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CRONOS GROUP INC. Unaudited Condensed Interim Consolidated Financial Statements For the Three and Six Months Ended

Tuesday, August 14, 2018 4 min read
Key Takeaway: CRONOS GROUP INC. Unaudited Condensed Interim Consolidated Financial Statements For the Three and Six Months Ended June 30, 2018 and June 30, 2017 (in thousands of Canadian dollars) Cronos Group Inc. Unaudited Condensed Interim Consolidated Financial Statements For the three and

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CRONOS GROUP INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2018 and June 30, 2017
(in thousands of Canadian dollars)
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2018 and June 30, 2017
Unaudited Condensed Interim Consolidated Statements of Financial Position 1
Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Loss 2
Unaudited Condensed Interim Consolidated Statements of Changes in Equity 3
Unaudited Condensed Interim Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Interim Consolidated Financial Statements 5
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Financial Position
As at June 30, 2018 and December 31, 2017
(in thousands of CDN $)
Notes As at June 30, 2018 As at December 31, 2017
Assets
Current assets
Cash $ 89,609 $ 9,208
Accounts receivable 22(i) 2,844 1,140
Sales taxes receivable 6,952 3,114
Prepaids and other receivables 4,112 790
Biological assets 6 6,899 3,722
Inventory 6 12,334 8,416
Loan receivable 7,22(i) 314 314
Total current assets 123,064 26,704
Promissory note receivable 8,22(i) 1,304 -
Investment in Whistler 9 3,851 3,807
Other investments 10 725 1,347
Property, plant and equipment 11 93,657 56,172
Intangible assets 12 11,043 11,207
Goodwill 13 1,792 1,792
Total assets $ 235,436 $ 101,029
Liabilities
Current liabilities
Accounts payable and other liabilities 22(ii) $ 2,333 $ 7,878
Total current liabilities 2,333 7,878
Construction loan payable 14 5,565 5,367
Deferred income tax liability 21 268 1,416
Total liabilities 8,166 14,661
Shareholders' equity
Share capital 15(a) 224,742 83,559
Shares to be issued 15(c) 17 -
Warrants 16(a) 1,868 3,364
Stock options 16(b) 3,810 2,289
Accumulated deficit (4,051 ) (3,724 )
Accumulated other comprehensive income 884 880
Total shareholders' equity 227,270 86,368
Total liabilities and shareholders' equity $ 235,436 $ 101,029
Commitments and contingencies 20
Subsequent events 25
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Approved on behalf of the Board of Directors:
"Michael Gorenstein" "James Rudyk"
Director Director
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss)
For the three and six months ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
Notes 2018 2017 2018 2017
Revenue 17 $ 3,394 $ 643 $ 6,339 $ 1,157
Cost of sales
Inventory expensed to cost of sales, before fair value adjustments 5,6 1,254 215 2,821 413
Gross profit before fair value adjustments 2,140 428 3,518 744
Fair value adjustments
Unrealized change in fair value of biological assets 5,6 (6,831 ) (1,122 ) (9,575 ) (2,701 )
Realized fair value adjustments on inventory sold in the period 5,6 2,625 429 4,819 1,288
Total fair value adjustments (4,206 ) (693 ) (4,756 ) (1,413 )
Gross profit 6,346 1,121 8,274 2,157
Operating expenses
Sales and marketing 364 87 950 131
General and administrative 4,219 1,872 6,680 3,208
Share-based payments 16(b),19 950 439 1,724 631
Depreciation and amortization 11,12 323 228 608 429
Total operating expenses 5,856 2,626 9,962 4,399
Operating income (loss) 490 (1,505 ) (1,688 ) (2,242 )
Other income (expense)
Interest income (expense) (37 ) 13 (59 ) (137 )
Share of income from Whistler investment 9 3 313 44 416
Gain on other investments 10 - 1,330 221 1,271
Total other income (expense) (34 ) 1,656 206 1,550
Income (loss) before income taxes 456 151 (1,482 ) (692 )
Income tax recovery 21 (267 ) (23 ) (1,155 ) (22 )
Net income (loss) $ 723 $ 174 $ (327 ) $ (670 )
Other comprehensive income
Gain on revaluation and disposal of other investments, net of tax 10,21 39 11 4 694
Comprehensive income (loss) $ 762 $ 185 $ (323 ) $ 24
Net income (loss) per share
Basic and diluted 18 $ 0.00 $ 0.00 $ (0.00 ) $ (0.01 )
Weighted average number of outstanding shares
Basic 18 175,529,196 132,647,546 166,343,078 128,824,503
Diluted 18 211,524,230 167,787,028 166,343,078 128,824,503
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Equity
