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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
FORM 6-K/A
 ______________________________________________________
Report of Foreign Private Issuer
Pursuant to Section 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of March 2020
Commission File No. 001-38403  
______________________________________________________
CRONOS GROUP INC.
(Name of registrant)  
______________________________________________________
720 King Street W., Suite 320
Toronto, Ontario
M5V 2T3
(Address of registrant’s principal executive office)
______________________________________________________
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F  ¨ Form 40-F  x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (1):
    Yes  ¨    No  x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b) (7):
    Yes  ¨    No  x
 
 
 
 
 





EXHIBIT INDEX
 
 
 
Exhibit
Description 
99.1
99.2
99.3
99.4







SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
 
 
 
CRONOS GROUP INC.
(Registrant)
 
 
By:
/s/ Michael Gorenstein
Name:
Michael Gorenstein
Title:
President and Chief Executive Officer
Date: March 30, 2020



Exhibit

Notice to Reader

Cronos Group Inc. ("Cronos Group" or the "Company") has restated its unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019, the six months ended June 30, 2019, and the three and nine months ended September 30, 2019, which were previously filed on SEDAR (the “interim financial statements”). Subsequent to the original issuance of the interim financial statements, the Audit Committee of the Company’s Board of Directors, with the assistance of outside counsel and forensic accountants, conducted a review of certain bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of the revenue associated with those transactions. As a result of this review, it was concluded that there were accounting errors in the previously filed interim financial statements, due to three wholesale transactions (one in the three months ended March 31, 2019 and two in the three months ended September 30, 2019) that were inappropriately accounted for as revenue. These errors have been corrected in the amended and restated unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019, the six months ended June 30, 2019, and the three and nine months ended September 30, 2019. See note 28 of the amended and restated unaudited condensed interim consolidated statements for more detail.

















https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronoslogoa08.jpg


CRONOS GROUP INC.
Amended and Restated Condensed Interim Unaudited Consolidated Financial Statements

For the Three and Nine Months ended September 30, 2019 and September 30, 2018

(In thousands of Canadian dollars)





Cronos Group Inc.
Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018

Table of Contents

Amended and Restated Unaudited Condensed Interim Consolidated Statements of Financial Position
1
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss)
2
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Changes in Equity
3
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Cash Flows
4
Notes to the Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
5



Cronos Group Inc.
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Financial Position
As at September 30, 2019 and December 31, 2018
(in thousands of CDN $)


 
Notes
 
As at September 30, 2019 (Restated - Note 28)
 
As at December 31, 2018
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
23(a)
 
$
1,475,459

 
$
32,634
Short-term investments
23(a)
 
 
517,064

 
 
-
Interest receivable
23(a)
 
 
3,829

 
 
-
Accounts receivable
23(a)
 
 
6,935

 
 
4,163
Sales taxes receivable
 
 
 
3,999

 
 
3,419
Current portion of loans receivable
7,23(a)
 
 
6,083

 
 
314
Prepaid expenses and other assets
 
 
 
11,742

 
 
3,876
Biological assets
4
 
 
2,101

 
 
9,074
Inventory
4
 
 
54,138

 
 
11,584
Total current assets
 
 
 
2,081,350

 
 
65,064
Advances to joint ventures
5,23(a)
 
 
26,367

 
 
6,395
Net investments in equity accounted investees
5
 
 
1,389

 
 
4,038
Other investments
6
 
 
-

 
 
705
Loans receivable
7,23(a)
 
 
44,082

 
 
-
Property, plant and equipment
9
 
 
216,277

 
 
171,720
Right-of-use assets
3,12
 
 
7,957

 
 
171
Intangible assets
10
 
 
96,047

 
 
11,234
Goodwill
8,10
 
 
284,227

 
 
1,792
Total assets
 
 
$
2,757,696

 
$
261,119
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Accounts payable and other liabilities
23(b)
 
 
54,391

 
 
15,372
Holdbacks payable
23(b)
 
 
-

 
 
7,887
Government remittances payable
23(b)
 
 
738

 
 
1,123
Current portion of lease obligations
3,12,23(b)
 
 
420

 
 
41
Construction loan payable
13,23(b)
 
 
-

 
 
20,951
Derivative liabilities
14,23(b)
 
 
545,514

 
 
-
Total current liabilities
 
 
 
601,063

 
 
45,374
Lease obligations
3,12,23(b)
 
 
7,744

 
 
119
Due to non-controlling interests
11,23(b)
 
 
2,378

 
 
2,136
Deferred income tax liability
21
 
 
(298
)
 
 
1,850
Total liabilities
 
 
$
610,887

 
$
49,479
Shareholders' equity
 
 
 
 
 
 
 
Share capital
15(a)
 
 
693,620

 
 
225,500
Share-based reserve
16
 
 
11,808

 
 
7,789
Retained earnings (accumulated deficit)
 
 
 
1,442,016

 
 
(22,715)
Accumulated other comprehensive (loss) income
 
 
 
(98
)
 
 
930
Total equity attributable to shareholders of Cronos Group
 
 
 
2,147,346

 
 
211,504
Non-controlling interests
3,11
 
 
(537
)
 
 
136
Total shareholders' equity
 
 
 
2,146,809

 
 
211,640
Total liabilities and shareholders' equity
 
 
$
2,757,696

 
$
261,119
 
 
 
 

 
 
 
Commitments and contingencies
20
 
 
 
 
 
 
Subsequent events
29
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these amended and restated unaudited condensed interim consolidated financial statements
 
Approved on behalf of the Board of Directors:
 
"Michael Gorenstein"
"James Rudyk"
Director
Director
   


1
Cronos Group Inc.
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except share and per share amounts)


 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Notes
 
2019 (Restated - Note 28)
 
2018
 
2019 (Restated - Note 28)
 
2018
Gross revenue
17
 
$
8,277

 
$
3,760

 
$
23,573

 
$
10,099

Excise taxes
 
 
(639
)
 
-

 
(1,704
)
 
-

Net revenue
 
 
7,638

 
3,760

 
21,869

 
10,099

Cost of sales
 
 
 
 
 
 
 
 
 
Cost of sales before fair value adjustments
 
 
4,618

 
1,688

 
11,307

 
4,509

Inventory write-down
4
 
4,929

 
-

 
4,929

 
-

Gross profit before fair value adjustments
 
 
(1,909
)
 
2,072

 
5,633

 
5,590

Fair value adjustments
 
 
 
 
 
 
 
 
 
Unrealized change in fair value of biological assets
4
 
10,015

 
(1,533
)
 
(7,562
)
 
(11,108
)
Realized fair value adjustments on inventory sold in the period
 
 
9,081

 
1,511

 
15,041

 
6,330

Total fair value adjustments
 
 
19,096

 
(22
)
 
7,479

 
(4,778
)
Gross profit (loss)
 
 
(21,005
)
 
2,094

 
(1,846
)
 
10,368

Operating expenses
 
 
 
 
 
 
 
 
 
Sales and marketing
 
 
6,057

 
598

 
12,915

 
1,548

Research and development
 
 
3,439

 
-

 
8,072

 
-

General and administrative
 
 
21,270

 
4,820

 
46,057

 
11,500

Share-based payments
16
 
3,125

 
1,223

 
5,864

 
2,947

Depreciation and amortization
9,10,12
 
907

 
330

 
2,052

 
938

Total operating expenses
 
 
34,798

 
6,971

 
74,960

 
16,933

Operating loss
 
 
(55,803
)
 
(4,877
)
 
(76,806
)
 
(6,565
)
Other income (expense)
 
 
 
 
 
 
 
 
 
Interest income (expense)
 
 
11,703

 
(62
)
 
26,954

 
(121
)
Financing and transaction costs
 
 
(8,031
)
 
-

 
(42,097
)
 
-

Gain on revaluation of derivative liabilities
14
 
835,079

 
-

 
1,535,405

 
-

Gain on revaluation of financial liabilities
16(d)
 
194

 
-

 
194

 
-

Share of (loss) income from equity accounted investees
5
 
(746
)
 
20

 
(2,001
)
 
64

Gain on disposal of Whistler
5
 
-

 
-

 
20,606

 
-

Gain on other investments
6
 
-

 
-

 
924

 
221

Total other income (expense)
 
 
838,199

 
(42
)
 
1,539,985

 
164

Income (loss) before income taxes
 
 
782,396

 
(4,919

 
1,463,179

 
(6,401
)
Deferred income tax (recovery) expense
21
 
(3,959
)
 
2,352

 
(2,112
)
 
1,197

Net income (loss)
 
 
$
786,355

 
$
(7,271
)
 
$
1,465,291

 
$
(7,598
)
Net income (loss) attributable to:
 
 
 
 
 
 
 
 
 
Cronos Group
 
 
$
786,727

 
$
(7,210
)
 
$
1,465,948

 
$
(7,537
)
Non-controlling interests
11
 
(372
)
 
(61
)
 
(657
)
 
(61
)
 
 
 
$
786,355

 
$
(7,271
)
 
$
1,465,291

 
$
(7,598
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Gain (loss) on revaluation or disposal of other investments
6,21
 
$
(300
)
 
$
233

 
$
(197
)
 
$
237

Foreign exchange gain (loss) on translation of subsidiaries
2(a),11
 
(755
)
 
3

 
(843
)
 
3

Total other comprehensive income (loss)
 
 
(1,055
)
 
236

 
(1,040
)
 
240

Comprehensive income (loss)
 
 
$
785,300

 
$
(7,035
)
 
$
1,464,251

 
$
(7,358
)
Comprehensive income (loss) attributable to:
 
 
 
 
 
 
 
 
 
Cronos Group
 
 
$
785,686

 
$
(6,975
)
 
$
1,464,920

 
$
(7,298
)
Non-controlling interests
11
 
(386
)
 
(60
)
 
(669
)
 
(60
)
 
 
 
$
785,300

 
$
(7,035
)
 
$
1,464,251

 
$
(7,358
)
Earnings (loss) per share
 
 
 
 
 
 
 
 
 
Basic
18
 
$
2.32

 
$
(0.04
)
 
$
4.92

 
$
(0.04
)
Diluted
18
 
$
0.53

 
$
(0.04
)
 
$
1.22

 
$
(0.04
)
Weighted average number of outstanding shares
 
 
 
 
 
 
 
 
 
Basic
18
 
338,957,949

 
177,483,122

 
297,964,058

 
170,097,232

Diluted
18
 
369,268,672

 
177,483,122

 
333,618,691

 
170,097,232

 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these amended and restated unaudited condensed interim consolidated financial statements




2
Cronos Group Inc.
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Changes in Equity
For the nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except number of share amounts)


 
 
 
 
 
 
 
 
 
 
 
Share-based reserve
 
 
 
 
 
 
 
 
 
 
 
Notes
 
Number of shares
 
Share capital
 
Shares to be issued
 
Warrants
 
Stock options
 
Restricted stock units
 
Retained
earnings (accumulated deficit) (Restated - Note 28)
 
Accumulated
other comprehensive income (loss)
 
Non-controlling interests
 
Total (Restated - Note 28)
Balance at January 1, 2019 as previously reported
 
 
178,720,022

 
$
225,500

 
$
-

 
$
1,548

 
$
6,241

 
$
-
 
$
(22,715
)
 
$
930

 
$
136

 
$
211,640

Adoption of IFRS 16
3
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
(68
)
 
 
-

 
 
(4
)
 
 
(72
)
Balance at January 1, 2019 as restated
 
 
178,720,022

 
 
225,500

 
 
-

 
 
1,548

 
 
6,241

 
 
-
 
 
(22,783
)
 
 
930

 
 
132

 
 
211,568

Shares issued
15(a)
 
154,917,740

 
 
408,516

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
408,516

Share issuance costs
15(a)
 
-

 
 
(5,007)

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
(5,007
)
Warrants exercised
16(a)
 
7,390,961

 
 
2,709

 
 
-

 
 
(794)

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
1,915

Vesting of options
16(b)
 
-

 
 
-

 
 
-

 
 
-

 
 
5,018

 
 
-
 
 
-

 
 
-

 
 
-

 
 
5,018

Options exercised
16(b)
 
8,217

 
 
36

 
 
-

 
 
-

 
 
(12)

 
 
-
 
 
-

 
 
-

 
 
-

 
 
24

Share appreciation rights exercised
16(b)
 
161,870

 
 
439

 
 
-

 
 
-

 
 
(439)

 
 
-
 
 
(1,149
)
 
 
-

 
 
-

 
 
(1,149
)
Vesting of restricted stock units
16(c)
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
246
 
 
-

 
 
-

 
 
-

 
 
246

Top-up Rights exercised
14(c),15(c)
 
2,565,397

 
 
61,427

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
61,427

Net income (loss)
 
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
1,465,948

 
 
-

 
 
(657
)
 
 
1,465,291

Other comprehensive income (loss)
 
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
(1,028
)
 
 
(12
)
 
 
(1,040
)
Balance at September 30, 2019
 
 
343,764,207

 
$
693,620

 
$
-

 
$
754

 
$
10,808

 
$
246
 
$
1,442,016

 
$
(98
)
 
$
(537
)
 
$
2,146,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
 
149,360,603

 
$
83,559

 
$
-

 
$
3,364

 
$
2,289

 
$
-
 
$
(3,724
)
 
$
880

 
$
-

 
$
86,368

Shares issued
15(a)
 
15,677,143

 
 
146,032

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
146,032

Share issuance costs
 
 
-

 
 
(9,479
)
 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
(9,479
)
Shares to be issued
 
 
-

 
 
-

 
 
17

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
17

Warrants exercised
16(a)
 
13,114,336

 
 
4,616

 
 
-

 
 
(1,816
)
 
 
-

 
 
-
 
 
-

 
 
-

 
 
-

 
 
2,800

Vesting of options
16(b)
 
-

 
 
-

 
 
-

 
 
-

 
 
2,947

 
 
-
 
 
-

 
 
-

 
 
-

 
 
2,947

Options exercised
16(b)
 
366,638

 
 
721

 
 
-

 
 
-

 
 
(154
)
 
 
-
 
 
-

 
 
-

 
 
-

 
 
567

Share appreciation rights exercised
16(b)
 
181,726

 
 
100

 
 
-

 
 
-

 
 
(100
)
 
 
-
 
 
-

 
 
-

 
 
-

 
 
-

Non-controlling interests arising from Cronos Israel
 
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
-

 
 
371

 
 
371

Net loss
 
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
(7,537
)
 
 
-

 
 
(61
)
 
 
(7,598
)
Other comprehensive income
 
 
-

 
 
-

 
 
-

 
 
-

 
 
-

 
 
-
 
 
-

 
 
239

 
 
1

 
 
240

Balance at September 30, 2018
 
 
178,700,446

 
$
225,549

 
$
17

 
$
1,548

 
$
4,982

 
$
-
 
$
(11,261
)
 
$
1,119

 
$
311

 
$
222,265

 
The accompanying notes are an integral part of these amended and restated unaudited condensed interim consolidated financial statements




3
Cronos Group Inc.
Amended and Restated Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $)



 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Notes
 
2019
(Restated - Note 28)
 
2018
 
2019
(Restated - Note 28)
 
2018
Operating activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
$
786,355

 
$
(7,271)

 
$
1,465,291

 
$
(7,598)

Items not affecting cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized change in fair value of biological assets
4
 
 
10,015

 
 
(1,533)

 
 
(7,562
)
 
 
(11,108)

Realized fair value adjustments on inventory sold in the period
 
 
 
9,081

 
 
1,511

 
 
15,041

 
 
6,330

Share-based payments
16
 
 
3,125

 
 
1,223

 
 
5,864

 
 
2,947

Depreciation and amortization
9,10,12
 
 
907

 
 
330

 
 
2,052

 
 
938

Depreciation relieved on inventory sold
22
 
 
1,566

 
 
145

 
 
2,164

 
 
361

Gain on revaluation of derivative liabilities
14
 
 
(835,079
)
 
 
-

 
 
(1,535,405
)
 
 
-

Gain on revaluation of financial liabilities
16(d)
 
 
(194
)
 
 
-

 
 
(194
)
 
 
-

Share of loss (income) from equity accounted investees
5
 
 
746

 
 
(20)

 
 
2,001

 
 
(64)

Inventory write-down
 
 
 
4,929

 
 
-

 
 
4,929

 
 
-

Gain on disposal of Whistler
5
 
 
-

 
 
-

 
 
(20,606
)
 
 
-

Gain on other investments
6
 
 
-

 
 
-

 
 
(924
)
 
 
(221)

Deferred income tax (recovery) expense
21
 
 
(3,959
)
 
 
2,352

 
 
(2,112
)
 
 
1,197

Foreign exchange loss (gain)
 
 
 
822

 
 
2

 
 
914

 
 
(10)

Net changes in non-cash working capital
22
 
 
(4,748
)
 
 
(9,377)

 
 
(33,870
)
 
 
(26,039)

Cash and cash equivalents used in operating activities
 
 
 
(26,434
)
 
 
(12,638)

 
 
(102,417
)
 
 
(33,267)

Investing activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity (purchase) of short-term investments, net
 
 
 
227,872

 
 
-

 
 
(517,064
)
 
 
-

Advances to joint ventures
5
 
 
93

 
 
(2,674)

 
 
(21,200
)
 
 
(2,674)

Investments in equity accounted investees
5
 
 
-

 
 
(201)

 
 
(2,200
)
 
 
(201)

Proceeds from sale of other investments
6
 
 
-

 
 
-

 
 
26,078

 
 
967

Payment to exercise ABcann warrants
6
 
 
-

 
 
-

 
 
-

 
 
(113)

Advances on loans receivable
7
 
 
(27,450
)
 
 
-

 
 
(43,800
)
 
 
-

Proceeds from repayment of loans receivable
7
 
 
314

 
 
-

 
 
314

 
 
-

Purchase of property, plant and equipment
8
 
 
(22,055
)
 
 
(34,229)

 
 
(49,954
)
 
 
(71,896)

Purchase of intangible assets
9
 
 
(137
)
 
 
(125)

 
 
(765
)
 
 
(294)

Acquisition of Redwood
8
 
 
(301,368
)
 
 
-

 
 
(301,368
)
 
 
-

Cash assumed on acquisition
8,11
 
 
3,922

 
 
1,304

 
 
3,922

 
 
-

Cash and cash equivalents used in investing activities
 
 
 
(118,809
)
 
 
(35,925)

 
 
(906,037
)
 
 
(74,211)

Financing activities
 
 
 
 
 
 
 
 
 
 
 
 
 
Advance from non-controlling interests
11
 
 
129

 
 
-

 
 
242

 
 
-

Repayment of lease obligations
12
 
 
(336
)
 
 
-

 
 
(552
)
 
 
-

Repayment of construction loan payable
13
 
 
-

 
 
-

 
 
(21,311
)
 
 
-

Payment of accrued interest on construction loan payable
13
 
 
-

 
 
-

 
 
(121
)
 
 
(185
)
Proceeds from Altria Investment
14,15(a)
 
 
-

 
 
-

 
 
2,434,757

 
 
-

Proceeds from share issuance
15(a)
 
 
-

 
 
-

 
 
-

 
 
146,993

Share issuance costs
15(a)
 
 
(5
)
 
 
(35
)
 
 
(5,007
)
 
 
(9,479
)
Proceeds from exercise of warrants and options
16(a),16(b)
 
 
7

 
 
471

 
 
1,939

 
 
2,423

Withholding taxes paid on share appreciation rights
16(b)
 
 
(33
)
 
 
-

 
 
(1,149
)
 
 
-

Proceeds from exercise of Top-up Rights
14(c),15(a)
 
 
40,860

 
 
-

 
 
41,688

 
 
-

Cash and cash equivalents provided by financing activities
 
 
 
40,622

 
 
436

 
 
2,450,486

 
 
139,752

Net change in cash and cash equivalents
 
 
 
(104,621
)
 
 
(48,127
)
 
 
1,442,032

 
 
32,274

Cash and cash equivalents - beginning of period
 
 
 
1,579,231

 
 
89,609

 
 
32,634

 
 
9,208

Effects of foreign exchange on cash and cash equivalents
 
 
 
849

 
 
-

 
 
793

 
 
-

Cash and cash equivalents - end of period
 
 
$
1,475,459

 
$
41,482

 
$
1,475,459

 
$
41,482

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental cash flow information
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid
 
 
$
77

 
 
189

 
$
829

 
 
684

Interest received
 
 
 
2,402

 
 
-

 
 
12,456

 
 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these amended and restated unaudited condensed interim consolidated financial statements

4
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

 1.
Nature of business

 
Cronos Group Inc. ("Cronos Group" or the "Company") was incorporated under the Business Corporations Act (Ontario). Cronos Group is a public corporation, with its head office located at 720 King Street West, Suite 320, Toronto, Ontario, M5V 2T3. The Company's common shares are listed on the Nasdaq Global Market ("NASDAQ") and on the Toronto Stock Exchange ("TSX") under the ticker symbol "CRON".
 
Cronos Group is an innovative global cannabinoid company, with an international supply chain and distribution across five continents. The Company is engaged in the cultivation, manufacturing, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group's brand portfolio includes PEACE NATURALS™, a global health and wellness platform, two adult-use brands, COVE™ and Spinach™, and Lord Jones™, a hemp-derived cannabidiol ("CBD") personal care brand. The Company operates two wholly-owned license holders ("License Holders") under the Cannabis Act (Canada) and its relevant regulations (the "Cannabis Act"). The Company's License Holders are Peace Naturals Project Inc. ("Peace Naturals"), which has production facilities near Stayner, Ontario, and Original BC Ltd. ("OGBC"), which has a production facility in Armstrong, British Columbia.
 
Cronos Group has also established five strategic joint ventures in Canada, Israel, Australia, and Colombia. One of these strategic joint ventures is considered a subsidiary for financial reporting purposes, refer to Note 11.

2.
Basis of presentation
 
 
 
 
 
 
 
These amended and restated unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2019 and September 30, 2018 have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting. The accounting policies adopted in the preparation of the amended and restated unaudited condensed interim consolidated financial statements are consistent with those followed in the preparation of the Company's audited annual consolidated financial statements for the year ended December 31, 2018, except for the adoption of new standards effective as of January 1, 2019. The Company has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. The Company applied, as of January 1, 2019, International Financial Reporting Standard ("IFRS") 16, Leases and Interpretation of the IFRS Interpretations Committee ("IFRIC") 23, Uncertainty over income tax treatments. As required by IAS 34, the nature and effect of these changes are disclosed in Note 3.
 
 
 
 
 
 
 
These amended and restated unaudited condensed interim consolidated financial statements do not conform in all respects to the requirements of IFRS as issued by the International Accounting Standards Board ("IASB") for annual financial statements. Accordingly, these amended and restated unaudited condensed interim consolidated financial statements should be read in conjunction with the Company's December 31, 2018 audited annual consolidated financial statements and notes.
 
 
 
 
 
 
 
These amended and restated unaudited condensed interim consolidated financial statements were approved by the Board of Directors of the Company (the "Board") on March 29, 2020.



5
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

2.
Basis of presentation (continued)
(a)
Basis of consolidation
 
 
 
 
 
 
 
 
 
These amended and restated unaudited condensed interim consolidated financial statements are comprised of the financial results of the Company and its wholly-owned subsidiaries, which are the entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Where the Company does not have a controlling interest but has the ability to exert significant influence, the equity method is used. The Company consolidates the financial results of the following entities, which the Company controls:
Subsidiaries
 
Jurisdiction of incorporation
 
Incorporation date
 
Ownership interest
Cronos Israel G.S. Cultivations Ltd. (i)
 
Israel
 
February 4, 2018
 
70%
Cronos Israel G.S. Manufacturing Ltd. (i)
 
Israel
 
September 4, 2018
 
90%
Cronos Israel G.S. Store Ltd. (i)
 
Israel
 
June 28, 2018
 
90%
Cronos Israel G.S. Pharmacies Ltd. (i)
 
Israel
 
February 15, 2018
 
90%
 
 
 
 
 
 
 
 
 
(i) 
These Israeli entities are collectively referred to as "Cronos Israel".
In the amended and restated unaudited condensed interim consolidated statements of operations and comprehensive income (loss), net income (loss) and other 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 section of the amended and restated unaudited condensed interim consolidated statements of financial position and the amended and restated unaudited condensed interim consolidated statements of changes in equity.
 
 
 
 
 
 
 
 
 
(b)
Investments in equity accounted investees
 
Investees in which the Company has significant influence or joint control are accounted for using the equity method. The Company's interests in equity accounted investees are summarized in the following chart.
Equity accounted investees
 
Notes
 
Jurisdiction of incorporation
 
Ownership interest
Cronos Australia Limited ("Cronos Australia")
 
5,28
 
Australia
 
50%
MedMen Canada Inc. ("MedMen Canada")
 
5
 
Canada
 
50%
Cronos Growing Company Inc. ("Cronos GrowCo")
 
5
 
Canada
 
50%
NatuEra S.à. r.l ("NatuEra")
 
5
 
Luxembourg
 
50%

As at December 31, 2018, the Company held a 19% ownership interest in Whistler Marijuana Company ("Whistler"). During the nine months ended September 30, 2019, the Company divested its investment in Whistler.

(c)
Basis of measurement
 
 
 
 
 
 
 
Apart from biological assets, other investments, deferred share units, and derivative liabilities, which are measured at fair value, the amended and restated unaudited condensed interim consolidated financial statements have been presented and prepared on the basis of historical cost.

(d)
Functional and presentation currency
 
These amended and restated unaudited condensed interim consolidated financial statements are presented in Canadian dollars ("CDN"), which is the functional currency of the Company. The functional currency of all subsidiaries is the national currency of the respective jurisdiction of incorporation which includes Israel and the United States of America ("U.S.").

on

6
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

3.
Adoption of new accounting pronouncements
 
(a)
IFRS 16, Leases
 
IFRS 16 was issued in January 2016 and replaces the previous guidance on leases, predominantly IAS 17, Leases. The Company has applied IFRS 16 with an initial application date of January 1, 2019, in accordance with the transitional provisions specified in IFRS 16. As a result, the Company has changed its accounting policy for lease contracts as detailed below. The Company has applied the following practical expedients:
 
 
 
 
 
 
 
 
(i)
The Company applied the simplified transition approach and did not restate comparative information. As a result, the Company recognized the cumulative effect of initially applying IFRS 16 as an adjustment to the accumulated deficit as at January 1, 2019.
 
 
 
 
 
 
 
 
(ii)
On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Company applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17, and IFRIC 4, Determining whether an arrangement contains a lease, were not reassessed for whether they contain a lease. The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
 
 
 
 
 
 
 
 
In accordance with the practical expedients applied, the Company has recognized lease liabilities and right-of-use assets at the date of initial application for leases previously classified as operating leases in accordance with IAS 17. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company has elected to measure the right-of-use assets at the carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Company's incremental borrowing rate at the date of initial application. For the lease previously classified as a finance lease under IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of initial application is equal to the carrying amount of the leased asset and lease liability immediately before the date of initial application.

The following table summarizes the impacts of adopting IFRS 16 on the Company's amended and restated unaudited condensed interim consolidated financial statements as at the date of initial application:


As at January 1, 2019
 
As previously reported
under IAS 17
 
 
Adjustments (i)
 
 
As restated
under IFRS 16
 
Right-of-use assets
 
$
217
 
 
$
1,890
 
 
$
2,107
 
Accumulated depreciation
 
 
46
 
 
 
144
 
 
 
190
 
Current lease liabilities
 
 
41
 
 
 
303
 
 
 
344
 
Non-current lease liabilities
 
 
119
 
 
 
1,515
 
 
 
1,634
 
Accumulated deficit
 
 
(22,715)
 
 
 
(68)
 
 
 
(22,783)
 
Non-controlling interests
 
 
136
 
 
 
(4)
 
 
 
132
 

(i) 
The adjustments are due to the recognition of right-of-use assets and lease obligations for lease contracts previously classified as operating leases under IAS 17 prior to the date of initial application. The weighted average incremental borrowing rate applied to the lease liabilities recognized at the date of initial application is 12%. There would be no difference between the discounted value of the operating lease commitments disclosed at December 31, 2018 and the adjustments above. Furthermore, there were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

7
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

3.
Adoption of new accounting pronouncements (continued)

The following is the Company's policy for accounting for lease contracts in accordance with IFRS 16:

At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. In addition, the right-of-use assets are adjusted for impairment losses, if any. The estimated useful lives and recoverable amounts of right-of-use assets are determined on the same basis as those of property and equipment. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective interest method. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

(b)
IFRIC 23, Uncertainty over income tax treatments
IFRIC 23 clarifies the application of recognition and measurement requirements in IAS 12, Income taxes, when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers each tax treatment independently or collectively, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and how an entity considers changes in facts and circumstances. IFRIC 23 became effective for fiscal years beginning on or after January 1, 2019, with earlier application permitted. The Company has adopted this interpretation as of its effective date and has assessed no significant impact as a result of the adoption of this interpretation.


4.
Biological assets and inventory
 
 
 
 
 
(a)
Biological assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company's biological assets consist of cannabis plants. The changes in the carrying amounts of the biological assets are as follows:
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
Balance - beginning of period
 
$
10,032
 
 
$
6,899
 
 
$
9,074
 
 
$
3,722
Capitalization of production costs
 
 
6,208
 
 
 
1,276
 
 
 
15,044
 
 
 
4,986
Unrealized change in fair value of biological assets
 
 
(10,015)
 
 
 
1,533
 
 
 
7,562
 
 
 
11,108
Transferred to inventory upon harvest
 
 
(4,124)
 
 
 
(4,076)
 
 
 
(29,579)
 
 
 
(14,184)
Balance - end of period
 
$
2,101
 
 
$
5,632
 
 
$
2,101
 
 
$
5,632

As at September 30, 2019, the Company has 75,649 plants classified as biological assets which are expected to ultimately yield 4,388 kg of dry cannabis (December 31, 2018 - 46,004 plants which were expected to ultimately yield 6,303 kg of dry cannabis).

The Company measures its biological assets at fair value less costs to sell. This valuation is based on the expected harvest yield (on a grams per plant basis) for plants currently being cultivated, adjusted for the expected net selling price less post-harvest costs attributable to bringing a harvested gram of cannabis to a saleable condition and ultimate sale (on a per gram basis). The Company accretes the fair value of each cannabis plant on a straight-line basis over the expected growing cycle. As at September 30, 2019, the plants were on average 6 weeks into the growing cycle, 45% complete, and were ascribed approximately 45% (December 31, 2018 - 6 weeks, 37%, and 37%, respectively) of their expected fair value at harvest date.


8
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

4.
Biological assets and inventory (continued)
(b)
Inventory
 
Inventory consisted of the following:
 
As at September 30, 2019
(Restated - Note 28)
 
 
As at December 31, 2018
Dry cannabis
 
 
 
 
 
 
 
 
 
 
Finished goods
420 kg
 
$
1,467
 
 
187 kg
 
$
972
Work-in-process
7,860 kg
 
 
28,155
 
 
1,789 kg
 
 
7,733
 
 
 
 
29,622
 
 
 
 
 
8,705
 
 
 
 
 
 
 
 
 
 
 
Cannabis oils (i)
 
 
 
 
 
 
 
 
 
 
Finished goods
596 kg
 
 
3,429
 
 
115 kg
 
 
656
Work-in-process
5,580 kg
 
 
14,458
 
 
220 kg
 
 
1,250
 
 
 
 
17,887
 
 
 
 
 
1,906
 
 
 
 
 
 
 
 
 
 
 
Cannabinoid infused products (ii)
 
 
 
 
 
 
 
 
 
 
Finished goods
 
 
 
977
 
 
 
 
 
-
Cannabinoid concentrates
 
 
 
2,505
 
 
 
 
 
-
 
 
 
 
3,482
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
Raw materials (iii)
 
 
 
161
 
 
 
 
 
171
Supplies and consumables
 
 
 
2,986
 
 
 
 
 
802
 
 
 
$
54,138
 
 
 
 
$
11,584
(i) 
Cannabis oils are expressed in dry cannabis gram equivalents. Refer to Note 4(d) for the equivalency factor applied.

