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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
Form 10-Q
_______________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-38403
__________________________
CRONOS GROUP INC.
(Exact name of registrant as specified in its charter)
__________________________
British Columbia, Canada
N/A
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
111 Peter St. Suite 300
Toronto, Ontario
M5V 2G9
(Address of principal executive offices)(Zip Code)
416-504-0004
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, no par valueCRONThe Nasdaq Stock Market LLC


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer
Non-accelerated fileroSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No x
As of November 4, 2020, there were 356,186,817 common shares of the registrant issued and outstanding.






1



Table of Contents
PART I
FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II
OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

Unless otherwise noted or the context indicates otherwise, references in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to the “Company”, “Cronos Group”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect wholly owned subsidiaries and, if applicable, its joint ventures and investments accounted for by the equity method; the term “cannabis” means the plant of any species or subspecies of genus Cannabis and any part of that plant, including all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers; and the term “U.S. hemp” has the meaning given to term “hemp” in the U.S. Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), including hemp-derived cannabidiol (“CBD”).
This Quarterly Report contains references to our trademarks and trade names and to trademarks and trade names belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks or trade names to imply a relationship with, or endorsement or sponsorship of us or our business by, any other companies.
All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars; all references to “C$” are to Canadian dollars; all references to “A$” are to Australian dollars and all references to “ILS” are to Israeli New Shekels.

2


PART I
FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Table of Contents

3


Cronos Group Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2020 and December 31, 2019
(In thousands of U.S. dollars, except share amounts, unaudited)


As of
September 30, 2020December 31, 2019
Assets
Current assets
Cash and cash equivalents$1,097,846 $1,199,693 
Short-term investments202,883 306,347 
Accounts receivable(i)
6,086 4,638 
Other receivables10,401 7,232 
Current portion of loans receivable7,781 4,664 
Prepaids and other assets10,532 9,395 
Inventory, net56,359 38,043 
Held-for-sale assets2,066 3,248 
Total current assets1,393,954 1,573,260 
Investments in equity accounted investees19,059 557 
Advances to joint ventures461 19,437 
Loan receivable, net76,148 44,967 
Property, plant and equipment171,404 159,948 
Right-of-use assets9,840 6,546 
Intangible assets68,604 71,235 
Goodwill179,459 214,492 
Total assets$1,918,929 $2,090,442 
Liabilities
Current liabilities
Accounts payable and other liabilities$39,012 $35,301 
Current portion of lease obligation1,274 427 
Derivative liabilities102,655 297,160 
Total current liabilities142,941 332,888 
Due to non-controlling interests2,889 1,844 
Lease obligation8,612 6,680 
Total liabilities$154,442 $341,412 
Commitments and contingencies(ii)
Shareholders’ equity
Share capital(iii,iv)
$566,577 $561,165 
Additional paid-in capital32,491 23,234 
Retained earnings1,175,742 1,137,646 
Accumulated other comprehensive income (loss)(7,820)27,838 
Total equity attributable to shareholders of Cronos Group1,766,990 1,749,883 
Non-controlling interests(2,503)(853)
Total shareholders’ equity1,764,487 1,749,030 
Total liabilities and shareholders’ equity$1,918,929 $2,090,442 
(i)Net of current expected credit loss allowance of $64 as of September 30, 2020 (December 31, 2019 – $136)
(ii)Refer to Note 19 and Note 20 in the notes to condensed consolidated financial statements.
(iii)Authorized for issuance as of September 30, 2020: unlimited (December 31, 2019 – unlimited).
(iv) Shares issued as of September 30, 2020: 355,733,914 (as of December 31, 2019: 348,817,472)
See notes to condensed consolidated financial statements.
4


Cronos Group Inc.
Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2020 and 2019
(In thousands of U.S dollars, except share and per share amounts, unaudited)


