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Thanks, Mike, and good morning everyone, I'm excited to be part of my first Cronos Group Earnings Call. Both our press release and MD&A includes comparisons of our financials to the same period in 2018. Currently, we believe the best way to evaluate our business and the industry is a comparison on a sequential quarter basis. The industries have gone through substantial change since the first quarter of 2018, primarily driven by the opening of the Canadian adult-use market. With that said, I will focus the majority of my comments discussing the first quarter's performance versus the fourth quarter of 2018.
We also believe adjusted EBITDA is one measure along with the fourth quarter of 2018. We also believe adjusted EBITDA is one measure along with net revenue, kilograms sold and average selling price to evaluate the operating performance of the business. Adjusted EBITDA removes the impact of items that may distort underlying business trends and results. We have included a reconciliation of net income to adjusted EBITDA in our MD&A and our press release.
The company reported an adjusted EBITDA loss of $8.9 million in the first quarter of 2019. The loss increased by 13% from the fourth quarter of 2018, primarily due to increased operating expenses, partially offset by a increase in net revenue. The company reported net revenue of $6.5 million in the first quarter of 2019, an increase of 15% from the fourth quarter of 2018.
This increase is primarily due to two factors, first, dry flower wholesale revenue in the fourth quarter, which carries no excise tax reduction for 2019. The sequential growth continues to be impacted by the supply constraints in the market. As Mike mentioned, we expect to have additional production capacity online in the second half of the year as we balance meeting demand today with focusing on the long-term strategy of our business.
As we continue to invest in our business, our brands and R&D initiatives, our adjusted EBITDA will likely decline over 2019, will position the company for accelerated growth in 2020. Kilograms of cannabis sold increased 7%, to 1,111 kilograms in the first quarter of 2019 from the fourth quarter of 2018, primarily due to increased cannabis production. As we look to 2019, we see that quarter-over-quarter increases will slowly scale in the first half of the year as we ramp up production and with momentum for revenue growth building in the second half of the year. Average selling price for the first quarter of 2019 increased 7% to $5.73 from the fourth quarter of 2018.
As previously mentioned, this is primarily driven by the increased revenue resulting from CBD oil, which carries no excise tax reduction. We believe gross profit before fair value adjustments provide useful information to understand and evaluate operating performance by excluding the non-cash fair value adjustments associated with biological assets and inventory. Gross profit before fair value adjustments for the first quarter of 2019 was $3.5 million, an increase of 42% from the fourth quarter of 2018. This sequential increase in gross profit before fair value adjustments was largely driven by an increase in kilograms sold and a higher average selling price for reasons already discussed as well as a reduction in cost of sales before fair value adjustments per gram or fully loaded unit cost of goods sold. Unit cost of goods sold decreased by 11% to $2.69 in the first quarter of 2019 from the fourth quarter of 2018. This was primarily driven by productivity gains realized in our cultivation operations.
Operating expenses for the first quarter of 2019 totaled $13.9 million representing an increase of 12% from the fourth quarter of 2018. The increase is primarily driven by professional fees for services in connection with various strategic initiatives and increased staffing levels across all functions within the organization in line with the company's growth strategy. In order to carry out our 2019 strategic objectives, we look at functions over the course of the next three quarters. Additionally in March 2019, Cronos Group sold all of its approximate 19% equity interest in Whistler Medical Marijuana Corporation to Aurora Cannabis in an all share transaction. At closing, Cronos Group received approximately $24.7 million in value of Aurora common shares with the company subsequently sold for approximately $25.6 million in cash.
Subject to the satisfaction of certain specified milestones the Cronos Group expects to receive an additional $7.6 million in value of Aurora common shares. Based on market conditions at the time of the transaction and assuming all milestones are met, Cronos expects to generate in aggregate a return of 8.7x on its investment in Whistler. You'll also notice that on a reported basis, the company reported a significant increase in net income due to various one-time items, which are described in the MD&A and the financial statements. I would like to comment on one of those items. Altria's investment included a warrant and other financial derivatives that allow Altria to acquire additional shares in Cronos Group.
