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

Tuesday, November 13, 2018 4 min read
Key Takeaway: CRONOS GROUP INC. Unaudited Condensed Interim Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2018 and September 30, 2017 (in thousands of Canadian dollars) Cronos Group Inc. Unaudited Condensed Interim Consolidated Financial Statements For th

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CRONOS GROUP INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2018 and September 30, 2017
(in thousands of Canadian dollars)
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
Unaudited Condensed Interim Consolidated Statements of Financial Position 1
Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss ) 2
Unaudited Condensed Interim Consolidated Statements of Changes in Equity 3
Unaudited Condensed Interim Consolidated Statements of Cash Flows 4
Notes to the Unaudited Condensed Interim Consolidated Financial Statements 5
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Financial Position
As at September 30, 2018 and December 31, 2017
(in thousands of CDN $)
Notes As at September 30, 2018 As at December 31, 2017
Assets
Current assets
Cash $ 41,482 $ 9,208
Accounts receivable 23(i) 3,278 1,140
Sales taxes receivable 9,953 3,114
Prepaids and other receivables 23(i) 10,246 790
Biological assets 6 5,632 3,722
Inventory 6 15,073 8,416
Loan receivable 7,23(i) 314 314
Total current assets 85,978 26,704
Advances to related corporations 8,23(i) 2,674 -
Investments in equity accounted investees 9 4,072 3,807
Other investments 10,23(iii) 994 1,347
Property, plant and equipment 11 127,595 56,172
Intangible assets 12 11,345 11,207
Goodwill 13 1,792 1,792
Total assets $ 234,450 $ 101,029
Liabilities
Current liabilities
Accounts payable and other liabilities 23(ii) $ 3,066 $ 7,878
Government remittances payable 739 -
Construction loan payable 15 5,724 -
Total current liabilities 9,529 7,878
Construction loan payable 15 - 5,367
Deferred income tax liability 22 2,656 1,416
Total liabilities 12,185 14,661
Shareholders' equity
Share capital 16(a) 225,549 83,559
Shares to be issued 16(b) 17 -
Warrants 17(a) 1,548 3,364
Stock options 17(b) 4,982 2,289
Accumulated deficit (11,261 ) (3,724 )
Accumulated other comprehensive income 1,119 880
Total equity attributable to shareholders of Cronos 221,954 86,368
Non-controlling interests 14 311 -
Total shareholders' equity 222,265 86,368
Total liabilities and shareholders' equity $ 234,450 $ 101,029
Commitments and contingencies 21
Subsequent events 26
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 nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except share and per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
Notes 2018 2017 2018 2017
Revenue 18 $ 3,760 $ 1,314 $ 10,099 $ 2,471
Cost of sales before fair value adjustments 5,6 1,688 464 4,509 877
Gross profit before fair value adjustments 2,072 850 5,590 1,594
Fair value adjustments
Unrealized change in fair value of biological assets 5,6 (1,533 ) (2,478 ) (11,108 ) (5,179 )
Realized fair value adjustments on inventory sold in the period 5,6 1,511 1,324 6,330 2,612
Total fair value adjustments (22 ) (1,154 ) (4,778 ) (2,567 )
Gross profit 2,094 2,004 10,368 4,161
Operating expenses
Sales and marketing 598 176 1,548 306
General and administrative 4,820 1,066 11,500 4,274
Share-based payments 17(b),20 1,223 539 2,947 1,170
Depreciation and amortization 11,12 330 255 938 684
Total operating expenses 6,971 2,036 16,933 6,434
Operating loss (4,877 ) (32 ) (6,565 ) (2,273 )
Other income (expense)
Interest expense (62 ) (22 ) (121 ) (159 )