Three months ended September 30,Nine months ended September 30,
2020201920202019
Net revenue, before excise taxes$13,621 $6,269 $34,397 $17,724 
Excise taxes(2,263)(484)(4,724)(1,282)
Net revenue11,358 5,785 29,673 16,442 
Cost of sales12,895 3,498 29,584 8,507 
Inventory write-down 5,424 11,024 5,424 
Gross profit (loss)(1,537)(3,137)(10,935)2,511 
Operating expenses
Sales and marketing7,236 4,591 20,849 9,723 
Research and development (“R&D”)4,734 2,605 12,955 6,076 
General and administrative18,860 16,202 61,048 34,987 
Share-based payments7,916 3,531 12,898 7,949 
Depreciation and amortization886 632 2,252 1,315 
Total operating expenses39,632 27,561 110,002 60,050 
Operating loss(41,169)(30,698)(120,937)(57,539)
Other income (expense)
Interest income, net3,781 8,939 15,266 20,455 
Share of loss from investments in equity accounted investees(1,327)(565)(3,293)(1,504)
Gain on revaluation of derivative liabilities105,307 632,482 182,795 1,158,008 
Financing and transaction costs(40)(6,083)(40)(31,684)
Impairment loss on goodwill and intangible assets  (40,000) 
Gain on disposal of other investments3,974  4,743 16,242 
Loss on reclassification of held-for-sale assets(919) (919) 
Other income (loss)318 147 334 147 
Total other income (loss)111,094 634,920 158,886 1,161,664 
Income (loss) before income taxes69,925 604,222 37,949 1,104,125 
Income tax expense988 58 988 58 
Income from continuing operations$68,937 $604,164 $36,961 $1,104,067 
Income (loss) from discontinued operations(473)(36)(519)(63)
Net income (loss)$68,464 $604,128 $36,442 $1,104,004 
Net income (loss) attributable to:
Cronos Group$69,033 $604,410 $38,096 $1,104,501 
Non-controlling interests(569)(282)(1,654)(497)
$68,464 $604,128 $36,442 $1,104,004 
Other comprehensive income (loss)
Foreign exchange gain (loss) on translation$26,167 $(12,422)$(35,654)$9,424 
Total other comprehensive income (loss)26,167 (12,422)(35,654)9,424 
Comprehensive income (loss)$94,631 $591,706 $788 $1,113,428 
Comprehensive income (loss) attributable to:
Cronos Group$95,183 $591,996 $2,438 $1,113,929 
Non-controlling interests(552)(290)(1,650)(501)
$94,631 $591,706 $788 $1,113,428 
Net income (loss) per share
Basic - continuing operations$0.20 $1.78 $0.11 $3.71 
Basic - discontinued operations0.000.000.000.00
Diluted - continuing operations(i)
0.19 1.62 0.10 0.92 
Diluted - discontinued operations(i)
0.000.000.000.00
Weighted average number of outstanding shares
Basic350,288,783 338,957,949 349,397,156 297,964,058 
Diluted(i)
369,619,020 369,268,672 374,731,451 333,618,691 
(i) In computing diluted earnings per share, incremental common shares are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive.
See notes to condensed consolidated financial statements.
5


Cronos Group Inc.
Condensed Consolidated Statements of Changes in Equity (Deficit)
For the three months ended September 30, 2020 and 2019
(In thousands of U.S. dollars, except share amounts, unaudited)


Number of sharesShare capitalAdditional paid-in capitalRetained earnings Accumulated other comprehensive income (loss)Non-controlling interestsTotal shareholders' equity (deficit)
Balance at July 1, 2020349,886,402 $565,221 $27,046 $1,106,709 $(33,970)$(1,951)$1,663,055 
Warrants exercised5,407,890 619 (619)— — —  
Vesting of options— — 1,551 — — — 1,551 
Options exercised25,534 57 (53)— — — 4 
Vesting of restricted share units, net of withholding taxes414,088 — 4,217 — — — 4,217 
Vesting of common shares issued in connection with the use of certain publicity rights in brand development— — 349 — — — 349 
Top-up Rights exercised— 680  — — — 680 
Net income (loss)— — — 69,033 — (569)68,464 
Other comprehensive income— — — — 26,150 17 26,167 
Balance at September 30, 2020355,733,914 $566,577 $32,491 $1,175,742 $(7,820)$(2,503)$1,764,487 
Number of sharesShare capitalAdditional paid-in capitalRetained earnings Accumulated other comprehensive income (loss)Non-controlling interestsTotal shareholders' equity (deficit)
Balance at July 1, 2019336,144,543 $423,108 $14,779 $471,310 $11,973 $(112)$921,058 
Shares issued5,086,586 56,109 — — — — 56,109 
Share issuance costs— (4)— — — — (4)
Vesting of options— — 2,891 — — — 2,891 
Options exercised18,619 38 (33)(25)— — (20)
Vesting of restricted share units— — 186 — — — 186 
Top-up Rights exercised2,514,459 45,338 — — — — 45,338 
Net income (loss)— — — 604,410 — (282)604,128 
Other comprehensive loss— — — — (12,414)(8)(12,422)
Balance at September 30, 2019343,764,207 $524,589 $17,823 $1,075,695 $(441)$(402)$1,617,264 

See notes to condensed consolidated financial statements.
6


Cronos Group Inc.
Condensed Consolidated Statements of Changes in Equity (Deficit)
For the nine months ended September 30, 2020 and 2019
(In thousands of U.S. dollars, except share amounts, unaudited)