(ii) 
Cannabinoid infused products pertain to inventory related to the four operating subsidiaries (collectively, "Redwood") of Redwood Holding Group, LLC acquired by the Company, refer to Note 8. Redwood does not have any biological assets and is not subject to the fair value adjustment. Inventory is measured at the lower of cost and net realizable value.
(iii) 
As at September 30, 2019, raw materials consisted of 0.265 kg (December 31, 2018 - 0.267 kg) of seeds held by the Company.

As at September 30, 2019, the Company held 89 kg (December 31, 2018 - 29 kg) of dry cannabis and 7 kg (December 31, 2018 - 4 kg) of cannabis oils as retention samples, which are valued at $nil. Inventory is written down for any obsolescence or when the net realizable value of inventory is less than the carrying value. For the three and nine months ended September 30, 2019, the Company recorded an inventory write-down of $4,929.

(c)
Direct and indirect cost allocations

Costs incurred to transform biological assets up to the point of harvest ("production costs") are capitalized as they are incurred, which become the cost basis of the biological assets. These costs include direct costs such as nutrients, soil, and seeds, as well as other indirect costs such as utilities, an allocation of indirect labour, property taxes, and depreciation of equipment used in the growing process. The biological assets are then revalued to fair value less costs to sell immediately prior to harvest and at the end of each reporting period. Gains or losses arising from changes in the fair value less costs to sell, excluding capitalized production costs, are presented as unrealized changes in the fair value of biological assets. At the point of harvest, agricultural produce consisting of cannabis is considered inventory. The fair value less costs to sell becomes the cost base of inventory. Any subsequent post-harvest costs ("processing costs"), including direct costs attributable to processing and related overhead, are capitalized to inventory as they are incurred. Upon ultimate sale of inventory, the associated production and processing costs are presented as cost of sales before fair value adjustments; the remaining cost of inventory, associated with fair value less costs to sell prior to harvest, is presented as realized fair value adjustments on inventory sold in the period.

9
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

4.
Biological assets and inventory (continued)

(c)
Direct and indirect cost allocations (continued)

The direct and indirect costs related to biological assets and inventory are allocated as follows. The allocation basis was consistent for the nine months ended September 30, 2019 and 2018, unless otherwise specified.

Nature of cost
Allocation basis
Consumables (insect control, fertilizers, soil)
100% allocated to production costs because these costs are incurred to support plant growth
Labour costs (including salaries and benefits)
Allocated based on job descriptions of various personnel
40% allocated to processing costs; 40% allocated to production costs; 20% allocated to operating expenses (2018 - 30%; 40%; and 30%; respectively)
Supplies and small tools
80% allocated to production costs; 20% allocated to processing costs
Utilities
Allocated based on estimates of usage
10% allocated to processing costs; 90% allocated to production costs
Property taxes, depreciation, security
Allocated based on estimates of square footage
20% allocated to processing costs; 50% allocated to production costs; 30% allocated to operating expenses
Packaging costs
100% allocated to processing costs


(d)
Significant inputs and sensitivity analyses
 
 
 
 
 
The Company has made the following estimates related to significant inputs in the valuation model:
Significant inputs
Definition
Net selling price per gram
Estimated net selling price per gram of dry cannabis based on historical sales of dry cannabis, excluding sales of cannabis oil, and anticipated prices, after adjustment for excise taxes
Harvest yield per plant
Expected grams of dry cannabis to be harvested from a cannabis plant, based on the weighted average historical yields by plant strain
Stage of growth
Weighted average plant age (in weeks) out of the 14 week (December 31, 2018 - 16 week) growing cycle as of the period end date
Processing costs per gram
Estimated post-harvest costs per gram to bring a gram of harvested cannabis to its saleable condition, including drying, curing, testing and packaging, and overhead allocation; estimated based on post-harvest costs incurred during the period divided by number of grams processed during the period
Selling costs per gram
Estimated shipping, order fulfillment, and labelling costs per gram; calculated as selling costs incurred during the period divided by number of grams sold during the period
Equivalency factor
Estimated grams of dry cannabis required to produce one millilitre of cannabis oil; estimated based on historical conversion results
Mass multipliers
Estimated multiples of crude extract and isolate mass in diluted cannabis oil products

These inputs are level 3 on the fair value hierarchy, and are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets and inventory in future periods.

The following table quantifies each of the significant unobservable inputs described above and provides a sensitivity analysis of the impact on the reported values of biological assets and inventory. The sensitivity analysis for each significant input is performed by assuming a 5% decrease in the input while other significant inputs remain constant at management's best estimate as of the period end date.


10
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

4.
Biological assets and inventory (continued)
(d)
Significant inputs and sensitivity analyses
 
 
As at September 30,
 
Increase (decrease) as at
September 30, 2019
 
As at December 31,
 
Increase (decrease) as at
December 31, 2018
 
2019
 
Biological assets
 
Inventory
 
2018
 
Biological assets
 
Inventory
Net selling price per gram
$3.58/g
 
$
(360)
 
$
(897)
 
$5.58/g
 
$
(673)
 
$
(640)
Harvest yield per plant
58 g
 
 
(102)
 
 
-
 
137 g
 
 
(446)
 
 
-
Stage of growth
6 weeks
 
 
(102)
 
 
-
 
6 weeks
 
 
(446)
 
 
-
Processing costs per gram
$2.47/g
 
 
248
 
 
447
 
$1.98/g
 
 
175
 
 
65
Selling costs per gram
$0.09/g
 
 
10
 
 
38
 
$0.43/g
 
 
52
 
 
50
Equivalency factor
0.25 g/mL
 
 
(15)
 
 
(41)
 
0.32 g/mL
 
 
(45)
 
 
(104)
Mass multipliers
35x - 50x
 
 
(27)
 
 
(49)
 
30x - 50x
 
 
(5)
 
 
(24)
5.
Equity accounted investees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
Advances to joint ventures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances to joint ventures are unsecured, non-interest bearing, and have no terms of repayment, unless otherwise specified. The joint ventures are solely funded by their shareholders and the advances are considered an extension of the Company's investments therein. As such, losses recognized in excess of the Company's capital contributions are applied against the respective advances.
 
MedMen Canada (ii)
 
Cronos
GrowCo (iii)
 
Cronos Australia (iv)
 
NatuEra (v)
 
Total
As at January 1, 2019
$
1,696
 
$
4,051
 
$
648
 
$
-
 
$
6,395
Advances (repayments)
 
(12)
 
 
20,557
 
 
364
 
 
291
 
 
21,200
Advances to joint ventures recovered from (applied to) carrying amount of investments
 
46
 
 
29
 
 
(1,012)
 
 
(291
 
 
(1,228
As at September 30, 2019
$
1,730
 
$
24,637
 
$
-
 
$
-
 
$
26,367
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MedMen Canada (ii)
 
Cronos
GrowCo (iii)
 
Cronos Australia (iv)
 
NatuEra (v)
 
Total
As at January 1, 2018
$
-
 
$
-
 
$
-
 
$
-
 
$
-
Advances
 
1,767
 
 
11
 
 
896
 
 
-
 
 
2,674
As at September 30, 2018
$
1,767
 
$
11
 
$
896
 
$
-
 
$
2,674

(b)
Net investment in equity accounted investees
 
 
 
 
 
 
 
 
 
 
 
 
 
A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows:
 
 
Whistler (i)
 
MedMen Canada (ii)
 
Cronos GrowCo (iii)
 
Cronos Australia (iv)
 
NatuEra (v)
 
Total
As at January 1, 2019
$
4,038
 
$
-
 
$
-
 
$
-
 
$
-
 
$
4,038
Share of net income (loss)
 
38
 
 
46
 
 
(116)
 
 
(1,185)
 
 
(784)
 
 
(2,001)
Contribution to (disposal of) investment
 
(4,076)
 
 
-
 
 
2,200
 
 
-
 
 
-
 
 
(1,876)
Advances to joint ventures applied to (recovered from) carrying amount of investments
 
-
 
 
(46)
 
 
(29)
 
 
1,012
 
 
291
 
 
1,228
As at September 30, 2019
$
-
 
$
-
 
$
2,055
 
$
(173)
 
$
(493)
 
$
1,389


11
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

5.
Equity accounted investees (continued)
(b)
Net investment in equity accounted investees (continued)
 
 
 
Whistler (i)
 
 
MedMen Canada (ii)
 
 
Cronos GrowCo (iii)
 
 
Cronos Australia (iv)
 
 
NatuEra (v)
 
 
Total
 
As at January 1, 2018
 
$
3,807
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
3,807
 
Share of net income
 
 
64
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
64
 
Capital contributions
 
 
-
 
 
 
101
 
 
 
100
 
 
 
-
 
 
 
-
 
 
 
201
 
As at September 30, 2018
 
$
3,871
 
 
$
101
 
 
$
100
 
 
$
-
 
 
$
-
 
 
$
4,072
 

(i) 
Whistler was incorporated in British Columbia, Canada and is a License Holder with production facilities in British Columbia, Canada. Although the Company held less than 20% of the ownership interest and voting control of Whistler as at December 31, 2018, the Company had the ability to exercise significant influence through both its power to elect board members, and aggregately, with affiliated shareholders, the Company held over 20% of the voting control of Whistler.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
On March 4, 2019, the Company sold all 2,563 shares of Whistler, representing approximately 19.0% of Whistler's issued and outstanding common shares, to Aurora Cannabis Inc. ("Aurora"), in connection with Aurora's acquisition of Whistler (the "Whistler Transaction"). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares with an aggregate value of approximately $24,682. The closing of the Whistler Transaction resulted in a gain of $20,606 recognized in net income, with the Aurora common shares received being measured at fair value through profit or loss. Refer to Note 6. In addition, the Company expects to receive further Aurora common shares valued at an aggregate of approximately $6,000 upon the satisfaction of certain specified milestones, which has not been recognized in these amended and restated unaudited condensed interim consolidated financial statements. The exact number of Aurora common shares to be issued to the Company following the satisfaction of each such milestone will be determined in reference to the five-day volume weighted average price of Aurora common shares immediately prior to the achievement of the applicable milestone.

(ii) 
MedMen Canada was incorporated under the Canada Business Corporations Act ("CBCA") on March 13, 2018, with the objective of distribution, sale, and marketing of cannabis products in Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 20 years commencing from 2018.

(iii) 
Cronos GrowCo was incorporated under the CBCA on June 14, 2018, with the objective of building a cannabis production greenhouse, applying for cannabis licenses under the Cannabis Act, and growing, cultivating, extracting, producing, selling, and distributing cannabis in accordance with such licenses.

(iv) 
Cronos Australia Pty. Ltd. was incorporated under the Corporations Act 2001 (Australia) on December 6, 2016. On September 27, 2018, Cronos Australia Pty. Ltd. underwent a restructuring, resulting in the incorporation of Cronos Australia Limited on that date, which became the ultimate holding company of the group, owning 100% of Cronos Australia Group Pty. Ltd., which in turn owns 100% of Cronos Australia - Marketing & Distribution Pty. Ltd., Cronos Australia - Operations Pty. Ltd, and Cronos Australia – New Zealand Ltd.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances are denominated in Australian dollars ("AUD"). $1,353 ($1,500 AUD) (December 31, 2018 - $940 ($1,000 AUD)) is governed by an unsecured loan bearing interest at a rate of 12% per annum, calculated and compounded daily, in arrears, on the amounts advanced from the date of each advance. The loan is due on January 1, 2022. If the loan is overdue, the outstanding amount bears interest at an additional 2% per annum.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(v) 
The Company indirectly holds a 50% interest in NatuEra Colombia S.A.S. ("NatuEra Colombia") through the Company's joint venture, NatuEra. NatuEra Colombia is a wholly owned subsidiary of NatuEra, incorporated in Colombia.

Advances are denominated in United States dollars ("USD"). $291 ($226 USD) (December 31, 2018 - $nil) is governed by an unsecured promissory note bearing interest at a rate of 1% per annum. The loan is due January 25, 2020.


12
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)


6.
Other investments
 
Other investments consist of investments in common shares and warrants of companies in the cannabis industry. These investments, with the exception of shares of Evergreen Medicinal Supply Inc. ("Evergreen") and warrants of ABcann Global Corporation (now known as "VIVO Cannabis Inc.") ("ABcann"), were quoted in an active market as of the relevant period end date and, as a result, had a reliably measurable fair value as of such period end dates.
 
As at
September 30, 2019
 
 
As at
December 31, 2018
 
Fair value through other comprehensive income investments
 
 
 
 
 
 
 
Canopy Growth Corporation ("Canopy") (i)
$
-
 
 
$
405
 
Evergreen (ii)
 
-
 
 
 
300
 
 
$
-
 
 
$
705
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Gain recognized in net income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aurora (iv)
$
-
 
 
$
-
 
 
$
924
 
 
$
-
 
ABcann - share warrants (iii)
 
-
 
 
 
-
 
 
 
-
 
 
 
221
 
 
$
-
 
 
$
-
 
 
$
924
 
 
$
221
 

 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Gain (loss) recognized in other comprehensive income (loss) after taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canopy (i)
$
-
 
 
$
269
 
 
$
67
 
 
$
504
 
ABcann - shares (iii)
 
-
 
 
 
-
 
 
 
-
 
 
 
(224)
 
Evergreen (ii)
 
(300)
 
 
 
-
 
 
 
(300)
 
 
 
-
 
Deferred tax recovery (expense)
 
-
 
 
 
(36)
 
 
 
36
 
 
 
(43)
 
Gain (loss) on revaluation and disposal of investment, net of tax
$
(300)
 
 
$
233
 
 
$
(197)
 
 
$
237
 

(i) 
During the nine months ended September 30, 2019, the Company sold all remaining 11,062 common shares of Canopy for gross proceeds of $472 (2018 - 18,436 shares for gross proceeds of $687).
 
 
 
 
 
 
 
 
 
 
 
(ii) 
During the three months ended September 30, 2019, the Company's investment in Evergreen was determined to be impaired. The Company assessed that the fair value of the investment is $nil as Health Canada has suspended Evergreen's cultivation license under the Cannabis Act. This has been recorded under loss on revaluation of investments in other income (expense).
(iii) 
During the nine months ended September 30, 2018, the Company exercised 182,927 share warrants for aggregate consideration of $113, for additional shares of ABcann. Prior to the exercise, the share warrants were revalued to fair value using the Black-Scholes option pricing model. Subsequently, the Company sold all of its shares of ABcann for proceeds of $280.
 
 
 
 
 
 
 
 
 
 
 
(iv) 
In connection with the Whistler Transaction described in Note 5, the Company received 2,524,341 common shares of Aurora. During the nine months ended September 30, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $25,606.

13
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

7.
Loans receivable

 
 
 
As at
September 30, 2019
 
 
As at
December 31, 2018
Current portion
 
 
 
 
 
 
NatuEra (i)
$
6,083
 
 
$
-
Evergreen (iv)
 
-
 
 
 
314
Long term portion
 
 
 
 
 
 
Cronos GrowCo (ii)
 
27,450
 
 
 
-
2645485 Ontario Inc. ("Mucci") (iii)
 
16,350
 
 
 
-
Add: Accrued interest
 
306
 
 
 
-
Foreign exchange gain (loss)
 
(24)
 
 
 
-
Total loans receivable
$
50,165
 
 
$
314
Total long term portion of loans receivable
$
44,082
 
 
$
-
(i) 
On September 27, 2019, the Company entered into a master loan agreement (the "series A loan") for $6,083 ($4,575 USD) with NatuEra with effect as of August 29, 2019. The total series A loan is $9,150 USD, of which the Company has committed to fund 50% and its joint venture partner has committed to fund the remaining 50%. The outstanding principal amount bears interest at a fixed annual rate of 5.67% with a maturity date of August 29, 2020.
 
 
(ii) 
On August 23, 2019, the Company entered into a credit agreement with Cronos GrowCo in respect of a $100,000 secured non-revolving term loan credit facility (the "credit facility"). The credit facility will mature on March 31, 2031 and will bear interest at varying rates based on the Canadian prime rate. Interest began to accrue as of the closing date and is payable on a quarterly basis until maturity, except that any interest accrued prior to March 31, 2021 will be payable not later than December 31, 2021. The principal is payable on a quarterly basis commencing on March 31, 2021. The credit facility is secured by substantially all present and after acquired property of Cronos GrowCo and its subsidiaries. Mucci, the other 50% shareholder of Cronos GrowCo, has provided a limited recourse guarantee in favour of the Company, secured by Mucci's shares in Cronos GrowCo. As at September 30, 2019, Cronos GrowCo had drawn $27,450 from the credit facility.
 
 
(iii) 
On June 28, 2019, the Company entered into a promissory note receivable agreement (the "promissory note") for $16,350 with Mucci. The outstanding principal amount of the promissory note bears interest at 3.95% and is due within 90 days of demand. The Company does not intend to demand the loan within 12 months. Interest accrued under the promissory note until July 1, 2021 shall be satisfied by a way of capitalization on the principal amount and interest thereafter shall be paid in cash on a quarterly basis. The loan is secured by a general security agreement covering all assets of Mucci.
 
 
(iv) 
During the three and nine months ended September 30, 2019, the Company received cash repayment of $314 on the loan receivable from Evergreen.


8.
Business combination

On September 5, 2019, the Company acquired Redwood. Redwood is a manufacturer and distributor of hemp-derived CBD infused products in the United States under the brand, Lord Jones™. Redwood's products use pure hemp oil that contains natural phytocannabinoids and terpenes found in the plant. The Company plans to use its resources to capitalize on the significant demand to further create and scale hemp-derived consumer products and brands.

The Company acquired all of the issued and outstanding shares of Redwood (the "Redwood Acquisition") for an aggregate consideration of $375,555 ($283,159 USD), which included $301,138 ($227,050 USD) in cash and 5,086,586 common shares of the Company with a fair value of $74,417 ($56,109 USD). The fair value of the shares issued as part of the consideration paid was based on the average of the volume weighted average trading price of the common shares on NASDAQ on each of the ten consecutive trading days prior to the date of the Membership Interest Purchase Agreement dated August 1, 2019 (the "MIPA"), by and among the Company, Redwood Holding Group, LLC, and certain Key Persons solely for the purposes as described in the MIPA, at $14.74 per share.


14
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

8.
Business combination (continued)

During the third quarter of 2019, the Redwood Acquisition was unanimously approved by the board of directors of Redwood Holdings Group, LLC and by the Board following the unanimous recommendation of a special committee of independent directors ("Special Committee"). A Special Committee composed entirely of independent directors of the Company was formed to evaluate and make recommendations to the Board since Michael Gorenstein, Chief Executive Officer and a director of Cronos Group, and Jason Adler, a director of Cronos Group, each hold an indirect interest in Redwood Holding Group, LLC by way of their interest in certain funds affiliated with Gotham Green Partners, which were each limited liability company members of Redwood Holding Group, LLC.

The following table summarizes the Company's preliminary allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date. The final purchase price allocation will be adjusted as needed, pending the finalization of customary post-close working capital adjustments and continued review of the estimates and assumptions used in valuing property and equipment and intangible assets, among other identifiable assets acquired and liabilities assumed, and will be finalized no later than one year after the acquisition date.

 
 
 
 
September 5, 2019
Fair value of net assets acquired
 
 
Cash
$
3,922
Accounts receivable (i)
 
857
Prepaid expenses and other assets
 
272
Inventory
 
3,721
Property and equipment
 
2,507
Right-of-use assets
 
4,686
Intangible assets (ii)
 
84,933
Goodwill
 
282,865
Accounts payable and accrued liabilities
 
(3,566)
Lease obligations
 
(4,642)
 
$
375,555

(i) 
The fair value of acquired accounts receivable is $857. No loss allowance has been recognized on acquisition.

(ii) 
Intangible assets include the fair value of brand name of $84,883 ($64,000 USD), the remaining balance relates to software.

For the three and nine months ended September 30, 2019, acquisition-related costs of $7,914 and $11,501 are included in financing and transaction costs respectively.

During the period from September 5, 2019 to September 30, 2019, the Company recognized $897 in revenues and a net loss of $431 from Redwood operations. If the acquisition had occurred on January 1, 2019, the Company estimates it would have recorded an increase of $12,729 in revenues and an increase of $1,958 in net income for the nine months ended September 30, 2019.

There were no acquisitions during the three and nine months ended September 30, 2018.



15
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

9.
Property, plant and equipment

Cost
As at
January 1, 2019
 
 
Additions (i)
 
 
Acquisitions
(Note 8)
 
 
Transfers
 
 
Foreign exchange effects
 
 
As at
September 30, 2019
Land
$
3,207
 
 
$
2,037
 
 
$
-
 
 
$
-
 
 
$
(519)
 
 
$
4,725
Building structures
 
21,652
 
 
 
36,444
 
 
 
-
 
 
 
139,711
 
 
 
-
 
 
 
197,807
Furniture and equipment
 
676
 
 
 
1,914
 
 
 
266
 
 
 
-
 
 
 
(18)
 
 
 
2,838
Computer equipment
 
464
 
 
 
629
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1,093
Security equipment
 
985
 
 
 
325
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1,310
Production equipment
 
4,823
 
 
 
3,817
 
 
 
765
 
 
 
-
 
 
 
(1)
 
 
 
9,404
Road
 
137
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
137
Leasehold improvements
 
1,584
 
 
 
395
 
 
 
1,476
 
 
 
-
 
 
 
(2)
 
 
 
3,453
Construction in progress
 
141,473
 
 
 
5,157
 
 
 
-
 
 
 
(139,711)
 
 
 
(1,844)
 
 
 
5,075
 
$
175,001
 
 
$
50,718
 
 
$
2,507
 
 
$
-
 
 
$
(2,384)
 
 
$
225,842


Accumulated depreciation
As at
January 1, 2019
 
 
Additions (ii)
 
 
Acquisitions
(Note 8)
 
 
Transfers
 
 
Foreign exchange effects
 
 
As at
September 30, 2019
Building structures
$
1,184
 
 
$
4,910
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
6,094
Furniture and equipment
 
121
 
 
 
192
 
 
 
-
 
 
 
-
 
 
 
-
 
 
313
Computer equipment
 
169
 
 
 
195
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
364
Security equipment
 
384
 
 
 
178
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
562
Production equipment
 
896
 
 
 
636
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1,532
Road
 
17
 
 
 
4
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
21
Leasehold improvements
 
510
 
 
 
169
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
679
 
$
3,281
 
 
$
6,284
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
9,565
Net book value
$
171,720
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
216,277


Cost
As at
January 1, 2018
 
 
Additions (i)
 
 
As at
September 30, 2018
Land
$
1,558
 
 
$
19
 
 
$
1,577
Building structures
 
11,518
 
 
 
7,346
 
 
 
18,864
Furniture and equipment
 
134
 
 
 
318
 
 
 
452
Computer equipment
 
148
 
 
 
150
 
 
 
298
Security equipment
 
886
 
 
 
87
 
 
 
973
Production equipment
 
2,481
 
 
 
386
 
 
 
2,867
Road
 
137
 
 
 
-
 
 
 
137
Leasehold improvements
 
1,497
 
 
 
87
 
 
 
1,584
Construction in progress
 
39,337
 
 
 
64,045
 
 
 
103,382
 
$
57,696
 
 
$
72,438
 
 
$
130,134
 
 
 
 
 
 
 
 
 
 
 
 

16
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

9.
Property, plant and equipment (continued)

Accumulated depreciation
As at
January 1, 2018
 
 
Additions (ii)
 
 
As at
September 30, 2018
Building structures
$
433
 
 
$
504
 
 
$
937
Furniture and equipment
 
43
 
 
 
50
 
 
 
93
Computer equipment
 
75
 
 
 
44
 
 
 
119
Security equipment
 
196
 
 
 
139
 
 
 
335
Production equipment
 
431
 
 
 
322
 
 
 
753
Road
 
10
 
 
 
5
 
 
 
15
Leasehold improvements
 
336
 
 
 
129
 
 
 
465
 
$
1,524
 
 
$
1,193
 
 
$
2,717
Net book value
$
56,172
 
 
 
 
 
 
$
127,417

(i) 
During the nine months ended September 30, 2019, there were non-cash additions from the amortization of capitalized transaction costs and the capitalization of accrued interest to construction in progress and building structures amounting to $683 (2018 - $542). Refer to Note 13. In addition, advances from non-controlling interests accrued interest of $81 (2018 - $nil) which were capitalized to building structures during the nine months ended September 30, 2019. Refer to Note 11. Additions also include property, plant and equipment purchased from the Apotex Fermentation Inc. Asset Purchase Agreement that closed in July 2019.

(ii) 
During the nine months ended September 30, 2019, $2,164 (2018 - $134) of the current period's depreciation expense was recorded as part of cost of sales. An additional $5,188 (2018 - $668) of depreciation expense was capitalized to biological assets and inventory.



10.
Intangible assets and goodwill
 
 
 
 
 
 
 
 
(a)
Intangible assets

Cost
As at
January 1, 2019
 
 
Additions
 
 
Acquisitions
(Note 8)
 
 
Foreign exchange effects
 
 
As at
September 30, 2019
Software
$
360
 
 
$
628
 
 
$
50
 
 
$
-
 
 
$
1,038
Brand
 
-
 
 
 
-
 
 
 
84,883
 
 
 
(128)
 
 
 
84,755
Health Canada Licenses - OGBC
 
1,611
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
1,611
Health Canada Licenses - Peace Naturals
 
9,596
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
9,596
Israeli Cannabis Code - Cronos Israel G.S. Cultivations Ltd. (i)
 
156
 
 
 
57
 
 
 
-
 
 
 
(50)
 
 
 
163
Israeli Cannabis Code - Cronos Israel G.S. Manufacturing Ltd. (i)
 
218
 
 
 
80
 
 
 
-
 
 
 
(69)
 
 
 
229
 
 
$
11,941
 
 
$
765
 
 
$
84,933
 
 
$
(247)
 
 
$
97,392

Accumulated amortization
As at
January 1, 2019
 
 
Amortization
 
 
Acquisitions
(Note 8)
 
 
Foreign exchange effects
 
 
As at
September 30, 2019
Software
$
73
 
 
$
162
 
 
$
-
 
 
$
-
 
 
$
235
Health Canada Licenses - OGBC
 
101
 
 
 
76
 
 
 
-
 
 
 
-
 
 
 
177
Health Canada Licenses - Peace Naturals
 
533
 
 
 
400
 
 
 
-
 
 
 
-
 
 
 
933
 
$
707
 
 
$
638
 
 
$
-
 
 
$
-
 
 
$
1,345
Net book value
$
11,234
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
96,047

17
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)


10.
Intangible assets and goodwill (continued)
 
 
 
 
 
 
 
 
 
Cost
As at
January 1, 2018
 
Additions
 
As at
September 30, 2018
Software
$
-
 
$
294
 
$
294
Health Canada Licenses - OGBC
 
1,611
 
 
-
 
 
1,611
Health Canada Licenses - Peace Naturals
 
9,596
 
 
-
 
 
9,596
Israeli Cannabis Code - Cronos Israel G.S. Cultivations Ltd. (i)
 
-
 
 
155
 
 
155
Israeli Cannabis Code - Cronos Israel G.S. Manufacturing Ltd. (i)
 
-
 
 
217
 
 
217
 
 
$
11,207
 
$
666
 
$
11,873

Accumulated amortization
As at
January 1, 2018
 
Amortization
 
As at
September 30, 2018
Software
$
-
 
$
52
 
$
52
Health Canada Licenses - OGBC
 
-
 
 
76
 
 
76
Health Canada Licenses - Peace Naturals
 
-
 
 
400
 
 
400
 
$
-
 
$
528
 
$
528
Net book value
$
11,207
 
 
 
 
$
11,345

(i) 
The Israeli Cannabis Codes were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities specified above. Refer to Note 11. Construction of Cronos Israel's greenhouse was completed in the first half of 2019 while its manufacturing facility was completed in the third quarter of 2019. Cronos Israel is now beginning the GMP certification process for the facility. Amortization will begin when the facilities are available for use.

(b)
Goodwill

 
 
As at
January 1, 2018
 
 
Additions
(Note 8)
 
 
Foreign exchange effects
 
 
As at
September 30, 2019
OGBC
$
392
 
 
$
-
 
 
$
-
 
 
$
392
Peace Naturals
 
1,400
 
 
 
-
 
 
 
-
 
 
 
1,400
Redwood
 
-
 
 
 
282,865
 
 
 
(430)
 
 
 
282,435
 
 
$
1,792
 
 
$
282,865
 
 
$
(430)
 
 
$
284,227



11.
Subsidiaries with non-controlling interests
 
 
 
 
 
In September 2018, the Company subscribed for its equity interest in a strategic joint venture in Israel, consisting of four legal entities, with the Israeli agricultural collective settlement Kibbutz Gan Shmuel ("Gan Shmuel"), for the production, manufacturing and distribution of medical cannabis. The Company's equity interest subscription in all four of the Israeli entities comprising Cronos Israel, was accounted for as an asset acquisition as the Israeli entities did not meet the definition of a business at the respective dates Cronos Group acquired control. Gan Shmuel provided the Company a promissory note for monies advanced from the Company up to the sum of $978 (2,700 Israeli Shekels ("ILS")). During the six months ended June 30, 2018, the Company advanced a sum of $1,304 (3,600 ILS). As such, $326 (900 ILS) of the receivable was unsecured. From September 2018 and onwards, Cronos Israel has been included in these consolidated financial statements.


 
 

18
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

11.
Subsidiaries with non-controlling interests (continued)
Financial information of significant subsidiaries with non-controlling interests are as follows:
 
Cronos Israel G.S. Cultivations Ltd.
 
Cronos Israel G.S. Manufacturing Ltd.
 
As at September 30, 2019
 
As at December 31, 2018
 
Percentage interest held by non-controlling interests
 
30
%
 
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
$
974

 
$
820

 
$
1,794
 
$
1,403
 
Non-current assets
 
12,544

 
 
23,207

 
 
35,751
 
 
11,050
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
1,436

 
 
1,066

 
 
2,502
 
 
401
 
Non-current liabilities (i)
 
13,932

 
 
22,779

 
 
36,711
 
 
10,601
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
(1,850)

 
 
182

 
 
(1,668)
 
 
1,451
 
Attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
Cronos Group
 
(1,295)

 
 
164

 
 
(1,131)
 
 
1,315
 
Non-controlling interests
 
(555)

 
 
18

 
 
(537)
 
 
136
 
(i) 
Non-current liabilities include advances from non-controlling interests, in the amount of $2,249 (December 31, 2018 - $2,092) plus cumulative accrued interest of $129 (December 31, 2018 - $44). These advances are denominated in ILS, are unsecured, bear interest at 5%, with no fixed terms of repayment. Refer to Note 23(d).
The above information represents amounts before intercompany eliminations.

12.
Leases
 
 
 
 
 
 
 
 
 
 
Information about leases in which the Company is a lessee is presented below.
 
 
 
 
 
 
 
 
 
 
(a)
Right-of-use assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company's leasing activities include the lease of land-use rights, office premises, and equipment used in the production of cannabis and related products.
Cost
As at January 1, 2019
(Note 3)
 
Additions
 
Acquisitions
(Note 8)
 
Foreign exchange effects
 
As at
September 30, 2019
Land-use rights
$
884
 
$
41
 
$
-
 
$
-
 
$
925
Building
 
1,006
 
 
1,626
 
 
4,686
 
 
(9)
 
 
7,309
Production equipment
 
217
 
 
-
 
 
-
 
 
-
 
 
217
 
 
 
$
2,107
 
$
1,667
 
$
4,686
 
$
(9)
 
$
8,451
Accumulated depreciation
As at January 1, 2019 (Note 3)
 
Additions
 
Acquisitions
(Note 8)
 
Foreign exchange effects
 
As at
September 30, 2019
Land-use rights
$
40
 
$
60
 
$
-
 
$
(13)
 
$
87
Building
 
104
 
 
234
 
 
-
 
 
-
 
 
338
Production equipment
 
46
 
 
23
 
 
-
 
 
-
 
 
69
 
 
$
190
 
$
317
 
$
-
 
$
(13)
 
$
494
Net book value
$
1,917
 
 
 
 
 
 
 
 
 
 
$
7,957

19
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

Production equipment
As at January 1, 2018
 
Additions
 
As at September 30, 2018
Cost
$
-
 
$
217
 
$
217
Accumulated depreciation
 
-
 
 
(39)
 
 
(39)
Net book value
$
-
 
$
178
 
$
178
12.
Leases (continued)
(b)
Maturity analysis of lease obligations
 
 
 
 
 
 
 
 
 
 
The following represents a maturity analysis of the Company's undiscounted contractual lease obligations and potential exposures as at September 30, 2019.
 