For the three and six months ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except number of share amounts)
Notes Number of shares Share capital Shares to be issued Share-based reserve Accumulated deficit Accumulated other comprehensive income Total
Warrants Stock options
Balance at January 1, 2017 121,725,748 $ 33,590 $ - $ 3,983 $ 735 $ (6,215 ) $ 1,584 $ 33,677
Shares issued 15(a) 7,705,000 17,336 - - - - - 17,336
Share issuance costs - (1,322 ) - - - - - (1,322 )
Vesting of options 16(b) - - - - 631 - - 631
Options exercised 16(b) 394,163 689 - - (247 ) - - 442
Warrants exercised 16(a) 3,317,416 1,272 - (383 ) - - - 889
Unrealized gains reclassified to net income 10 - - - - - - (691 ) (691 )
Net loss - - - - - (670 ) - (670 )
Other comprehensive income 10 - - - - - - 694 694
Balance at June 30, 2017 133,142,327 $ 51,565 $ - $ 3,600 $ 1,119 $ (6,885 ) $ 1,587 $ 50,986
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 - (9,444 ) - - - - - (9,444 )
Vesting of options 16(b) - - - - 1,724 - - 1,724
Options exercised 16(b) 353,339 682 - - (142 ) - - 540
Warrants exercised 16(a) 11,364,335 3,852 - (1,496 ) - - - 2,356
Shares to be issued 15(c) - - 17 - - - - 17
Share appreciation rights 16(b) 150,215 61 (61 ) -
Net loss - - - - - (327 ) - (327 )
Other comprehensive loss 10,21 - - - - - - 4 4
Balance at June 30, 2018 176,905,635 $ 224,742 $ 17 $ 1,868 $ 3,810 $ (4,051 ) $ 884 $ 227,270
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the three and six months ended June 30, 2018 and June 30, 2017
(in thousands of CDN $)
Three Months Ended June 30, Six Months Ended June 30,
Notes 2018 2017 2018 2017
Operating activities
Net income (loss) $ 723 $ 174 $ (327 ) $ (670 )
Items not affecting cash:
Unrealized change in fair value of biological assets 5,6 (6,831 ) (1,122 ) (9,575 ) (2,701 )
Realized fair value adjustments on inventory sold in the period 5,6 2,625 429 4,819 1,288
Share-based payments 16(b),19 950 439 1,724 631
Depreciation and amortization 11,12 575 228 1,115 429
Share of income from Whistler investment 9 (3 ) (313 ) (44 ) (416 )
Gain on other investments 10 - (1,330 ) (221 ) (1,271 )
Deferred income tax recovery 21 (267 ) (23 ) (1,155 ) (22 )
Foreign exchange loss (gain) 4 - (12 ) -
(2,224 ) (1,518 ) (3,676 ) (2,732 )
Net changes in non-cash working capital:
Accounts receivable (318 ) (55 ) (1,704 ) (191 )
Sales taxes receivable (2,686 ) - (3,838 ) -
Prepaids and other receivables 544 (2,087 ) (3,322 ) (2,152 )
Biological assets 4,422 1,079 6,398 1,711
Inventory (5,945 ) (883 ) (8,737 ) (2,093 )
Accrued interest on loan receivable - - - (5 )
Accounts payable and other liabilities (659 ) 136 (5,750 ) 208
Cash flows used in operating activities (6,866 ) (3,328 ) (20,629 ) (5,254 )
Investing activities
Repayment of purchase price liability - - - (1,299 )
Investment in Whistler 9 - (1,076 ) - (1,076 )
Investment in ABcann Global Corporation 10 - (1,016 ) - (1,016 )
Proceeds from sale of other investments 10 280 1,683 967 1,771
Payment to exercise ABcann Global Corporation warrants 10 - - (113 ) -
Advances of promissory note receivable 8 (378 ) - (1,304 ) -
Purchase of property, plant and equipment 11 (30,025 ) (3,494 ) (37,667 ) (5,529 )
Purchase of intangible assets 12 (38 ) - (169 ) -
Cash flows used in investing activities (30,161 ) (3,903 ) (38,286 ) (7,149 )
Financing activities
Proceeds from exercise of warrants 15(b) 132 245 1,412 889
Proceeds received for shares to be issued 15(c) - - 961 -
Proceeds from exercise of options 16(b) 467 185 540 442
Proceeds from share issuance 15(a) 100,032 - 146,032 17,336
Share issuance costs (6,363 ) - (9,444 ) (1,322 )
Payment of accrued interest on construction loan 14 - - (185 ) -
Repayment of mortgage payable - (4,000 ) - (4,000 )
Cash flows provided by (used in) financing activities 94,268 (3,570 ) 139,316 13,345
Net change in cash 57,241 (10,801 ) 80,401 942
Cash - beginning of period 32,368 15,207 9,208 3,464
Cash - end of period $ 89,609 $ 4,406 $ 89,609 $ 4,406
Supplemental cash flow information
Interest paid $ 189 $ 80 $ 496 $ 200
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
1. Nature of business
Cronos Group Inc. (" Cronos Group " or the " Company "), was incorporated under the Business Corporations Act (Ontario). Cronos Group is a publicly traded corporation, with its head office located at 720 King Street West, Suite 320, Toronto, Ontario, M5V 2T3. The Company's common shares are currently listed on the Toronto Stock Exchange ( "TSX" ) and Nasdaq Global Market under the trading symbol "CRON".
