its average selling price in the quarter fell to C$7.32 ($5.53) from C$8.01 a year earlier. Although the third quarter was over before Canada legalized recreational pot on Oct. 17, the lower price was the result of initial sales to the provinces ahead of legalization and the company’s decision to cover the $1 per gram excise tax for medical patients, Chief Financial Officer William Hilson said on the company’s earnings call Tuesday.

The shares dropped 4.7 percent to C$10.79 at 11:40 a.m. in Toronto after earlier falling as much as 12 percent.

Investors shouldn’t be surprised by the drop in average selling price, Chief Executive Officer Mike Gorenstein said in an interview at Bloomberg’s Toronto office.

“People generally should have expected or understand there’s a difference between medical and rec, a lot of that comes to wholesale and comes with volume,” he said.

Gross margin before fair value adjustments, which place a value on plants while they’re still in the ground, fell to 55 percent from 65 percent a year earlier. The decrease was driven by the lower average selling price and a higher unit cost of sales as Toronto-based Cronos spent to bring a new 286,000-square-foot production facility online.

Cronos didn’t provide much detail about the first days of recreational sales.

‘Real Effects’

“We haven’t seen the real effects of adult use yet, I think we’ll see that over the coming quarters,” Gorenstein said on the earnings call. “We thought of October as a month where we’re working through kinks and making sure that all the areas of the supply chain are smoothing.”

By contrast, Aurora Cannabis Inc. said Monday its brands accounted for about 30 percent of sales through the government-run Ontario Cannabis Store in October, while it had the four best-selling dried-flower pot products in British Columbia. Aurora also said its average net selling price was C$9.19 and its gross margin on cannabis was 70 percent in the quarter ended Sept. 30.

Cronos currently supplies Ontario, British Columbia, Nova Scotia and Prince Edward Island with recreational pot. It’s in discussions with additional provinces but won’t rush into any agreements, Gorenstein said in an interview.

“It’s not just how much supply you have but how you get it out the door,” he said. “Every time you add a province you’re adding additional complexity.”

Cronos reported third-quarter revenue almost tripled from a year earlier to C$3.8 million as the amount of cannabis sold increased 213 percent to 514 kilograms (1,133 pounds). The net loss was C$7.27 million, or 4 cents a share, compared with a profit of C$1.1 million a year earlier.

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