 
Less than one year
 
One to five years
 
More than five years
 
Total
Contractual obligations
 
 
 
 
 
 
 
 
 
 
 
Lease obligations recognized
$
1,347
 
$
5,044
 
$
2,463
 
$
8,854
Short-term leases not recognized (i)
 
179
 
 
-
 
 
-
 
 
179
 
 
$
1,526
 
$
5,044
 
$
2,463
 
$
9,033
Potential exposures
 
 
 
 
 
 
 
 
 
 
 
Extension options
 
-
 
 
247
 
 
3,549
 
 
3,796
Lease not yet commenced to which the Company is committed
 
927
 
 
5,998
 
 
2,414
 
 
9,339
 
$
2,453
 
$
11,289
 
$
8,426
 
$
22,168
(i) 
The Company has applied the recognition exemption to short-term leases, which are therefore not recognized in the amended and restated unaudited condensed interim consolidated statements of financial position.
(c)
Supplemental disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2019, the Company recognized $311 of interest expense on lease obligations and $179 of lease payments associated with short-term leases in the amended and restated unaudited condensed interim consolidated statements of operations and comprehensive income (loss). For the nine months ended September 30, 2019, the total cash outflow relating to leases amounted to $924.
13.
Construction loan payable
 
As at
September 30, 2019
 
 
As at
December 31, 2018
Aggregate advances
$
-
 
 
$
21,311
Less: transaction costs (net of amortization)
 
-
 
 
 
(481)
Add: accrued interest
 
-
 
 
 
121
 
$
-
 
 
$
20,951
On August 23, 2017, Peace Naturals, as borrower, signed a construction loan agreement with Romspen Investment Corporation as lender, to borrow $40,000, to be funded by way of multiple advances. The aggregate advances were limited to $35,000 until the lender received an appraisal valuing the property in British Columbia at an amount of not less than $8,000. The loan bore interest at a rate of 12% per annum, calculated and compounded monthly, in arrears, on the amounts advanced from the date of each advance. The term of the loan was two years, with the borrower's option to extend for another twelve months. The loan was guaranteed by Cronos Group, Hortican Inc., OGBC, the responsible-person-in-charge and the senior-person-in-charge of OGBC and Peace Naturals.
 
 
 
 
 
 
 
On January 23, 2019, the Company entered into a credit agreement with Canadian Imperial Bank of Commerce, as administrative agent and lender, and the Bank of Montreal, as lender, in respect of a $65,000 secured non-revolving term loan credit facility (the "Credit Facility"). The Company used the funds available under the Credit Facility to fully repay the construction loan payable, consisting of $21,311 in loan principal and $275 in accrued interest and fees, calculated for the period from January 1, 2019 to January 22, 2019. On March 8, 2019, the Credit Facility was fully repaid. In connection to the Credit Facility, the Company incurred financing costs of $523 which were expensed upon repayment of the Credit Facility.

20
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

14.
Derivative liabilities
On March 8, 2019, the Company closed the previously announced investment in the Company (the "Altria Investment") by Altria Group, Inc. ("Altria"), pursuant to a subscription agreement dated December 7, 2018. Upon closing, the Altria Investment consisted of 149,831,154 common shares of the Company (refer to Note 15(a)), and one warrant of the Company (the "Altria Warrant"), refer to Note 14(a), issued to wholly owned subsidiaries of Altria. As of the closing date, Altria beneficially held an 45% ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would result in Altria holding a total ownership interest in the Company of 55% (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the "Agreement"), the Company granted Altria certain rights, among others, summarized in this note.

The summaries below are qualified entirely by the terms and conditions fully set out in the Agreement and the Altria Warrant, as applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
As at September 30, 2019, the Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to 76,392,046 common shares at the exercise price of $19.00 per common share, until expiry on March 8, 2023. The number of common shares of the Company to which the holder is entitled, and the corresponding exercise price, is subject to adjustment pursuant to a share dividend, share issuance, distribution, or share subdivision, split or other division, share consolidation, reverse-split or other aggregation, share reclassification, a capital reorganization, consolidation, amalgamation, arrangement, binding share exchange, merger or other combination, certain securities issuances, redemptions or certain other actions that would result in a reduction in the number of common shares of the Company outstanding, in each case, executed by the Company. If and whenever there is a reclassification of the common shares or a capital reorganization of the Company, or a consolidation, amalgamation, arrangement, binding share exchange or merger of the Company, in each case executed by the Company and pursuant to which (i) in the event the consideration received by the Company's shareholders is exclusively cash, the Company or the successor entity is required to purchase the Altria Warrant in cash equal to the amount by which the purchase price per share paid for the common shares acquired exceeds the exercise price of the Altria Warrant multiplied by the number of common shares that would be issuable upon exercise of the Altria Warrant, and (ii) in the event the consideration received by the Company's shareholders is not exclusively cash, the Altria Warrant shall remain outstanding in accordance with its terms.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(b)
The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the research and development partnership with Ginkgo Bioworks Inc. (the "Ginkgo Agreement"), refer to Note 20(a)(i)), the right to purchase up to such number of common shares of the Company in order to maintain its ownership percentage of issued and outstanding common shares of the Company immediately preceding any shares so issued by the Company ("Pre-emptive Rights"), at the same price per common share of the Company at which the common shares of the Company are sold in the relevant issuance; provided that the price per common share of the Company to be paid pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Agreement will be $16.25 per common share of the Company. These rights may not be exercised if Altria's ownership percentage of the issued and outstanding shares of the Company falls below 20%.
(c)
In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter, a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplates an equity component or bona fide acquisitions, mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions ("Top-up Rights"). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10-day volume-weighted average price of the common shares of the Company on the TSX at the time of exercise; provided that the per price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be $16.25 per common share. These rights may not be exercised if Altria's ownership percentage of the issued and outstanding shares of the Company falls below 20%.


21
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

14.
Derivative liabilities (continued)
The Company's policy for accounting for its derivative liabilities is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities are initially recognized at fair value at the date on which the derivative contract is entered into. Any attributable transaction costs are recognized in net income (loss) as incurred. Subsequent to initial recognition, derivative liabilities are measured at fair value, and changes are recognized immediately in net income (loss).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Altria Warrant, Pre-emptive Rights, and the fixed price Top-up Rights have been classified as derivative liabilities; related transaction costs of $29,660 have been expensed as financing costs. A reconciliation of the carrying amounts from the date of initial recognition, March 8, 2019, to September 30, 2019 is presented below:
 
 
 
 
 
 

 
 
 
As at
March 8, 2019
 
 
Gain on revaluation
 
 
Exercise of rights
 
 
As at
September 30, 2019
(a)
Altria Warrant
$
1,458,366
 
 
$
(1,041,353)
 
 
$
-
 
 
$
417,013
(b)
Pre-emptive Rights
 
124,176
 
 
 
(98,027)
 
 
 
-
 
 
 
26,149
(c)
Top-up Rights
 
518,116
 
 
 
(396,025)
 
 
 
(19,739)
 
 
 
102,352
 
 
 
$
2,100,658
 
 
$
(1,535,405)
 
 
$
(19,739)
 
 
$
545,514

The following is a reconciliation of the carrying amounts for the three months ended September 30, 2019:

 
 
 
As at
July 1, 2019
 
 
Gain on revaluation
 
 
Exercise of rights
 
 
As at
September 30, 2019
(a)
Altria Warrant
$
999,257
 
 
$
(582,244)
 
 
$
-
 
 
$
417,013
(b)
Pre-emptive Rights
 
80,375
 
 
 
(54,226)
 
 
 
-
 
 
 
26,149
(c)
Top-up Rights
 
319,962
 
 
 
(198,609)
 
 
 
(19,001)
 
 
 
102,352
 
 
 
$
1,399,594
 
 
$
(835,079)
 
 
$
(19,001)
 
 
$
545,514

The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as at September 30, 2019 and March 8, 2019, applying the following inputs:
 
 
 
 

 
 
 
 
As at
September 30, 2019
 
 
As at
March 8, 2019
 
 
 
 
Altria Warrant
 
 
Pre-emptive Rights
 
 
Top-up
Rights
 
 
Altria Warrant
 
 
Pre-emptive Rights
 
 
Top-up
Rights
 
Share price at valuation date (per share)
 
$11.97
 
 
$11.97
 
 
$11.97
 
 
$29.15
 
 
$29.15
 
 
$29.15
 
Subscription price (per share)
 
$19.00
 
 
$16.25
 
 
$16.25
 
 
$19.00
 
 
$16.25
 
 
$16.25
(i) 
Weighted average risk-free interest rate
 
1.49%
 
 
1.65%
 
 
1.61%
 
 
1.65%
 
 
1.64%
 
 
1.64%
(ii) 
Weighted average expected life (in years)
 
 
3.43
 
 
 
1.50
 
 
 
1.91
 
 
 
4.00
 
 
 
2.00
 
 
 
2.68
(iii) 
Expected annualized volatility
 
82%
 
 
82%
 
 
82%
 
 
80%
 
 
80%
 
 
80%
 
Expected dividend yield
 
0%
 
 
0%
 
 
0%
 
 
0%
 
 
0%
 
 
0%


22
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

14.
Derivative liabilities (continued)
(i) 
The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(ii) 
The expected life in years represents the period of time that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(iii) 
Volatility was estimated by taking the average of the historical volatility of the Company and its peer group.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table quantifies each of the significant unobservable inputs described above and provides a sensitivity analysis of the impact on the fair values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management's best estimate as of the respective dates. The decrease in the fair value of the derivative liabilities will result in an increase of net income by the same amount for the nine months period ended September 30, 2019.
 
 
 
Decrease as at September 30, 2019
 
Decrease as at March 8, 2019
Unobservable inputs
 
Altria Warrant
 
Pre-emptive Rights
 
Top-up
Rights
 
Altria Warrant
 
Pre-emptive Rights
 
Top-up
Rights
Share price at valuation date (per share)
 
$
61,559
 
$
4,962
 
$
17,963
 
$
185,292
 
$
17,688
 
$
69,922
Weighted average expected life
 
 
26,586
 
 
3,087
 
 
3,716
 
 
41,622
 
 
3,477
 
 
12,998
Expected annualized volatility
 
 
50,201
 
 
3,437
 
 
12,648
 
 
76,423
 
 
5,022
 
 
22,130
A 10% increase in the input while other significant inputs remain constant at management's best estimate as of the respective dates would be an equal but opposite impact.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
These inputs are level 3 on the fair value hierarchy, and are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of these derivative liabilities in future periods.
15.
Share capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
Common shares
 
 
 
 
 
 
 
 
 
 
The Company is authorized to issue an unlimited number of no par value common shares.
 
 
 
 
 
 
 
 
 
 
The holders of the common shares are entitled to receive dividends which may be declared from time to time, and are entitled to one vote per share at shareholder meetings of the Company. All common shares are ranked equally with regards to the Company's residual assets.

During the three months ended September 30, 2019, the Company issued 5,086,586 common shares as part of the purchase consideration for the acquisition of Redwood, refer to Note 8.
 
 
 
 
 
 
 
 
 
 
During the nine months ended September 30, 2019, the Company issued 149,831,154 common shares in connection with the Altria Investment. The total gross proceeds received by the Company were $2,434,757, which were first allocated to the derivative liabilities issued in connection with the Altria Investment, refer to Note 14, and the residual of $334,099 were allocated to share capital. Pursuant to the Altria Investment, the Company incurred transaction costs of $34,662, of which $5,007 was allocated to share capital and $29,660 to the derivative liabilities based on the relative values assigned to the respective components. During the three and nine months ended September 30, 2019, the Company issued 2,514,459 and 2,565,397 common shares upon Altria's exercise of Top-up Rights, respectively, for gross cash proceeds of $40,860 and $41,688, in addition to $19,001 and $19,739 partial extinguishment of derivative liability respectively. Refer to Note 14(c) for discussion of Top-up Rights.
 
 
 
 
 
 
 
 
 
 
During the nine months ended September 30, 2018, the Company issued 15,677,143 common shares for aggregate gross proceeds of $146,032 through two bought deal offerings.

23
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

15.
Share capital (continued)
(b)
Top-up Rights - market price

As part of the Altria Investment, the Company granted Top-up Rights to Altria, see Note 14(c). For options or warrants granted after March 8, 2019, see Note 16(b)(ii), the price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10-day volume-weighted average price of the common shares of the Company on the TSX at the time of exercise. No value is assigned to these rights until they are exercised. These rights may not be exercised if Altria's ownership percentage of the issued and outstanding shares of the Company falls below 20%.

16.
Share-based payments
 
 
(a)
Warrants
 
 
 
 
 
 
 
 
 
 
 
The following is a summary of the changes in warrants from January 1, 2019 to September 30, 2019:

 
 
 
 
Weighted average exercise price
 
 
Number of warrants
 
 
Share-based reserve
Balance at January 1, 2019
 
$
0.26
 
 
 
25,457,623
 
 
$
1,548
Exercise of warrants
 
 
0.26
 
 
 
(7,390,961)
 
 
 
(794)
Balance at September 30, 2019
 
$
0.26
 
 
 
18,066,662
 
 
$
754

The following is a summary of the changes in warrants from January 1, 2018 to September 30, 2018:

 
 
 
 
Weighted average exercise price
 
 
Number of warrants
 
 
Share-based reserve
Balance at January 1, 2018
 
$
0.24
 
 
 
38,654,654
 
 
$
3,364
Exercise of warrants
 
 
0.22
 
 
 
(13,114,336)
 
 
 
(1,816)
Expiry of warrants
 
 
0.26
 
 
 
(82,695)
 
 
 
-
Balance at September 30, 2018
 
$
0.25
 
 
 
25,457,623
 
 
$
1,548

As at September 30, 2019, the Company had outstanding warrants as follows:

Grant date
Expiry date
 
Number of warrants
 
 
Weighted average exercise price
October 8, 2015 - October 28, 2015
October 8, 2020 - October 28, 2020
 
 
2,976,610
 
 
$
0.31
May 13, 2016 - May 27, 2016
May 13, 2021 - May 27, 2021
 
 
15,090,052
 
 
 
0.25
 
 
 
 
 
 
18,066,662
 
 
$
0.26

24
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)


16.
Share-based payments (continued)

(b)
Stock options
 
(i)
Stock option plans
 
The Company had adopted an amended and restated stock option plan dated May 26, 2015 (the "2015 Stock Option Plan") which was approved by shareholders of the Company at the annual and general meeting of shareholders held on June 28, 2017. The 2015 Stock Option Plan allowed the Board to award options to purchase shares to certain directors, officers, key employees and service providers of the Company. The 2015 Stock Option Plan was amended by the Board in August 2019 to provide for certain provisions relevant to the treatment of options that have been issued to participants resident in Israel, in order to reflect the requirements of certain Israeli tax laws. No further awards will be granted under the 2015 Stock Option Plan; however, shares may be purchased via option exercise by the holders of any outstanding stock options previously issued under the 2015 Stock Option Plan.
 
On June 28, 2018, the shareholders of the Company approved a new stock option plan (the "2018 Stock Option Plan") which superseded the 2015 Stock Option Plan. The 2018 Stock Option Plan was amended by the Board in May 2019 to provide for certain provisions relevant to the treatment of options that may be issued from time to time to participants resident in Israel, in order to reflect the requirements of certain Israeli tax laws.
Participants under the 2018 Option Plan are eligible to be granted options to purchase shares at an exercise price established upon approval by the Board. When options are granted, the exercise price is, with respect to a particular date, the closing price as reported by the TSX on the immediately preceding trading day (the "Fair Market Value"). The 2018 Option Plan does not authorize grants of options with an exercise price below the Fair Market Value.
 
Vesting conditions for grants of options are determined by the Board. The typical vesting for employee grants is quarterly vesting over four to five years, and the typical vesting for directors and executive officers is quarterly vesting over three to five years. The term of the options is established by the Board, provided that the term of an option may not exceed seven years from the date of the grant.
 
 
 
 
 
 
 
 
 
 
 
The 2018 Option Plan also provides for the issuance of share appreciation rights ("SARs") in tandem with options. Each SAR entitles the holder to surrender to the Company, unexercised, the right to subscribe for shares pursuant to the related option and to receive from the Company a number of shares, rounded down to the next whole share, with a Fair Market Value on the date of exercise of each such SAR that is equal to the difference between such Fair Market Value and the exercise price under the related option, multiplied by the number of shares that cease to be available under the option as a result of the exercise of the SAR, subject to satisfaction of applicable withholding taxes and other source deductions. Each unexercised SAR terminates when the related option is exercised or the option terminates, including upon a change in control. Upon each exercise of an SAR, in respect of a share covered by an option, such option is cancelled and is of no further force or effect in respect of such share.

(ii)
Summary of changes
 
The following is a summary of the changes in options from January 1, 2019 to September 30, 2019:

 
 
 
Weighted average exercise price
 
 
Number of options
 
 
Share-based reserve
Balance at January 1, 2019
 
 
$
2.99
 
 
 
12,902,995
 
 
$
6,241
Issuance of options
 
 
20.08
 
 
 
1,534,162
 
 
 
-
Exercise of options and SARs
 
 
3.72
 
 
 
(254,199)
 
 
 
(451)
Cancellation of options
 
 
-
 
 
 
(5,083)
 
 
 
-
Vesting of issued options
 
 
-
 
 
 
-
 
 
 
5,018
Balance at September 30, 2019
 
$
4.83
 
 
 
14,177,875
 
 
$
10,808


25
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

16.
Share-based payments (continued)

(b)
Stock options (continued)

The following is a summary of the changes in options from January 1, 2018 to September 30, 2018:

 
 
 
Weighted average exercise price
 
 
Number of options
 
 
Share-based reserve
Balance at January 1, 2018
 
 
$
2.05
 
 
 
11,603,750
 
 
$
2,289
Issuance of options
 
 
7.98
 
 
 
1,830,000
 
 
 
-
Exercise of options and SARs
 
 
1.38
 
 
 
(572,383)
 
 
 
(254)
Cancellation of options
 
 
 
2.92
 
 
 
(12,792)
 
 
 
-
Vesting of issued options
 
 
 
-
 
 
 
-
 
 
 
2,947
Balance at September 30, 2018
 
$
2.92
 
 
 
12,848,575
 
 
$
4,982

The weighted average share price at the dates the options were exercised during the nine months ended September 30, 2019 was $24.42 per share (2018 - $9.17 per share).

As at September 30, 2019, the Company had outstanding and exercisable options as follows:

 
 
 
 
 
 
 
 
Weighted average
Grant date
Vesting terms
Expiry date
Number of options
 
Exercise price
 
Remaining contractual life
(in years)
August 5, 2016
Evenly over 48 months
August 5, 2021
 
1,058,334
 
$
0.50
 
 
1.85
October 6, 2016
Evenly over 48 months
October 6, 2021
 
3,267,541
 
 
1.23
 
 
2.02
November 21, 2016
Evenly over 48 months
November 21, 2021
 
182,000
 
 
1.84
 
 
2.15
April 12, 2017
Evenly over 48 months
April 12, 2022
 
3,255,134
 
 
3.14
 
 
2.53
August 23, 2017
Evenly over 48 months
August 23, 2022
 
2,856,537
 
 
2.42
 
 
2.90
November 9, 2017
Evenly over 48 months
November 9, 2022
 
200,000
 
 
3.32
 
 
3.11
January 30, 2018
Evenly over 48 months
January 30, 2023
 
109,375
 
 
8.40
 
 
3.34
January 31, 2018
Evenly over 48 months
January 31, 2023
 
267,917
 
 
9.00
 
 
3.34
May 18, 2018
Evenly over 48 months
May 18, 2023
 
1,163,750
 
 
7.57
 
 
3.63
June 28, 2018
Evenly over 20 quarters
June 28, 2024
 
180,000
 
 
8.22
 
 
3.75
September 13, 2018
Evenly over 16 quarters
September 13, 2025
 
25,000
 
 
14.70
 
 
3.96
October 12, 2018
Evenly over 16 quarters
October 12, 2025
 
28,125
 
 
11.80
 
 
4.04
December 14, 2018
Evenly over 20 quarters
December 14, 2025
 
50,000
 
 
15.29
 
 
4.21
March 28, 2019
Evenly over 16 quarters
March 28, 2024
 
51,830
 
 
24.75
 
 
4.50
May 11, 2019
Evenly over 16 quarters
May 11, 2024
 
1,263,957
 
 
20.65
 
 
4.62
August 12, 2019
Evenly over 16 quarters
August 12, 2024
 
31,115
 
 
17.68
 
 
4.87
September 5, 2019
Evenly over 16 quarters
September 5, 2024
 
187,260
 
 
15.34
 
 
4.94
Outstanding at September 30, 2019
 
14,177,875
 
$
4.84
 
$
2.81
Exercisable at September 30, 2019
 
7,442,390
 
$
2.66
 
$
2.47

These options expire at the earlier of 180 days of the death, disability or incapacity of the holder or specified expiry date, and can only be settled in common shares.


26
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

16.
Share-based payments (continued)

(b)
Stock options (continued)

(iii)
Fair value of options issued
 
The fair value of the options issued during the period was determined using the Black-Scholes option pricing model, using the following inputs:

 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2019
 
 
2018
Share price at grant date (per share)
$15.34 - $24.75
 
 
$7.57 - $14.70
Exercise price (per option)
$15.34 - $24.75
 
 
$7.57 - $14.70
Risk-free interest rate (i)
1.39% - 1.62%
 
 
2.01% - 2.45%
Expected life of options (in years) (ii)
5
 
 
5 - 7
Expected annualized volatility (iii)
89%
 
 
55%
Expected dividend yield
0%
 
 
0%
Weighted average Black-Scholes value at grant date (per option)
$10.60 - $15.91
 
 
$3.72 - $8.42

(i) 
The risk-free interest rate was based on Bank of Canada government bonds with a term equal to the expected life of the options.
 
 
 
 
 
 
 
 
 
 
 
(ii) 
The expected life in years represents the period of time that the options granted are expected to be outstanding.
 
 
 
 
 
 
 
 
 
 
 
(iii) 
Volatility was estimated by taking the average of the historical volatility of the Company and its peer group at the date of issuance.

(c)
Restricted stock units

On September 5, 2019, the Company issued an aggregate of 732,972 restricted stock units ("RSUs") to certain employees in connection with the acquisition of Redwood. Each RSU entitles the holder to receive upon vesting one common share of the Company. The fair value of these RSUs has been determined based on the quoted market price on the date of issuance of $15.34 per share. The RSUs vest over a three-year period following the grant date, and have no performance requirements. For the three and nine-months ended September 30, 2019, the Company recorded $246 (2018 - $nil) in share-based compensation expense related to these RSUs.

The following is a summary of the changes in RSUs from January 1, 2019 to September 30, 2019:

 
 
 
 
 
 
 
 
 
 
 
Number of RSUs
 
 
Share-based reserve
Balance at January 1, 2019
 
 
-
 
 
$
-
Issuance of RSUs
 
 
732,972
 
 
 
-
Vesting of issued RSUs
 
 
-
 
 
 
246
Balance at September 30, 2019
 
 
732,972
 
 
$
246

No RSUs were granted or outstanding during 2018.


27
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

16.
Share-based payments (continued)
 
 
(d)
Deferred share units

On August 10, 2019, the Company established a cash-settled deferred share unit ("DSU") plan for its non-executive directors. The DSU plan is designed to promote a greater alignment of long-term interests between non-executive directors and shareholders. The number of DSUs granted (including fractional DSUs) is determined by dividing the amount of renumeration payable by the closing price as reported by the TSX on the trading day immediately preceding the day of grant. DSUs are payable at the time a non-executive director ceases to hold the office of director for any reason whatsoever, and are settled by a lump-sum cash payment, based on the value of the DSU at such time. The value of the cash payout is determined by multiplying the number of DSUs vested at the payout date by the fair value of the Company's shares of the first trading day immediately following the payout date.

The fair value of the payout is determined at each reporting date based on the fair value of the Company's shares at the reporting date and is recorded within other liabilities.

The following is a summary of the changes in DSUs from January 1, 2019 to September 30, 2019:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of DSUs
 
 
Financial liability
Balance at January 1, 2019
 
-
 
 
$
-
Granting and vesting of DSUs
 
33,937
 
 
 
600
Gain on revaluation
 
-
 
 
 
(194)
Balance at September 30, 2019
 
33,937
 
 
$
406

No DSUs were granted or outstanding during 2018.


17.
Revenue from contracts with customers

The Company derives revenue from the following major product lines and geographical regions:

 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
2019
(Restated - Note 28)
 
 
2018
 
 
2019
(Restated - Note 28)
 
 
2018
Canadian
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dry cannabis
$
6,379

 
 
$
2,099
 
 
$
17,444
 
 
$
6,815
Cannabis oils
 
1,193

 
 
 
1,029
 
 
 
4,844
 
 
 
1,920
Other
 
23

 
 
 
68
 
 
 
157
 
 
 
181
 
 
 
$
7,595

 
 
$
3,196
 
 
$
22,445
 
 
$
8,916
International
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dry cannabis
 
(215
)
 
 
 
520
 
 
 
231
 
 
 
1,139
Cannabis oils
 
-

 
 
 
44
 
 
 
-
 
 
 
44
Other
 
 
897

 
 
 
-
 
 
 
897
 
 
 
-
 
 
 
 
682

 
 
 
564
 
 
 
1,128
 
 
 
1,183
Total gross revenue from contracts with customers
$
8,277

 
 
$
3,760
 
 
$
23,573
 
 
$
10,099

During the three and nine months ended September 30, 2019 and September 30, 2018, the Company earned gross revenue of $4,425 from 2 major customers (2018 - $1,596 from 3 major customers) and $9,439 from 2 major customers (2018 - $3,985 from 3 major customers), respectively. During the nine months ended September 30, 2019, $372 (2018 - $nil) in expected credit losses were recognized on receivables from contracts with customers in net income (loss). Refer to Note 23(a)(i).


28
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

18.
Earnings (loss) per share
 
Basic and diluted earnings (loss) per share are calculated using the following numerators and denominators:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
 
 
2019
(Restated - Note 28)
 
2018
 
2019
(Restated - Note 28)
 
2018
Basic earnings (loss) per share computation
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
786,727

 
$
(7,210)
 
$
1,465,948

 
$
(7,537)
Weighted average number of common shares outstanding
 
338,957,949

 
 
177,483,122
 
 
297,964,058

 
 
170,097,232
Basic earnings (loss) per share
$
2.32

 
$
(0.04)
 
$
4.92

 
$
(0.04)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share computation
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) used in the computation of basic earnings (loss) per share
$
786,727

 
$
(7,210)
 
$
1,465,948

 
$
(7,537)
Adjustment for gain on revaluation of derivative liabilities
 
(591,559
)
 
 
-
 
 
(1,058,939
)
 
 
-
Net income (loss) used in the computation of diluted income (loss) per share
$
195,168

 
$
(7,210)
 
$
407,009

 
$
(7,537)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding used in the computation of basic earnings (loss) per share
 
338,957,949

 
 
177,483,122
 
 
297,964,058

 
 
170,097,232
Dilutive effect of warrants
 
17,792,227

 
 
-
 
 
20,080,244

 
 
-
Dilutive effect of stock options and share appreciation rights
 
10,435,804

 
 
-
 
 
11,030,736

 
 
-
Dilutive effect of restricted share units
 
732,972

 
 
 
 
 
732,972

 
 
 
Dilutive effect of Altria Warrant
 
-

 
 
-
 
 
1,833,853

 
 
-
Dilutive effect of Top-up Rights - exercised and exercisable fixed price
 
1,349,720

 
 
-
 
 
1,976,828

 
 
-
Weighted average number of common shares outstanding used in the computation of diluted earnings (loss) per share
 
369,268,672
 
 
177,483,122
 
 
333,618,691
 
 
170,097,232
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.53

 
$
(0.04)
 
$
1.22

 
$
(0.04)
The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive or because conditions for contingently issuable shares were not satisfied at the end of the reporting periods.


 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
 
Notes
 
2019
 
 
2018
 
 
2019
 
 
2018
Ginkgo Equity Milestones
20(a)(i)
 
 
14,674,904
 
 
 
-
 
 
 
14,674,904
 
 
 
-
Pre-emptive Rights
14(b)
 
 
12,006,740
 
 
 
-
 
 
 
12,006,740
 
 
 
-
Top-up Rights - fixed price
14(c)
 
 
25,126,670
 
 
 
-
 
 
 
25,126,670
 
 
 
-
Top-up Rights - market price
15(b)
 
 
1,255,223
 
 
 
-
 
 
 
1,255,223
 
 
 
-
Altria Warrant
14(a)
 
 
76,392,046
 
 
 
-
 
 
 
-
 
 
 
-
Warrants
16(a)
 
 
-
 
 
 
25,457,623
 
 
 
-
 
 
 
25,457,623
Stock options and share appreciation rights
16(b)
 
 
1,346,902
 
 
 
12,848,575
 
 
 
51,830
 
 
 
12,848,575
Total anti-dilutive securities
 
 
 
 
130,802,485
 
 
 
38,306,198
 
 
 
53,115,367
 
 
 
38,306,198




29
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

19.
Related party transactions
 
The following is a summary of the Company's related party transactions during the period:
 
(a)
Key management compensation
Key management personnel are persons responsible for planning, directing and controlling activities of the entity, and include executive and non-executive directors. Compensation provided to key management is as follows:

 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
2019
 
 
2018
 
 
2019
 
 
2018
Short-term employee benefits, including salaries and fees
$
429
 
 
$
260
 
 
$
925
 
 
$
595
Share-based payments
 
1,362
 
 
 
385
 
 
 
2,575
 
 
 
1,080
 
$
1,791
 
 
$
645
 
 
$
3,500
 
 
$
1,675
During the nine months ended September 30, 2019, 1,180,160 options (2018 - 150,000 options) were issued to key management. As at September 30, 2019 and December 31, 2018, there were no balances payable to members of key management.
 
 
 
 
 
 
 
 
 
 
(b)
Director compensation
 
 
 
 
 
 
 
 
 
 
During the nine months ended September 30, 2019, no options (2018 - 550,000 options) were issued to directors of the Company, excluding a director who was also a member of key management, and share-based payments of $736 (2018 - $894) were recognized. Refer to Note 16(b) and (d).
 
 
 
 
 
 
 
 
 
 
(c)
Other related party transactions
 
 
 
 
 
 
 
 
 
 
During the nine months ended September 30, 2019, the Company recorded $3,090 ($2,329 USD) to Altria Pinnacle LLC ("Altria Pinnacle") for various services. In addition, the Company purchased machinery and equipment amounting to $1,451 (4,345 ILS) from Altria Israel Ltd. There were no other related party transactions during the nine months ended September 30, 2018.

During the three and nine months ended September 30, 2019, the Company entered into two separate loan agreements with its joint ventures, Cronos GrowCo and NatuEra. Refer to Note 7 for details.


20.
Commitments and contingencies
 
(a)
The Company has committed funding to the following research and development ("R&D") projects:
 
 
(i)
Ginkgo. On September 4, 2018, the Company announced a research and development partnership with Ginkgo Bioworks Inc. ("Ginkgo") to develop scalable and consistent production of a wide range of cannabinoids, including THC, CBD and a variety of other lesser known and rarer cannabinoids. As part of this partnership, Cronos Group has agreed to issue up to 14,674,904 common shares of the Company (aggregate value of approximately $100,000 USD as of July 17, 2018 assuming all milestones are met) ("Ginkgo Equity Milestones") in tranches and $22,000 USD in cash subject to Ginkgo's achievement of certain milestones ("Ginkgo Research and Development Milestones") and to fund certain R&D expenses, including foundry access fees. On May 9, 2019, the Ginkgo Agreement was amended to expand the scope of services provided by Ginkgo to include support for the Company's commercialization of cultured cannabinoids, including the provision of certain development, scale up, and manufacturing services by Ginkgo to the Company related to deployment and commercialization of developed products.

