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Cronos Group braces for weaker pot prices thanks to Canada's recreational market

Cronos Group Inc. reported a net loss of $7.2 million, or four cents per share, compared to income of $1.1 million in the third quarter of 2017.

Cronos Group Inc. (CRONsays lower prices paid by provincial pot distributors and Ottawa’s $1 per gram excise tax helped swing the company to a $7.27 million net loss in its third quarter.

The Toronto-based cannabis company reported a 186 per cent year-over-year revenue increase to $3.8 million before the markets opened on Tuesday. Gross profit ticked up to $2.09 million, versus $2 million in the same quarter last year. The company reported a net loss of $7.2 million, or four cents per share, compared to income of $1.1 million in the third quarter of 2017.

Canada’s fifth-largest cannabis company said its average selling price in the quarter shrank to $7.32 per gram, from $8.01 a year earlier. Chief Financial Officer William Hilson signalled the company is anticipating weaker prices, slashing the forward-looking price-per-gram assumption from $8.50 to $7.

“The rationale for this change is the impact of absorbing the new $1 per gram excise tax applied to both medicinal and recreational sales, as well as the lower average selling price associated with the new recreational sales to provinces,” Hilson told investors on a conference call Tuesday morning.

He said the company’s change in comprehensive income is a result of those factors.

Under International Financial Reporting Standards, cannabis companies pre-book profit for “biological assets” before they are fully grown and sold.

Cronos sold 514 kilograms of cannabis in the quarter, a 213 per cent increase over the 164 kilograms sold in the same period last year. Total operating expenses surged 242 per cent compared to the same quarter last year to $4.94 million.

Craig Wiggins, one-third of an independent analysis team called TheCannalysts, expects more licensed producers will lower their price forecasts as recreational products make up a larger portion of sales compared to pricier medical cannabis.

“They are resetting their assumptions now because going forward they will not be able to sell at that level,” he said of Cronos Group. “That’s across the board. Everybody is going to be forecasting weaker prices.”

Toronto-listed Cronos Group shares fell 3.9 per cent to $10.82 at 12:48 a.m. ET, after dropping as much as 12 per cent in early trading.

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