Cronos Group will report these financial derivative liabilities at fair value each quarter. As such there may be significant reported earnings volatility, primarily driven by quarterly adjustments related to the movement of Cronos Group stock price. In the first quarter, Cronos Group recorded a non-cash gain of $436 million related to the change in fair value of these financial derivative liabilities. We've included additional disclosures in the financial statements regarding the investment, the accounting treatment and the impact of the financial derivative liabilities.
Turning to the balance sheet, as of March 31, the company's total cash position was $2.4 billion. In addition to providing us meaningful liquidity, the Altria investment affords us the flexibility to capitalize on opportunistic external growth opportunities and accelerate organic growth initiatives.
I would like to provide some insights into the short-term use of funds received from Altria in March. As we continue to scale the business for future success, we will increase our capital investments related to production specifically as it relates to our Peace Naturals facility expansion and automation equipment, GroCo and Israel facilities.
As you are aware, the pending regulations related to the legalization of derivative products, which include vaporizers and edibles in the Canadian adult-use market will require increased investment as we work our way through 2019. Additionally, the launch of our vaporizer innovation center in Israel, Cronos Device Labs, will require investment to develop next-generation technology for cannabis and cannabinoid vaporizers.
This concludes my review of the financials for the quarter ended March 31, 2019.
I'll turn it over to Mike for closing remarks.
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [5]
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Thank you, Jerry. In closing, the business in the first quarter of 2019 performed in line with our expectations. We continue to stay focused on creating a leading cannabis company that is well positioned to capture the expanding global market opportunity by building our supply chain, distribution, intellectual property and brand portfolios. We are delighted to officially close our transaction with Altria and to kick-off a relationship we expect to drive significant growth and value creation. This investment as well as numerous other actions taken in the quarter and the quarters to come will provide a strong foundation for Cronos Group.
Let's now open the lines for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question comes from the line of Tamy Chen with BMO Capital Markets. Your line is now open.
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Tamy Chen, BMO Capital Markets Equity Research - Analyst [2]
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Thanks. Hi, everyone. My first question is just wanted to talk on the inventory for a second. I noticed that the finished inventory was a bit modest at the quarter end with more of it was work-in-progress. And just given the time that it seems to take now to convert harvest and unfinished products into the finished packaged goods, I am just wondering how should we think about the sales ramp for the next quarter and even for the second half of 2019?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [3]
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Yes, thanks for the question. I wouldn't read too much into one quarter's activity. As we mentioned on the call, our production at Peace will continue to ramp up over the course of 2019, and we believe that harvesting more kilograms each quarter would naturally increase our work-in-process. And given that it takes about 45 days for vape [ph] to go through drying, curing, and testing before it could be bottled, so work-in-process increases, further pronounced by this gestation period.
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Tamy Chen, BMO Capital Markets Equity Research - Analyst [4]
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Okay, thanks. Got it. And my follow-up is just wondering on the Israel R&D center, why there versus elsewhere? And can you talk a bit more about what you mean by next-gen vapes? I think there are some vape products that exist today with some level of metered dosage. So is it -- is that it's a new type of oil formulation? Or is it new additional features of technologies on the pen itself that you are looking to develop?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [5]
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Sure. Thanks. Why Israel? I think really we look at Israel as a global leader in cannabis research. And we already have production operators there with Cronos Israel, a partnership with Technion for preclinical trials for skin repair. And one of the things that was important to us is making sure that we could accelerate this initiative. And so we actually took over the facilities and employees from former Altria entity Altria Israel. So it's not a Greenfield operation, but it's a fully established R&D facility with technology, equipment, and talent that's already intact. And we think that the best course of action is to use our own R&D capabilities to develop the vapor product. But I think when you look at what's out there and you think of how these devices will come online, it's important to look not just at what the device itself it is, but how that device is developed in connection with the formulation. So what we're seeing other areas is that the formulation tying into the heating coil, understanding how to adjust the temperature control, tying that into meter dosing, how much vapor is being released depending on what your consumer target is whether that's a large amount of vapor being released versus a smaller softer amount really can affect what occasion you are targeting. So I think it's putting all those together and taking those building blocks, combining that with understanding what the spectrum of cannabinoids that we are using are, whether that's primarily a THC or CBD based formulation or whether that's really making sure that the heating points are preserving flavor and really getting the most out of the rare cannabinoids that we are using. Having that platform, technology in-house and being able to iterate across vapor and flower, I think is very important.