Share of income (loss) from investment in associate 9 20 (53 ) 64 363
Gain on other investments 10 - 1,128 221 2,399
Total other income (expense) (42 ) 1,053 164 2,603
Income (loss) before income taxes (4,919 ) 1,021 (6,401 ) 330
Income tax expense (recovery) 22 2,352 (76 ) 1,197 (98 )
Net income (loss) $ (7,271 ) $ 1,097 $ (7,598 ) $ 428
Net income (loss) attributable to:
Cronos Group (7,210 ) 1,097 (7,537 ) 428
Non-controlling interests 14 (61 ) - (61 ) -
$ (7,271 ) $ 1,097 $ (7,598 ) $ 428
Other comprehensive income (loss)
Gain (loss) on revaluation and disposal of other investments, net of tax 10,22 233 (2 ) 237 692
Foreign exchange gain on translation of foreign operations 2(c) 3 - 3 -
Total other comprehensive income (loss) 236 (2 ) 240 692
Comprehensive income (loss) $ (7,035 ) $ 1,095 $ (7,358 ) $ 1,120
Comprehensive income (loss) attributable to:
Cronos Group (6,975 ) 1,095 (7,298 ) 1,120
Non-controlling interests 14 (60 ) - (60 ) -
$ (7,035 ) $ 1,095 $ (7,358 ) $ 1,120
Net income (loss) per share
Basic and diluted 19 $ (0.04 ) $ 0.01 $ (0.04 ) $ 0.00
Weighted average number of outstanding shares
Basic 19 177,483,122 134,913,931 170,097,232 130,782,161
Diluted 19 177,483,122 143,592,860 170,097,232 139,461,090
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 nine months ended September 30, 2018 and September 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 Non-controlling interests 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 16(a) 14,376,112 32,346 - - - - - - 32,346
Share issuance costs - (1,350 ) - - - - - - (1,350 )
Vesting of options 17(b) - - - - 1,170 - - - 1,170
Options exercised 17(b) 478,746 752 - - (267 ) - - - 485
Warrants exercised 17(a) 6,072,096 2,152 - (619 ) - - - - 1,533
Shares to be issued 16(c) - - 76 - - - - - 76
Unrealized gains reclassified to net income 10 - - - - - - (1,537 ) - (1,537 )
Net income - - - - - 428 - - 428
Other comprehensive income 10 - - - - - - 692 - 692
Balance at September 30, 2017 142,652,702 $ 67,490 $ 76 $ 3,364 $ 1,638 $ (5,787 ) $ 739 $ - $ 67,520
Balance at January 1, 2018 149,360,603 $ 83,559 $ - $ 3,364 $ 2,289 $ (3,724 ) $ 880 $ - $ 86,368
Shares issued 16(a) 15,677,143 146,032 - - - - - - 146,032
Share issuance costs - (9,479 ) - - - - - - (9,479 )
Vesting of options 17(b) - - - - 2,947 - - - 2,947
Options exercised 17(b) 366,638 721 - - (154 ) - - - 567
Warrants exercised 17(a) 13,114,336 4,616 - (1,816 ) - - - - 2,800
Shares to be issued 16(b) - - 17 - - - - - 17
Share appreciation rights 17(b) 181,726 100 - - (100 ) - - - -
Non-controlling interests arising from Cronos Israel 14 - - - - - - - 371 371
Net loss - - - - - (7,537 ) - (61 ) (7,598 )
Other comprehensive income 10,22,2(c) - - - - - - 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 unaudited condensed interim consolidated financial statements
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $)
Three Months Ended September 30, Nine Months Ended September 30,
Notes 2018 2017 2018 2017
Operating activities
Net income (loss) $ (6,392 ) $ 1,097 $ (6,719 ) $ 428
Items not affecting cash:
Unrealized change in fair value of biological assets 5,6 (1,533 ) (2,478 ) (11,108 ) (5,179 )
Realized fair value adjustments on inventory sold in the period 5,6 1,511 1,324 6,330 2,612
Share-based payments 17(b),20 1,223 539 2,947 1,170
Depreciation and amortization 11,12 645 255 1,760 684
Share of income (loss) from investment in associate 9 (20 ) 53 (64 ) (363 )
Gain on other investments 10 - (1,128 ) (221 ) (2,399 )
Deferred income tax expense (recovery) 22 1,473 (76 ) 318 (98 )
Foreign exchange loss (gain) 2 - (10 ) -
(3,091 ) (414 ) (6,767 ) (3,145 )
Net changes in non-cash working capital:
Accounts receivable 23(i) (434 ) (102 ) (2,138 ) (293 )
Sales taxes receivable (3,001 ) - (6,839 ) -
Prepaids and other receivables 23(i) (6,134 ) 452 (9,456 ) (1,700 )
Biological assets 5,6 2,800 2,452 9,198 4,162
Inventory 5,6 (4,250 ) (3,408 ) (12,987 ) (5,502 )
Accrued interest on loan receivable - - - (5 )
Accounts payable and other liabilities 733 3,261 (5,017 ) 3,470
Government remittances payable 739 - 739 -
Cash flows provided by (used in) operating activities (12,638 ) 2,241 (33,267 ) (3,013 )
Investing activities
Repayment of purchase price liability - (1,291 ) - (2,590 )
Investments in equity accounted investees 9 (201 ) - (201 ) (1,076 )
Investment in ABcann Global Corporation 10 - - - (1,016 )
Proceeds from sale of other investments 10 - 3,383 967 5,154
Payment to exercise ABcann Global Corporation warrants 10 - (2,268 ) (113 ) (2,268 )
Advances to related corporations 8 (2,674 ) - (2,674 ) -
Cash assumed on acquisition of Cronos Israel 14 1,304 - - -
Purchase of property, plant and equipment 11 (34,229 ) (11,571 ) (71,896 ) (17,101 )
Purchase of intangible assets 12 (125 ) - (294 ) -
Cash flows used in investing activities (35,925 ) (11,747 ) (74,211 ) (18,897 )
Financing activities
Proceeds from exercise of warrants 17(a) 444 720 1,856 1,533
Proceeds received for shares to be issued 16(b) - - 961 76
Proceeds from exercise of options 17(b) 27 43 567 485
Proceeds from share issuance 16(a) - 15,010 146,032 32,346
Share issuance costs (35 ) (29 ) (9,479 ) (1,350 )
Increase in indebtedness - 869 - 869
Proceeds from construction loan payable 15 - 5,022 - 5,022
Payment of accrued interest on construction loan 15 - - (185 ) -
Repayment of mortgage payable - - - (4,000 )
Cash flows provided by financing activities 436 21,635 139,752 34,981
Net change in cash (48,127 ) 12,129 32,274 13,071
Cash - beginning of period 89,609 4,406 9,208 3,464
Cash - end of period $ 41,482 $ 16,535 $ 41,482 $ 16,535
Supplemental cash flow information
Interest paid $ 189 $ 22 $ 684 $ 222
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 nine months ended September 30, 2018 and September 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".
Cronos Group is a geographically diversified and vertically integrated global cannabis company, with a presence across five continents, whose principal activities are the production and sale of cannabis in federally legal jurisdictions, including Canada and Germany. The Company operates two wholly-owned holders of licenses under the Cannabis Act (Canada) and its relevant regulations (collectively, the "Cannabis Act" ), known as " License Holders" . 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. Currently, Cronos Group sells dried cannabis and cannabis oils through wholesale and direct-to-consumer channels under our medical cannabis brand, PEACE NATURALS TM , and recreational cannabis brands, COVE TM and SPINACH TM .
Cronos Group has also entered into six strategic joint ventures, including those in Colombia, Australia, and Israel, and holds minority interests in cannabis-related companies and License Holders. Two of these strategic joint ventures are considered subsidiaries for financial reporting purposes, refer to Note 2(a).
2. Basis of presentation
The unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2018 and September 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. The Company applied, as of January 1, 2018, 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 Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
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" ) of Cronos Group on November 12, 2018.