Hortican Inc. (" Hortican "), is a wholly owned subsidiary of Cronos Group, incorporated under the Canada Business Corporations Act ( "CBCA" ).
Cronos Group operates two wholly owned licensed producers and sellers ( "Licensed Producers" ) of medical cannabis pursuant to the provisions of the Controlled Drugs and Substances Act ( "CDSA" ) and its relevant regulation, the Access to Cannabis for Medical Purposes Regulations ( "ACMPR" ), namely 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. Currently, Cronos Group sells dried cannabis flower and cannabis oils under its medical cannabis brand, Peace Naturals.
OGBC was incorporated as In the Zone Produce Ltd. (" In the Zone ") under the Business Corporations Act (British Columbia) and was acquired by Hortican on November 5, 2014. In the Zone changed its name to OGBC on October 16, 2017, and was continued under the CBCA on the same day. OGBC is a Licensed Producer pursuant to the provisions of the ACMPR and the CDSA. On February 26, 2014, Health Canada issued an initial cultivation license to OGBC under the ACMPR which has since been amended and supplemented. OGBC's current license has an effective term from February 28, 2017 to February 28, 2020 and grants OGBC the right to engage in the production and sale of dried cannabis flower. The license was amended to reflect its name change on October 20, 2017.
Peace Naturals was incorporated under the CBCA, and was acquired by Hortican on September 6, 2016. Peace Naturals is a Licensed Producer pursuant to the provisions of the ACMPR and the CDSA. On October 31, 2013, Health Canada issued an initial license to Peace Naturals for activities related to the production and sale of dried cannabis flower under the ACMPR, which has since been amended and supplemented. Peace Naturals' current license has an effective term from November 1, 2016 to November 1, 2019 and grants Peace Naturals the right to engage in, among other things, the production and sale of dried cannabis flower, cannabis resin, cannabis seeds, cannabis plants, and cannabis oils. On January 22, 2018, the Company announced that Peace Naturals received a dealer's license pursuant to the Narcotic Control Regulations and CDSA from Health Canada, which allows Peace Naturals to export medical cannabis extracts, including concentrated oil and resin products, internationally.
Cronos Australia PTY Ltd. (" Cronos Australia ") was incorporated under the Corporations Act 2001 (Australia) on December 6, 2016 by Cronos Group. Cronos Group holds 50% of the outstanding shares of Cronos Australia.
Indigenous Roots Inc. and Cronos Indigenous Holdings Inc. were incorporated under the CBCA on December 14, 2016 and March 16, 2017, respectively. Both corporations are wholly owned by Hortican. These two corporations, along with a third party limited partnership, formed Indigenous Roots LP on April 18, 2017.
Cronos Global Holdings Inc. (" Cronos Global ") was incorporated under the CBCA on April 25, 2017 by Hortican. Cronos Global will be the holding company for the Company's future global operations.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
2. Basis of presentation
The unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2018 and June 30, 2017, have been prepared in accordance with International Accounting Standard (" IAS ") 34, Interim Financial Reporting. The accounting policies adopted in the preparation of the 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, 2017, except for the adoption of new standards effective as of January 1, 2018. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The Company applies, for the first time, International Financial Reporting Standard (" IFRS ") 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. As required by IAS 34, the nature and effect of these changes are disclosed in Note 3.
The 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 unaudited condensed interim consolidated financial statements should be read in conjunction with the December 31, 2017 audited consolidated financial statements and notes.
These unaudited condensed interim consolidated financial statements were approved by the Board of Directors (the "Board" ) on August 13, 2018.
(a) Basis of consolidation
These unaudited condensed interim consolidated financial statements include the accounts of Cronos Group Inc., and its wholly owned subsidiaries, Hortican Inc., OGBC, Peace Naturals, Indigenous Roots Inc., Cronos Indigenous Holdings Inc., and Cronos Global. All intercompany transactions, balances, revenues and expenses have been eliminated upon consolidation. The Company applies the acquisition method to account for business combinations. Acquisition related costs are expensed as incurred.
(b) Basis of measurement
Apart from certain assets and liabilities measured at fair value as required under certain IFRSs, the unaudited condensed interim consolidated financial statements have been presented and prepared on the basis of historical cost.
(c) Functional and presentation currency
These unaudited condensed interim consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company and all of its subsidiaries.
(d) Estimates and critical judgments by management
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(i) Warrants and options
Warrants and options are initially valued at fair value, based on the application of the Black-Scholes option pricing model. This pricing model requires management to make various assumptions and estimates which are susceptible to uncertainty, including the volatility of the share price, expected dividend yield, expected term of the warrant or option and expected risk-free interest rate.