(ii)
Technion. On October 15, 2018, the Company announced a sponsored research agreement with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology ("Technion"). Research will be focused on the use of cannabinoids and their role in regulating skin health and skin disorders. The Company has committed to $1,784 USD of research funding over a period of three years. As at September 30, 2019, the Company paid a total of $598 USD in research funding. An additional $4,900 USD of cash payments will be paid to Technion upon the achievement of certain milestones.


30
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

20.
Commitments and contingencies (continued)
 
(b)
Altria. On February 18, 2019, the Company entered into an agreement with Altria Pinnacle, a wholly-owned subsidiary of Altria, to receive various services from Altria Pinnacle (the "Services Agreement"). Pursuant to the Services Agreement the Company will pay a monthly fee equal to the product of one hundred and five percent (105%) and the sum of: (i) all costs directly associated with the services incurred during the monthly period, and (ii) a reasonable and appropriate allocation of indirect costs incurred during the monthly period. The Company will also pay all third-party direct charges incurred during the monthly period in connection with the services, including any reasonable and documented costs, fees and expenses associated with obtaining any consent, license or permit. The Services Agreement will remain in effect until terminated by either party.
(c)
The following contingencies are related to Peace Naturals:
 
 
(i)
MedCann Access Acquisition Claim. On July 31, 2015, 8437718 Canada Inc., 8437726 Canada Inc., Michael Blaine Dowdle, Rade Kovacevic, Kevin Furet and 9388036 Canada Inc. (collectively, the "Plaintiffs") commenced a claim against Peace Naturals and a number of other parties, for $15,000 in damages allegedly resulting from the termination of a share purchase transaction for the acquisition of the Plaintiffs' company, MedCann Access. The Company believes that the allegations contained in the statement of claim are without merit and plans to vigorously defend itself; accordingly, no provision for loss has been recognized. On February 21, 2018, the parties began the discovery phase of the proceedings, which is ongoing.
 
 
(ii)
Warrants Claim. Jeffrey Gobuty, brother to Mark Gobuty, former CEO of Peace Naturals, brought a claim against Peace Naturals for $300 and for options to purchase shares with a value equivalent to $125 at pre-initial public offering ("IPO") levels that were purportedly issued by Mark Gobuty, the former CEO of Peace Naturals. This matter remains in the early stages of litigation and has not yet advanced to the discovery phase. The Company believes that the allegations contained in the statement of claim are without merit and plans to vigorously defend itself; accordingly, no provision for loss has been recognized.
(iii)
Former Employees' Unlawful Termination Claims. Peace Naturals and Cronos Group were served with claims by Jennifer Caldwell, a former employee, for damages of $580 and 30,000 options of the Company, in connection with claims of alleged wrongful termination. The Company believes that the allegations contained in the statement of claim are without merit and plans to vigorously defend itself; accordingly, no provision for loss has been recognized.
(d)
The Company has committed to the following supply agreements:
 
 
 
 
 
 
 
 
(i)



In May 2019, the Company announced a take or pay supply agreement with MediPharm Labs Inc. ("MediPharm") for cannabis concentrate. MediPharm will supply the Company with approximately $30,000 of cannabis concentrate over 18 months, and, subject to certain renewal and purchase options, potentially up to $60,000 over 24 months. In addition, the Company announced a tolling agreement with MediPharm, where the Company may supply bulk quantities of dried cannabis to MediPharm for processing on a fee for service basis into bulk resin or other cannabis oil derivative products.

21.
Income taxes
The Company's combined Canadian federal and provincial statutory income tax rate is 26.50% for the periods ended September 30, 2019 and 2018. The Company's combined U.S. federal and state statutory income tax rate is 29.84% for the period ended September 30, 2019 (not applicable in 2018). The rate is expected to apply for the full year and is applied to the pre-tax income for the three and nine month periods.
 
 
 
 
 
 
 
 
 
 
Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset.


31
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

21.
Income taxes (continued)

The changes in the net deferred tax liability are provided below:
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019
(Restated - Note 28)
 
 
2018
 
 
2019
(Restated - Note 28)
 
 
2018
Balance - beginning of period
$
3,661

 
 
$
268

 
 
$
1,850

 
 
$
1,416

Expense (recovery) recognized in net income (loss)
 
(3,959
)
 
 
 
2,352

 
 
 
(2,112
)
 
 
 
1,197

Expense (recovery) recognized in other comprehensive income (loss)
 
-

 
 
 
36

 
 
 
(36
)
 
 
 
43

Balance - end of period
$
(298
)
 
 
$
2,656

 
 
$
(298
)
 
 
$
2,656



22.
Supplemental cash flow information
(a)
The net changes in non-cash working capital items are as follow:
 
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
Notes
 
2019
(Restated - Note 28)
 
 
2018
 
 
2019
(Restated - Note 28)
 
 
2018
Interest receivable
 
 
$
1,922

 
 
$
-

 
 
$
(3,829
)
 
 
$
-

Accounts receivable
 
 
 
5,025

 
 
 
(434
)
 
 
 
26

 
 
 
(2,138
)
Sales taxes receivable
 
 
 
3,583

 
 
 
(3,001
)
 
 
 
(580
)
 
 
 
(6,839
)
Prepaid expenses and other assets
 
 
 
(4,663
)
 
 
 
(6,134
)
 
 
 
(7,866
)
 
 
 
(9,456
)
Current portion of loans receivable
 
 
 
(6,083
)
 
 
 
-

 
 
 
(6,083
)
 
 
 
-

Biological assets (i)
4
 
 
(1,297
)
 
 
 
2,924

 
 
 
17,312

 
 
 
9,544

Inventory (ii)
4
 
 
(26,513
)
 
 
 
(4,204
)
 
 
 
(62,277
)
 
 
 
(12,872
)
Accounts payable and other liabilities
 
 
 
24,160

 
 
 
733

 
 
 
36,415

 
 
 
(5,017
)
Holdbacks payable
 
 
 
(2,274
)
 
 
 
-

 
 
 
(7,887
)
 
 
 
-

Government remittances payable
 
 
 
108

 
 
 
739

 
 
 
(385
)
 
 
 
739

Add back: net working capital assumed on acquisition
8
 
 
1,284

 
 
 
-

 
 
 
1,284

 
 
 
-

Net changes in non-cash working capital
 
 
$
(4,748
)
 
 
$
(9,377
)
 
 
$
(33,870
)
 
 
$
(26,039
)
(i) 
The reconciliation of the cash flows from biological assets are as follows:
 
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
Balance - beginning of period
 
 
$
10,032
 
 
$
6,899
 
 
$
9,074
 
 
$
3,722
Balance - end of period
 
 
 
2,101
 
 
 
5,632
 
 
 
2,101
 
 
 
5,632
Changes during the period
 
 
$
7,931
 
 
$
1,267
 
 
$
6,973
 
 
$
(1,910
Non-cash changes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized change in fair value of biological assets
 
 
 
(10,015)
 
 
 
1,533
 
 
 
7,562
 
 
 
11,108
Capitalization of depreciation expense
 
 
 
1,898
 
 
 
242
 
 
 
4,284
 
 
 
614
Depreciation relieved on inventory sold
 
 
 
(1,111)
 
 
 
(118)
 
 
 
(1,507)
 
 
 
(268)
Net change in non-cash working capital
 
 
$
(1,297)
 
 
$
2,924
 
 
$
17,312
 
 
$
9,544


32
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

22.
Supplemental cash flow information (continued)

(ii) 
The reconciliation of the cash flows from inventory are as follows:

 
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
 
2019
(Restated - Note 28)
 
 
2018
 
 
2019
(Restated - Note 28)
 
 
2018
Balance - beginning of period
 
 
$
41,599

 
 
$
12,334

 
 
$
11,584

 
 
$
8,416

Balance - end of period
 
 
 
54,138

 
 
 
15,073

 
 
 
54,138

 
 
 
15,073

Changes during the period
 
 
$
(12,539
)
 
 
$
(2,739
)
 
 
$
(42,554
)
 
 
$
(6,657
)
Non-cash changes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized fair value adjustments on inventory sold
 
 
 
(9,081
)
 
 
 
(1,511
)
 
 
 
(15,041
)
 
 
 
(6,330
)
Capitalization of depreciation expense
 
 
 
491

 
 
 
73

 
 
 
904

 
 
 
208

Depreciation relieved on inventory sold
 
 
 
(455
)
 
 
 
(27
)
 
 
 
(657
)
 
 
 
(93
)
Inventory write-down
 
 
 
(4,929
)
 
 
 
-

 
 
 
(4,929
)
 
 
 
-

Net change in non-cash working capital
 
 
$
(26,513
)
 
 
$
(4,204
)
 
 
$
(62,277
)
 
 
$
(12,872
)

(b)
The reconciliation of the cash flows from derivative liabilities, refer to Note 14, are as follows:
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
 
2018
 
2019
 
 
2018
Balance - beginning of period
 
 
$
1,399,594
 
 
$
-
 
$
-
 
 
$
-
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Altria Warrant
 
 
 
-
 
 
 
-
 
 
1,458,366
 
 
 
-
Pre-emptive Rights
 
 
 
-
 
 
 
-
 
 
124,176
 
 
 
-
Top-up Rights
 
 
 
-
 
 
 
-
 
 
518,116
 
 
 
-
Non-cash changes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on revaluation of derivative liabilities
 
 
 
(835,079)
 
 
 
-
 
 
(1,535,405)
 
 
 
-
Exercise of Top-up Rights
 
 
 
(19,001)
 
 
 
-
 
 
(19,739)
 
 
 
-
Balance - end of period
 
 
$
545,514
 
 
$
-
 
$
545,514
 
 
$
-


23.
Financial instruments
 
(a)
Credit risk
 
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable, and its investing activities, including cash and cash equivalents, short-term investments, and related interest receivable held with banks and financial institutions, advances to joint ventures, and loans receivable. The Company's maximum exposure to this risk is equal to the carrying amount of these financial assets.
 
 
 

33
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

23.
Financial instruments (continued)

(a)
Credit risk (continued)

(i)
Accounts receivable
 
 
 
 
 
 
 
 
 
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money, and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan, and a failure to make contractual payments for a period of greater than 120 days past due. As at September 30, 2019, the Company recognized an approximate expected credit loss allowance of $371 (December 31, 2018 - $50).
 
 
 
 
 
 
 
 
 
Provided below is the information about the credit risk exposure on the Company's accounts receivable using a provision matrix of expected credit loss rates against an analysis of the age of accounts receivable:

 
 
 
Expected credit loss rates
 
As at September 30,
2019
(Restated - Note 28)
 
 
As at December 31,
2018
 
Less than 30 days past billing date
0% to 3%
 
$
6,486
 
 
$
3,980
 
31 to 60 days past billing date
0% to 5%
 
 
128
 
 
 
136
 
61 to 90 days past billing date
0% to 8%
 
 
82
 
 
 
-
 
91 to 120 days past billing date
0% to 12%
 
 
220
 
 
 
19
 
Over 120 days past billing date
0% to 18%
 
 
19
 
 
 
28
 
 
 
 
 
$
6,935
 
 
$
4,163

 
The Company has assessed that there is no concentration of credit risk as at September 30, 2019 (December 31, 2018- 88% of the Company's accounts receivable were due from 5 customers).

(ii)
Cash and cash equivalents, short-term investments, and interest receivable
 
 
 
 
 
 
 
 
 
The Company held cash and cash equivalents amounting to $1,475,459 at September 30, 2019 (December 31, 2018 - $32,634). The short-term investments and related interest receivable of $520,893 (December 31, 2018 - $nil) represents short-term investments with a maturity of less than a year and accrued interest as at September 30, 2019. The cash and cash equivalents and short-term investments are held with central banks and financial institution counterparties that are highly rated. As such, the Company has assessed an insignificant loss allowance on these financial instruments.

(iii)
Advances to joint ventures
 
 
 
 
 
 
 
 
 
The Company has assessed that there has been no significant increase in credit risk of these advances from initial recognition based on the financial position of the borrowers, and the regulatory and economic environment of the borrowers. As a result, the loss allowance recognized during the period was limited to 12 month expected credit losses. Based on historical information, and adjusted for forward-looking expectations, the Company has assessed an insignificant loss allowance on these advances as at September 30, 2019 and December 31, 2018.

34
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

23.
Financial instruments (continued)

(a)
Credit risk (continued)

(iv)
Loans receivable
 
 
 
 
 
 
 
 
 
Credit risk associated with the loans receivable arises from the possibility that the counterparty may experience financial difficulty and be unable to make the contractual payments. The Company has assessed that there has been no significant increase in credit risk of these advances from initial recognition based on the financial position of the borrowers, and the regulatory and economic environment of the borrowers. As a result, the loss allowance recognized during the period was limited to 12 month expected credit losses. Based on historical information, and adjusted for forward-looking expectations, the Company has assessed an insignificant loss allowance on these loans receivable as at September 30, 2019 and December 31, 2018.

(b)
Liquidity risk
 
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due, and arises principally from the Company's accounts payable and other liabilities, holdbacks payable, government remittances payable, construction loan payable, derivative liabilities, lease obligations, and due to non-controlling interests. The Company's policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations as they become due. Further, the Company's management is responsible for ensuring funds exist and are readily accessible to support business opportunities as they arise. The Company's funding is primarily provided in the form of capital raised through the issuance of shares and share-based instruments.
 
The following represents an analysis of the age of accounts payable:

 
 
 
As at September 30, 2019
(Restated - Note 28)
 
 
As at December 31,
2018
Less than 30 days past billing date
$
8,106
 
 
$
1,201
31 to 60 days past billing date
 
6,294
 
 
 
365
61 to 90 days past billing date
 
1,094
 
 
 
29
Over 90 days past billing date
 
2,319
 
 
 
-
 
$
17,813
 
 
$
1,595

As at September 30, 2019, 50% of the Company's payables were due to 1 vendor (December 31, 2018 - 35% due to 1 vendor).

(c)
Market risk
 
(i)
Price risk
 
 
Price risk is the risk that the fair value of, or future cash flows from, the Company's financial instruments will significantly fluctuate due to changes in market prices. The value of the financial instruments can be affected by changes in interest rates, market and economic conditions, and equity and commodity prices. The Company is exposed to price risk in divesting its investments, such that, unfavourable market conditions could result in dispositions of investments at less than favourable prices. Further, the revaluation of securities classified as fair value through other comprehensive income, could result in significant write-downs of the Company's investments, which would have an adverse impact on the Company's financial position.
 
 
The Company previously managed price risk by having a portfolio of securities from multiple issuers, such that the Company was not singularly exposed to any one issuer. During the nine months ended September 30, 2019, the Company substantially divested from its investments subject to price risk. Refer to Note 6.

35
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

23.
Financial instruments (continued)

(d)
Currency risk
 
Currency risk is the risk that the fair value of, or future cash flows from, the Company's financial instruments will significantly fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on advances to joint ventures denominated in AUD and USD, refer to Note 5(a), as well as loan receivable denominated in USD, refer to Note 7. The Company is further exposed to this risk through subsidiaries operating in Israel, refer to Note 2(d). The Company does not currently use foreign exchange contracts to hedge its exposure to currency risk as management has determined that this risk is not significant at this point in time. As such, the Company's financial position and financial results may be adversely affected by the unfavourable fluctuations in currency exchange rates.

The following table provides a summary of financial instruments and other monetary instruments denominated in foreign currency (in thousands):

 
 
Currency
 
As at September 30,
2019
 
 
As at December 31,
2018
Advances to joint venture
AUD
 
 
1,514
 
 
 
1,029
Advances to joint venture
USD
 
 
386
 
 
 
-
Loan receivable
USD
 
 
8,056
 
 
 
-
Cash and cash equivalents
USD
 
 
21,231
 
 
 
-
Accounts receivable
USD
 
 
985
 
 
 
-
Accounts payable and other liabilities
USD
 
 
10,797
 
 
 
-
Lease obligations (including current portion)
USD
 
 
6,174
 
 
 
-
Cash and cash equivalents
ILS
 
 
27,103
 
 
 
840
Sales taxes receivable
ILS
 
 
2,792
 
 
 
2,066
Accounts payable and other liabilities
ILS
 
 
8,381
 
 
 
1,083
Due to non-controlling interests
ILS
 
 
6,248
 
 
 
5,878
Lease obligations (including current portion)
ILS
 
 
6,476
 
 
 
-

A 10% strengthening of the Canadian dollar against the foreign currencies listed above would increase net income by $836 and decrease other comprehensive loss by $835 (December 31, 2018 - increase net loss by $90 and decrease other comprehensive income by $326). A 10% weakening of the Canadian dollar against the foreign currencies listed above would result in an equal, but opposite effect.

(e)
Interest rate risk
 
The Company's exposure to interest rate risk only relates to any investments of surplus cash. The Company invests surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at September 30, 2019, the Company had cash and cash equivalents, short-term investments, and related interest receivable amounting to $1,996,352 (December 31, 2018 - $32,634).

36
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

24.
Fair value hierarchy
 
Assets recorded at fair value on the amended and restated unaudited condensed interim consolidated statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
 
Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets and liabilities. In these amended and restated unaudited condensed interim consolidated financial statements other investments (Canopy) and DSUs are included in this category.
 
Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. In these amended and restated unaudited condensed interim consolidated financial statements, there are no financial instruments included in this category.
 
Level 3 - valuation techniques using the inputs for the asset or liability that are not based on observable market data. In these amended and restated unaudited condensed interim consolidated financial statements, other investments (Evergreen), biological assets, and derivative liabilities are included in this category.

The Company's policy for determining when transfers between levels of the fair value hierarchy occur is based on the date of the event or changes in circumstances that caused the transfer. For the nine months ended September 30, 2019 and 2018, there were no transfers between levels.
 
For all financial instruments classified as amortized cost, the carrying value approximated fair value at the reporting dates.


25.
Capital management
 
The Company's objectives when managing its capital are to maintain a sufficient capital base to: (i) meet its short-term obligations, (ii) sustain future operations and expansions, (iii) ensure its ability to continue as a going concern, and (iv) retain stakeholder confidence. The Company defines capital as its net assets, total assets less total liabilities. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Company may issue new shares, options, or warrants, issue new debt, or acquire or dispose of assets. The Company is not subject to externally imposed capital requirements. Management reviews its capital management approach on an ongoing basis and believes that this approach is reasonable. There have been no changes to the Company's capital management approach in the period.
 
As at September 30, 2019, the Company managed net assets of $2,146,809 (December 31, 2018 - $211,640).


26.
Upcoming change in reporting framework
 
Effective December 31, 2019, the Company will become a domestic issuer under the rules of the U.S. Securities and Exchange Commission, and will no longer qualify as a "foreign private issuer" under those rules. As a result, the Company will have to prepare the December 31, 2019 audited annual financial statements in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), with such change being applied retrospectively. The extent of the impact from this change in accounting framework has not yet been quantified, but the Company anticipates that the results for the year ended December 31, 2019 will include two reportable segments: the U.S. and Rest of World. We also intend to report the results, including restated comparative financial information, in USD.


37
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

27.
Non-monetary transaction
 
On March 28, 2019, the Company entered into two transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin from the third party and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for at the carrying value of inventory transferred by the Company, which equaled the value of the cannabis resin received. No revenue was recognized as a result of this transaction and no gain or loss was recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss).

In September 2019, the Company entered into three transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin and cannabis tincture oil and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for at the carrying value of inventory transferred by the Company. $3.0 million was recognized in revenue as a result of this transaction and no gain or loss was recognized in the Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss). 


28.
Restatement
The Company has amended and restated its unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2019 (“interim financial statements”). Subsequent to the original issuance of the interim financial statements, the Audit Committee of the Company’s Board of Directors, with the assistance of outside counsel and forensic accountants, conducted a review of certain bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of the revenue associated with those transactions. As a result of this review, it was concluded that there were accounting errors in the previously filed interim financial statements.

In the case of the nine months ended September 30, 2019, these accounting errors were due to three wholesale transactions, one of which occurred during the three-months ended March 31, 2019 and was inappropriately accounted for as revenue. The transaction involved the exchange of cannabis dry flower for cannabis resin, with a third party, in two simultaneous transactions entered into in contemplation of one another. Subsequent to the original issuance of the interim financial statements, this transaction was not deemed to meet the criteria for revenue recognition in accordance with IFRS 15 and was subsequently accounted for as a non-monetary transaction valued at the carrying value of the inventory exchanged. This resulted in revenue being overstated by approximately $2.5 million and cost of goods sold being overstated by approximately $2.4 million on the Consolidated Statements of Operations and Comprehensive Income (Loss), in the interim financial statements for the nine months ended September 30, 2019.

During the three months ended September 30, 2019, there was a similar wholesale transaction where cannabis dry flower was exchanged for cannabis extracts in three simultaneous transactions which were entered into in contemplation of one another. Subsequent to the original issuance of the interim financial statements, this transaction was not deemed to meet the criteria for revenue recognition in accordance with IFRS 15 due to lack of commercial substance and was subsequently accounted for as a non-monetary transaction valued at the carrying value of the inventory exchanged. This resulted in revenue being overstated by approximately $2.1 million, cost of goods sold being overstated by approximately $3.4 million and realized fair value adjustment on inventory was overstated by approximately $2.3 million on the Consolidated Statements of Operations and Comprehensive Income (Loss), in the interim financial statements for the three and nine months ended September 30, 2019.
 
During the three months ended September 30, 2019, there was another wholesale transaction for a sale of dried cannabis to a third party. The transaction was deemed to be a consignment sale under the guidance of IFRS 15 Revenue from contracts with customers. As a result, revenue recognized was overstated by approximately $3.0 million, cost of sales was overstated by approximately $1.7 million and realized fair value adjustment on inventory was overstated by approximately $3.3 million on the Consolidated Statements of Operations and Comprehensive Income (Loss), in each case in the interim financial statements for the three and nine months ended September 30, 2019.

The resulting corrections are noted in the adjustments column in the following tables.


38
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

28.
Restatement (continued)

Restated line items on the Amended and Restated Unaudited Condensed Interim Consolidated Statements of Financial Position:
 
 
As at September 30, 2019
 
 
As previously reported
 
Adjustments
 
Restated
Assets
 
 
 
 
 
 
Accounts receivable
$
12,655

$
(5,720
)
$
6,935

Sales taxes receivable
 
4,624

 
(625
)
 
3,999

Inventory
 
52,865

 
1,273

 
54,138

Total current assets
 
2,086,422

 
(5,072
)
 
2,081,350

Total assets
 
2,762,768

 
(5,072
)
 
2,757,696

Liabilities
 
 
 
 
 
 
Accounts payable and other liabilities
 
57,722

 
(3,331
)
 
54,391

Total current liabilities
 
604,394

 
(3,331
)
 
601,063

Deferred income tax liability
 
77

 
(375
)
 
(298
)
Total liabilities
 
614,593

 
(3,706
)
 
610,887

Shareholders' equity (deficit)
 
 
 
 
 
 
Retained earnings (accumulated deficit)
 
1,443,382

 
(1,366
)
 
1,442,016

Total equity attributable to shareholders of Cronos Group
 
2,148,712

 
(1,366
)
 
2,147,346

Total shareholders' equity
 
2,148,175

 
(1,366
)
 
2,146,809


Restated line items on the Amended and Restated Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss):
 
Three months ended September 30, 2019
 
As previously reported
 
Adjustments
 
Restated
Gross revenue
$
13,339

 
$
(5,062
)
 
$
8,277

Cost of sales
7,432

 
(2,814
)
 
4,618

Inventory write-down
 -

 
4,929

 
4,929

Cost of sales before fair value adjustments
7,432

 
2,115

 
9,547

Gross profit before fair value adjustments
5,268

 
(7,177
)
 
(1,909
)
Realized fair value adjustments on inventory sold in the period
14,617

 
(5,536
)
 
9,081

Total fair value adjustments
24,632

 
(5,536
)
 
19,096

Gross profit
(19,364
)
 
(1,641
)
 
(21,005
)
Operating loss
(54,162
)
 
(1,641
)
 
(55,803
)
Income (loss) before income taxes
784,037

 
(1,641
)
 
782,396

Deferred income tax expense (recovery)
(3,959
)
 
 -

 
(3,959
)
Net income (loss)
787,996

 
(1,641
)
 
786,355

Comprehensive income (loss)
786,941

 
(1,641
)
 
785,300









39
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

28.
Restatement (continued)
 
Nine months ended September 30, 2019
 
As previously reported
 
Adjustments
 
Restated
Gross revenue
$
31,111

 
$
(7,538
)
 
$
23,573

Cost of sales
15,178

 
(3,871
)
 
11,307

Inventory write-down
 -

 
4,929

 
4,929

Cost of sales before fair value adjustments
15,178

 
1,058

 
16,236

Gross profit before fair value adjustments
14,229

 
(8,596
)
 
5,633

Realized fair value adjustments on inventory sold in the period
21,896

 
(6,855
)
 
15,041

Total fair value adjustments
14,334

 
(6,855
)
 
7,479

Gross profit
(105
)
 
(1,741
)
 
(1,846
)
Operating loss
(75,065
)
 
(1,741
)
 
(76,806
)
Income (loss) before income taxes
1,464,920

 
(1,741
)
 
1,463,179

Deferred income tax expense (recovery)
(1,737
)
 
(375
)
 
(2,112
)
Net income (loss)
1,466,657

 
(1,366
)
 
1,465,291

Comprehensive income (loss)
1,465,617

 
(1,366
)
 
1,464,251

Restated line items on the Amended and Restated Unaudited Condensed Interim Consolidated Statements of Cash Flows:
 
Three months ended September 30, 2019
 
 
 As previously reported
 
 Adjustment
 
 Restated
Operating activities
 
 
 
 
 
 
Net income (loss)
 
$
787,996

 
$
(1,641
)
 
$
786,355

Realized fair value adjustments on inventory sold in the period
 
14,617

 
(5,536
)
 
9,081

Inventory write-down
 
—

 
4,929

 
4,929

Net changes in non-cash working capital
 
(6,996
)
 
2,248

 
(4,748
)
Cash and cash equivalents used in operating activities
 
(26,434
)
 
 -

 
(26,434
)
 
Nine months ended September 30, 2019
 
 
 As previously reported
 
 Adjustment
 
 Restated
Operating activities
 
 
 
 
 
 
Net income (loss)
 
$
1,466,657

 
$
(1,366
)
 
$
1,465,291

Realized fair value adjustments on inventory sold in the period
 
21,896

 
(6,855
)
 
15,041

Inventory write-down
 
 -

 
4,929

 
4,929

Deferred income tax expense (recovery)
 
(1,737
)
 
(375
)
 
(2,112
)
Net changes in non-cash working capital
 
(37,537
)
 
3,667

 
(33,870
)
Cash and cash equivalents used in operating activities
 
(102,417
)
 
 -

 
(102,417
)
Restated line items on the Amended and Restated Unaudited Condensed Interim Consolidated Statements of Changes in Equity:
 
 
 As at September 30, 2019
 
 
 As previously reported
 
 Adjustment
 
 Restated
Retained earnings (accumulated deficit) as at January 1, 2019
(22,783
)
 
 -

 
(22,783
)
Net loss for nine months ended September 30, 2019
 
1,466,657

 
(1,366
)
 
1,465,291

Retained earnings (accumulated deficit) as at September 30, 2019
 
1,443,382

 
(1,366
)
 
1,442,016

(i) Adjustment in retained earnings (accumulated deficit) as at September 30, 2019 due to net income change stated above.




40
Cronos Group Inc.
Notes to Amended and Restated Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2019 and September 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)

29.
Subsequent events
 
 
(a)
On October 25, 2019, Cronos Australia issued 40 million new shares in an initial public offering at an offering price of AUD $0.50 per share (the "Cronos Australia IPO"). Cronos Australia began trading on the Australian Securities Exchange in early November 2019.
Established in February 2018, Cronos Australia was a 50/50 joint venture between Cronos Group and NewSouthern Capital Pty Ltd., and is led by Rodney Cocks and Peter Righetti. The launch marked a significant milestone in Cronos Group's commitment to advancing cannabis research and producing and distributing products and brands at a global scale. Upon completion of the Cronos Australia IPO, Cronos Group holds approximately 31 percent of the issued capital of Cronos Australia.
 
 
(b)
Subsequent to the third quarter of 2019, the Company has commenced certain initiatives to better align its evolving business and its four strategic pillars. Certain facilities at the Peace Naturals Campus are intended to be repurposed from cultivation activities to provide for the following activities: additional R&D activities focused on new technologies for value-added product manufacturing; production and manufacturing of derivative products; and increased vault and warehousing capabilities.
 
The Company is currently assessing the impact of these anticipated changes and planned improvements to the Peace Naturals Campus, which is expected to result in the Company recording a pre-tax one-time charge for certain fixed assets, biological assets, and other operating costs. The Company, at this time, estimates the pre-tax one-time charge to be no more than $15,000, the majority of which is expected to be recorded in the fourth quarter of 2019. 



41
Exhibit









https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronq32019mdaimage1.jpg

CRONOS GROUP INC.

Amended and Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations

For the Three and Nine Months Ended September 30, 2019

(in thousands of Canadian dollars)

1


Notice to reader
Cronos Group Inc. ("Cronos Group" or the "Company") has restated its unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019, the six months ended June 30, 2019, and the three and nine months ended September 30, 2019, which were previously filed on SEDAR (the “interim financial statements”). Subsequent to the original issuance of the interim financial statements, the Audit Committee of the Company’s Board of Directors, with the assistance of outside counsel and forensic accountants, conducted a review of certain bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of the revenue associated with those transactions. As a result of this review, it was concluded that there were accounting errors in the previously filed interim financial statements, due to three wholesale transactions that were inappropriately accounted for as revenue. These errors have been corrected in the amended and restated unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019, the six months ended June 30, 2019, and the three and nine months ended September 30, 2019. See note 28 of the amended and restated unaudited condensed interim consolidated statements for more detail.

As a result of these changes, the following changes were made to the management’s discussion and analysis of financial condition and results of operation for the three and nine months ended September 30, 2019 as previously filed.