(a) Basis of consolidation
These unaudited condensed interim consolidated financial statements include the accounts of Cronos Group and its subsidiaries, summarized in the following chart. 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.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Subsidiaries Jurisdiction of incorporation Incorporation (Formation) date Ownership interest
Hortican Inc. Canada January 17, 2013 100%
Peace Naturals Project Inc. Canada November 21, 2012 100%
Original BC Ltd. Canada March 15, 2013 100%
Cronos Canada Holdings Inc. Canada March 13, 2018 100%
Cronos Indigenous Holdings Inc. Canada March 16, 2017 100%
Indigenous Roots Inc. Canada December 14, 2016 100%
Indigenous Roots Limited Partnership Canada April 19, 2017 50%
Cronos Global Holdings Inc. Canada April 25, 2017 100%
Cronos Group Celtic Holdings Ltd. Ireland February 6, 2018 100%
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. Pharmacy Ltd. (i) Israel February 15, 2018 90%
(i) Cronos Israel G.S. Cultivations Ltd., Cronos Israel G.S. Manufacturing Ltd., Cronos Israel G.S. Store Ltd., and Cronos Israel G.S. Pharmacy Ltd. are collectively referred to as "Cronos Israel" .
(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, with the exception of Cronos Israel which has a functional currency of the Israeli Shekel. The assets and liabilities of foreign operations are translated into Canadian dollars at period-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into Canadian dollars using average exchange rates. Exchange differences resulting from translating foreign operations are recognized in other comprehensive income and accumulated in equity.
(d) Estimates and critical judgments by management
The preparation of these unaudited condensed interim consolidated financial statements in conformity with IAS 34 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are reviewed periodically and adjustments are made as appropriate in the period they become known. Items for which actual results may differ materially from these estimates are described in the following section.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 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) Income taxes
Income taxes and tax exposures recognized in these 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.
(v) 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 harvest yield from the cannabis plants, the value associated with each stage of the plants' growth cycle, estimated selling price, processing costs to convert harvested cannabis into finished goods, selling costs, and the equivalency factor to convert dry cannabis into cannabis oil. The Company's estimates are, by their nature, subject to change. Refer to Note 6.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
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.
(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 has assessed no significant changes as a result of the adoption of this new standard.
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. For consumer sales, payment is due prior to transfer of control. For non-consumer sales, payment is due 60 days after transfer of control. For international sales, fixed consideration is due 30 days and variable consideration due maximum 120 days after transfer of control.
(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 equity investments as fair value through other comprehensive income investments as they are not held for trading by the Company. 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 nine months ended September 30, 2018, a net gain of approximately $294 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:
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(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 measured 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
Other receivables Amortized cost Amortized cost
Loan receivable Amortized cost Amortized cost
Advances to related corporations 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
(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.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
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. 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 unaudited 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. The Company will adopt this interpretation as of its effective date. The Company is currently assessing the impact of the adoption of this standard on its unaudited condensed interim consolidated financial statements.
5. Accounting Changes
(a) Change in estimate
The Company 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 revised its estimate, and assessed that the licenses have an estimated useful life equal to the remaining useful life of the corresponding facilities.
The change in estimate was accounted for prospectively.
(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. While the Company's biological assets are within the scope of IAS 41 Agriculture, the Company applies a similar approach to IAS 2 Inventories in capitalizing direct and indirect costs of biological assets. These costs include direct costs such as nutrients, soil, and seeds, as well as other indirect costs such as utilities, an allocation of indirect labour, property taxes, and depreciation of equipment used in the growing process. The biological assets are then revalued to fair value less costs to sell 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 cost of sales when the inventory is sold.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
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, upon retrospective application.
Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Operations and Comprehensive Income (Loss)
Cost of sales
Cost of sales before fair value adjustments $ 658 $ 1,688 $ 214 $ 464
Production costs 1,276 - 531 -
Total cost of sales 1,934 1,688 745 464
Gross profit before fair value adjustments 1,826 2,072 569 850
Fair value adjustments:
Unrealized change in fair value of biological assets (2,809 ) (1,533 ) (3,009 ) (2,478 )
Realized fair value adjustments on inventory sold in the period 2,541 1,511 1,574 1,324
Total fair value adjustments (268 ) (22 ) (1,435 ) (1,154 )
Gross profit $ 2,094 $ 2,094 $ 2,004 $ 2,004
Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
Original accounting policy New accounting policy Original accounting policy New accounting policy
Statement of Operations and Comprehensive Income (Loss)
Cost of sales
Cost of sales before fair value adjustments $ 1,438 $ 4,509 $ 339 $ 877
Production costs 4,986 - 940 -
Total cost of sales 6,424 4,509 1,279 877
Gross profit before fair value adjustments 3,675 5,590 1,192 1,594
Fair value adjustments:
Unrealized change in fair value of biological assets (16,094 ) (11,108 ) (6,119 ) (5,179 )
Realized fair value adjustments on inventory sold in the period 9,401 6,330 3,150 2,612
Total fair value adjustments (6,693 ) (4,778 ) (2,969 ) (2,567 )
Gross profit $ 10,368 $ 10,368 $ 4,161 $ 4,161
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Three Months Ended September 30, 2018 Three Months Ended September 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 $ (2,809 ) $ (1,533 ) $ (3,009 ) $ (2,478 )
Realized fair value adjustments on inventory sold in the period 2,541 1,511 1,574 1,324
Net changes in non-cash working capital:
Increase in biological assets 4,076 2,800 2,983 2,452
Increase in inventory (5,280 ) (4,250 ) (3,658 ) (3,408 )
Net effect on cash flows used in operating activities $ (1,472 ) $ (1,472 ) $ (2,110 ) $ (2,110 )
Nine Months Ended September 30, 2018 Nine Months Ended September 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 $ (16,094 ) $ (11,108 ) $ (6,119 ) $ (5,179 )
Realized fair value adjustments on inventory sold in the period 9,401 6,330 3,150 2,612
Net changes in non-cash working capital:
Increase in biological assets 14,184 9,198 5,102 4,162
Increase in inventory (16,058 ) (12,987 ) (6,040 ) (5,502 )
Net effect on cash flows used in operating activities $ (8,567 ) $ (8,567 ) $ (3,907 ) $ (3,907 )
6. Biological assets and inventory
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 September 30, Nine Months Ended September 30,
2018 (Note 5) 2017 (Note 5) 2018 (Note 5) 2017 (Note 5)
Biological assets - beginning of period $ 6,899 $ 2,785 $ 3,722 $ 1,795
Capitalization of production costs 1,276 531 4,986 940
Unrealized change in fair value of biological assets 1,533 2,478 11,108 5,179
Transferred to inventory upon harvest (4,076 ) (2,983 ) (14,184 ) (5,103 )
Biological assets - end of period $ 5,632 $ 2,811 $ 5,632 $ 2,811
As of September 30, 2018, it is expected that the Company's biological assets will ultimately yield approximately 3,319 kg of cannabis (December 31, 2017 - 1,695 kg). As at September 30, 2018, the Company has 24,961 plants (December 31, 2017 - 7,353 plants) that are biological assets.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
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
Labour costs (including salaries and benefits) Allocated based on job descriptions of various personnel of which 26% are allocated to processing costs, 42% are allocated to production costs, and 32% are allocated to operating expenses, on a weighted average basis
Supplies and small tools Allocated based on job descriptions of various personnel of which 20% are allocated to processing costs and 80% are allocated to production costs
Utilities Allocated based on estimates of usage of which 10% are allocated to processing costs and 90% are allocated to production costs
Property taxes, amortization, security Allocated based on estimates of square footage of which 20% are allocated to processing costs, 50% are allocated to production costs, and 30% are allocated to operating expenses
Packaging costs 100% are allocated to processing costs
(i) Processing costs are capitalized to inventory and then recognized in 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).