(ii) Useful lives and impairment of long-lived assets
Long-lived assets are defined as property, plant and equipment and intangible assets with finite lives. Depreciation and amortization are dependent upon estimates of useful lives and impairment is dependent upon estimates of recoverable amounts. These are determined through the exercise of judgment, and are dependent upon estimates that take into account factors such as economic and market conditions, frequency of use, anticipated changes in laws, and technological improvements.
(iii) Impairment of cash-generating units and goodwill
The impairment test for cash generating units (" CGU s") to which goodwill is allocated is based on the value in use of the CGU, determined in accordance with the expected cash flow approach. The calculation is based on assumptions used to estimate future cash flows, the cash flow growth rate and the discount rate.
(iv) Fair value of privately held financial assets classified as fair value through other comprehensive income
The Company's management considers specific information about the investee companies, trends in general market conditions, and the share performance of similar publicly traded companies when valuing the Company's privately held investments.
Management considers the following factors to indicate a change in the fair value, or impairment of, a privately held investment, and may adjust the value if:
a. there has been significant subsequent equity financing provided by outside investors at a value which differs from the current recorded value of the investee company, in which case the fair value of the investment is adjusted to equal the value at which that financing took place;
b. there have been significant corporate, political, legal, or operating events affecting the investee company such that management believes they will materially impact the investee company's prospects and therefore its fair value. In these circumstances, the adjustment to fair value of the investment will be based on management's judgment;
c. the investee company is placed into receivership or bankruptcy;
d. based on financial information received from the investee company, it is evident that the investee company is unlikely to be able to continue as a going concern;
e. receipt or denial by the investee company of medical marijuana licenses from Health Canada, which allow the investee company to initiate or continue operations; and
f. management changes by the investee company that the Company's management believes will have an impact on the investee company's ability to achieve its objectives and build value for shareholders.
(v) Income taxes
Income taxes and tax exposures recognized in the unaudited condensed interim consolidated financial statements reflect management's best estimate of the outcome based on facts known at the reporting date. When the Company anticipates a future income tax payment based on its estimates, it recognizes a liability. The difference between the expected amount and the final tax outcome has an impact on current and deferred taxes when the Company becomes aware of this difference.
In addition, when the Company incurs losses for income tax purposes, it assesses the probability of taxable income being available in the future based on its budgeted forecasts. These forecasts are adjusted to take into account certain non-taxable income and expenses and specific rules on the use of unused credits and tax losses. When the forecasts indicate that sufficient future taxable income will be available to deduct the temporary differences, a deferred tax asset is recognized for all deductible temporary differences.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(vi) Biological assets and inventory
Biological assets, consisting of cannabis plants, are measured at fair value less costs to sell. At the point of harvest, the biological assets are transferred to inventory at fair value less costs to sell. As a result, critical estimates related to the valuation of biological assets are also applicable to inventory.
Determining the fair value less costs to sell requires the Company to make assumptions about the expected future yield from the cannabis plants, the value associated with each stage of the plants' growth cycle, estimated selling price, costs to convert harvested cannabis into finished goods, and costs to sell. The Company's estimates are, by their nature, subject to change.
3. Adoption of new accounting pronouncements
(a) Amendments to IFRS 2 Share-based payments
The amendments to IFRS 2 clarify how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The effective date of these amendments was January 1, 2018. The Company has adopted these amendments as of the effective date and has assessed no significant changes as a result of the adoption of these amendments on the current period.
(b) IFRS 15 Revenue from contracts with customers
IFRS 15 was issued by the IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. IFRS 15 became effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company has adopted this new standard as of its effective date using the full retrospective method of adoption, and have assessed no significant changes as a result of the adoption of this new standard on the current period.
Under IFRS 15, the revenue recognition model has changed from one based on the transfer of risks and rewards of ownership to the transfer of control. The Company's contracts with customers for the sales of dried cannabis and cannabis oil include one performance obligation, a promise in a contract with a customer to transfer a good or service. As the transfer of risks and rewards generally coincides with the transfer of control at a point in time, upon shipment or delivery, depending on the contract, the timing and amount of revenue considering discounts, rebates, and variable consideration, recognized from this principal revenue stream has not changed as a result of the adoption of this new standard.
The following is the Company's revenue recognition policy in accordance with IFRS 15:
(i) Revenue recognition
Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The Company's contracts with customers for the sales of dried cannabis and cannabis oil include one performance obligation. The Company has concluded that revenue from the sale of these products should be recognized at the point in time when control of the assets is transferred to the customer, which is on shipment or delivery, depending on the contract.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(c) IFRS 9 Financial instruments
IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only three categories: amortized cost, fair value through other comprehensive income, and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. The effective date of this standard was January 1, 2018. The Company has adopted this new standard as of its effective date on a retrospective basis with the exception of financial assets that were derecognized at the date of initial application, January 1, 2018. The 2017 comparatives were not restated. As a result of the new classification model and measurement requirements under IFRS 9, the Company has elected to classify the available-for-sale investments as fair value through other comprehensive income investments. Under this classification, there is no recycling of gains or losses from accumulated other comprehensive income to profit or loss. Due to the adoption of IFRS 9, during the three and six months ended June 30, 2018, a net gain (loss) of approximately $(224) and $294 respectively on the disposal of investments classified as fair value through other comprehensive income was recorded in other comprehensive income rather than profit or loss during the period. The new classification and measurement of the Company's financial assets are as follows:
(i) Equity instruments at fair value through other comprehensive income ( "FVOCI" )
This category only includes equity instruments, which the Company intends to hold for the foreseeable future and which the Company has irrevocably elected to so classify upon initial recognition or transition. The Company classified its quoted and unquoted equity instruments as equity instruments at FVOCI. Equity instruments in this category are subsequently measured at fair value with changes recognized in other comprehensive income, with no recycling of gains or losses to profit or loss upon derecognition. Dividend income is recognized in earnings. Equity instruments at FVOCI are not subject to an impairment assessment under IFRS 9.