2


i)    
The correction of Net Revenue for the three and nine months ended September 30, 2019 from $12,700 to $7,638, and from $29,407 to $21,869, respectively.
ii)   
The correction of Gross Margin before Fair Value Adjustments for the three and nine months ended September 30, 2019 from 41% to (25%), and from 48% to 26%, respectively.
iii)  
The correction of Adjusted EBITDA for the three and nine months ended September 30, 2019 from $(23,932) to $(31,109), and from $(50,651) to $(59,247), respectively.
iv)   
The correction of Canadian Extract Sales (% of Net Product Revenue) for the three and nine months ended September 30, 2019 from 9% to 15%, and from 16% to 21%, respectively.
v)    
The correction of Kilograms Sold for the three and nine months ended September 30, 2019 from 3,142 kg to 1,167 kg, and from 5,837 kg to 3,420 kg, respectively.
vi)   
The correction of New Product Revenue / Gram Sold for the three and nine months ended September 30, 2019 from $3.75 to $5.76, and from $4.86 to $6.09, respectively.
vii)  
The correction of Cost of Sales before Fair Value Adj. / Gram Sold for the three and nine months ended September 30, 2019 from $2.27 to $7.92, and from $2.55 to $4.66, respectively.
viii) 
The correction of Cost of Sales for the three and nine months ended September 30, 2019 from $32,064 to $28,643, and from $29,512 to $23,715, respectively.
ix)   
The correction of Gross Profit for the three and nine months ended September 30, 2019 from $(19,364) to $(21,005), and from $(105) to $(1,846), respectively.
x)    
The correction of Operating Loss for the three and nine months ended September 30, 2019 from $(54,162) to $(55,803), and from $(75,065) to $(76,806), respectively.
xi)   
The correction of Income (Loss) before Income Taxes for the three and nine months ended September 30, 2019 from $784,037 to $782,396, and from $1,464,920 to $1,463,179, respectively.
xii)  
The correction of Deferred Income Tax Expense (Recovery) from for the nine months ended September 30, 2019 from $(1,737) to $(2,112).
xiii) 
The correction of Net Income (Loss) for the three and nine months ended September 30, 2019 from $787,996 to $786,355, and from $1,466,657 to $1,463,291, respectively.
xiv)  
The correction of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 from $787,996 to $785,300, and from $1,465,617 to $1,464,251, respectively.
xv)   
The correction of Net Revenue, Dried Cannabis from for the three and nine months ended September 30, 2019 from $10,630 to $5,568, and from $23,685 to $16,147, respectively.
xvi)  
The correction of Kilograms Sold, Dried Cannabis from for the three and nine months ended September 30, 2019 from 2,996 kg to 1,021 kg, and from 5,219 kg to 2,802 kg, respectively.
xvii) 
The correction of Avg. Net Selling Price Per Gram Sold, Dried Cannabis from for the three and nine months ended September 30, 2019 $3.55 to $5.46, and from $4.54 to $5.76, respectively.
xviii)
The correction of Cost of Sales before Fair Value Adjustments from for the three and nine months ended September 30, 2019 $7,432 to $9,547, and from $15,178 to $16,236, respectively.
xix)  
The correction of Gross Profit before Fair Value Adjustments from for the three and nine months ended September 30, 2019 $5,268 to $(1,909), and from $14,299 to $5,633, respectively.
xx)   
The correction of Realized Fair Value Adjustments on Inventory Sold from for the three and nine months ended September 30, 2019 from $14,617 to $9,081, and from $21,896 to $15,041, respectively.
xxi)  
The correction of Gross Margin for the three and nine months ended September 30, 2019 from (152%) to (275%), and from (0%) to (8%), respectively.
xxii) 
The correction of Cost of Sales before Fair Value Adj./Gram Sold for Non-U.S. market for the three and nine months ended September 30, 2019 from $2.27 to $7.92, and from $2.55 to $4.66, respectively.
xxiii)
The correction of Adjusted EBIT for the three and nine months ended September 30, 2019 from $(26,405) to $(33,582), and from $(54,867) to $(63,463), respectively.
xxiv) 
The correction of Basic Earnings Per Share for the three months ended March 31, 2019 from $1.95 to $1.96.
xxv)
The correction of Basic Earnings Per Share for the three months ended September 30, 2019 from $2.33 to $2.32.

GENERAL MATTERS
This amended and restated management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of Cronos Group Inc. is current as of November 11, 2019 and provides financial information for the three and nine months ended September 30, 2019, as amended and restated March 30, 2020 solely to reflect the issuance of the amended and restated unaudited condensed interim consolidated financial statements as described above. This MD&A should be read in conjunction with the amended and restated unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2019 and September 30, 2018, including the related notes thereto (the “Interim Financial Statements”), and the audited annual consolidated financial statements for the year ended December 31, 2018, including the related notes thereto and the related management’s discussion and analysis.

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Unless otherwise noted or the context indicates otherwise, 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 Company’s board of directors, on the recommendation of the audit committee, approved the Interim Financial Statements and this MD&A on March 29, 2020.
Basis of Presentation
This MD&A has been prepared in accordance with the MD&A disclosure requirements under National Instrument 51-102, Continuous Disclosure Obligations of the Canadian Securities Administrators. The accompanying Interim Financial Statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Certain totals, subtotals and percentages throughout this MD&A are calculated using the rounded numbers as they appear in the tables. All currency amounts herein are expressed in thousands of Canadian dollars, unless otherwise noted. All references to “dollars” or “$” are to Canadian dollars, all references to “US$” are to United States dollars and all references to “AUD$” are to Australian dollars.
All references in this MD&A to “Q3 2019” and “Q3 2018” are to the fiscal quarters for the three months ended September 30, 2019 and September 30, 2018, respectively. All references in this MD&A to “YTD 2019” and “YTD 2018” are to the nine months ended September 30, 2019 and September 30, 2018, respectively. All references in this MD&A to “Q1 2019” and “Q2 2019” are to the fiscal quarter for the three months ended March 31, 2019 and the fiscal quarter for the three months ended June 30, 2019, respectively.
Non-IFRS Measures
This MD&A refers to certain non-IFRS measures. These measures are not recognized under IFRS, do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. Rather, these measures are provided as a supplement to those IFRS measures to provide additional information regarding the Company’s results of operations from management’s perspective. Accordingly, non-IFRS measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with IFRS. Each non-IFRS measure presented in this MD&A is reconciled to its most directly comparable IFRS measure.
Adjusted EBIT
Adjusted earnings before interest and tax (“Adjusted EBIT”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis. Adjusted EBIT is defined as net income or loss, excluding interest expense, interest income, deferred income tax expense or recovery, share-based payments, unrealized change in the fair value of biological assets, realized fair value adjustments on inventory sold, financing and transaction costs, gain on revaluation of derivative liabilities, gain on revaluation of financial liability, share of income or loss from investments in equity accounted investees and gain or loss on other investments. The Company believes that Adjusted EBIT is useful to compare its operating profitability across periods. See “Results of Operations – Reconciliation of Non-IFRS Measures” for a reconciliation of Adjusted EBIT to its most directly comparable IFRS measure.
Adjusted EBITDA
Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) is used by management as a supplemental measure to review and assess operating performance and trends on a comparable basis. Adjusted EBITDA is defined as Adjusted EBIT excluding depreciation and amortization. The Company believes that Adjusted EBITDA is useful to compare its ability to generate cash from operations across periods. See “Results of Operations – Reconciliation of Non-IFRS Measures” for a reconciliation of Adjusted EBITDA to its most directly comparable IFRS measure.
Definitions
Gross Profit before Fair Value Adjustments and Gross Margin before Fair Value Adjustments
Gross profit before fair value adjustments and gross margin before fair value adjustments are used by management to provide a better representation of performance in the period by excluding non-cash fair value measurements required by IFRS. Management believes these measures provide useful information as they represent the gross profit or gross margin for management purposes based on the Company’s complete cost to produce inventory sold, exclusive of any fair value measurements required by IFRS.

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Gross profit before fair value adjustments is defined as gross profit excluding any non-cash fair value adjustments on biological assets or inventory sold required by IFRS. Gross margin before fair value adjustments is defined as gross profit before fair value adjustments divided by net revenue.
Kilogram or Gram Equivalents
Kilogram or gram equivalents refer to the equivalent number of kilograms or grams of dried cannabis required to produce extracted cannabis in the form of cannabis oil in the Canadian market. The Company converts its cannabis oil to gram equivalents using a standard “equivalency factor” of one gram per four milliliters of cannabis oil. Any reference to “grams” or “kilograms” in this MD&A includes both grams of dried cannabis and gram equivalents, unless otherwise noted and identified as dried grams or gram equivalents.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains certain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. All information contained herein that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of historical fact.
Forward-Looking Statements in this MD&A include, but are not limited to, statements with respect to:
•
the performance of our business and operations;
•
expectations regarding revenues, expenses and anticipated cash needs;
•
expectations regarding cash flow, liquidity and sources of funding;
•
our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact;
•
the expansion of our facilities, the costs and timing associated therewith and the receipt of approval from Health Canada to increase the maximum production limits and sales from the expanded facilities;
•
the expected growth in the number of customers using our cannabis;
•
the expected growth in our growing, production and supply chain capacities;
•
expectations with respect to future production costs;
•
expectations with respect to future sales and distribution channels, including the ability to secure additional provincial and territorial listings;
•
the expected methods to be used by the Company to distribute and sell cannabis;
•
the competitive conditions of the industry;
•
expectations regarding the ongoing impact on the Company of the legalization of cannabis for adult-use in Canada and the Company’s ability to participate in such market;
•
the ongoing impact of the legalization of additional cannabis types and forms for adult-use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets;
•
the legalization of the use of cannabis for medical- or adult-use in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized;
•
expectations regarding the regulation of the hemp industry in the U.S., including the promulgation of final regulations for the hemp industry by the U.S. Department of Agriculture (the “USDA”);
•
laws and regulations and any amendments thereto applicable to our business and the impact thereof;
•
our ability to execute on our strategy and the anticipated benefits of such strategy;
•
the competitive advantages and business strategies of the Company;
•
the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof;

5


•
the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis;
•
our future product offerings;
•
the ability to successfully create and launch brands and further create and scale hemp-derived consumer products, including through the Company’s acquisition of Redwood and derivative products in Canada;
•
the anticipated future gross margins of our operations;
•
expectations regarding capital expenditures;
•
the Company’s ability or plans to identify, develop, commercialize or expand the Company’s technology and research and development initiatives in cannabinoids, or the success thereof;
•
accounting standards and estimates;
•
expectations regarding the resolution of litigation and legal proceedings;
•
expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment (as defined herein);
•
expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third-party supply, tolling and manufacturing agreements;
•
expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic alliances and investees, including the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks, Inc. (“Ginkgo”);
•
expectations regarding the costs and benefits associated with our recent acquisitions, including the Redwood Acquisition and the Cronos Fermentation Acquisition (each as defined herein);
•
the anticipated benefits and impact of the Altria Investment; and
•
the potential exercise of the Altria Warrant (as defined herein), including proceeds to the Company that may result therefrom.

Certain of the Forward-Looking Statements contained herein concerning the cannabis industry are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of this industry, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While we are not aware of any misstatement regarding any industry or government data or other information presented herein that is based on such data, the cannabis industry involves risks and uncertainties that are subject to change based on various factors, which are described further below.
The Forward-Looking Statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including (i) management’s perceptions of historical trends, current conditions and expected future developments; (ii) our ability to generate cash flow from operations; (iii) general economic, financial market, regulatory and political conditions in which we operate; (iv) the production yields and output from Peace Naturals Project Inc. (“Peace Naturals”), Original BC Ltd. (“OGBC”) and our joint ventures, strategic alliances and investees; (v) consumer interest in our products; (vi) competition; (vii) anticipated and unanticipated costs; (viii) government regulation of our activities and products and in the areas of taxation and environmental protection; (ix) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (x) our ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; (xi) our ability to conduct operations in a safe, efficient and effective manner; (xii) our construction plans and timeframe for completion of such plans; (xiii) our ability to integrate our recent acquisitions into our existing operations; and (xiv) other considerations that are believed to be appropriate in the circumstances, including that the foregoing factors, collectively, are not expected to have a material impact on us. While management of the Company considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.
By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements in this MD&A. Such factors include, without limitation, the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected; disruption from the Altria Investment making it more difficult to maintain relationships with customers, employees or suppliers; future levels of revenues; consumer demand for cannabis products, including hemp-derived products; our ability to manage disruptions in credit markets or changes to our credit rating; future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses; the success or timing of completion of ongoing or anticipated capital or maintenance projects;

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business strategies, growth opportunities and expected investment; the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all); the potential effects of judicial or other proceedings on our business, financial condition, results of operations and cash flows; continued or further volatility in and/or degradation of general economic, market, industry or business conditions; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations; the anticipated effects of actions of third parties such as competitors, activist investors or federal (including U.S. federal), state, provincial, territorial or local regulatory authorities, self-regulatory organizations or plaintiffs in litigation; and the factors discussed under the heading “Risks and Uncertainties” in this MD&A and under the heading “Risk Factors” in our latest Annual Information Form dated March 25, 2019 (the “AIF”). Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements.
Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as at and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned that the Forward-Looking Statements may not be appropriate for any other purpose. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. Forward-Looking Statements contained herein are made as of the date of this MD&A and are based on the beliefs, estimates, expectations and opinions of management on the date such Forward-Looking Statements are made. The Company undertakes no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements, except as required by applicable law. The Forward-Looking Statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement.

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COMPANY OVERVIEW
General
Cronos Group is an innovative global cannabinoid company, with international production and distribution across five continents. The Company is engaged in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS™, a global health and wellness platform, two adult-use brands, COVE™ and Spinach™, and Lord Jones™, a hemp-derived cannabidiol (“CBD”) personal care brand.
Cronos Group’s common shares are listed on the Nasdaq Global Market (“NASDAQ”) and on the Toronto Stock Exchange (“TSX”) under the ticker symbol “CRON”.
The Company operates two wholly-owned license holders (“License Holders”) under the Cannabis Act (Canada) (the “Cannabis Act”) and its relevant regulations (the “Cannabis Regulations”). Our License Holders are Peace Naturals, which has production facilities near Stayner, Ontario, and OGBC, which has a production facility in Armstrong, British Columbia. Cronos Group has also established five strategic joint ventures in Canada, Israel, Australia and Colombia. The Company’s ownership interest in each of our License Holders and joint ventures is summarized in the table below.
 
 
Jurisdiction
 
Ownership
Interest(1)
 
Wholly Owned License Holders
 
 
 
 
 
 
Peace Naturals
 
Canada
 
 
100
%
OGBC
 
Canada
 
 
100
%
 
 
 
 
 
 
 
Joint Ventures
 
 
 
 
 
 
Cronos Israel(2)
 
Israel
 
 
90
%
Cronos Growing Company Inc. ("Cronos GrowCo")
 
Canada
 
 
50
%
NatuEra S.à r.l. ("NatuEra")
 
Colombia
 
 
50
%
Cronos Australia Pty. Ltd. ("Cronos Australia")(3)
 
Australia
 
 
31
%
MedMen Canada Inc. ("MedMen Canada")
 
Canada
 
 
50
%
(1) 
The Company defines ownership interest as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest shown above.
(2) 
Cronos Group holds a 70% equity interest in the cultivation company, and a 90% equity interest in each of the manufacturing, distribution and pharmacies companies of Cronos Israel (as defined herein).
(3) 
During the three and nine months ended September 30, 2019, the Company held a 50% ownership interest in Cronos Australia. On October 25, 2019, Cronos Australia completed its previously announced initial public offering, issuing 40 million new shares at an offering price of AUD$0.50 per share. Following completion of the initial public offering, the Company holds approximately 31% of the issued capital of Cronos Australia.

Strategy
Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities:
•
growing a portfolio of iconic brands that resonate with consumers;
•
developing a diversified global sales and distribution network;
•
establishing an efficient global supply chain; and
•
creating and monetizing disruptive intellectual property.

Altria Strategic Investment
In March 2019, the Company closed a $2.4 billion investment in the Company (the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. At closing, the Company issued to certain wholly-owned subsidiaries of Altria common shares of the Company and one warrant, which may be exercised in part or in full on or before March 8, 2023 (the “Altria Warrant”). Full exercise of the Altria Warrant is expected to provide the Company with approximately $1.4 billion of additional proceeds (subject to adjustment). As of the closing date, Altria beneficially held a 45% ownership interest in the Company (calculated on a non-diluted basis) and, if exercised in full, the exercise of the Altria Warrant

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would result in Altria holding a total ownership interest of approximately 55% (calculated on a non-diluted basis). The Company’s strategic partnership with Altria provides Cronos Group with additional financial resources, product development and commercialization capabilities, and deep regulatory expertise to better position the Company to compete in the global cannabis industry.
In connection with the closing of the Altria Investment, the Company and Altria entered into an investor rights agreement (the “Investor Rights Agreement”) pursuant to which Altria has certain governance rights, including the right to nominate a specified number of directors to the Company’s board of directors and approval rights over certain Company actions, and certain pre-emptive and top-up rights entitling Altria to maintain its pro rata beneficial ownership in the Company (these pre-emptive and top-up rights together, the “Altria Anti-Dilution Rights”). Under the Investor Rights Agreement, Altria has agreed to make Cronos Group its exclusive global partner for pursuing cannabis opportunities (subject to certain limited exceptions). Also, in connection with the closing, the Company and Altria entered into certain commercial support arrangements pursuant to which Altria provides the Company with consulting services.
Redwood Acquisition
The Company closed its previously announced acquisition (the “Redwood Acquisition”) of four Redwood Holding Group, LLC operating subsidiaries (collectively, “Redwood”). The transaction provides the Company with a leading U.S. hemp-based products platform, including hemp-derived CBD infused skincare and other consumer products that are sold online and through retail and hospitality partner channels in the U.S. under the brand, Lord Jones™.
During the third quarter of 2019, the Redwood Acquisition was unanimously approved by the board of directors of Redwood Holding Group, LLC and by the Company’s board of directors following the unanimous recommendation of a special committee of independent directors (“Special Committee”). A Special Committee composed entirely of independent directors of the Company was formed to evaluate and make recommendations to the board of directors since Michael Gorenstein, Chief Executive Officer and a director of Cronos Group, and Jason Adler, a director of Cronos Group, each held an indirect interest in Redwood Holding Group, LLC by way of their interest in certain funds affiliated with Gotham Green Partners, which were each limited liability company members of Redwood Holding Group, LLC.
Brand Portfolio
Cronos Group is committed to building a portfolio of iconic brands that responsibly elevate the consumer experience. Currently, in Canada, Cronos Group sells dried cannabis, pre-rolls and cannabis oils through wholesale and direct-to-client channels under its health and wellness platform, PEACE NATURALSTM, and under its two adult-use brands, COVETM and SpinachTM. In the U.S., the Company markets and distributes hemp-derived CBD infused skincare and other consumer products online and through retail and hospitality partner channels under the brand Lord Jones™.
 
https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronq32019mdaimage2.jpg
https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronq32019mdaimage3.jpg
https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronq32019mdaimage4.jpg
https://cdn.kscope.io/d3497063ca51ea86e7254d62674ebdff-cronq32019mdaimage5.jpg

Brand Positioning

Health & Wellness

Premium Adult-Use,
terpene-rich extracts, small batch runs

Mainstream Adult-Use

Luxury Adult Consumer Goods
Product Offering
Dried Cannabis, Oils
Dried Cannabis, Oils,
Pre-Rolls
Dried Cannabis, Pre-Rolls
CBD-infused Cosmetics, Oils, Supplements
Geographic Availability
Canada and Germany
Canada (British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and Prince Edward Island)
Canada (British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia and Prince Edward Island)
U.S.
 
 
 
 
 


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Health & Wellness
The Company currently distributes products under one health and wellness platform for the Canadian and international medical markets:
•
PEACE NATURALS™ is a global health and wellness platform committed to producing high-quality cannabis and cannabis products. PEACE NATURALS™ is focused on building and shaping the global medical cannabis market and promoting a whole health approach to wellness, which emphasizes diet and lifestyle. The brand’s goal is to improve the lives of others, one patient at a time.

Adult-Use
The Company has launched two brands for the Canadian adult-use market:
•
COVE™ is a premium positioned brand focused on creating crafted experiences. The brand utilizes an uncompromising approach to quality leveraging terpene-rich, proprietary strains that are grown in small-batch runs. COVE™’s indoor, strain-specific grow rooms allow for 1-on-1 plant care while maintaining the highest quality standards throughout the entire process. The goal of this premium brand is to Make Each Experience a DiscoveryTM.
•
SpinachTM is positioned as a mainstream adult-use brand with High Expectations™, geared towards a wide range of consumers that don’t take life too seriously and are looking for entertaining, fun ways to enhance activities. A lighthearted and playful brand, Spinach™ is focused on offering Farm-To-Bowl™ products that bring friends together and make experiences more enjoyable.
Adult Consumer Goods
The Company operates one brand for the adult consumer goods market in the U.S.:
•
Lord Jones™ is a luxury beauty and lifestyle brand focusing on high-quality hemp-derived CBD personal care products. The Lord Jones™ hemp-derived CBD-infused supplements, and skincare products are distributed online and to over 800 premium stores including retail brands Sephora, SoulCycle and Neiman Marcus. The Lord Jones™ brand aims to bring a calm sense of well-being and an elevated experience to all its consumers.

Global Sales and Distribution
Cronos Group is developing a diversified global sales and distribution network by leveraging established partners for their scale, salesforce and market expertise. The Company is also building a domestic distribution footprint in Canada through the direct-to-client medical market and the adult-use market, as well as a distribution footprint for hemp-derived CBD consumer products in the U.S. both online and through retail and hospitality partner channels.
Domestic Distribution
Medical Market
The Company currently sells dried cannabis and cannabis oils direct to clients through its health and wellness platform, PEACE NATURALSTM. These clients are typically sourced through physician and clinic referrals or word of mouth recommendations from existing clients.
Adult-Use Market
On October 17, 2018, Canada became the first G7 country and the second country in the world to legalize cannabis sales for adult-use at a federal level. The Company currently sells dried flower, pre-rolls and cannabis oils through its adult-use brands, COVETM and SpinachTM, to cannabis control authorities in Ontario, British Columbia, Alberta, Nova Scotia and Prince Edward Island, as well as to private-sector retailers in Saskatchewan. As of the date hereof, these six provinces together represent approximately 70% of the Canadian population. As the Company’s supply chain grows, and as a result of the implementation of Further Regulations (as defined herein) on October 17, 2019 which allows for the sale of additional cannabis derivative products and format factors starting in December 2019, the Company intends to increase penetration within existing markets and expand its distribution into additional provinces and territories in Canada. The rate of the Company’s supply chain growth remains subject to factors that are beyond the Company’s control, including evolving regulations, the development of sufficient infrastructure and retail roll-out across Canada.


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MedMen Canada Joint Venture
In March 2018, the Company entered into a strategic joint venture with MedMen Enterprises USA, LLC (“MedMen”). Each of the Company and MedMen owns a 50% equity interest in the joint venture, MedMen Canada, and has equal representation on the board of directors of MedMen Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 20 years. MedMen Canada is currently in the process of obtaining the necessary licenses, permits, and retail locations, in provinces where private retail is permitted under applicable law, to create a premium MedMen branded retail chain in Canada modelled after MedMen’s iconic retail concept in Los Angeles, Las Vegas and Manhattan. Commencement of operations will be subject to obtaining such licenses and permits.
International Distribution
United States
In September 2019, the Company completed the Redwood Acquisition. Redwood manufactures, markets and distributes hemp-derived CBD infused skincare and other consumer products online and through retail and hospitality partner channels in the U.S. under the brand Lord Jones™. Redwood’s products use pure hemp oil that contains natural phytocannabinoids and terpenes found in the plant. Cronos Group plans to use its resources to capitalize on the significant demand to further create and scale hemp-derived consumer products and brands.
Germany
In October 2017, the Company announced its strategic partnership and five-year exclusive distribution agreement with G. Pohl-Boskamp GmbH & Co. KG (“Pohl-Boskamp”), an international pharmaceutical manufacturer and distributor with a German distribution network of pharmacies, to distribute PEACE NATURALSTM branded cannabis products within the German medical market. The Company currently exports dried cannabis to Germany and announced its first shipment to Pohl-Boskamp in December 2017.
Poland
In June 2018, Cronos Group entered into a strategic distribution partnership with Delfarma Sp. Zo.o (“Delfarma”). Delfarma is a pharmaceutical wholesaler with a distribution network of over 5,000 pharmacies and more than 200 hospitals that collectively reaches approximately 40% of the Polish domestic market. Under the five-year exclusive distribution agreement, Cronos Group will supply PEACE NATURALSTM branded cannabis products to Delfarma for distribution within the Polish medical market. The Company and Delfarma are currently in the process of obtaining the necessary regulatory approvals to sell cannabis products in Poland.
Other International Markets
The Company intends to supply the medical cannabis markets in Israel, Latin America, and Australia through the operations of Cronos Israel, NatuEra, and Cronos Australia, respectively, once operational.
Global Supply Chain
Cronos Group is focused on establishing an efficient global supply chain by developing industry-leading methodologies and best practices at Peace Naturals, the Company’s center of excellence, and leveraging this expertise to create beneficial domestic and international production partnerships. The Company plans to develop a global supply chain, which will employ a combination of wholly-owned production facilities, third-party suppliers and global production partnerships all of which support the manufacturing of cannabinoid-based consumer goods.
Realignment of key performance indicators subsequent to the close of the Redwood Acquisition
In line with Cronos Group’s strategy to create sustainable long-term value in the areas of research and development and marketing innovative branded products, the Company will no longer disclose its Estimated Annual Rated Capacity by facility.  During the period, the Company continued to enter new markets and product categories, and its strategy of establishing an efficient global supply chain has grown to include a number of third party supply, tolling, and contract manufacturing arrangements. As a result of these operational improvements and the evolution of the Company’s business, certain disclosures related to facility square footage and production capacity have become less reliably correlated to the Company’s performance and future prospects, and are therefore no longer considered by management to be key performance indicators, and are no longer disclosed.

11


Domestic Supply Chain
Peace Naturals
Peace Naturals operates a production facility (the “Peace Naturals Campus”) licensed for cannabis production and the manufacturing of certain cannabis products. The production processes at the Peace Naturals Campus are Good Manufacturing Practices (“GMP”) certified under relevant European Economic Area GMP directives by the national competent authority of Germany.
The Peace Naturals Campus is engaged in cultivation, processing, finishing, packaging and shipping activities, as well as tissue culture and micro propagation, providing a year-round supply of cannabis for extraction. The Peace Naturals Campus also engages in research and development to pilot various production technologies, with any tests yielding favorable operational improvements evaluated for dissemination to the Company’s other domestic and international partnership facilities. The facilities at the Peace Naturals Campus also focus on developing new technologies for value-added product manufacturing and research and development on cannabinoid formulations, delivery systems and product development.
OGBC
OGBC primarily engages in cultivation and processing operations. OGBC currently engages in inter-company bulk transfers of dried cannabis flower to Peace Naturals, where it is processed and packaged for sale and sold under the Company’s brand portfolio.
Cronos GrowCo Joint Venture
In July 2018, the Company entered into a strategic joint venture with a group of investors led by Bert Mucci (the “Greenhouse Partners”), a leading Canadian large-scale greenhouse operator. Each of the Company and the Greenhouse Partners owns a 50% equity interest in the joint venture, Cronos GrowCo, and has equal representation on its board of directors. Cronos GrowCo is constructing a purpose-built greenhouse and manufacturing facility in Kingsville, Ontario. Construction of the greenhouse has commenced. The Company expects to complete the greenhouse structure in the fourth quarter of 2019 and expects the greenhouse to become operational in phases in the second half of 2020. Completed construction of the greenhouse is subject to obtaining the relevant building and occupancy permits and other customary approvals. Commencement of operations at Cronos GrowCo will be subject to obtaining the appropriate licenses under applicable law.
Third Party Supply and Manufacturing Agreements
In May 2019, the Company announced a tolling agreement with MediPharm Labs Inc. (“MediPharm”), where the Company may supply bulk quantities of dried cannabis to MediPharm for processing on a fee for service basis into bulk resin or other cannabis oil derivative products.
In May 2019, the Company announced a take or pay supply agreement with MediPharm for cannabis resin (the “MediPharm Supply Agreement”). MediPharm will supply the Company with approximately $30.0 million of cannabis resin over 18 months, and, subject to certain renewal and purchase options, potentially up to $60.0 million over 24 months.
In July 2019, the Company entered into a contract manufacturing agreement with Heritage Cannabis Holdings Corp. (“Heritage”), a vertically integrated cannabis producer. Heritage will be responsible for providing cannabis extract and services related to the filling and packaging of vaporizer devices for the Canadian cannabis adult-use and medical markets.
International Supply Chain
Cronos Israel Joint Venture
In September 2017, the Company announced a strategic joint venture in Israel (“Cronos Israel”) with the Israeli agricultural collective settlement Kibbutz Gan Shmuel (“Gan Shmuel”) for the production, manufacture, and distribution of medical cannabis. Cronos Israel consists of four companies: (i) cultivation (encompassing nursery and cultivation operations), (ii) manufacturing, (iii) distribution and (iv) pharmacies (the “Cronos Israel Companies”). The Company holds a 70% equity interest in the cultivation company and a 90% equity interest in each of the manufacturing, distribution, and pharmacies companies of Cronos Israel. Gan Shmuel holds the remaining equity interest in each of the Cronos Israel Companies. Each of Cronos Group and Gan Shmuel has one board member nominee on the board of directors of each of the Cronos Israel Companies. Cronos Group has the right to nominate a further two members to the board of each Cronos Israel Company, and, until such time, its nominated director possesses two votes.

12


The initial phase of construction of Cronos Israel involves the construction of a greenhouse and a manufacturing facility that will be utilized for analytics, formulation and R&D. The construction of the greenhouse was completed in the first half of 2019, and construction of the manufacturing facility was completed in the third quarter of 2019.
In early 2017, the Medical Cannabis Unit of the Israeli Ministry of Health (the “Yakar”) granted Gan Shmuel preliminary licenses (“Israel Codes”) to establish four distinct cannabis commercial operations: (i) propagation and breeding, (ii) commercial cannabis cultivation, (iii) extraction, formulation and packaging, and (iv) patient care and distribution. The Israel Codes were successfully transferred to Cronos Israel in May 2018. Commencement of cultivation, manufacturing and distribution operations at Cronos Israel is subject to final inspection by the Yakar and the issuance of final cannabis licenses.
In January 2019, the Israeli government approved the export of medical cannabis from Israel, which would allow medical cannabis license holders that meet certain quality standards to export medical cannabis, under the supervision of the Israeli authorities, to United Nations’ Single Convention on Narcotic Drugs-signatory countries that have explicitly approved the import of cannabis. Subject to obtaining all necessary licenses and permits, the Company intends to export medical cannabis products from Cronos Israel once production operations have commenced.
NatuEra Joint Venture – Colombia
In August 2018, the Company announced a strategic joint venture with an affiliate of Agroidea SAS (“AGI”), a leading Colombian agricultural services provider with over 30 years of experience and expertise in management of industrial-scale production and R&D in horticultural operations for export from Colombia. Each of the Company and AGI owns a 50% equity interest in the joint venture, NatuEra. Cronos Group has three manager nominees on the board of managers of NatuEra, while AGI has four manager nominees on the board of managers. NatuEra intends to develop, cultivate, manufacture, and export cannabis-based medical and consumer products for the Latin American and global markets. NatuEra plans to develop its initial cultivation and manufacturing operations with a purpose-built, GMP-standard facility located in Cundinamarca, Colombia. Construction of the GMP-standard facility has commenced, and completion of construction is subject to obtaining the relevant permits and other customary approvals. The Colombian Ministry of Justice and Law granted a wholly-owned subsidiary of NatuEra (i) a license to cultivate non-psychoactive cannabis, (ii) a license to cultivate psychoactive cannabis, and (iii) a license to manufacture cannabis derivative products for domestic use and export. In addition, the Colombian Agricultural Institute has registered a wholly-owned subsidiary of NatuEra as a certified psychoactive and non-psychoactive seed producer and the National Narcotics Fund has registered such subsidiary as a manufacturer of cannabis derivatives products for national use and export. Commencement of operations at the facility will be subject to obtaining the remaining appropriate authorizations under applicable law.
Cronos Australia Joint Venture
In February 2018, the Company announced a strategic joint venture, Cronos Australia, with NewSouthern Capital Pty. Ltd. (“NewSouthern”) for the research, production, manufacture and distribution of medical cannabis. Prior to the closing of the Cronos Australia IPO (described below), each of the Company and NewSouthern owned a 50% equity interest in Cronos Australia and had equal representation on the board of directors of Cronos Australia. The Company believes that Cronos Australia will serve as its hub for Australia, New Zealand and South East Asia, bolstering the Company’s distribution network in the Australia and Asia-Pacific region.
In February 2018, Cronos Australia was granted a medicinal cannabis cultivation license and a medicinal cannabis research license by the Office of Drug Control (the “ODC”). In June 2018, Cronos Australia was granted a medicinal cannabis manufacture license by the ODC.
Cronos Australia has also received an import license from the ODC, which, together with Cronos Australia maintaining all necessary import permits, will enable it to import PEACE NATURALSTM branded products for sale in the Australian medical market. Cronos Australia has also received the licenses and approvals which, together with the applicable import licenses and permits, authorizes the sale of finished PEACE NATURALSTM branded products. Cronos Australia has also received an export license from the ODC to export certain medical cannabis products, subject to receipt of all necessary permits.

13


Intellectual Property Initiatives
Cronos Group is committed to building disruptive intellectual property, by advancing cannabis and cannabinoid research, technology and product development. Among others, our intellectual property development activity includes the following key initiatives.
Cronos Device Labs
In April 2019, Cronos Group established Cronos Device Labs Ltd. (“Cronos Device Labs”), the Company’s Israel-based global R&D center for vaporizer innovation. The state-of-the-art facility is equipped with advanced vaporizer technology and analytical testing infrastructure and is home to an experienced team of product development talent. The Cronos Device Labs’ team, with over 80 years of combined experience in vaporizer development, is comprised of product designers, mechanical, electrical and software engineers, and analytical and formulation scientists. This global R&D center is expected to significantly enhance Cronos Group’s innovation capabilities and accelerate development of next-generation vaporizer products specifically tailored to cannabinoid use.
Ginkgo Strategic Partnership
In September 2018, the Company launched its R&D partnership with Ginkgo that could ultimately enable the Company to produce certain cultured cannabinoids at commercial scale at a fraction of the cost of traditional cultivation. These cultured cannabinoid molecules are identical to those produced by plants grown with traditional cultivation but are created by leveraging the power of biological manufacturing via fermentation. In addition to THC and CBD, these cultured cannabinoids include rare cannabinoids that are economically impractical or nearly impossible to produce at high purity and scale through traditional cultivation. If the Ginkgo Strategic Partnership is ultimately successful, Cronos Group expects to be able to produce large volumes of these cultured cannabinoids from custom yeast strains without incurring significant capital expenditures to build new cultivation and extraction facilities.
Pursuant to the collaboration and license agreement dated September 1, 2018 between Ginkgo and the Company (the “Ginkgo Collaboration Agreement”), Ginkgo will work with the Company on the R&D of microorganisms capable of producing certain target cannabinoids in a scalable and highly efficient manner. The Company will have the exclusive global right to use and commercialize key patented intellectual property related to the production of the target cannabinoids. Assuming all milestones in the Ginkgo Collaboration Agreement are met, the transaction had an aggregate value (as of July 17, 2018) of US$100.0 million in Cronos Group common shares, to be issued in milestone-contingent tranches. These milestones each relate to the production of certain target cannabinoids for less than US$1,000 per kilogram of pure cannabinoid at a scale of at least 200 liters. The Company and Ginkgo have targeted three years to reach the milestone events for each of the target cannabinoids. The Company will fund certain R&D and foundry expenses throughout the development process, which are expected to amount to approximately US$22.0 million, subject to the achievement of certain milestones. On May 9, 2019, the Ginkgo Collaboration Agreement was amended to expand the scope of services provided by Ginkgo to include support for the Company’s commercial manufacture of cultured cannabinoids.
Ginkgo has undertaken to perform its R&D work and services in compliance with all applicable laws regarding controlled substances. In November 2018, Ginkgo received from the U.S. Drug Enforcement Agency (the “DEA”) a DEA Researcher (I) Controlled Substance Registration Certificate and received a Researcher Controlled Substance Registration Certificate from the Massachusetts Department of Public Health to conduct specified research involving cannabinoids. The Company intends to produce and distribute the target cannabinoids globally, where legally permissible, and has received confirmation from Health Canada that this method of production is permitted under the Cannabis Act.
Technion Research Agreement
In October 2018, the Company entered into a sponsored research agreement with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”) to explore the use of cannabinoids and their role in regulating skin health and skin disorders. The preclinical studies will be conducted by Technion over a three-year period and will focus on three skin conditions: acne, psoriasis and skin repair.
Research will be led by Technion faculty members Dr. David “Dedi” Meiri and Dr. Yaron Fuchs, each one of the world’s leading researchers in cannabis and skin stem cell research, respectively. Dr. Meiri heads the Laboratory of Cannabis and Cancer Research with vast experience in cannabis and endocannabinoid research. Dr. Fuchs heads the Laboratory of Stem Cell Biology and Regenerative Medicine with years of experience in the biology of the skin and its pathologies. Development and implementation of the research will be conducted at Technion’s Laboratory of Cancer Biology and Cannabis Research and the Lorry I. Lokey Interdisciplinary Center of Life Sciences and Engineering in Haifa, Israel.

14



Cronos Fermentation
In July 2019, the Company closed the acquisition (the “Cronos Fermentation Acquisition”) of certain assets from Apotex Fermentation Inc. (“AFI”), including a GMP compliant fermentation and manufacturing facility in Winnipeg, Manitoba. The state-of-the-art facility, which will operate as “Cronos Fermentation”, includes fully equipped laboratories covering microbiology, organic and analytical chemistry, quality control and method development as well as two large scale microbial fermentation production areas with a combined production capacity of 102,000 liters, three downstream processing plants, and bulk product and packaging capabilities. The acquisition is expected to provide the fermentation and manufacturing capabilities Cronos Group needs in order to capitalize on the progress underway with Ginkgo, by enabling the Company to produce the target cannabinoids contemplated under the Ginkgo Collaboration Agreement at commercial scale with high quality and high purity.
The Company is in the process of aligning specifications for the equipment and manufacturing required for the production and downstream processing of cannabinoids. To support this work, a team of engineers, scientists, production and quality assurance personnel that previously worked at the facility joined the Company in November, 2019. Commercial production at the facility is subject to completion of the equipment alignment for cannabinoid-based production, the receipt of the appropriate licenses from Health Canada for the production of cultured cannabinoids under the Cannabis Act and the achievement of milestones under the Ginkgo Strategic Partnership.
Minority Investments
The Company has also invested in and made loans to cannabis-related companies and License Holders.
In January 2019, the Company sold its shares of Canopy Growth Corporation for net proceeds of approximately $0.5 million.
In March 2019, the Company sold its approximate 19% equity interest in Whistler to Aurora Cannabis Inc. (“Aurora”) in an all-share transaction (the “Whistler Transaction”). In connection with the closing of the Whistler Transaction, the Company received approximately $24.7 million in value of Aurora common shares, which the Company subsequently sold for approximately $25.6 million in cash. Subject to the satisfaction of certain specified milestones, the Company expects to receive approximately $6.0 million in additional value of Aurora common shares. Neither the attainment of any milestones nor the persistence of specific market conditions can be assured.
During the three months ended September 30, 2019, the Company’s investment in Evergreen Medicinal Supply Inc of $0.3 million was determined to be impaired. The Company assessed that the fair value of the investment is $nil as Health Canada has suspended Evergreen’s cultivation license under the Cannabis Act.
INDUSTRY AND MARKET TRENDS AND REGULATORY DEVELOPMENTS
The Company’s business and activities are heavily regulated in all jurisdictions in which Cronos Group currently operates. Our AIF contains a description of the regulatory framework applicable to our business as of the date of the AIF. The following provides a description of certain recent regulatory developments since the fiscal year ended December 31, 2018 that have the potential to impact the Company’s financial performance.
Amendments to the Cannabis Regulations
On October 17, 2019, the Regulations Amending the Cannabis Regulations came into force (the “Further Regulations”). The Further Regulations amend the Cannabis Act and Cannabis Regulations to, among other things, allow the production and sale of extracts (including concentrates), edibles and topicals by parties holding the appropriate licenses in addition to dried cannabis, fresh cannabis, cannabis seeds, cannabis plants and cannabis oil. The first notices of new cannabis products in respect of the new product forms authorized under the Further Regulations could be submitted as of October 17, 2019 with sale being permitted 60 calendar days after the applicable date of submission. The Company has submitted the necessary notices of new cannabis products (such as vaporizers) in respect of the new product forms for sales of such new products beginning the fourth quarter of 2019.
Provincial and Territorial Distribution Frameworks for Regulated Adult-Use Cannabis
While the Cannabis Act and Cannabis Regulations provide for the regulation of the commercial production, processing, distribution and sale (for medical purposes) of cannabis and related matters by the federal government of Canada, the provinces and territories of Canada regulate the distribution, sale and consumption of adult-use cannabis, such as retail licensing, minimum age requirements, places where cannabis can be consumed, and a range of other matters. The governments of every Canadian province and territory

15


have implemented regulatory regimes for the distribution, sale and use of adult-use cannabis within those jurisdictions; however, these regulatory regimes continue to evolve over time.
Update to the Health Canada Licensing Regime
On May 8, 2019, Health Canada changed its licensing criteria for new applicants for licenses to cultivate cannabis, process cannabis, or sell cannabis for medical purposes. These categories of license applicants are now required to have a site that meets all the requirements of the Cannabis Regulations at the time of their application, as well as satisfying any other applicable application criteria. With respect to existing applications, Health Canada has indicated it will complete a high-level review of all applications currently in the queue. If an application passes this review, Health Canada will provide a status update letter to the applicant. Once the current applicant has a completed site that meets the regulatory requirements, Health Canada will continue reviewing the application in priority based on the original application date.
Hemp Regulatory Framework in the U.S.
After the closing of the Redwood Acquisition, the Company derives a portion of its revenues from the manufacture, marketing and distribution of hemp-derived cosmetic products and other hemp-derived consumer products, including food products and dietary supplements, online and through retail and hospitality partner channels in certain states in the U.S. All hemp-derived products produced and sold by the Company constitute hemp (i) under the Agricultural Improvement Act of 2018 (the “2018 Farm Bill”) or (ii) the applicable state-law equivalent in all states in which the Company produces and sells such hemp-derived products. The 2018 Farm Bill was enacted in the U.S. on December 20, 2018. Prior to this enactment, cannabis was scheduled as a controlled substance (marijuana) under the United Stated Controlled Substances Act (the “CSA”) with limited exemptions based on the portion of the cannabis plant. The 2018 Farm Bill, among other things, removed hemp (which is defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis”) and its derivatives, extracts and cannabinoids, including CBD, derived from hemp, from the definition of “marijuana” in the CSA, thereby removing hemp and its derivatives as controlled substances. The 2018 Farm Bill also amended the Agricultural Marketing Act of 1946 to allow for production and sale of hemp and its derivatives in the U.S.

The 2018 Farm Bill tasks the USDA with promulgating regulations in relation to the cultivation and production of hemp. The 2018 Farm Bill also directs the USDA to promulgate federal regulations that would apply to the production of hemp in every state which does not put forth a state hemp plan for approval by the USDA. There is uncertainty concerning the timing and manner of implementation of the 2018 Farm Bill. The USDA has proposed draft interim final rules on domestic hemp production and has released guidelines for sampling and testing procedures. There is a 60-day public comment period on the interim final rules, following which the USDA will begin its process to approve state plans. The USDA has committed to draft and publish a final set of rules within two years, however, the timing and content of the USDA’s regulations cannot be assured.

Additionally, states may adopt regulatory schemes that impose different levels of regulation and costs on the production of hemp. Because states have not yet obtained USDA approval for state plans for commercial hemp production and cannot do so until the USDA promulgates regulations to review those plans, the timing of the adoption of state plans remains uncertain. Moreover, the 2018 Farm Bill provides that its provisions do not preempt or limit state laws that regulate the production of hemp. Accordingly, some states may choose to restrict or prohibit some or all hemp production or sales within the state and variances in states’ laws and regulations on hemp are likely to persist. Further, each state has discretion to develop and implement its own laws and regulations governing the manufacturing, marketing, labeling, and sale of hemp products, which will create a patchwork of different regulatory schemes applicable to such products.

Under the 2018 Farm Bill, the FDA has retained authority over the Federal Food, Drug, and Cosmetic Act-regulated products (e.g., drugs (human and animal), food (human and animal), dietary supplements and cosmetics) containing hemp hemp-derived ingredients, including CBD. Moreover, states have retained regulatory authority through their own analogues to the Federal Food, Drug and Cosmetic Act, and the states may diverge from the federal treatment of the use of hemp as, or in, food, dietary supplements or topical cosmetic products.

The FDA has consistently taken the position that CBD, whether derived from hemp or cannabis, is prohibited from use as an ingredient in food and dietary supplements. This stems from its interpretation of the exclusionary clauses in the Federal Food Drug & Cosmetic Act because CBD has been approved as a prescription drug and is the subject of substantial clinical investigations as a drug, which have been made public. The exclusionary clauses under the Federal Food Drug & Cosmetic Act provide that a substance that has been approved and/or has been subject to substantial clinical investigations as a drug may not be used in a food or dietary supplement, unless the substance was first marketed in a food or dietary supplement prior to the initiation of substantial clinical investigations of the substance as a drug.


16


The FDA has not issued regulations that elaborate on the exclusionary clauses and the FDA has not taken any enforcement action in the courts asserting a violation of the exclusionary clauses. To date, the FDA has issued several warning letters to companies unlawfully marketing CBD products. In many of these cases, the manufacturer made unsubstantiated claims about the product being able to treat serious medical conditions (e.g., cancer, Alzheimer’s disease, opioid withdrawal and anxiety) and had not obtained drug approvals. Some of these letters were co-signed with the Federal Trade Commission (“FTC”) and cited the companies for making egregious claims about the efficacy of CBD which were not substantiated by competent and reliable scientific evidence. Recently, the FDA has issued warning letters against dietary supplement manufacturers for manufacturing CBD supplements in licensed facilities in addition to various other violations. Importantly, these recent warning letters did not object to the CBD dietary supplements on the basis of any claims made – instead, the FDA cited the manufacturer on the basis that CBD was not a permissible dietary supplement ingredient.

The FDA has stated that it recognizes the potential opportunities and significant interest in drug and other consumer products containing CBD, is committed to evaluating the agency’s regulatory policies related to CBD and has established a dedicated internal working group to explore potential pathways for various types of CBD products to be lawfully marketed. The FDA held a public hearing in May 2019 to obtain scientific data and information about the safety, manufacturing, product quality, marketing, labeling and sale of products containing cannabis or cannabis-derived compounds and has indicated that it plans to report its progress by early Fall 2019. The rules and regulations and enforcement in this area continue to evolve and develop.

For more information regarding certain risks facing our business in connection with the hemp regulatory framework in the U.S., see the section below entitled “Risks and Uncertainties –Risks Relating to the Company’s U.S. Hemp Business.”
Restrictions on Business Activities in the U.S.
The Company currently does not engage in any commercial activities related to the cultivation, distribution or possession of cannabis in the U.S. The Ginkgo Strategic Partnership contemplates the performance of licensed R&D activities in the U.S., in order to produce cultured cannabinoids, in full compliance with all applicable laws regarding controlled substances. In addition, the Company engages in the manufacture, marketing, and distribution of hemp-derived cosmetic products and other hemp-derived consumer products online and through retail and hospitality partner channels in certain states in the U.S. From time to time, the Company may have minority interests in non-U.S. cannabis companies (as disclosed in the AIF). Based on what is publicly disclosed by these minority investees, the Company is not aware of any U.S. cannabis-related activities of such minority investees as of the date of this MD&A.
Additional information with respect to the Company’s business and applicable regulatory frameworks are included in the AIF.


17


FINANCIAL HIGHLIGHTS
($ in 000s, except where noted otherwise)
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
Change
 
September 30,
 
Change
 
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
 
2019
(Restated)
 
2018
 
$
(Restated)
%
(Restated)
Financial Results
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Revenue
 
$
7,638

 
$
3,760

 
$
3,878
 
 
103
%
 
$
21,869

 
$
10,099

 
$
11,770
 
117
%
Gross Margin before Fair Value Adjustments(1)
 
 
(25%)

 
 
55
%
 
--
 
--
 
 
 
26
%
 
 
55
%
 
--
--
 
Adjusted EBITDA(2)
 
$
(31,109)

 
$
(3,201)

 
$
(27,908)
 
 
872
%
 
$
(59,247)

 
$
(7,097)

 
$
(52,150)
 
735
%
Canadian Extract Sales (% of Net Product Revenue)
 
 
15
%
 
 
29
%
 
--
 
--
 
 
 
21
%
 
 
19
%
 
--
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Results for Non-U.S. Markets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kilograms Sold
 
 
1,167

 
 
514

 
 
653
 
 
127
%
 
 
3,420

 
 
1,472

 
 
1,948
 
132
%
Net Product Revenue / Gram Sold
 
$
5.76

 
$
7.18

 
$
(1.43)
 
 
(20%)

 
$
6.09

 
$
6.74

 
$
(0.65)
 
(10%)

Cost of Sales before Fair Value Adj. / Gram Sold
 
 
7.92

 
 
3.28

 
 
4.64
 
 
141%

 
 
4.66

 
 
3.06

 
 
1.60
 
52%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
 
$
1,475,459

 
$
41,482

 
$
1,433,977
 
 
3,457
%
 
 
 
 
 
 
 
 
 
 
 
Short-Term Investments
 
 
517,064

 
 
—

 
 
517,064
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
545,514

 
 
—

 
 
545,514
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
See “General Matters – Definitions” for information related to Gross Margin before Fair Value Adjustments.
(2) 
See “General Matters – Non-IFRS Measures” for information related to Adjusted EBITDA.
(3) 
Dollar amounts are as of the last day of the period indicated.

•
Net revenue was $7.6 million in Q3 2019, representing a 103% increase from $3.8 million in Q3 2018, primarily driven by the launch of the adult-use market in Canada and the inclusion of Redwood from the date of closing on September 5, 2019 to the end of the quarter. Net revenue decreased 25% quarter-over-quarter from $10.2 million in Q2 2019, primarily driven by decreased sales in domestic dried cannabis market and offset by the inclusion of Redwood.
•
1,167 kilograms were sold in the non-U.S. market in Q3 2019, representing a 127% increase from 514 kilograms sold in Q3 2018, primarily driven by increased cannabis production and the launch of the adult-use market in Canada. Kilograms sold decreased 26% quarter-over-quarter from 1,584 kilograms sold in Q2 2019, primarily driven by decreased domestic dried cannabis sales.
•
Cost of sales before fair value adjustments per gram sold for the non-U.S. market was $7.92 in Q3 2019, representing a 141% increase from $3.28 in Q3 2018 and a 163% increase from $3.01 in Q2 2019. The increase quarter-over-quarter was driven by higher production cost on a per gram basis and the impact of inventory written down in Q3 2019 to the value of $4.9 million, representing a increase of 129%.


18


($ in 000s, except where noted otherwise)
Third
 
Second
 
 
 
Quarter
 
Quarter
 
Change
 
2019
(Restated)
 
2019
 
$
(Restated)
 
%
(Restated)
Financial Results
 
 
 
 
 
 
 
 
 
 
 
Net Revenue
$
7,638

 
$
10,237

 
$
(2,599)
 
 
(25%)

Gross Margin before Fair Value Adjustments(1)
 
(25%)

 
 
53
%
 
--
 
--
 
Adjusted EBITDA(2)
$
(31,109)

 
$
(17,772)

 
$
(13,337)
 
 
75
%
Canadian Extract Sales (% of Net Product Revenue)
 
15
%
 
 
20
%
 
--
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Results for Non-U.S. Markets
 
 
 
 
 
 
 
 
 
 
 
Kilograms Sold
 
1,167

 
 
1,584

 
 
(417)
 
 
(26%)

Net Product Revenue / Gram Sold
$
5.76

 
$
6.44

 
$
(0.69)
 
 
(11%)

Cost of Sales before Fair Value Adj. / Gram Sold
 
7.92

 
 
3.01

 
 
4.91
 
 
163%

 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet(3)
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,475,459

 
$
1,579,231

 
$
(103,772)
 
 
(7%)

Short-Term Investments
 
517,064

 
 
744,936

 
 
(227,872)
 
 
(31%)

Derivative Liabilities
 
545,514

 
 
1,399,594

 
 
(854,080)
 
 
(61%)

(1) 
See “General Matters – Definitions” for information related to Gross Margin before Fair Value Adjustments.
(2) 
See “General Matters – Non-IFRS Measures” for information related to Adjusted EBITDA.
(3) 
Dollar amounts are as of the last day of the period indicated.

QUARTERLY BUSINESS HIGHLIGHTS AND RECENT DEVELOPMENTS POST QUARTER-END
Establishing an efficient global supply chain
Peace Naturals Campus operational updates
Subsequent to the third quarter of 2019, the Company has commenced certain initiatives to better align its evolving business and its four strategic pillars. Certain facilities at the Peace Naturals Campus are intended to be repurposed from cultivation activities to provide for the following activities: additional R&D activities focused on new technologies for value-added product manufacturing; production and manufacturing of derivative products; and increased vault and warehousing capabilities.
The Company is currently assessing the impact of these anticipated changes and planned improvements to the Peace Naturals Campus, which is expected to result in the Company recording a pre-tax one-time charge for certain fixed assets, biological assets, and other operating costs. The Company, at this time, estimates the pre-tax one-time charge to be no more than $15.0 million, the majority of which is expected to be recorded in the fourth quarter of 2019.
Cronos Israel moves closer to cultivation
The Cronos Israel facility continues to move closer to cultivation. Construction of Cronos Israel’s greenhouse was completed in the first half of 2019, while its manufacturing facility was completed in the third quarter of 2019. Cronos Israel is now beginning the GMP certification process for the facility, which is expected to occur in phases throughout 2020 in relation to the manufacturing processes for bottled flower, pre-rolls, and oil.
Financing provided to Cronos GrowCo for construction of additional domestic greenhouse production capacity
On August 23, 2019, the Company entered into a credit agreement, as administrative agent and lender, with Cronos GrowCo, as borrower, in respect of a $100 million secured non-revolving term loan credit facility. Cronos GrowCo intends to use the funds available under this credit facility to fund the construction of the previously announced custom-built greenhouse and for general operating purposes.
The credit facility will mature on March 31, 2031 and will bear interest at varying rates based on the Canadian prime rate. Interest began to accrue as of the closing date and will be payable on a quarterly basis until maturity, except that any interest accrued prior to March 31, 2021 will be payable not later than December 31, 2021. The credit facility is secured by substantially all present and after acquired property of Cronos GrowCo and its subsidiaries. The Greenhouse Partners have also provided a limited recourse

19


guarantee in favour of the Company, secured by the Greenhouse Partners’ shares in Cronos GrowCo. As of September 30, 2019, Cronos GrowCo had borrowed $27.5 million against the credit facility.
MediPharm Contract Manufacturing Agreement
On September 18, 2019, the Company entered into a contract manufacturing agreement with MediPharm. MediPharm will be responsible for providing services related to the filling and packaging of vaporizer devices for the Canadian cannabis adult-use and medical markets.
Developing a diversified global sales and distribution network
Initial public offering of Cronos Australia
On October 25, 2019, Cronos Australia issued 40 million new shares at an offering price of AUD $0.50 per share (the “Cronos Australia IPO”). Cronos Australia began trading on the Australian Securities Exchange in early November 2019.
Established in February 2018, Cronos Australia was a 50/50 joint venture between Cronos Group and NewSouthern Capital Pty Ltd., and is led by Rodney Cocks and Peter Righetti. The launch marked a significant milestone in Cronos Group’s commitment to advancing cannabis research and producing and distributing products and brands at a global scale. Upon completion of the Cronos Australia IPO, Cronos Group holds approximately 31 percent of the issued capital of Cronos Australia.
Growing a portfolio of iconic brands that resonate with consumers
Launch of the PEACE+™ product line to the U.S. hemp-derived CBD market
The Company is launching PEACE+™, a new hemp-derived CBD brand in the U.S. PEACE+™ is about more than making a better, high-quality hemp-derived CBD product; it stems from the belief that wellbeing can lead to a better world, full of positivity and possibility. It’s a belief that extends beyond the products and into everything the brand seeks to do and stand for. PEACE+™ intends to sell hemp-derived CBD tincture products through a test market of approximately 1,000 retail stores in the U.S. The Company intends to utilize Altria’s distribution network to access the U.S. convenience store retail channel and gain consumer insights prior to expanding distribution more broadly. The launch will be supported by the Redwood management team.
Enhancing our leadership team
Realignment of the organization subsequent to the close of the Redwood Acquisition
On September 20, 2019, the Company enacted a realignment of its organizational structure at the senior leadership level in order to enhance its ability to embrace rapid growth and expansion, and to enter new markets and product categories. The Company appointed Jeff Jacobson to a newly created General Manager, Canada and Europe role. Jeff Jacobson is now responsible for overseeing territory-specific sales and operations in the Canadian and European markets. Mr. Jacobson was previously Cronos Group’s Vice President of Sales and Business Development.
In the U.S., Robert Rosenheck, co-founder of Lord Jones™, remains CEO of Redwood, with oversight of the U.S. hemp business. Prior to launching Lord Jones™, Mr. Rosenheck was a partner at CAPOBIANCO, a Los Angeles-based agency with clients including General Mills, Sony Music, Credit Suisse, Paramount Pictures, and Random House Publishing Group.
With this shift in resources, David Hsu, Chief Operating Officer, and William Hilson, Chief Commercial Officer, will be transitioning from the Company. The Cronos Group team extends their gratitude to Mr. Hsu and Mr. Hilson for their service and contributions to the Company.
Nomination of Jody Begley to Board of Directors
On September 30, 2019, in connection with its investment in the Company, Altria nominated Jody Begley to the Cronos Group board of directors. Mr. Begley is currently Senior Vice President, Tobacco Products for Altria in which he oversees Altria's core tobacco businesses as well as its Engineering, Quality and Product Development support. Altria’s nomination replaces one of its previous director nominees, K.C. Crosthwaite.
Prior to Mr. Begley’s current role at Altria, he served as President and General Manager of Nu Mark, leading the company's development and marketing of innovative tobacco products for adult smokers and vapers. He joined Philip Morris USA in 1995 and has held various leadership positions at several Altria companies, including Vice President, Brand Management, PM USA;

20


Vice President, Strategy & Business Development; Vice President, Marketing & Promotion Services; Vice President, Brand Management, Smokeless; and Vice President, Customer & Marketing Services.
RESULTS OF OPERATIONS
Selected Financial Results
The following table summarizes the selected financial results for the periods indicated.
($ in 000s)
Three Months Ended
September 30,
 
Change
Nine Months Ended
September 30,
 
Change
 
2019
(Restated)
 
2018
 
$
(Restated)
%
(Restated)
2019
(Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
Net Revenue
$
7,638
 
$
3,760
 
$
3,878
 
103%
$
21,869
 
$
10,099
 
$
11,770
 
117%
Cost of Sales
 
28,643
 
 
1,666
 
 
26,977
 
1,619%
 
23,715
 
 
(269)
 
 
23,984
 
(8,916%)
Gross Profit
 
(21,005)
 
 
2,094
 
 
(23,099)
 
(1,103%)
 
(1,846)
 
 
10,368
 
 
(12,214)
 
(118%)
Operating Expenses
 
34,798
 
 
6,971
 
 
27,827
 
399%
 
74,960
 
 
16,933
 
 
58,027
 
343%
Operating Loss
 
(55,803)
 
 
(4,877)
 
 
(50,926)
 
1,044%
 
(76,806)
 
 
(6,565)
 
 
(70,241)
 
1,070%
Other Income
 
838,199
 
 
(42)
 
 
838,241
 
(1,995,812%)
 
1,539,985
 
 
164
 
 
1,539,821
 
938,915%
Income (Loss) before Income Taxes
 
782,396
 
 
(4,919)
 
 
787,315
 
(16,006%)
 
1,463,179
 
 
(6,401)
 
 
1,469,580
 
(22,959%)
Deferred Income Tax Expense (Recovery)
 
(3,959)
 
 
2,352
 
 
(6,311)
 
(268%)
 
(2,112)
 
 
1,197
 
 
(3,309)
 
(276%)
Net Income (Loss)
 
786,355
 
 
(7,271)
 
 
793,626
 
(10,915%)
 
1,465,291
 
 
(7,598)
 
 
1,472,889
 
(19,385%)
Other Comprehensive Income (Loss)
 
(1,055)
 
 
236
 
 
(1,291)
 
(547%)
 
(1,040)
 
 
240
 
 
(1,280)
 
(533%)
Comprehensive Income (Loss)
 
785,300
 
 
(7,035)
 
 
792,335
 
(11,263%)
 
1,464,251
 
 
(7,358)
 
 
1,471,609
 
(20,000%)

Altria Investment Derivative Liabilities
The Company records derivative liabilities associated with the Altria Warrant and Altria Anti-Dilution Rights (the “Derivative Liabilities”) at fair value at the end of each reporting period. Significant volatility in reported net income may result from quarterly adjustments to the fair value of Derivative Liabilities, which is primarily driven by movement in Cronos Group’s stock price. Fair value adjustments to Derivative Liabilities is a non-cash item.
At September 30, 2019, the Company recorded $545.5 million in Derivative Liabilities on its balance sheet, resulting in an unrealized gain on revaluation of Derivative Liabilities of $835.1 million (2018 - nil) in other income for Q3 2019 and $1.5 billion (2018 - nil) for YTD 2019. See note 14 “Derivative liabilities” to the Interim Financial Statements for additional information.

21


Net Revenue
The following table sets forth net revenue, kilograms sold, and average net selling price per gram sold by product type for the periods indicated.
($ in 000s)
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2019
(Restated)
 
2018
 
$
(Restated)
%
(Restated)
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
Net Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dried Cannabis
$
5,568
 
$
2,619
 
$
2,949
 
113
%
 
$
16,147
 
$
7,954
 
$
8,193
 
 
103
%
Cannabis Oil
 
1,149
 
 
1,073
 
 
76
 
7
%
 
 
4,668
 
 
1,964
 
 
2,704
 
 
138
%
Product Revenue
 
6,717
 
 
3,692
 
 
3,025
 
82
%
 
 
20,815
 
 
9,918
 
 
10,897
 
 
110
%
Other
 
921
 
 
68
 
 
853
 
1,254
%
 
 
1,054
 
 
181
 
 
873
 
 
482
%
Total Net Revenue
 
7,638
 
 
3,760
 
 
3,878
 
103
%
 
 
21,869
 
 
10,099
 
 
11,770
 
 
117
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kilograms Sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dried Cannabis
 
1,021
 
 
397
 
 
624
 
157
%
 
 
2,802
 
 
1,264
 
 
1,538
 
 
122
%
Cannabis Oil
 
146
 
 
117
 
 
29
 
25
%
 
 
618
 
 
208
 
 
410
 
 
197
%
Total Kilograms Sold
 
1,167
 
 
514
 
 
653
 
127
%
 
 
3,420
 
 
1,472
 
 
1,948
 
 
132
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Avg. Net Selling Price Per Gram Sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dried Cannabis
$
5.46
 
$
6.60
 
$
(1.14)
 
(17%)

 
$
5.76
 
$
6.29
 
$
(0.53)
 
 
(8%)

Cannabis Oil
 
7.87
 
 
9.17
 
 
(1.30)
 
(14%)

 
 
7.55
 
 
9.44
 
 
(1.89)
 
 
(20%)

Product Revenue
 
5.76
 
 
7.18
 
 
(1.43)
 
(20%)

 
 
6.09
 
 
6.74
 
 
(0.65)
 
 
(10%)


Results for Q3 2019 compared to Q3 2018
For Q3 2019, the Company reported net revenue of $7.6 million as compared to $3.8 million for Q3 2018, representing an increase of $3.9 million, or 103%. The average net selling price per gram sold decreased from $7.18 per gram for Q3 2018 by 20% to $5.76 per gram for Q3 2019. This change was primarily due to:
•
sales into the domestic adult-use market, which did not exist in Q3 2018; and
•
other sales in hemp-derived CBD infused products related to the acquisition of Redwood, which did not exist in Q3 2018.

Results for YTD 2019 compared to YTD 2018
For YTD 2019, the Company reported net revenue of $21.9 million as compared to $10.1 million for YTD 2018, representing an increase of $11.8 million, or 117%. The average net selling price per gram sold decreased from $6.74 per gram for YTD 2018 by 10% to $6.09 per gram for YTD 2019. This change was primarily due to:
•
increased capacity and yield developments resulting in the sale of 5,837 kilograms for YTD 2019 compared to 1,472 kilograms for YTD 2018; and
•
launch and continued growth of the adult-use market.


22


Cost of Sales and Gross Profit
Cost of sales and gross profit for the periods indicated are as follows:
($ in 000s)
Three Months Ended
September 30,
 
Change
 
Nine Months Ended
September 30,
 
Change
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales before Fair Value Adjustments
$
9,547
 
$
1,688

 
$
7,859
 
 
466
%
 
$
16,236

 
$
4,509

 
$
11,727
 
 
260
%
Gross Profit before Fair Value Adjustments(1)
 
(1,909)
 
 
2,072

 
 
(3,981)
 
 
(192%)

 
 
5,633

 
 
5,590

 
 
43
 
 
1
%
Fair Value Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized Change in Fair Value of Biological Assets
 
10,015
 
 
(1,533)

 
 
11,548
 
 
(753%)

 
 
(7,562)

 
 
(11,108)

 
 
3,546
 
 
(32%)

Realized Fair Value Adjustments on Inventory Sold
 
9,081
 
 
1,511

 
 
7,570
 
 
501
%
 
 
15,041

 
 
6,330

 
 
8,711
 
 
138
%
Total Fair Value Adjustments
 
19,096
 
 
(22)

 
 
19,118
 
 
(86,900%)

 
 
7,479

 
 
(4,778)

 
 
12,257
 
 
(257%)

Gross Profit
 
(21,005)
 
 
2,094

 
 
(23,099)
 
 
(1,103%)

 
 
(1,846)

 
 
10,368

 
 
(12,214)
 
 
(118%)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Margin before Fair Value Adjustments(1)
 
(25%)
 
 
55
%
 
--
 
--
 
 
 
26
%
 
 
55
%
 
--
 
--
 
Gross Margin
 
(275%)
 
 
56
%
 
--
 
--
 
 
 
(8%)

 
 
103
%
 
--
 
--
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales before Fair Value Adj./Gram Sold for Non-U.S. market
$
7.92
 
$
3.28

 
$
4.64
 
 
141%

 
$
4.66

 
$
3.06

 
$
1.60
 
 
52%

(1) 
See “General Matters – Definitions” for information related to Gross Profit and Gross Margin before Fair Value Adjustments.

Cost of sales before fair value adjustments consists of two main categories:
•
Production costs. These costs are capitalized to biological assets as costs directly attributable to growing the plants to the point of harvest, transferred to inventory upon harvest and recognized in cost of sales when the inventory is sold. These costs include direct costs such as nutrients, soil, and seeds, as well as other indirect costs such as utilities, an allocation of indirect labor, property taxes, and depreciation of equipment used in the growing process.
•
Processing costs. These costs are capitalized to inventory and then recognized in cost of sales when the inventory is sold. These costs represent post-harvest costs incurred to bring harvested cannabis to its saleable condition, which include drying and curing, testing and packaging, and overhead allocation.

Fair value adjustments consist of two main categories:
•
Unrealized Change in Fair Value of Biological Assets. This line item represents the effect of the non-cash fair value adjustments of biological assets produced in the period, excluding capitalized production costs.
•
Realized Fair Value Adjustments on Inventory Sold. This line item represents the effect of the non-cash fair value adjustments capitalized to inventory being recognized in the statement of operations as the corresponding inventory is sold.


23


Results for Q3 2019 compared to Q3 2018
For Q3 2019, the Company reported gross profit / (loss) before fair value adjustments of ($1.9 million) as compared to $2.1 million for Q3 2018, representing a decrease of $4 million, or 192%. Gross margin before fair value adjustments decreased from 55% for Q3 2018 to (25%) for Q3 2019. Drivers of these variances are set forth below:
•
decrease was driven by higher production cost on a per gram basis and the impact of inventory written down in Q3 2019 of $4.9 million, representing an increase of 129% in cost of sales before fair value adjustments and inventory write-down per gram and;
•
decrease in gross margin before fair value adjustments was largely driven by an increase in excise taxes that did not exist during Q3 2018.

Results for YTD 2019 compared to YTD 2018
For YTD 2019, the Company reported gross profit before fair value adjustments of $5.63 million as compared to $5.59 million for YTD 2018, representing an increase of $0.04 million, or 1%. Gross margin before fair value adjustments decreased from 55% for YTD 2018 to 26% for YTD 2019. Drivers of these variances are set forth below:
•
increase in gross profit before fair value adjustments was largely driven by both an increase in kilograms sold and an increase in net revenue as described above; and
•
decrease in gross margin before fair value adjustments was largely driven by an increase in excise taxes that did not exist during YTD 2018.

Operating Expenses
Operating expenses for the periods indicated are as follows:
($ in 000s)
Three Months Ended
September 30,
 
Change
 
Nine Months Ended
September 30,
 
Change
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%
 
2019
(Restated)
 
2018
 
$(Restated)
 
%(Restated)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and Marketing
$
6,057

 
$
598

 
$
5,459
 
913
%
 
$
12,915

 
$
1,548

 
$
11,367
 
734
%
Research and Development
 
3,439

 
 
—

 
 
3,439
 
 
 
 
8,072

 
 
—

 
 
8,072
 
 
General and Administrative
 
21,270

 
 
4,820

 
 
16,450
 
341
%
 
 
46,057

 
 
11,500

 
 
34,557
 
300
%
Share-Based Payments
 
3,125

 
 
1,223

 
 
1,902
 
156
%
 
 
5,864

 
 
2,947

 
 
2,917
 
99
%
Depreciation and Amortization
 
907

 
 
330

 
 
577
 
175
%
 
 
2,052

 
 
938

 
 
1,114
 
119
%
Total Operating Expenses
 
34,798

 
 
6,971

 
 
27,827
 
399
%
 
 
74,960

 
 
16,933

 
 
58,027
 
343
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a Percentage of Net Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and Marketing
 
79
%
 
 
16
%
 
--
 
 
 
 
59
%
 
 
15
%
 
--
 
 
Research and Development
 
45
%
 
NA
 
 
--
 
 
 
 
37
%
 
NA
 
 
--
 
 
General and Administrative
 
278
%
 
 
128
%
 
--
 
 
 
 
211
%
 
 
114
%
 
--
 
 
Share-Based Payments
 
41
%
 
 
33
%
 
--
 
 
 
 
27
%
 
 
29
%
 
--
 
 
Depreciation and Amortization
 
12
%
 
 
9
%
 
--
 
 
 
 
9
%
 
 
9
%
 
--
 
 
Total Operating Expenses
 
456

 
 
185
%
 
--
 
 
 
 
343
%
 
 
168
%
 
--
 
 

Results for Q3 2019 compared to Q3 2018
For Q3 2019, the Company reported total operating expenses of $34.8 million as compared to $7.0 million for Q3 2018, representing an increase of $27.8 million, or 399%. This change was primarily due to:
•
an increase in professional and consulting fees for services rendered in connection with various strategic initiatives, legal fees, and accounting fees;
•
higher marketing costs to build and develop our brands;
•
increased staffing levels across functions including procurement, information technology, sales and marketing, finance, and operations, in line with the Company’s growth strategy; and

24


•
R&D expenses related to the Ginkgo Strategic Partnership and Technion research agreement.

Results for YTD 2019 compared to YTD 2018
For YTD 2019, the Company reported total operating expenses of $75.0 million as compared to $16.9 million for YTD 2018, representing an increase of $58.0 million, or 343%. This change was primarily due to:
•
an increase in professional and consulting fees for services rendered in connection with various strategic initiatives, legal fees, and accounting fees;
•
higher marketing costs to build and develop our brands;
•
increased staffing levels across functions including procurement, information technology, sales and marketing, finance, and operations, in line with the Company’s growth strategy; and
•
R&D expenses related to the Ginkgo Strategic Partnership and Technion research agreement.

Other Income
Other income for the periods indicated are as follows:
($ in 000s)
Three Months Ended
September 30,
 
Change
 
Nine Months Ended
September 30,
 
Change
 
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
Other Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Income (Expense)
$
11,703

 
$
(62)

 
$
11,765

 
(18,976%)
 
$
26,954
 
$
(121)

 
$
27,075
 
(22,376%)

Financing and Transaction Costs
 
(8,031)

 
 
—

 
 
(8,031)

 
 
 
 
(42,097)
 
 
—

 
 
(42,097)
 
 
Gain on Revaluation of Derivative Liabilities
 
835,079

 
 
—

 
 
835,079

 
 
 
 
1,535,405
 
 
—

 
 
1,535,405
 
 
Gain on Revaluation of Financial Liabilities
 
194

 
 
—

 
 
194

 
 
 
 
194
 
 
—

 
 
194
 
 
Share of Income (Loss) from Investments in Equity Accounted Investees
 
(746)

 
 
20

 
 
(766)

 
(3,830%)
 
 
(2,001)
 
 
64

 
 
(2,065)
 
(3,227%)

Gain on Disposal of Whistler
 
—

 
 
—

 
 
—

 
 
 
 
20,606
 
 
—

 
 
20,606
 
 
Gain on Other Investments
 
—

 
 
—

 
 
—

 
 
 
 
924
 
 
221

 
 
703
 
318
%
Total Other Income
 
838,199

 
 
(42)

 
 
838,241

 
(1,995,812%)
 
 
1,539,985
 
 
164

 
 
1,539,821
 
938,915
%

Results for Q3 2019 compared to Q3 2018
For Q3 2019, the Company reported total other income of $838.2 million as compared to other expenses of $0.042 million for Q3 2018, representing an increase in income of $838.2 million. This change was primarily due to:
•
an increase in interest income (expense) due to interest earned on funds received from the Altria Investment;
•
transaction and financing costs in Q3 2019, which include costs related to the Cronos Fermentation Acquisition and the Redwood Acquisition; and
•
a gain on the revaluation of the Derivative Liabilities.


25


Results for YTD 2019 compared to YTD 2018
For YTD 2019, the Company reported total other income of $1,540.0 million as compared to $0.2 million for YTD 2018, representing an increase in income of $1,540.0 million. This change was primarily due to:
•
an increase in interest income (expense) due to interest earned on funds received from the Altria Investment;
•
transaction and financing costs in YTD 2019, which include costs related to the Altria Strategic investment, the Cronos Fermentation Acquisition and the Redwood Acquisition; and
•
a gain on the revaluation of the Derivative Liabilities.

Deferred Income Tax Expense
Results for Q3 2019 compared to Q3 2018
The Company recorded a deferred income tax recovery of $4.0 million in Q3 2019 as compared to an expense of $2.4 million in Q3 2018. The effective tax rate for Q3 2019 was (1%) as compared to (48%) in Q3 2018.
Results for YTD 2019 compared to YTD 2018
The Company recorded a deferred income tax recovery of $2.1 million in YTD 2019 as compared to an expense of $1.2 million in YTD 2018. The effective tax rate in YTD 2019 was (0%) as compared to (19%) in YTD 2018.
The effective tax rate differs from the Company’s statutory tax rate due to the non-taxable gain on revaluation of Derivative Liabilities. The Altria Warrant, pre-emptive rights and top-up rights issued in connection with the Altria Investment would currently be settled through the issuance of shares of the Company if exercised by Altria, which is not expected to result in a taxable gain or loss to the Company.
Comprehensive Income (Loss)
Comprehensive income (loss) for the periods indicated are as follows:
($ in 000s)
Three Months Ended
September 30,
 
Change
 
Nine Months Ended
September 30,
 
Change
 
2019
(Restated)
 
2018
 
$
(Restated)
 
%(Restated)
 
2019 (Restated)
 
2018
 
$
(Restated)
 
%
(Restated)
Comprehensive Income (Loss)
$
785,300
 
$
(7,035)
 
$
792,335
 
(11,263%)
 
$
1,464,251
 
$
(7,358)
 
$
1,471,609
 
 
(20,000%)

Results for Q3 2019 compared to Q3 2018
For Q3 2019, the Company reported comprehensive income of $785.3 million as compared to a comprehensive loss of $7.0 million for Q3 2018, representing an increase of $792.3 million. The change in total comprehensive income results from the factors described in the immediately preceding section above.
Results for YTD 2019 compared to YTD 2018
For YTD 2019, the Company reported comprehensive income of $1,464.3 million as compared to a comprehensive loss of $7.4 million for YTD 2018, representing an increase of $1,471.6 million. The change in total comprehensive income results from the factors described in the immediately preceding section above.

26


Reconciliation of Non-IFRS Measures
A reconciliation of Adjusted EBIT and Adjusted EBITDA to net income, the most directly comparable IFRS measure, is presented in the following table.
($ in 000s)
Third
 
Second
 
Third
 
Quarter
 
Quarter
 
Quarter
 
2019
(Restated)
 
2019
 
2018
Net Income (Loss)
$
786,355

 
$
250,968

 
$
(7,271)

Adjustments
 
 
 
 
 
 
 
 
Interest (Income) Expense
 
(11,703)

 
 
(12,531)

 
 
62

Deferred Income Tax Expense (Recovery)
 
(3,959)

 
 
(335)

 
 
2,352

Share-Based Payments
 
3,125

 
 
2,002

 
 
1,223

Unrealized Change in Fair Value of Biological Assets
 
10,015

 
 
(4,024)

 
 
(1,533)

Realized Fair Value Adjustments on Inventory Sold
 
9,081

 
 
3,557

 
 
1,511

Financing and Transaction Costs
 
8,031

 
 
4,505

 
 
—

Gain on Revaluation of Derivative Liabilities
 
(835,079)

 
 
(263,943)

 
 
—

Gain on Revaluation of Financial Liabilities
 
(194)

 
 
—

 
 
—

Share of Loss (Income) from Investments in Equity Accounted Investees
 
746

 
 
991

 
 
(20)

Gain on Disposal of Whistler
 
—

 
 
—

 
 
—

Gain on Other Investments
 
—

 
 
—

 
 
—

Adjusted EBIT
 
(33,582)

 
 
(18,810)

 
 
(3,676)

Depreciation and Amortization
 
2,473

 
 
1,038

 
 
475

Adjusted EBITDA
 
(31,109)

 
 
(17,772)

 
 
(3,201)


Below is the reconciliation of Adjusted EBIT and Adjusted EBITDA to net income for nine months ended September 30, 2019 and 2018.
 
 
 
 
 
 
 
($ in 000s)
 
Nine Months Ended
 
 
September 30,
 
 
2019
(Restated)
 
2018
Net Income (Loss)
 
$
1,465,291
 
$
(7,598)

Adjustments
 
 
 
 
 
 
Interest (Income) Expense
 
 
(26,954)
 
 
121

Deferred Income Tax Expense (Recovery)
 
 
(2,112)
 
 
1,197

Share-Based Payments
 
 
5,864
 
 
2,947

Unrealized Change in Fair Value of Biological Assets
 
 
(7,562)
 
 
(11,108)

Realized Fair Value Adjustments on Inventory Sold
 
 
15,041
 
 
6,330

Financing and Transaction Costs
 
 
42,097
 
 
—

Gain on Revaluation of Derivative Liabilities
 
 
(1,535,405)
 
 
—

Gain on Revaluation of Financial Liabilities
 
 
(194)
 
 
—

Share of Loss (Income) from Investments in Equity Accounted Investees
 
 
2,001
 
 
(64)

Gain on Disposal of Whistler
 
 
(20,606)
 
 
—

Gain on Other Investments
 
 
(924)
 
 
(221)

Adjusted EBIT
 
 
(63,463)
 
 
(8,396)

Depreciation and Amortization
 
 
4,216
 
 
1,299

Adjusted EBITDA
 
 
(59,247)
 
 
(7,097)


27


SELECTED QUARTERLY FINANCIAL INFORMATION
The following table summarizes selected quarterly financial information for the last eight quarters.
($ in 000s, except per share data)
FY 2019
 
FY 2018
 
FY 2017
 
Q3
(Restated)
 
Q2
 
Q1 (Restated)
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
Net Revenue
$
7,638
 
$
10,237
 
$
3,994
 
$
5,604
 
$
3,760
 
$
3,394

 
$
2,945
 
$
1,611
Net Income (Loss)
 
786,355
 
 
250,968
 
 
427,968
 
 
(11,607)
 
 
(7,271)
 
 
723

 
 
(1,050)
 
 
2,063
Comprehensive Income (Loss)
 
785,300
 
 
250,864
 
 
428,087
 
 
(11,797)
 
 
(7,035)
 
 
762

 
 
(1,085)
 
 
667
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
2.32
 
$
0.75
 
$
1.96
 
$
(0.06)
 
$
(0.04)
 
$
—

 
$
(0.01)
 
$
0.01
Diluted Earnings Per Share
 
0.53
 
 
0.22
 
 
0.48
 
 
(0.06)
 
 
(0.04)
 
 
—

 
 
(0.01)
 
 
0.01

The Company does not exhibit any material seasonality over its fiscal year, with the exception of its operations in the U.S. under the brand Lord Jones™, for which a material concentration of sales online and through retail and hospitality partner channels exists within the fourth quarter. For further information on changes in income statement data, please see “Results of Operations” in this MD&A.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
As of September 30, 2019, the Company had $1,475.5 million in cash and cash equivalents and $517.1 million in short term investments.
Summary of Cash Flows
The major components of the Company’s statements of cash flows for the periods indicated are as follows:
($ in 000s)
Three Months Ended
September 30,
 
 
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2019
 
2018
 
 
$ Change
 
2019
 
2018
 
$ Change
Cash and Cash Equivalents Used in Operating Activities
$
(26,434)
 
$
(12,638)
 
 
$
(13,796)
 
$
(102,417)
 
$
(33,267)
 
$
(69,150)
Cash and Cash Equivalents Used in Investing Activities
 
(118,809)
 
 
(35,925)
 
 
 
(82,884)
 
 
(906,037)
 
 
(74,211)
 
 
(831,826)
Cash and Cash Equivalents Provided by Financing Activities
 
40,622
 
 
436
 
 
 
40,186
 
 
2,450,486
 
 
139,752
 
 
2,310,734
Net Change in Cash and Cash Equivalents
 
(104,621)
 
 
(48,127)
 
 
 
(56,494)
 
 
1,442,032
 
 
32,274
 
 
1,409,758

Q3 2019 Cash Flows
Operating Activities. During Q3 2019, $26.4 million of cash was used by operating activities as compared to $12.6 million in Q3 2018, representing an increase of $13.8 million in cash used in operating activities. This change is primarily driven by a $16.3 million increase in net income adjusted for non-cash items and a $2.5 million decrease in the net change in non-cash working capital.
Investing Activities. During Q3 2019, the Company used $118.8 million (2018 – $35.9 million) in cash from investing activities, primarily due to the acquisition of Redwood for $297.0 million (2018 – nil), net of cash assumed on acquisition, advances to joint ventures and loan receivable of $27.0 million (2018 – $2.7 million), $22.2 million (2018 – $34.4 million) in capital expenditures related primarily to Cronos Israel and the Peace Naturals Campus, partially offset by maturity of short-term investments of $227.9 million (2018 – nil).

28


Financing Activities. During Q3 2019, cash provided by financing activities was $40.6 million, primarily due to the proceeds from exercise of warrants and options as well as the Top-up Rights of $40.9 million. In Q3 2018, cash provided by financing activities was $0.4 million, primarily due to proceeds from the exercise of warrants and options.
YTD 2019 Cash Flows
Operating Activities. During YTD 2019, $102.4 million of cash was used by operating activities as compared to $33.3 million in YTD 2018, representing an increase of $69.1 million in cash used in operating activities. This change is primarily driven by a $58.1 million increase in net income adjusted for non-cash items and an $11.0 million increase in the net change in non-cash working capital.
Investing Activities. During YTD 2019, the Company used $906.0 million (2018 – $74.2 million) of cash in investing activities, primarily due to purchases of short term investments of $517.1 million (2018 – nil), the acquisition of Redwood for $297.0 million (2018 – nil), net of cash assumed on acquisition, advances to joint ventures and loan receivable of $64.7 million (2018 – $2.7 million), $50.7 million (2018 – $72.2 million) in capital expenditures related primarily to the Peace Naturals Campus, Cronos Fermentation, Cronos Israel, Cronos Device Labs, and partially offset by proceeds from sale of other investments of $26.1 million (2018 – $1.0 million).
Financing Activities. During YTD 2019, cash provided by financing activities was $2,450.5 million, primarily due to the $2,434.8 million in proceeds from the strategic investment from Altria and partially offset by the repayment of the $21.3 million construction loan payable. During YTD 2018, cash provided by financing activities was $139.8 million, primarily due to $42.9 million in net proceeds from the January 2018 Bought Deal (as defined herein) and $93.7 million in net proceeds from the April 2018 Bought Deal.
In January 2018, the Company closed a bought deal pursuant to which the Company issued a total of 5,257,143 common shares at a price of $8.75 per common share for aggregate proceeds of approximately $46.0 million (before taking into account any commissions, fees, or expenses) (the “January 2018 Bought Deal”).
In April 2018, the Company closed a bought deal offering pursuant to which the Company issued a total of 10,420,000 common shares at a price of $9.60 per common share for aggregate proceeds of approximately $100.0 million (before taking into account any commissions, fees or expenses) (the “April 2018 Bought Deal”).
Capital Resources
Debt
In August 2017, the Company entered into a senior secured loan, to be funded by way of multiple advances, for up to $40.0 million in committed capital (the “Romspen Construction Loan”) with Romspen Investment Corporation. In January 2019, the Romspen Construction Loan was fully repaid. See note 13 “Construction loan payable” to the Interim Financial Statements for additional information.
In January 2019, the Company entered into a credit agreement with Canadian Imperial Bank of Commerce, as administrative agent and lender, and the Bank of Montreal, as lender, in respect of a $65.0 million secured non-revolving term loan credit facility (the “Credit Facility”). In connection with the closing of the Credit Facility, the Company used funds available under the Credit Facility to fully repay the Romspen Construction Loan. In March 2019, the Credit Facility was repaid in full by the Company with a portion of the proceeds from the Altria Investment.

29


Contractual Obligations
As of September 30, 2019, the Company had the following contractual obligations:
($ in 000s)
Payments Due by Period
 
Total
 
Less Than
1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
Lease Obligations Recognized
$
8,854
 
$
1,347

 
$
2,725

 
$
2,319

 
$
2,463

Lease Obligations Not Recognized
 
9,518
 
 
1,106

 
 
2,944

 
 
3,054

 
 
2,414

Purchase Obligations
 
47,033
 
 
30,996

 
 
16,037

 
 
—

 
 
—

Derivative Liabilities
 
545,514
 
 
545,514

 
 
—

 
 
—

 
 
—

Other Long-Term Liabilities
 
2,378
 
 
—

 
 
—

 
 
2,378

 
 
—

Total Contractual Obligations
 
613,297
 
 
578,963

 
 
21,706

 
 
7,751

 
 
4,877


Lease obligations recognized relate to the Company’s headquarters and equipment leases. Lease obligations not recognized relate to the Company’s future lease commitments for its headquarters and leases with a maturity of less than one year. Purchase obligations relate to R&D commitments associated with the Ginkgo Strategic Partnership, the Technion research agreement and the MediPharm Supply Agreement. Derivative Liabilities represent obligations related to the Altria Strategic Investment. See note 14 “Derivative liabilities” to the Interim Financial Statements for more information related to Derivative Liabilities. Other long-term liabilities represent obligations to non-controlling interests.
Equity
During Q1 2019, in connection with the closing of the Altria Investment, the Company issued 149,831,154 common shares to Altria at a price of $16.25 per common share and the Altria Warrant for aggregate gross proceeds of approximately $2.4 billion (before taking into account any commissions, fees or expenses).
Pursuant to the Altria Investment, the Company incurred transaction costs of $34,662, of which $5,007 was allocated to share capital and $29,660 to the derivative liabilities based on the relative values assigned to the respective components. During the three and nine months ended September 30, 2019, the Company issued 2,514,459 and 2,565,397 common shares upon Altria's exercise of Top-up Rights, respectively, for gross cash proceeds of $40,860 and $41,688, in addition to $19,001 and $19,739 partial extinguishment of derivative liability respectively.
During Q3 2019, the Company issued 5,086,586 common shares as part of the purchase consideration for Redwood.
Financial Condition
The Company’s primary need for liquidity is to fund operations and capital expenditures. Cronos Group’s ability to fund operations and capital expenditures depends on, among other things, future operating performance and cash flows that are subject to general economic conditions and financial and other factors, including factors beyond the Company’s control.
Historically, the Company has primarily funded its operations through debt and equity financings. The Company believes that cash on hand will be sufficient to satisfy its operational needs through at least the next 12 months.

30


SHARE INFORMATION
The issued and outstanding common shares, along with shares potentially issuable, are as follows as of the date indicated below.
(Actual shares)
 
As at
November 11, 2019
Issued and Outstanding Shares
 
 
 
Common Shares
 
 
343,764,207
Total Issued and Outstanding Shares
 
 
343,764,207
Potentially Issuable Shares
 
 
 
Stock Options
 
 
14,177,875
Warrants
 
 
18,066,662
Restricted Stock Units
 
 
732,972
Altria Warrant
 
 
76,392,046
Exercisable Top-up Rights
 
 
4,176,987
Total Potentially Issuable Shares
 
 
113,546,542
 
 
 
 
Total Outstanding and Potentially Issuable Shares
 
 
457,310,749

LEGAL PROCEEDINGS
As of the date of this MD&A, we are subject to three ongoing claims for damages. See note 20 “Commitments and contingencies” to the Interim Financial Statements for further discussions on our legal proceedings. We believe that all allegations in each proceeding are without merit and plan to vigorously defend ourselves; accordingly, no provision for loss has been recognized.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this MD&A, the Company has no off-balance sheet arrangements.
FINANCIAL INSTRUMENTS
As of the date of this MD&A, we have the following financial instruments: cash and cash equivalents, interest receivable, accounts receivable, advances to joint ventures, other investments, accounts payable and other liabilities, holdbacks payable, derivative liabilities and due to non-controlling interests. These financial instruments were not used in any hedging activities. See note 23 “Financial instruments” to the Interim Financial Statements for the assessment of related risks.
TRANSACTIONS BETWEEN RELATED PARTIES
The Company has engaged in transactions with related parties as follows:
($ in 000s)
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
Key Management Compensation(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Employee Benefits, Including Salaries and Fees
 
$
429
 
 
$
260
 
 
$
925
 
 
$
595
Share-Based Payments
 
 
1,362
 
 
 
385
 
 
 
2,575
 
 
 
1,080
Total Key Management Compensation
 
 
1,791
 
 
 
645
 
 
 
3,500
 
 
 
1,675
(1) 
Key management personnel are persons responsible for planning, directing and controlling activities of an entity, and include executive and non-executive directors.
During Q3 2019, no options (2018 – no options) were issued to key management. During YTD 2019, 1,180,160 options (2018 - 150,000 options) were issued to key management. As at September 30, 2019 and December 31, 2018, there were no balances payable to members of key management.

31


During Q3 2019, no options (2018 – no options) were issued to directors of the Company, excluding a director who was also a member of key management, and share-based payments of $0.3 million (2018 – $0.4 million) were recognized. During YTD 2019, no options (2018 – 550,000 options) were issued to directors of the Company, excluding a director who was also a member of key management, and shared-based payments of $0.7 million (2018 – $0.9 million) were recognized.
During Q3 2019 and YTD 2019, the Company recorded $1.7 million (2018 – nil) and $3.1 million (2018 – nil) respectively payable to Altria Pinnacle for various services.
During YTD 2019, the Company purchased machinery and equipment amounting to $1.5 million (ILS$4.3 million) from Altria Israel Ltd.
During Q3 2019, the Company entered into two separate loan agreements with its joint ventures Cronos GrowCo and NatuEra. Please refer to note 7 “Loans Receivable” to the Interim Financial Statements for additional information.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Except as noted below, the IASB has not issued any new standards, amendments to standards, or interpretations that have impacted the Company during Q3 2019. Our adoption of previously issued new standards, amendments to standards, and interpretations are set forth below.
IFRS 16, Leases
IFRS 16 was issued in January 2016 and replaces the previous guidance on leases, predominantly IAS 17, Leases. The Company has applied IFRS 16 with an initial application date of January 1, 2019, in accordance with the transitional provisions specified in IFRS 16. As a result, the Company has changed its accounting policy for lease contracts as detailed in note 3 “Adoption of new accounting pronouncements” to the Interim Financial Statements. The Company has applied the following two practical expedients. First, the Company applied the simplified transition approach and did not restate comparative information. As a result, the Company recognized the cumulative effect of initially applying IFRS 16 as an adjustment to the accumulated deficit as at January 1, 2019. Second, on transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Company applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17, and IFRS Interpretations Committee (“IFRIC”), Determining whether an arrangement contains a lease, were not reassessed for whether there is a lease. The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
In accordance with the practical expedients applied, the Company has recognized lease liabilities and right-of-use assets at the date of initial application for leases previously classified as operating leases in accordance with IAS 17. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company has elected to measure the right-of-use assets at the carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Company’s incremental borrowing rate at the date of initial application. For the lease previously classified as a finance lease under IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of initial application is equal to the carrying amount of the leased asset and lease liability immediately before the date of initial application.
IFRIC 23, Uncertainty over Income Tax Treatments
IFRIC 23 clarifies the application of recognition and measurement requirements in IAS 12, Income taxes, when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers each tax treatment independently or collectively, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and how an entity considers changes in facts and circumstances. IFRIC 23 became effective for fiscal years beginning on or after January 1, 2019, with earlier application permitted. The Company has adopted this interpretation as of its effective date and has assessed no significant impact as a result of the adoption of this interpretation.
CRITICAL ACCOUNTING ESTIMATES
There have been no updates to the critical accounting estimates disclosed in the Company’s MD&A for the fiscal year ended December 31, 2018.

32


DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING
In accordance with National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, and as required by the applicable rules of the U.S. Securities and Exchange Commission (the “SEC”), management is responsible for establishing and maintaining disclosure controls and procedures (“DC&P”), as defined in Rules 13a-15(e) and 15d-15(e) under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), and internal control over financial reporting (“ICFR”), as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management has designed DC&P and ICFR based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material information relating to the Company is made known to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in securities legislation. ICFR is designed, under the supervision of the CEO and CFO, to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of its financial statements in accordance with IFRS.
The CEO and CFO have concluded that as of September 30, 2019, due to the existence of the material weaknesses in our ICFR described below, our DC&P were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act or other applicable securities laws were recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and in other applicable securities laws, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act or under other applicable securities laws, is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Management conducted an assessment of the effectiveness of the Company’s ICFR based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, management has concluded that its ICFR was not effective as of September 30, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS, due to the material weaknesses described below.
A material weakness is a deficiency, or combination of deficiencies in ICFR, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified material weaknesses in the following areas:
•
Risk Assessment: The Company did not appropriately design controls to monitor and respond to changes in our business in relation to our transactions in the wholesale market.
•
Segregation of Duties: The Company did not maintain adequately designed controls on segregation of purchase and sale responsibilities to ensure accurate recognition of revenue in accordance with IFRS.
•
Non-Routine Transactions: The Company’s controls were not effective to ensure that non-routine transactions, including deviations from contractually established sales terms, were authorized, communicated, identified and evaluated for their potential effect on revenue recognition.
Because of these control deficiencies which we have also determined to be material weaknesses, the Company overstated revenue, cost of sales and inventory related to non-routine, wholesale sale transactions which have resulted in the restatement of the interim financial statements for the three months ended March 31, 2019, the six months ended June 30, 2019 and three and nine months ended September 30, 2019.
While the risk assessment deficiency did not directly result in a misstatement to the financial statements, it was a contributing factor in the other material weaknesses described above. Because of the segregation of duties and non-routine transaction deficiencies, the Company restated one transaction for the three months ended March 31, 2019 and the six months ended June 30, 2019, and two transactions for the three months ended September 30, 2019 to correct misstatements. These deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis.
Management’s assessment of the effectiveness of internal control over financial reporting excluded the entities acquired on September 5, 2019 in the Redwood Acquisition, whose net assets on a combined basis constitute approximately 17.5% of the total assets as of September 30, 2019 and 4.1% and a nominal % of net revenues and net income respectively, for the quarter then ended.

33


Remediation of Material Weaknesses
•
Risk Assessment: The Company will enhance its process to evaluate on a quarterly basis its risk assessment model and risk control matrices related to any significant changes in its business environment.
•
Segregation of Duties: We have identified and will be implementing controls and procedures to ensure segregation of duties over sales transactions and purchase transactions to include (i) updating our delegation of authority policy to ensure only individuals in our sales department approve sales to customers, only individuals in our procurement and supply chain departments approve purchases and prevent all other departments from authorizing these transactions; (ii) building and establishing Know Your Customer and Know Your Vendor databases to ensure a higher level of scrutiny for any entity that is both a customer and a vendor; and (iii) building and delivering a training and education program of revenue recognition principles inclusive of non-monetary transactions to all applicable stakeholders.
•
Non-routine Transactions: We have identified and will be implementing controls and procedures to ensure adequate review and disclosure of non-routine transactions, specifically targeting wholesale sales and purchases to include (i) requiring the preparation of accounting memorandums from the Finance Department on all non-routine transactions which must include all key elements of the transaction and review and approval of either the CEO or CFO prior to any non-routine transactions being executed; (ii) requiring the preparation of business cases for all wholesale sales and purchases to ensure they have legitimate business purposes; and (iii) enhancing our existing sub-certification process, to include all relevant employees to increase vigilance in identifying and understanding non-routine transactions and their impact prior to issuing financial statements.
We believe the measures described above will remediate the material weaknesses we have identified and strengthen our ICFR. We are committed to continuing to improve our internal control processes and have already implemented the separation of the purchase and sale departments through changes in the Company’s organizational structure, and have begun to implement the other steps described above. We will also continue to review, optimize, and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or we may modify certain of the remediation measures described above. These material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
During Q3 2019, there were no changes in our ICFR that have materially affected, or are reasonably likely to materially affect, our ability to certify the design of our ICFR, other than the material weaknesses described above. The Company continues to invest in systems and improvement of internal controls, including the planned implementation of a tier one ERP system throughout 2020.
RISKS AND UNCERTAINTIES
We are subject to various risks that could have a material impact on us, our financial performance, condition and outlook. The risks and uncertainties described below are those we currently believe to be material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected. These risks include, but are not limited to, the following risks:
•
We are reliant on our licenses, authorizations, approvals and permits for our ability to grow, store and sell cannabis and other products derived therefrom and such licenses are subject to ongoing compliance, reporting and renewal requirements, including significant regulation under the Cannabis Act as well as various provincial, territorial and municipal legislation.
•
Our ability to continue to grow, process, store and sell medical cannabis and participate in the Canadian medical and adult-use cannabis markets is dependent on the maintenance and validity of our licenses from Health Canada.
•
We operate in a highly regulated sector and may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business.
•
License holders, including our License Holders, are constrained by law in their ability to produce and market products.
•
The laws, regulations and guidelines generally applicable to the cannabis industry are changing and may change in ways currently unforeseen by us.
•
Changes in the regulations governing cannabis outside of Canada may adversely impact our business.
•
There can be no assurance that the legislation governing adult-use cannabis in Canada will allow for growth.

34


•
The effect of the legalization of adult-use cannabis in Canada on the medical cannabis industry is still uncertain, and it may have a significant negative effect upon our medical cannabis business if our existing or future medical-use customers decide to purchase products available in the adult-use market instead of purchasing medical-use products from us.
•
We may be unsuccessful in competing in the legal adult-use cannabis market in Canada.
•
Future clinical research studies on the effects of medical cannabis may lead to conclusions that dispute or conflict with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis.
•
Our expansion into jurisdictions outside of Canada is subject to risks.
•
Investments and joint ventures outside of Canada are subject to the risks normally associated with any conduct of business in foreign countries, including varying degrees of political, legal and economic risk.
•
If we choose to engage in other R&D activities outside of Canada, controlled substance and other legislation and treaties may restrict or limit our ability to research, manufacture and develop a commercial market for our products.
•
Our use of joint ventures may expose us to risks associated with jointly owned investments.
•
There can be no assurance that our current and future strategic alliances or expansions of scope of existing relationships will have a beneficial impact on our business, financial condition and results of operations.
•
We and certain of our subsidiaries have limited operating history and therefore we are subject to many of the risks common to early-stage enterprises.
•
Our existing production facilities in Canada are integral to our operations and any adverse changes or developments affecting our facilities may impact our business, financial condition and results of operations.
•
We may not successfully execute our production capacity expansion strategy.
•
The cannabis industry and markets are relatively new in Canada and in other jurisdictions, and this industry and market may not continue to exist or grow as anticipated or we may ultimately be unable to succeed in this industry and market.
•
The Canadian excise duty framework may affect profitability.
•
We are dependent on our senior management.
•
We may be subject to product liability claims.
•
Our products may be subject to recalls.
•
We may be unable to attract or retain skilled labor and personnel with experience in the cannabis sector, and may be unable to attract, develop and retain additional employees required for our operations and future developments.
•
We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative consumer perception.
•
We may not be able to successfully develop new products or find a market for their sale.
•
The technologies, process and formulations we use may face competition or become obsolete.
•
Clinical trials of cannabis-based medical products and treatments are novel terrain with very limited or non-existent clinical trials history; we face a significant risk that any trials will not result in commercially viable products and treatments.
•
We may fail to retain existing customers or acquire new customers.
•
We may not be able to achieve or maintain profitability and may continue to incur losses in the future.
•
We may not be able to secure adequate or reliable sources of funding required to operate our business.
•
The adult-use cannabis market in Canada may become oversupplied following the recent implementation of the Cannabis Act and the related legalization of cannabis for adult-use.
•
We must rely largely on our own market research to forecast sales and market demand which may not materialize.
•
We may experience breaches of security at our facilities or fraudulent or unpermitted data access or other cyber-security breaches, which may cause our customers to lose confidence in our security and data protection measures and may expose us to risks related to breaches of applicable privacy laws.
•
If we are not able to comply with all safety, health and environmental regulations applicable to our operations and industry, we may be held liable for any breaches thereof.
•
We may become involved in regulatory or agency proceedings, investigations and audits.
•
We may be subject to, or prosecute, litigation in the ordinary course of business.
•
We may not be able to successfully manage our growth.

35


•
We may compete for market share with other companies, both domestically and internationally, that may have longer operating histories and more financial resources, manufacturing and marketing experience than us.
•
We rely on third-party distributors to distribute our products, and those distributors may not perform their obligations.
•
We may not supply the provinces and territories of Canada with our products in the quantities anticipated, or at all.
•
Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result of their relationship with us and may, as a result, refuse to do business with us.
•
U.S. border officials could deny entry into the U.S. to our management, employees and/or investors.
•
Our cannabis cultivation operations are subject to risks inherent in an agricultural business.
•
Our cannabis cultivation operations are vulnerable to rising energy costs and dependent upon key inputs.
•
We are vulnerable to third party transportation risks.
•
We are subject to liability arising from any fraudulent or illegal activity by our employees, contractors and consultants.
•
We will seek to maintain adequate insurance coverage in respect of the risks we face, however, insurance premiums for such insurance may not continue to be commercially justifiable and there may be coverage limitations and other exclusions which may not be sufficient to cover our potential liabilities.
•
We are subject to certain restrictions of the TSX which may constrain our ability to expand our business internationally.
•
Failure to establish and maintain effective internal control over financial reporting may result in us not being able to accurately report our financial results, which could result in a loss of investor confidence and adversely affect the market price of our common shares.
•
We are subject to risks related to the protection and enforcement of our intellectual property rights and may become subject to allegations that we are in violation of intellectual property rights of third parties.
•
We license some intellectual property rights, and the failure of the owner of such intellectual property to properly maintain or enforce the intellectual property underlying such licenses could have a material adverse effect on our business, financial condition and performance.
•
Conflicts of interest may arise between us and our directors and officers, including as a result of the continuing involvement of certain of our directors with Altria and its affiliates.
•
Tax and accounting requirements may change in ways that are unforeseen to us and we may face difficulty or be unable to implement and/or comply with any such changes.
•
Our financial performance is subject to risks of foreign exchange rate fluctuation which could result in foreign exchange losses.
•
The inability of our counterparties and customers to meet their financial obligations to us may result in financial losses.
•
Natural disasters, unusual weather, pandemic outbreaks, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.
•
Altria has significant influence over us following the closing of the Altria Investment.
•
We have discretion in the use of net proceeds from the Altria Investment and may not use them effectively.
•
We may not realize the benefits of our strategic partnership with Altria, which could have an adverse effect on our business and results of operations.
•
Any common shares issued pursuant to the exercise of the Altria Warrant will dilute shareholders.
•
Altria’s significant interest in the Company may impact the liquidity of the common shares.
•
The change of control provisions in certain of our existing or future contractual arrangements may be triggered upon the exercise of the Altria Warrant in part or in full.
•
Future sales of our common shares by Altria could cause the market price for our common shares to fall.
•
The market price for our securities may be volatile and subject to fluctuation in response to numerous factors, many of which are beyond our control.
•
We are eligible to be treated as an “emerging growth company”, as defined in the Jumpstart Our Business Startups (JOBS) Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our securities less attractive to investors.
•
We incur increased costs as a result of being a public company in the U.S., and our management is required to devote substantial time to U.S. public company compliance programs.

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•
As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.
•
We will lose foreign private issuer status in the future, which could result in significant additional costs and expenses to us.
•
We may require additional capital in the future and we cannot give any assurance that such capital will be available at all or available on terms acceptable to us and, if it is available, additional capital raised by us may dilute holders of our securities.
•
A substantial number of our securities are owned by a limited number of existing shareholders.
•
It is not anticipated that any dividend will be paid to holders of common shares for the foreseeable future.
•
Investors in the U.S. may have difficulty bringing actions and enforcing judgments against us and others based on securities law civil liability provisions.
•
If we are a passive foreign investment company for U.S. federal income tax purposes in any year, certain adverse tax rules could apply to U.S. holders of our common shares.
•
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

A more detailed description of certain risks associated with the Company can be found under the heading “Risk Factors” in the AIF.
Additional Risks Relating to the Company’s U.S. Hemp Business
Future clinical research studies on the effects of cannabis, hemp and cannabinoids (such as CBD and THC) may lead to conclusions that dispute or conflict with our understanding and belief regarding their benefits, viability, safety, efficacy, dosing and social acceptance.
Research in Canada, the U.S. and elsewhere regarding the benefits, viability, safety, efficacy and dosing of cannabis, hemp or cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few studies on the benefits of cannabis, hemp or cannabinoids.
Although we believe that the existing public scientific literature generally supports our beliefs regarding the benefits, viability, safety and efficacy of cannabis, hemp and cannabinoids, future research may cast doubt or disprove such beliefs, or could raise or heighten concerns regarding cannabis, hemp and cannabinoids. Given these risks, uncertainties and assumptions, undue reliance should not be placed on such literature. In addition, the FDA has raised several questions regarding the safety of CBD and gaps in the public scientific literature supporting the use of CBD by the general population.
Future research studies and clinical trials may draw opposing conclusions or reach negative conclusions regarding the benefits, viability, safety and efficacy related to the use of cannabis, hemp and cannabinoids, which could have a material and adverse effect on the demand for our products with the potential to lead to a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
We believe that the hemp industry in the U.S. is highly dependent upon broad social acceptance and positive consumer perception regarding the safety, efficacy and quality of hemp products, as well as consumer views concerning regulatory compliance and perceived similarities or differences between hemp and cannabis. Consumers, vendors, landlords/lessors, industry partners or third-party service providers may incorrectly perceive hemp products as cannabis, thereby confusing them for having the THC content of cannabis or for being illegal under U.S. federal law which potentially impacts our ability to sell our products or obtain the necessary services or supplies to manufacture, store or transport our products.
There is limited long-term data with respect to the efficacy and side effects of our products.
Some of our products contain hemp extract and combinations with other ingredients. There is limited long-term data with respect to efficacy, side effects and/or interaction of these substances with human or animal biochemistry. As a result, our products could have unexpected side effects, the discovery of which could lead to civil litigation, regulatory actions and even possibly criminal enforcement actions. In addition, if the products we sell do not or are not perceived to have the effects intended by the end user, our business may suffer.
The current controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for hemp vaporizer products and expose us to litigation and additional regulation.
There have been a number of highly publicized cases involving lung and other illnesses and deaths that appear to be related to vaporizer devices and/or products used in such devices (such as vaporizer liquids). There is uncertainty as to the cause of these

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illnesses and deaths. Focus is currently on the vaporizer devices, the manner in which the devices were used and the related vaporizer device products – THC, nicotine, possibly adulterated products and other illegal unlicensed cannabis vaporizer products. Some states and cities have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products or impose restrictions on flavors or use of such vaporizers. This trend may continue, accelerate and expand. Further, state and federal regulators (including the FDA) are also considering the need to regulate and perhaps prohibit certain vaporizer devices and certain vaporizer products.

This controversy could well extend to the hemp market and the use of hemp-derived ingredients, including CBD, in vaporizer products as well as tinctures and other ingestible products. Any such extension could materially and adversely affect our hemp business, business, financial condition, operating results, liquidity, cash flow and operational performance. Litigation is accelerating in the vaporizer marketplace and that litigation could potentially expand to hemp products, which would materially and adversely affect our hemp business, financial condition, operating results, liquidity, cash flow and operational performance.
We are subject to uncertainty regarding the legal and regulatory status of hemp, including with respect to U.S. federal and state implementation of the 2018 Farm Bill and related laws, including the Federal Food, Drug, and Cosmetic Act, and the interpretation or application of, or changes to, such laws and regulations may have material and adverse effects on our business, financial condition, operating results, liquidity, cash flow and operational performance.
In 2014, Congress passed the 2014 Farm Bill, which permitted the domestic cultivation of “industrial hemp” (defined as the plant Cannabis Sativa L. and any part of such plant, whether growing or not, with no more than 0.3% THC on a dry weight basis) as part of agricultural pilot programs adopted by individual states for the purposes of research by state departments of agriculture and institutions of higher education. There is significant uncertainty concerning the permissible scope of commercial activity under the 2014 Farm Bill. The 2014 Farm Bill only authorized institutions of higher education and state agricultural departments to cultivate industrial hemp, and only to do so for research purposes. However, it also gave significant discretion to states to regulate industrial hemp pilot programs. Many states that have adopted pilot programs have licensed private companies to cultivate and process industrial hemp. Additionally, many states have interpreted the 2014 Farm Bill to permit marketing research concerning industrial hemp through, among other things, commercial marketing and sale of industrial hemp and industrial hemp products. In contrast, the DEA, FDA and the United States Department of Agriculture (“USDA”) have taken the position that, under the 2014 Farm Bill, industrial hemp products may not be sold for the purpose of general commercial activity or in states without agricultural pilot programs that permit their sale for research marketing purposes; these agencies have also taken the position that, under the 2014 Farm Bill, industrial hemp plants and seeds may not be transported across state lines.
On December 20, 2018, the 2018 Farm Bill was signed into law. The 2018 Farm Bill, among other things, removes “hemp” (defined as the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3% on a dry weight basis and its derivatives) from the Controlled Substances Act and amends the Agricultural Marketing Act of 1946 to permit the production and sale of hemp in the U.S. The 2018 Farm Bill tasks the USDA with promulgating regulations in relation to the cultivation and production of hemp. The 2018 Farm Bill also directs the USDA to promulgate federal regulations that would apply to the production of hemp in every state which does not put forth a state hemp plan for approval by the USDA. Until such time as the USDA approves state hemp plans or promulgates regulations for hemp production in states without approved plans, hemp production is governed by the more restrictive 2014 Farm Bill, and commercial production of hemp may violate federal law. There is uncertainty concerning the timing and manner of implementation of the 2018 Farm Bill. The USDA has proposed draft interim final rules on domestic hemp production and has released guidelines for sampling and testing procedures. There is a 60-day public comment period on the interim final rules, following which the USDA will begin its process to approve state plans. The USDA has committed to draft and publish a final set of rules within two years; however, the timing and content of the USDA’s regulations cannot be assured.
Additionally, states may adopt regulatory schemes that impose different levels of regulation and costs on the production of hemp. Because states have not yet obtained USDA approval for state plans for commercial hemp production and cannot do so until the USDA promulgates regulations to review those plans, the timing of the adoption of state plans remains uncertain. Moreover, the 2018 Farm Bill provides that its provisions do not preempt or limit state laws that regulate the production of hemp. Accordingly, some states may choose to restrict or prohibit some or all hemp production or sales within the state and variances in states’ laws and regulations on hemp are likely to persist. Further, each state has discretion to develop and implement its own laws and regulations governing the manufacturing, marketing, labeling, and sale of hemp products, which will create a patchwork of different regulatory schemes applicable to such products.
Under the 2018 Farm Bill, the FDA has retained authority over the Federal Food, Drug, and Cosmetic Act-regulated products (e.g., drugs (human and animal), food (human and animal), dietary supplements and cosmetics) containing hemp and hemp-derived ingredients, including CBD. Moreover, states have retained regulatory authority through their own analogues to the Federal Food,

38


Drug and Cosmetic Act, and the states may diverge from the federal treatment of the use of hemp as, or in, food, dietary supplements or topical cosmetic products. The FDA or applicable states (under their Controlled Substances Act and Federal Food, Drug, and Cosmetic Act analogues) may ultimately not permit the sale of non-pharmaceutical products containing hemp-derived ingredients, including CBD.
The FDA or particular states may ultimately prohibit the sale of some or all dietary supplements or conventional foods containing hemp and hemp-derived ingredients, including CBD.
The FDA has consistently taken the position that CBD, whether derived from hemp or cannabis, is prohibited from use as an ingredient in food and dietary supplements. This stems from its interpretation of the exclusionary clauses in the Federal Food Drug & Cosmetic Act because CBD has been approved as a prescription drug and is the subject of substantial clinical investigations as a drug, which have been made public. The exclusionary clauses under the Federal Food Drug & Cosmetic Act provide that a substance that has been approved and/or has been subject to substantial clinical investigations as a drug may not be used in a food or dietary supplement, unless the substance was first marketed in a food or dietary supplement prior to the initiation of substantial clinical investigations of the substance as a drug.
The FDA has not issued regulations that elaborate on the exclusionary clauses and the FDA has not taken any enforcement action in the courts asserting a violation of the exclusionary clauses. To date, the FDA has issued several warning letters to companies unlawfully marketing CBD products. In many of these cases, the manufacturer made unsubstantiated claims about the product being able to treat serious medical conditions (e.g., cancer, Alzheimer’s disease, opioid withdrawal and anxiety) and had not obtained drug approvals. Some of these letters were co-signed with the Federal Trade Commission (“FTC”) and cited the companies for making egregious claims about the efficacy of CBD which were not substantiated by competent and reliable scientific evidence. Recently, the FDA has issued warning letters against dietary supplement manufacturers for manufacturing CBD supplements in licensed facilities in addition to various other violations.
Until the FDA formally adopts regulations with respect to CBD products or announces an official position with respect to CBD products, there is a risk that the FDA could take enforcement action (e.g., warning letter, seizure, injunction) against the Company’s hemp-derived CBD products sold in the U.S.
The hemp industry in the U.S. is governed by various federal, state and local agencies and we may not always succeed in complying fully with applicable regulatory requirements.
The regulatory environment for the hemp industry in the U.S. is rapidly developing, and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that we may violate one or more applicable requirements. If our operations are found to be in violation of any such laws or any other governmental regulations, we may be subject to negative consequences, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, asset seizures, revocation or imposition of additional conditions on licenses to operate our business, the denial of regulatory applications (including by other regulatory regimes that rely on the positions of the DEA and FDA in the application of their respective regimes), the suspension or expulsion from a particular market or jurisdiction or of our key personnel, or the imposition of additional or more stringent inspection, testing and reporting requirements, any of which could adversely affect our business and financial results. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licenses and other permits, which could have a material adverse effect on our business, results of operations and financial condition. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact our ongoing costs relating to regulatory compliance.
Additionally, our advertising is subject to regulation by the FTC under the Federal Trade Commission Act as well as subject to regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, including as amended by the Dietary Supplement Health and Education Act of 1994, and by state agencies under analogous state laws. In recent years, the FTC, the FDA and state agencies have initiated numerous investigations of food and dietary supplement products both because of their CBD content and based on allegedly deceptive or misleading marketing claims and have, on occasion, issued warning letters due to such claims. At any point, enforcement strategies of a given agency can change as a result of other litigation in the space or changes in political landscapes and could result in increased enforcement efforts, which would materially impact our business. Some states also permit content, advertising and labelling laws to be enforced by state attorney generals, who may seek civil and criminal penalties, relief for consumers, class action certifications, class wide damages and recalls of products sold by us. Private litigation may also seek relief for consumers, class action certifications, class wide damages and recalls of products sold by us. Any actions against us by governmental authorities or private litigants could have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

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If the Company’s hemp business activities in the U.S. are found to be in violation of any of Untied States federal, state or local laws or any other governmental regulations:
•
the Company may be subject to warning letters, fines, penalties, administrative sanctions, settlements, injunctions, product recalls and/or other enforcement actions arising from civil, administrative or other proceedings initiated that could adversely affect the Company’s business, financial condition, operating results, liquidity, cash flow and operational performance;
•
the profits or revenues derived therefrom could be subject to money laundering statutes, including the Money Laundering Control Act, which could result in significant disruption to our Unites States hemp business operations and involve significant costs, expenses or other penalties; and
•
the Company’s suppliers, service providers and distributors may elect, at any time, to breach or otherwise cease to participate in supply, service or distribution agreements, or other relationships, on which the Company’s operations rely.
We may be required to submit a New Dietary Ingredient notification to the FDA, which may not be accepted without objection.
Even if the exclusionary clause issue is resolved in a manner favorable to us, we could be required to submit a New Dietary Ingredient (“NDI”) notification to the FDA with respect to hemp-derived ingredients, including CBD, used in dietary supplement products. This could depend on whether we can establish that a particular ingredient was marketed as a dietary ingredient in a dietary supplement prior to October 15, 1994 or is otherwise currently in the food supply in the same chemical form as used in our dietary supplement products. If FDA objects to our NDI notification, this could prevent us from producing, marketing and selling hemp products.
The market for hemp products in the U.S. is relatively new and is subject to risks associated with an emerging industry. This industry and market may not continue to exist or grow as anticipated or we may ultimately be unable to succeed in this industry and market.
The hemp industry in the U.S. is a new and highly speculative industry that is rapidly expanding and may ultimately not be successful. We face inherent challenges associated with being in a new market, including establishing reliable supply-chains and modernizing processing to compete with producers in other countries where industrial hemp cultivation and production of hemp products has already been established. Therefore, we are subject to all of the business risks associated with a new business in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of hemp products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
The market for hemp products in the U.S. is increasingly competitive.
The market for hemp products in the U.S. is competitive and evolving and we face strong competition from both existing and emerging companies that offer similar products. Some of our current and potential competitors may have longer operating histories, greater financial, marketing and other resources and larger customer bases than us.
Given the rapid changes affecting global, national and regional economies generally, and the hemp industry in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to respond to, among other things, changes in the economy, regulatory conditions, market conditions and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
The number of competitors in the hemp industry in the U.S. is expected to increase, which could negatively impact our market share and demand for our products. Additionally, if the U.S. takes steps to legalize non-hemp cannabis products, the impact of such a development could result in new entrants into our market and increased levels of competition.
The FDA or particular states may seek to regulate our topically applied products containing hemp-derived ingredients, including CBD, as drugs, medical devices, or drug-device combination products.
The FDA may seek to regulate our topically applied products containing hemp-derived ingredients, including CBD, under its authorities for medical products (i.e., drugs, medical devices, or drug-device combination products). Specifically, the agency could assert that our lotions, oils, balms and creams are intended for use in diagnosing, treating, mitigating, or preventing disease or for use in affecting the structure or any function of the body. In making classification decisions, the agency considers a wide variety of factors to determine a product’s intended use; indeed, the FDA has sometimes asserted that a product qualifies as a drug based solely on the presence of an ingredient widely understood to have drug effects, even in the absence of express claims about them. While we do not market our lotions, oils, balms and creams as drugs for use in the treatment of diseases or their symptoms, the FDA could still assert that the products are intended for use as drugs, including based on the understood or presumed physical

40


effects of topically administered cannabinoids. Thus, we may not have the ability to successfully respond to such allegations simply by modifying labelling or advertising claims. Ultimately, if the FDA asserts one of its medical product authorities over our lotion, oil, balm and cream products, and we cannot or elect not to comply with the onerous regulatory requirements applicable to the asserted medical product category (e.g., drug), we could be prevented from producing, marketing and selling topically applied products containing hemp-derived ingredients, including CBD. In addition, states may similarly seek to regulate our topically applied products containing hemp-derived ingredients, including CBD, as medical products (i.e., drugs, medical devices, or drug-device combination products) under state analogues to the Federal Food, Drug, and Cosmetic Act or otherwise. States have also considered and established additional restrictions on, or requirements for, the marketing of topically applied products containing hemp-derived ingredients. If the states assert their medical product authorities over our topically applied products containing hemp-derived ingredients, including CBD, in a manner that we cannot address simply by modifying labelling or advertising claims, and we cannot or elect not to comply with the onerous regulatory requirements applicable to the asserted medical product category (e.g., drug), we could be prevented from producing, marketing and selling topically applied products containing hemp-derived ingredients, including CBD. Likewise, if the states enforce or adopt regulatory interpretations or restrictions that limit our ability to market our topically applied products containing hemp-derived ingredients, including CBD, in such states, it could materially and adversely affect our business, financial condition, operating results, liquidity, cash flow and operational performance.
The presence of trace amounts of THC in our hemp products not intended to contain THC may cause adverse consequences to users of such products that will expose us to the risk of liability and other consequences.
Some of our products that are intended to primarily contain hemp-derived CBD, or other products, may contain trace amounts of THC. THC is an illegal or controlled substance in many jurisdictions, including under the federal laws of the U.S. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to consumers of our hemp products who test positive for any amounts of THC, even trace amounts, because of the presence of unintentional amounts of THC in our hemp products. In addition, certain metabolic processes in the body may negatively affect the results of drug tests. As a result, we may have to recall our products from the market. Positive tests for THC may adversely affect our reputation, ability to obtain or retain customers and participation in certain athletic or other activities. A claim or regulatory action against us based on such positive test results could materially and adversely affect our business, financial condition, operating results, liquidity, cash flow and operational performance.
The DEA could take action against us or the hemp industry.
There is substantial uncertainty concerning the legal status of hemp and hemp products containing hemp-derived ingredients, including CBD. The status of products derived from the cannabis or hemp plant, under both federal and state law can depend on the THC content of the plant or derivative (including whether the plant meets the statutory definition of “industrial hemp” or “hemp”), the part of the plant from which an individual or entity produces the derivative (including whether the plant meets the statutory definition of “marihuana” under the Controlled Substances Act), whether the cultivator, processor, manufacturer, or product marketer engages in cannabis-related activities for research versus purely commercial purposes, as well as the form and intended use of the product. The mere presence of a cannabinoid (such as CBD) is not dispositive as to whether the product is legal or illegal. For example, under U.S. law, products containing CBD may be unlawful if derived from cannabis not meeting the statutory definition of “industrial hemp” or “hemp,” if the product has impermissible THC content (i.e., greater than 0.3% on a dry weight basis), or if derived from industrial hemp grown outside the parameters of an approved industrial hemp pilot program or hemp cultivated in violation of the 2018 Farm Bill. Because the chemical and molecular composition of the ingredients in the product itself does not determine its legality, we may be subject to enforcement action, even if based on a mistaken understanding of the facts, relating to our products.
Additionally, before enactment of the 2018 Farm Bill, the DEA had taken the position that it was not practical to produce extracts that contain more than trace amounts of CBD using parts of the plant that were excluded from the definition of marihuana. Even after enactment of the 2018 Farm Bill, the DEA may not treat all products containing hemp-derived ingredients, including CBD, as exempt from the Controlled Substances Act. If the DEA takes action against us or the hemp industry, this could have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
We may be required to obtain various permits, licenses and approvals in connection with our hemp business.
We may be required to obtain and maintain certain permits, licenses and approvals in the jurisdictions where we source, process, or sell products derived from hemp. We may be unable to obtain or maintain any necessary licenses, permits or approvals. Moreover, we and/or third-party suppliers of hemp oil or hemp extract products could be required to obtain a Controlled Substances Act permit, which would likely not be a feasible option for retail products. Failure to obtain such licenses, permits or approvals, or any material delay in receiving these items is likely to delay and/or inhibit our ability to conduct our business, and would have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

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Hemp plants are vulnerable to specific agricultural risks that may have a material and adverse effect on our hemp operations.
Hemp is typically harvested in or around the month of October. Hemp plants can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. Such instances often lead to reduced crop quality, stunted growth and/or death of the plant. Moreover, hemp is “phytoremediative” (meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted). Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. If hemp used in our products is found to have levels of pathogens, toxins, chemicals or other undesirable compounds that exceed permitted limits, it may have to be destroyed. Should the hemp used in our products be lost due to pathogens, toxins, chemicals or other undesirable compounds, or if we or our suppliers are otherwise unable to obtain hemp for use in our products on an ongoing basis, it may have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.
Upcoming Change in Issuer’s GAAP
Effective December 31, 2019, the Company will become a domestic issuer under the rules of the U.S. Securities and Exchange Commission and will no longer qualify as a “foreign private issuer” under those rules. As a result, the Company will have to prepare its December 31, 2019 audited annual financial statements in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), with such change being applied retrospectively. The extent of the impact of this change in accounting framework has not yet been quantified, but the Company anticipates that the results for the year ended December 31, 2019, will include two reportable segments: the U.S. and Rest of World. We also intend to report the results, including comparative financial information, in USD.
ADDITIONAL INFORMATION
Our Canadian filings, including the AIF, are available on the System for Electronic Document Analysis and Retrieval at www.sedar.com. Our reports and other information filed with the SEC are available on the SEC’s Electronic Document Gathering and Retrieval System at www.sec.gov.


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Exhibit


Exhibit 99.3
FORM 52-109F2R
CERTIFICATION OF REFILED INTERIM FILINGS
This certificate is being filed on the same date that Cronos Group Inc. (the “issuer”) has refiled the interim financial report and related MD&A for the interim period ended September 30, 2019 by filing (i) an amended and restated interim financial report, (ii) a restated interim financial report (each of (i) and (ii), “the interim financial report”) and (iii) an MD&A (the “interim MD&A”), in each case, for the interim period ended September 30, 2019.
I, Michael Gorenstein, Chief Executive Officer and President of the issuer, certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of the issuer for the interim period ended September 30, 2019.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) (“COSO Framework”) published by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period
(a)
a description of the material weakness;
(b)
the impact of the material weakness on the issuer’s financial reporting and its ICFR; and
(c)
the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A
(a)
the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of
(i)
N/A
(ii)
N/A
(iii)
a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and
(b)
summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2019 and ended on September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: March 30, 2020.
/s/ “Michael Gorenstein”
Michael Gorenstein
Chief Executive Officer and President


Exhibit


Exhibit 99.4
FORM 52-109F2R
CERTIFICATION OF REFILED INTERIM FILINGS
This certificate is being filed on the same date that Cronos Group Inc. (the “issuer”) has refiled the interim financial report and related MD&A for the interim period ended September 30, 2019 by filing (i) an amended and restated interim financial report, (ii) a restated interim financial report (each of (i) and (ii), “the interim financial report”) and (iii) an MD&A (the “interim MD&A”), in each case, for the interim period ended September 30, 2019.
I, Jerry F. Barbato, Chief Financial Officer of the issuer, certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of the issuer for the interim period ended September 30, 2019.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(i)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(ii)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) (“COSO Framework”) published by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period
(a)
a description of the material weakness;
(b)
the impact of the material weakness on the issuer’s financial reporting and its ICFR; and
(c)
the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.
5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A
(a)
the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of
(i)
N/A
(ii)
N/A
(iii)
a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and
(b)
summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2019 and ended on September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: March 30, 2020.
/s/ “Jerry Barbato”
Jerry F. Barbato
Chief Financial Officer