The Company measures its biological assets at fair value less costs to sell. This valuation is based on the expected harvest yield (in grams) for plants currently being cultivated, adjusted for expected 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 fair value of each cannabis plant on a straight line basis over the expected growing cycle. As at September 30, 2018, the plants were on average 5 weeks (December 31, 2017 - 7 weeks) into the growing cycle (31% complete, December 31, 2017 - 44%) and were ascribed approximately 31% (December 31, 2017 - 44%) of their expected fair value at harvest date.
The Company has made the following significant estimates in this valuation model:
Selling price - estimated selling price per gram of dry cannabis based on historical sales and anticipated prices
Harvest yield per plant - represents the 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 - represents the weighted average plants' age (in weeks) out of the 16 week growing cycle as of the period end date
Processing costs - represents 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 - represents estimated shipping, order fulfillment, and labelling costs per gram, calculated by dividing selling costs incurred during the period by number of grams sold during the period
Equivalency factor - represents the estimated grams of dry cannabis required to produce one millilitre of cannabis oil, estimated based on historical results
The following table quantifies each of the significant unobservable inputs above and provides a sensitivity analysis of the impact on fair value of biological assets. Sensitivity analysis for each significant input is performed by assuming a 5% decrease of the input while other significant inputs remain constant at the management estimates as of the period end date.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
5% Decrease as at September 30, 2018 5% Decrease as at December 31, 2017
As at September 30, 2018 Biological assets Inventory As at December 31, 2017 Biological assets Inventory
Selling price per gram $ 7.00 $ (357 ) $ (697 ) $ 8.50 $ 227 $ 443
Harvest yield per plant 133 grams (277 ) - 182 grams 181 -
Stage of growth 5 weeks (277 ) - 7 weeks 181 -
Processing costs per gram $ 1.13 56 17 $ 0.82 22 9
Selling costs per gram $ 0.47 24 47 $ 0.97 227 443
Equivalency factor 0.25 grams (9 ) (61 ) 0.30 grams (1 ) (17 )
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.
As at September 30, 2018 As at December 31, 2017
Dry cannabis
Finished goods $ 11,137 $ 6,145
Work-in-process 1,915 1,630
13,052 7,775
Cannabis oils
Finished goods 589 332
Work-in-process 591 -
1,180 332
Raw materials 171 183
Supplies and consumables 670 126
$ 15,073 $ 8,416
As at September 30, 2018, the Company held 1,702 kg of dry cannabis and 294 L of cannabis oil as finished goods (December 31, 2017 - 815 kg and 137 L, respectively). In addition, the Company held 342 kg (December 31, 2017 - 243 kg) of harvested cannabis in the processing stage, and 314 L (December 31, 2017 - nil) of harvested cannabis in the oil extraction processing stage, classified as work-in-process as at September 30, 2018. Finally, 0.267 kg of seeds were held by the Company as raw materials (December 31, 2017 - 0.288 kg).
The amount of cost of sales before fair value adjustments during the period is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2018 (Note 5) 2017 (Note 5) 2018 (Note 5) 2017 (Note 5)
Cost of sales $ 3,199 $ 1,788 $ 10,839 $ 3,489
Realized fair value adjustments on inventory sold in the period (i) (1,511 ) (1,324 ) (6,330 ) (2,612 )
Cost of sales before fair value adjustments (ii) $ 1,688 $ 464 $ 4,509 $ 877
(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 before fair value adjustments.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
As at September 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
As at September 30, 2018 As at December 31, 2017
Cronos Australia PTY Ltd. (i) $ 896 $ -
Cronos Growing Company Inc. (ii) 11 -
MedMen Canada Inc. (ii) 1,767 -
$ 2,674 $ -
(i) The loan bears 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 December 1, 2020. If the loan is overdue, the outstanding amount bears interest at an additional 2% per annum. Refer to Note 9(b)(iii).