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Tamy Chen, BMO Capital Markets Equity Research - Analyst [6]
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Got it. Okay. Thank you. That's it from me.
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Operator [7]
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Your next question comes from the line of Chris Carey with Bank of America. Your line is now open.
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Christopher Michael Carey, BofA Merrill Lynch, Research Division - Research Analyst [8]
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Hi, thanks for the question. So I guess just from a capacity standpoint, right, you did about roughly 1,000 kilos in the first quarter and have or are working toward approximately 40,000 kilos in the near term. How soon do you think that gap can close? And what really needs to occur for that to happen? Is that the Canadian supply chain, you need more distribution points to start to open up? Do you need more export markets to start to open up? So I wonder if you could just provide some perspective on that.
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [9]
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Sure. As far as capacity, we expect that everything is planted in the second quarter and then it's really a matter to continue to dial things in as we go. As far as distribution points and how we work through the supply chain, I think it's -- a big factor here is going to be what those ultimate formats are. So you'll start to see also how we allocated for what product formats and that's really going to affect what the filling, packaging and shipping is. So, I think you'll see a lot of that towards the end of the year with the expected and planned change in regulations for what products we can release, start to open things up. And we expect that that may have a even bigger effect in terms of opening the types of products and just the number of distribution of retail points that open up. And that's a very important market for us. So making sure that we are prepared is a real big an issue for us.
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Christopher Michael Carey, BofA Merrill Lynch, Research Division - Research Analyst [10]
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Okay, okay. Thanks. And so just more broadly, right, you've got over $2 billion on the balance sheet and we've recently seen in the market, there are ways to create value that may be earned so obvious in a number of (technical difficulty)
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Operator [11]
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Your next question comes from the line of Vivien Azer with Cowen. Your line is now open.
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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]
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Hi, good morning. My first question was on, Mike, your comment on Colombia and your decision to prioritize hemp over marijuana, can you just offer a little bit more color on what informed that and how you're thinking about end markets and market sizing? Thanks.
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [13]
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Thanks, Vivien. So, a lot of what we're looking at is either import/export, and while you know we still will use and maintain the psychoactive license when we look at regulations for different product categories, and we start thinking of kind of the three main distribution channels. On one hand, you have traditional ethical pharma, and you have former regulations on import/export, it's kind of what you see in Germany. All the way on the other end of the spectrum, you've got recreational where it's extremely difficult to import/export. This middle category, whether you're thinking of things opening up for the farm bill or what we expect to happen with CBD in the EU over the next 18 months. We see borders falling much faster for non-intoxicating products primarily that are CBD-based. So having a scalable production base or input for CBD is something that's important, and I think that that market globally is going to expand probably more rapidly than the THC market, just based off of the ability to import/export. Otherwise, a lot of that product will likely be shifting towards domestic production for adult-use.