(ii) Amortized cost
This category includes financial assets that are held within a business model with the objective to hold the financial assets in order to collect contractual cash flows that meet the solely principal and interest (" SPPI ") criterion. Financial assets classified in this category are carried at amortized cost using the effective interest method.
(iii) Fair value through profit or loss
This category includes derivative instruments as well as quoted equity instruments which the Company has not irrevocably elected, at initial recognition or transition, to classify at FVOCI. This category would also include debt instruments whose cash flow characteristics fail the SPPI criterion or are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell. Financial assets in this category are recorded at fair value with changes recognized in profit or loss.
The assessment of the Company's business models was made as of the date of initial application, January 1, 2018, and then applied retrospectively to those financial assets that were not derecognized before January 1, 2018.
IAS 39 IFRS 9
Financial assets
Cash Fair value through profit or loss Fair value through profit or loss
Accounts receivable Amortized cost Amortized cost
Promissory note receivable Amortized cost Amortized cost
Loan receivable Amortized cost Amortized cost
Other investments Available-for-sale FVOCI
Financial liabilities
Accounts payable and other liabilities Amortized cost Amortized cost
Construction loan payable Amortized cost Amortized cost
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(iv) Impairment of financial assets
The adoption of IFRS 9 has fundamentally changed the Company's accounting of impairment losses for financial assets by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss (" ECL ") approach. IFRS 9 requires the Company to record an allowance for ECLs for all debt financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive. The shortfall is then discounted at a rate approximating the asset's original effective interest rate.
4. New and revised standards and interpretations issued but not yet effective
(a) IFRS 16 Leases
IFRS 16 was issued in January 2016 and replaces the previous guidance on leases. This standard provides a single recognition and measurement model to be applied by lessees to leases, with required recognition of assets and liabilities for most leases. This standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted if the Company is also applying IFRS 15, Revenue from Contracts with Customers. The Company will adopt this new standard as of its effective date. The Company is currently evaluating the impact of the adoption of this new standard on its condensed interim consolidated financial statements.
(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 will be effective for the Company's fiscal year beginning on January 1, 2019, with earlier application permitted. The Company is currently assessing the impact of the adoption of this standard on its condensed interim consolidated financial statements.
5. Accounting Changes
(a) Change in estimate
The Company has revised its estimate of the useful life of the Health Canada Licenses, described in Note 12. Previously, the Company estimated that the licenses had an indefinite life. During the three months ended, March 31, 2018, the Company has revised its estimate, and assessed that the licenses have an estimated useful life equal to the remaining useful life of the corresponding facilities.
(b) Change in accounting policy
During the three months ended June 30, 2018, the Company made a voluntary change in accounting policy to capitalize the direct and indirect costs attributable to the biological asset transformation. The previous accounting policy was to expense these costs as period costs. The new accounting policy is as follows:
(i) Biological assets
The Company measures biological assets consisting of cannabis plants at fair value less costs to sell up to the point of harvest. Production costs related to the transformation of biological assets to the point of harvest are capitalized, which become the cost basis of the biological assets, and are then revalued to fair value less costs to sell at the end of the period. Agricultural produce consisting of cannabis is measured at fair value less costs to sell at the point of harvest, which becomes the basis for the cost of inventory after harvest. Gains or losses arising from changes in fair value less costs to sell, excluding capitalized production costs, are included under fair value adjustments within the statement of operations. Upon harvest, capitalized production costs are transferred to inventory and are included in inventory expensed to cost of sales when the inventory is sold.