Number of sharesShare capitalAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Non-controlling interestsTotal shareholders’ equity (deficit)
Balance as of January 1, 2020348,817,472 $561,165 $23,234 $1,137,646 $27,838 $(853)$1,749,030 
Warrants exercised5,407,890 619 (619)— — —  
Vesting of options— — 5,051 — — — 5,051 
Options exercised1,094,464 1,386 (1,381)— — — 5 
Vesting of restricted share units, net of withholding taxes414,088 — 5,699 — — — 5,699 
Vesting of common shares issued in connection with the use of certain publicity rights in brand development— 2,000 507 — — — 2,507 
Top-up Rights exercised— 1,407 — — — — 1,407 
Net income (loss)— — — 38,096 — (1,654)36,442 
Other comprehensive income (loss)— — — — (35,658)4 (35,654)
Balance at September 30, 2020355,733,914 $566,577 $32,491 $1,175,742 $(7,820)$(2,503)$1,764,487 
Number of sharesShare capitalAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Non-controlling interestsTotal shareholders’ equity (deficit)
Balance as of January 1, 2019178,720,022 $175,001 $11,263 $(27,945)$(9,870)$100 $148,549 
Shares issued154,917,740 304,411 — — — — 304,411 
Share issuance costs— (3,722)— — — — (3,722)
Warrants exercised7,390,961 2,034 (596)— — — 1,438 
Vesting of options— — 7,309 — — — 7,309 
Options exercised170,087 356 (339)(861)— — (844)
Vesting of restricted share units— — 186  — — 186 
Top-up Rights exercised2,565,397 46,509 — — — — 46,509 
Net income (loss)— — — 1,104,501 — (497)1,104,004 
Other comprehensive income (loss)— — — — 9,429 (5)9,424 
Balance at September 30, 2019343,764,207 $524,589 $17,823 $1,075,695 $(441)$(402)$1,617,264 
See notes to condensed consolidated financial statements.
7


Cronos Group Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2020 and 2019
(In thousands of U.S. dollars, except share amounts, unaudited)


Nine months ended September 30,
20202019
Operating activities
Net income (loss)$36,442 $1,104,004 
Items not affecting cash:
Inventory write-down11,024 5,424 
Share-based payments12,898 7,949 
Depreciation and amortization5,095 2,956 
Share of loss from investments in equity accounted investees3,293 1,504 
Gain on revaluation of derivative liabilities(182,795)(1,158,008)
Gain on disposal of other investments(4,743)(16,242)
Impairment loss on goodwill and intangible assets40,000  
Loss (gain) on unrealized foreign exchange(3,020)807 
Provision for inventory and doubtful accounts3,119  
Non-cash sales and marketing2,505  
Loss on reclassification of held-for-sale assets919  
Other, net(298)(89)
Net changes in non-cash working capital(29,123)(25,098)
Cash flows used in operating activities(104,684)(76,793)
Investing activities
Purchase of short-term investments(125,562)(384,288)
Proceeds from disposal of short-term investments220,058  
Investments in equity accounted investees (1,658)
Proceeds from sale of other investments4,743 19,614 
Advances to joint ventures (15,951)
Purchase of property, plant and equipment(21,334)(37,622)
Payment of accrued interest on construction loan payable (89)
Purchase of intangible assets(3,094)(574)
Acquisition of Redwood (227,224)
Advances on loans receivable(37,000)(33,012)
Proceeds from repayment of loans receivable 238 
Cash assumed on acquisition  2,957 
Cash flows provided by (used in) investing activities37,811 (677,609)
Financing activities
Advance from non-controlling interests(187)183 
Repayment of lease obligations(1,859)(414)
Proceeds from Altria Investment 1,809,556 
Proceeds from exercise of Top-up Rights 31,566 
Proceeds from exercise of warrants and options5 1,455 
Withholding taxes paid on equity awards(2,148)(861)
Share issuance costs (3,722)
Advance of loans payable 48,715 
Repayment of loans payable (48,309)
Transaction costs paid on construction loan payable (15,971)
Cash flows provided by (used in) financing activities(4,189)1,822,198 
Effect of foreign currency translation on cash and cash equivalents(30,785)22,691 
Net change in cash and cash equivalents(101,847)1,090,487 
Cash and cash equivalents, beginning of period1,199,693 23,927 
Cash and cash equivalents, end of period$1,097,846 $1,114,414 
Supplemental cash flow information
Interest paid156 647 
Interest received13,473 9,690 
See notes to condensed consolidated financial statements.
8

Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020
(In thousands of U.S. dollars, except for gram and share amounts, unaudited)
1. Background
Cronos Group Inc. (“Cronos Group” or the “Company”) was incorporated on August 21, 2012 under the Business Corporations Act (Ontario). Effective July 9, 2020, the Company’s legal existence was continued to the Province of British Columbia and under the British Columbia Business Corporations Act. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.”
Cronos Group is an innovative global cannabinoid company, with international production and distribution across five continents. The Company is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is building an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS, a global wellness platform; two adult-use brands, COVE and Spinach; and three U.S. hemp-derived consumer products brands, Lord Jones, Happy Danceand PEACE+.
Cronos Group has established four strategic joint ventures in Canada, Israel, and Colombia. One of these strategic joint ventures, Cronos Israel (as defined herein) is consolidated for financial reporting purposes. The Company also holds approximately 31% of the issued capital of Cronos Australia Limited (“Cronos Australia”) and accounts for its investment in Cronos Australia under the equity method of accounting. For additional discussion regarding the joint ventures and strategic investment, see Note 6.

2. Summary of Significant Accounting Policies and Changes in Accounting Policy
(a)Basis of presentation
The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for any other reporting period.
These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in its Annual Report on Form 10-K/A for the year ended December 31, 2019 (the “Annual Financial Statements”).
(b)Basis of consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company, and all entities in which the Company has a controlling voting interest and/or is the primary beneficiary of a variable interest as of and for the period presented. The Company consolidates the financial results of the following entities, which the Company controls:
SubsidiariesJurisdiction of incorporationIncorporation date
Ownership interest (ii)
Cronos Israel G.S. Cultivation Ltd. (i)
IsraelFebruary 4, 201870%
Cronos Israel G.S. Manufacturing Ltd. (i)
IsraelSeptember 4, 201890%
Cronos Israel G.S. Store Ltd. (i)
IsraelJune 28, 201890%
Cronos Israel G.S. Pharmacy Ltd. (i)
IsraelFebruary 15, 201890%
(i)    These Israeli entities are collectively referred to as “Cronos Israel.”
(ii)    “Ownership interest” is defined as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest.
In the condensed consolidated statements of net income (loss) and comprehensive income (loss), the net income (loss) and comprehensive income (loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of Cronos Israel are presented separately in the shareholders’ equity (deficit) section of the condensed consolidated balance sheets and condensed consolidated statements of changes in equity (deficit). All intercompany transactions and balances are eliminated upon consolidation.
9

Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020
(In thousands of U.S. dollars, except for gram and share amounts, unaudited)
(c)Goodwill and indefinite life intangible assets
Goodwill and indefinite life intangible assets are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. The Company performs an impairment test annually in the fourth quarter by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has two reporting units: the U.S. reporting unit and the Rest of World reporting unit.
During the second quarter of 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the period represented potential indicators of impairment for the U.S. reporting unit. Accordingly, the Company performed an interim impairment analysis during the second quarter of 2020. No triggering events were identified during the three months ended September 30, 2020. See Note 13 for more information regarding intangibles assets and goodwill.
(d)Definite life intangible assets
On July 1, 2020, the Company changed its method of amortization for the computer software asset class from an accelerated 50% double declining method to the straight-line method of five years. The Company determined that the change in estimate to the straight-line method is more appropriate based on the usage of the assets in the asset class. The change in estimate is applied prospectively as of July 1, 2020.
Intangible assets with finite useful lives are recorded at cost less any accumulated amortization and accumulated impairment losses. Intangible assets acquired through a business combination are measured at fair value at the acquisition date.
The Company capitalizes certain costs incurred in connection with its enterprise resource planning software, which include external direct costs of materials and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of the software for the function intended. All other costs are expensed as incurred.
Intangible assets with finite useful lives are amortized over their estimated useful lives using the following methods and rates:
MethodRate
SoftwareStraight-line5 years
Enterprise resource planning (“ERP”) systemStraight-line5 years
Health Canada licensesStraight-lineUseful life of corresponding facilities
Israeli codes(i)
Straight-lineUseful life of corresponding facilities
(i)    The preliminary licenses granted to Kibbutz Gan Shmuel (the Cronos Israel joint venture partner) by the Medical Cannabis Unit of the Israeli Ministry of Health in early 2017 (the “Israeli codes”) were transferred by non-controlling interests to Cronos Israel in exchange for equity interests in the Cronos Israel entities specified above. 
Amortization begins when assets become available for use. The estimated useful life, amortization method, and rate are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
(e)Assets held for sale and discontinued operations
In accordance with Accounting Standards Codification (“ASC”) 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations.