Exhibit | Description |
99.1 | |
99.2 | |
99.3 | |
99.4 |
CRONOS GROUP INC. | |
(Registrant) | |
By: | /s/ Michael Gorenstein |
Name: | Michael Gorenstein |
Title: | President and Chief Executive Officer |
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 |
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 |
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 |
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 |
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 |
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. |
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% |
(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."). |
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. |
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. |
3. | Adoption of new accounting pronouncements (continued) |
(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 |
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. |
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. |
(c) | Direct and indirect cost allocations |
4. | Biological assets and inventory (continued) |
(c) | Direct and indirect cost allocations (continued) |
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 |
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. |
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 |
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. |
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. |
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 |
8. | Business combination (continued) |
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. |
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 | ||||||
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 |
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. | ||||
11. | Subsidiaries with non-controlling interests (continued) |
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 |
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. |
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%. |
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 |
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% |
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. |
15. | Share capital (continued) |
(b) | Top-up Rights - market price |
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 |
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 |
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 |
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 |
16. | Share-based payments (continued) |
(b) | Stock options (continued) |
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 |
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 |
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 |
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 |
16. | Share-based payments (continued) |
(d) | Deferred share units |
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 |
17. | Revenue from contracts with customers |
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 |
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 |
19. | Related party transactions |
The following is a summary of the Company's related party transactions during the period: | |
(a) | Key management compensation |
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. |
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. |
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. |
21. | Income taxes (continued) |
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 |
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. | |
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. |
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 |
(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. |
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. |
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 | - |
(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). |
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. |
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 |
28. | Restatement (continued) |
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 |
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 |
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 |
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 | ) |
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 |
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. |
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. |
• | 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; |
• | 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. |
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. |
• | 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. |
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. |
• | 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. |
• | 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. |
• | 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. |
($ 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 $4.9 million, representing a increase of 129%. |
($ 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. |
($ 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%) |
($ 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%) |
• | 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. |
• | 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. |
($ 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. |
• | 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. |
• | 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. |
• | decrease was driven by higher production cost on a per gram basis and the impact of inventory written down in Q3 2019 of $4.9 million, representing an increase of 129% in cost of sales before fair value adjustments and inventory write-down per gram and; |
• | decrease in gross margin before fair value adjustments was largely driven by an increase in excise taxes that did not exist during Q3 2018. |
• | increase in gross profit before fair value adjustments was largely driven by both an increase in kilograms sold and an increase in net revenue as described above; and |
• | decrease in gross margin before fair value adjustments was largely driven by an increase in excise taxes that did not exist during YTD 2018. |
($ 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 | % | -- |
• | 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. |
• | 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. |
($ 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 | % |
• | 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. |
• | 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. |
($ 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%) |
($ 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) |
($ 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) |
($ 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 |
($ 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 |
($ 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 |
(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 |
($ 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. |
• | 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. |
• | 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 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. |
• | 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. |
• | 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. |
• | 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. |
• | 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. |
(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. |
(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. |
(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. |
/s/ “Michael Gorenstein” |
Michael Gorenstein |
Chief Executive Officer and President |
(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. |
(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. |
(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. |
/s/ “Jerry Barbato” |
Jerry F. Barbato |
Chief Financial Officer |