The new accounting policy provides more reliable and relevant information to users as the gross profit before fair value adjustments only considers the costs incurred on inventory sold during the year, and excludes costs incurred on the biological transformation until the related harvest is sold. The following demonstrates the change for each prior period presented. There is no impact of this policy change on gross profit, net income (loss), basic and diluted earnings per share, the statement of financial position, or the statement of changes in equity on the current or any prior period.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Three Months Ended June 30, 2018 Three Months Ended June 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Operations and Comprehensive Income (Loss)
Cost of sales
Inventory expensed to cost of sales, before fair value adjustments $ 259 $ 1,254 $ 55 $ 215
Production costs 1,996 - 174 -
Total cost of sales (recovery) 2,255 1,254 229 215
Gross profit before fair value adjustments 1,139 2,140 414 428
Fair value adjustments:
Unrealized change in fair value of biological assets (8,827 ) (6,831 ) (1,296 ) (1,122 )
Realized fair value adjustments on inventory sold in the period 3,620 2,625 589 429
Total fair value adjustments (5,207 ) (4,206 ) (707 ) (693 )
Gross profit $ 6,346 $ 6,346 $ 1,121 $ 1,121
Six Months Ended June 30, 2018 Six Months Ended June 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Operations and Comprehensive Income (Loss)
Cost of sales
Inventory expensed to cost of sales, before fair value adjustments $ 780 $ 2,821 $ 125 $ 413
Production costs 3,710 - 409 -
Total cost of sales (recovery) 4,490 2,821 534 413
Gross profit before fair value adjustments 1,849 3,518 623 744
Fair value adjustments:
Unrealized change in fair value of biological assets (13,285 ) (9,575 ) (3,110 ) (2,701 )
Realized fair value adjustments on inventory sold in the period 6,860 4,819 1,576 1,288
Total fair value adjustments (6,425 ) (4,756 ) (1,534 ) (1,413 )
Gross profit $ 8,274 $ 8,274 $ 2,157 $ 2,157
Three Months Ended June 30, 2018 Three Months Ended June 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Cash Flows
Operating activities
Items not affecting cash:
Unrealized change in fair value of biological assets $ (8,827 ) $ (6,831 ) $ (1,296 ) $ (1,122 )
Realized fair value adjustments on inventory sold in the period 3,620 2,625 589 429
Net changes in non-cash working capital:
Increase in biological assets 6,418 4,422 1,253 1,079
Increase in inventory (6,940 ) (5,945 ) (1,043 ) (883 )
Net effect on cash flows used in operating activities $ (5,729 ) $ (5,729 ) $ (497 ) $ (497 )
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Six Months Ended June 30, 2018 Six Months Ended June 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Cash Flows
Operating activities
Items not affecting cash:
Unrealized change in fair value of biological assets $ (13,285 ) $ (9,575 ) $ (3,110 ) $ (2,701 )
Realized fair value adjustments on inventory sold in the period 6,860 4,819 1,576 1,288
Net changes in non-cash working capital:
Increase in biological assets 10,108 6,398 2,120 1,711
Increase in inventory (10,778 ) (8,737 ) (2,381 ) (2,093 )
Net effect on cash flows used in operating activities $ (7,095 ) $ (7,095 ) $ (1,795 ) $ (1,795 )
The Company's biological assets consist of cannabis plants. The changes in the carrying amount of the biological assets are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2018 (Note 5) 2017 (Note 5) 2018 (Note 5) 2017 (Note 5)
Biological assets - beginning of period $ 4,490 $ 2,742 $ 3,722 $ 1,795
Unrealized change in fair value of biological assets 6,831 1,122 9,575 2,701
Transferred to inventory upon harvest (4,422 ) (1,079 ) (6,398 ) (1,711 )
Biological assets - end of period $ 6,899 $ 2,785 $ 6,899 $ 2,785
As of June 30, 2018, it is expected that the Company's biological assets will ultimately yield approximately 2,426 kg of medical cannabis (December 31, 2017 - 1,695 kg). As at June 30, 2018, the Company has 14,440 plants that are biological assets (December 31, 2017 - 7,353 plants).
Nature of cost Allocation basis (i)
Consumables (insect control, fertilizers, soil) 100% allocated to production costs as these costs are incurred to support plant growth
Facilities labour (including salaries and benefits) Allocated based on job descriptions of various personnel of which 25% allocated to processing costs and 75% allocated to production costs
Quality control labour (including salaries and benefits) Allocated based on time spent on quality control of plants versus harvested product of which 50% allocated to production costs to ensure plant health and 50% allocated to processing costs, to test quality of harvested product
Production labour (including salaries and benefits) Allocated based on job descriptions of various personnel of which 20% allocated to processing costs and 80% allocated to production costs
Utilities Allocated based on estimates of usage of which 10% allocated to processing costs and 90% allocated to production costs
Property taxes, amortization, security Allocated based on estimates of square footage of which 20% allocated to processing costs, 50% allocated to production costs, and 30% allocated to operating expenses
Packaging costs 100% allocated to processing costs
(i) Processing costs are capitalized to inventory and then recognized in inventory expensed to cost of sales when the inventory is sold. Production costs are capitalized to biological assets as a cost directly attributable to growing the plants. Refer to Note 5(b)(i).
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
All of the plants are to be harvested into medical cannabis and as at June 30, 2018, on average, the plants were 42% complete (December 31, 2017 - 46%). This is a time measure of the plants' age relative to the estimated growth cycle of 16 weeks.