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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [14]
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Thanks. And just a follow-up on that in terms of kind of capabilities around finished goods, is that something that you want to bring in-house, because at least based on what we're seeing in the US, delivery formats for CBD have been highly varied, how are you going to address that?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [15]
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Yes, I think it really depends on which format. So there are certain formats that it certainly makes sense to bring in-house, and I think the more specialized and the more we feel we need to be able to have control to ensure that we've got consistency in quality and safety, we'll be bringing those in-house. And then I think there are others where we feel that along the value chain, we can use co-packers and co-manufacturing. So depending on the type of the oral ingestible versus vapor, where we know there are sophisticated and highly experienced partners that we can leverage, we certainly will do that. I think it also depends on which geography you're looking at, whether or not it's us shipping in ingredients, and then locally manufacturing versus being able to ship final product. So I don't know if it's simple to say, all in-house versus all-contracted. I think it really depends on which geography and ultimately which product.
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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [16]
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Okay, that's helpful. And just my last one, on your comment around expanding your distribution and presence in Canada, as you get more supply online, clearly there's a balance between going deeper into provinces, where you're already present versus expanding into other provinces. And I just wanted to hear kind of your extended thoughts on that, Mike, because you've had a bit more of a nuanced view around kind of the ability to brand build so early in the market? And so does that inform how you think about that choice, brand versus equity [ph]?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [17]
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Yes, thanks. That's a great question. I think when we look at -- normally your issue is when you launch a product, it's trial. How can I get someone to try a product given how much of a shortage there is. I think right now, it's really about driving repurchase, and trying to get as much horizontal or let's say, virtual shelf space as you can right now launching a lot of SKUs across the country. Really when trial isn't a problem, doesn't necessarily help for repurchase if you had stock out. So our preference is to be able to have in those provinces the ability to start building up relationships with customers, be able to continually drive repurchase, and then expand from there. I think also, again, when we think of formats in different categories and allocating supplies, we want to make sure that we can still fill a pipeline for new products that come online and follow that same strategy that will have enough inventory knowing that there is a quick supply ramp for us to be able to make sure that in other formats where we think it's easier to build brand equity across Canada, we're really able to make sure that we get repurchases after trial.
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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [18]
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Perfect. Thanks very much.
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Operator [19]
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Your next question comes from the line of Martin Landry with GMP Securities. Your line is now open.
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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [20]
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Hi, good morning. I just want to come back on the inventory balance, Mike, in Q4, you had alluded to some bottlenecks or challenges in downstream and processing and packaging. I was wondering has the situation improved, have you resolved these bottlenecks, and are you -- do you feel more comfortable with your post-harvest capacities?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [21]
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Yes. Thanks. Good morning. I think that's something that is resolving and that we're working towards, but is not fully resolved yet. And I think as we're continuing to ramp, it's something that we think should be resolved over the next few quarters, and it will likely come in different formats at different times. So we focus on making sure that we're able to automate in one category, while still making sure we have some product going out the door manually in others. But it does take time to set up automation lines for all products. But we do see that continue to improve and ramp and that's really being accelerated by a lot of help we're also getting from pretty experienced packaging engineers and automation experts from Altria.
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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [22]
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Great. And giving that your finished good levels are at similar levels as they were in December, how do we look at revenues for Q2? Should that imply that your Q2 revenues are likely to be stable versus Q1 or you still expect some growth there?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [23]
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Yes. I think it should be relatively stable, you'll see some growth. But as we said earlier, we really plan to ramp up finished goods in the back half of the year.
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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [24]
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Okay. Okay, thank you very much.
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Operator [25]
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Your next question comes from the line of John Zamparo with CIBC. Your line is now open.
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John Zamparo, CIBC Capital Markets, Research Division - Associate [26]
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Hey, thank you. Good morning. Wanted to ask about capital allocation. So similar to a question that was asked previously, and my apologies, I may have been cut off from the call briefly. But, Mike, you've been clear that you want to prioritize R&D and intellectual property, and that you're looking to avoid buying business plans, but I'm wondering what are your thoughts on quality and valuation of assets in the US market and would you potentially look at an acquisition that gives you optionality in the US?
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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [27]
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Thanks. Yes, I think that when I talk about business plan versus businesses, a lot of that does relate to just general maturity of the business, whether specifically it's I've applied for a l