The Company's valuation model for determining the fair value of biological assets is based on the stage of plant growth relative to the number of weeks in the growth cycle, multiplied by the estimated harvest yield, multiplied by the estimated selling price less costs to sell per gram. Management has assessed that there is a linear relationship between plant growth and fair value, as there is no significant initial cost associated with the plant, no observable market for a partially grown plant, and costs are incurred consistently over the term of the plant's growth cycle. The estimates of growing cycle, harvest yield, and costs per gram are based on the Company's historical results. The estimate of the selling price per gram is based on the Company's historical sales in addition to the Company's expected sales price going forward.
The Company has made the following significant estimates in this valuation model:
Average number of weeks in the growing cycle is sixteen weeks from propagation to harvest
Average harvest yield of whole flower and trim is 168 grams per plant
Average selling price of whole flower is $8.50 per gram
Processing costs include drying and curing, testing and packaging, and post-harvest overhead allocation, and oil extraction costs estimated to be $0.87 per gram
Selling costs include shipping, order fulfillment, and labelling, estimated to be $0.47 per gram
The Company has performed the following sensitivity analysis on the significant unobservable inputs as at June 30, 2018:
Input Impact of 5% decrease in input
Selling price per gram Decrease in biological assets by $397 and decrease in inventory by $583
Harvest yield per gram Decrease in biological assets by $336
Average number of weeks in growing cycle Increase in biological assets by $353
Processing costs per gram Increase in biological assets by $39 and increase in inventory by $7
Selling costs per gram Increase in biological assets by $22 and increase in inventory by $32
These inputs are level 3 on the fair value hierarchy, and are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.
Inventory as at June 30, 2018 consisted of the following:
As at June 30, 2018 As at December 31, 2017
Dry cannabis
Finished goods $ 9,264 $ 6,145
Work-in-process 1,566 1,630
10,830 7,775
Cannabis oils
Finished goods 695 332
Work-in-process 353 -
1,048 332
Raw materials 171 183
Supplies and consumables 285 126
$ 12,334 $ 8,416
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
As at June 30, 2018, the Company held 1,166 kg of dry cannabis and 350 L of cannabis oil as finished goods (December 31, 2017 - 815 kg and 137 L, respectively). In addition, the Company held 218 kg (December 31, 2017 - 243 kg) of harvested cannabis in the processing stage, and 187 L (December 31, 2017 - nil) of harvested cannabis in the oil extraction processing stage, classified as work-in-process as at June 30, 2018. Finally, 0.267 kg of seeds were held by the Company as raw materials (Dec ember 31, 2017 - 0.288 kg).
The amount of inventory expensed to cost of sales, before fair value adjustments, during the period is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2018 (Note 5) 2017 (Note 5) 2018 (Note 5) 2017 (Note 5)
Inventory expensed to cost of sales $ 3,879 $ 644 $ 7,640 $ 1,701
Realized fair value adjustments on inventory sold in the period (i) (2,625 ) (429 ) (4,819 ) (1,288 )
Inventory expensed to cost of sales, before fair value adjustments (ii) $ 1,254 $ 215 $ 2,821 $ 413
(i) This figure is included in the statement of operations as a fair value adjustment.
(ii) This figure is recorded in the statement of operations as cost of sales.
As at June 30, 2018 As at December 31, 2017
Loan receivable from Evergreen Medicinal Supply Inc. ( "Evergreen" ) (i) $ 265 $ 265
Add: Accrued interest 49 49
Loan receivable $ 314 $ 314
8. Promissory note receivable
The Company announced a strategic joint venture in Israel ( "Cronos Israel" ) with the Israeli agricultural collective settlement Kibbutz Gan Shmuel ( "Gan Shmuel" ) for the production, manufacture and distribution of medical cannabis. Following the receipt of approval from the Israeli Ministry of Health to issue equity interests, the Company will hold a 70% interest in each of the nursery and cultivation operations and a 90% interest in each of the manufacturing and distribution operations. Gan Shmuel has provided the Company a promissory note for monies advanced from the Company up to the sum of 2,700 Israeli Shekels ( "ILS" ) ($978). During the three months ended June 30, 2018, the Company advanced 900 ISL in excess of the 2,700 ILS promissory note receivable. As such, 900 ILS ($326) receivable is unsecured. The promissory note shall be returned to Gan Shmuel on the date that is 12 months after the date of receipt of the final cannabis cultivation license.
9. Investment in Whistler
As at June 30, 2018, the investment represents an approximate 19.0% (December 31, 2017 - 20.3%) ownership in Whistler Medical Marijuana Corporation ( "Whistler" ), incorporated in British Columbia, Canada. Whistler is a licensed producer and seller of medical marijuana with operations in British Columbia, Canada.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
A reconciliation of the carrying amount of the investment is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Balance - beginning of period $ 3,848 $ 2,669 $ 3,807 $ 2,566
Purchase of additional shares - 1,076 - 1,076
Company's share of income 3 313 44 416
Balance - end of period $ 3,851 $ 4,058 $ 3,851 $ 4,058
10. Other investments
Other investments consist of investments in common shares and warrants of several companies in the medical cannabis industry. These investments, with the exception of shares of Evergreen and warrants of ABcann Global Corporation (now known as "VIVO Cannabis Inc.") ( "ABcann" ), were traded 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 June 30, 2018 As at December 31, 2017
Fair value through other comprehensive income investments
Canopy Growth Corporation ( "Canopy" ) (i) $ 425 $ 877
Evergreen (iii) 300 300
$ 725 $ 1,177
Fair value through profit or loss investment
ABcann - share warrants (ii and v) - 170
$ 725 $ 1,347
The gains (losses) recognized upon the increase (decrease) in the fair value of other investments was as follows:
Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Gain recognized in net income (loss)
Canopy (i) $ - $ - $ - $ 36
ABcann - shares (ii) - 1,038 - 1,038
ABcann - share warrants (ii and v) - 292 221 197
$ - $ 1,330 $ 221 $ 1,271
Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Gain (loss) recognized through other comprehensive income before taxes
The Hydropothecary Corporation (iv) $ - $ (324 ) $ - $ 314
Canopy (i) 53 (80 ) 235 (35 )
ABcann - shares (ii) (34 ) 415 (224 ) 415
$ 19 $ 11 $ 11 $ 694
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(i) During the six months ended June 30, 2018, the Company sold some of its shares of Canopy for proceeds of $687 (June 30, 2017 - $88).
(ii) During the six months ended June 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.
During the six months ended June 30, 2017, ABcann completed a reverse takeover with Panda Capital Inc. As a result of this transaction, ABcann began trading on the TSX. The Company subscribed for additional shares of ABcann of $1,016 and sold certain shares of ABcann for proceeds of $1,683 during the three months ended June 30, 2017.
(iii) On March 16, 2017, Evergreen received a cultivation license under the ACMPR. As a result, the Company completed its subscription for a second tranche of shares of Evergreen for $100 and exercised its option to acquire an additional 5% of the equity of Evergreen for $500, for a total additional investment of $600. However, Evergreen, through its counsel, has indicated that the Company is not entitled to any interest in Evergreen and has rejected the payment. The Company filed a statement of claim in the Supreme Court of British Columbia and Evergreen has filed a statement of defence. The Company intends to vigorously pursue the enforcement of its rights to acquire equity in Evergreen.
(iv) During the six months ended June 30, 2017, BFK Capital Corp. acquired all of the outstanding shares of Hydropothecary Corporation, and began trading as Hydropothecary Corporation, (TSX: HEXO). As a result of this transaction, Hydropothecary Corporation executed a 6:1 stock split.
(v) As at December 31, 2017, the fair value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: risk free rate: 1.66%; volatility: 65%; share price: $1.53 per share; expected life: 0.76 years; and dividend yield: Nil%.
Cost As at January 1, 2018 Additions As at June 30, 2018
Land $ 1,558 $ 19 $ 1,577
Building structures 11,518 1,780 13,298
Furniture and equipment 134 293 427
Computer equipment 148 87 235
Security equipment 886 64 950
Production equipment 2,481 246 2,727
Road 137 - 137
Leasehold improvements 1,497 87 1,584
Equipment under finance lease - 217 217
Construction in progress 39,337 35,474 74,811
$ 57,696 $ 38,267 $ 95,963
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Accumulated depreciation As at January 1, 2018 Additions As at June 30, 2018
Building structures $ 433 $ 308 $ 741
Furniture and equipment 43 28 71
Computer equipment 75 27 102
Security equipment 196 91 287
Production equipment 431 210 641
Road 10 3 13
Leasehold improvements 336 84 420
Equipment under finance lease - 31 31
1,524 782 2,306
Net book value $ 56,172 $ 93,657
Cost As at January 1, 2017 Additions As at June 30, 2017
Land $ 1,558 $ - $ 1,558
Building structures 2,761 1,296 4,057
Furniture and equipment 63 65 128
Computer equipment 88 14 102
Security equipment 474 189 663
Production equipment 2,106 813 2,919
Road 137 - 137
Leasehold improvements 1,429 - 1,429
Construction in progress 6,034 3,152 9,186
$ 14,650 $ 5,529 $ 20,179
Accumulated depreciation As at January 1, 2017 Additions As at June 30, 2017
Building structures $ 120 $ 85 $ 205
Furniture and equipment 18 12 30
Computer equipment 36 18 54
Security equipment 60 57 117
Production equipment 103 179 282
Road 5 3 8
Leasehold improvements 186 75 261
528 429 957
Net book value $ 14,122 $ 19,222
Cost As at January 1, 2018 Additions As at June 30, 2018
Software $ - $ 169 $ 169
Health Canada Licenses - OGBC 1,611 - 1,611
Health Canada Licenses - Peace Naturals 9,596 - 9,596
$ 11,207 $ 169 $ 11,376
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six month periods ended June 30, 2018 and June 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
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Last updated: Aug 14, 2018