(ii) Advances are unsecured, non-interest bearing, and there are no terms of repayment. Refer to Note 9(b)(i) and (ii).
9. Investments in equity accounted investees
(a) Investment in associate
As at September 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 holder of a license to sell medical cannabis with operations in British Columbia, Canada.
A reconciliation of the carrying amount of the investment in associate is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Balance - beginning of period $ 3,851 $ 4,058 $ 3,807 $ 2,566
Purchase of additional shares - - - 1,076
Company's share of income (loss) 20 (53 ) 64 363
Balance - end of period $ 3,871 $ 4,005 $ 3,871 $ 4,005
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(b) Investments in joint ventures
A reconciliation of the carrying amount of the investments is as follows:
Ownership percentage As at January 1, 2018 Capital contributions As at September 30, 2018
MedMen Canada Inc. ( "MedMen Canada" ) (i) 50% $ - $ 101 $ 101
Cronos Growing Company Inc. ( "Cronos GrowCo" ) (ii) 50% - 100 100
Cronos Australia PTY Ltd. ( "Cronos Australia" ) (iii) 50% - - -
Total investment in joint ventures $ - $ 201 $ 201
The Company did not hold interests in joint ventures as at September 30, 2017.
(i) 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.
(ii) Cronos GrowCo was incorporated under the CBCA on June 14, 2018, with the objective to build a cannabis production greenhouse, apply for cannabis licenses under the Cannabis Act, and grow, cultivate, extract, produce, sell, and distribute cannabis in accordance with such licenses.
(iii) Cronos Australia was incorporated under the Corporations Act 2001 (Australia) on December 6, 2016 with a nominal capital contribution. Cronos Group has committed to provide 50% of the capital expenditure and operating expense funding requirements, approximately $7,200 and $3,800 respectively. The timing of these funding obligations has not been determined as of September 30, 2018.
10. Other investments
Other investments consist of investments in common shares and warrants of several companies in the 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 September 30, 2018 As at December 31, 2017
Fair value through other comprehensive income investments
Canopy Growth Corporation ( "Canopy" ) (i) $ 694 $ 877
Evergreen (ii) 300 300
$ 994 $ 1,177
Fair value through profit or loss investment
ABcann - share warrants (iii and v) - 170
$ 994 $ 1,347
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 30, 2017
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
The gains (losses) recognized upon the increase (decrease) in the fair value of other investments were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Gain (loss) recognized in net income (loss)
Canopy (i) $ - $ - $ - $ 36
ABcann - shares (iii) - 1,051 - 2,089
ABcann - share warrants (iii and v) - (286 ) 221 (89 )
The Hydropothecary Corporation ( "Hydropothecary" ) (iv) - 363 - 363
$ - $ 1,128 $ 221 $ 2,399
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Gain (loss) recognized in other comprehensive income before taxes
Hydropothecary (iv) $ - $ (115 ) $ - $ 199
Canopy (i) 269 81 504 46
ABcann - shares (iii) - 32 (224 ) 447
$ 269 $ (2 ) $ 280 $ 692
(i) During the nine months ended September 30, 2018, the Company sold some of its shares of Canopy for proceeds of $687 (September 30, 2017 - $88).
(ii) On March 16, 2017, Evergreen received a cultivation license under the Cannabis Act. 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.
(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.
During the nine months ended September 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 $4,523 during the nine months ended September 30, 2017.
(iv) During the nine months ended September 30, 2017, BFK Capital Corp. acquired all of the outstanding shares of Hydropothecary (currently operating as HEXO Corp. and trading as TSX: HEXO), and began trading as Hydropothecary. As a result of this transaction, Hydropothecary executed a 6:1 stock split.
During the nine months ended September 30, 2017, the Company sold certain shares of Hydropothecary for proceeds of $543. The cumulative gain previously recognized as other comprehensive income on these shares was reclassified to income during the period. The remaining shares were revalued at September 30, 2017 based on the fair market value, with the gain recognized as other comprehensive income.
(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%.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2018 and September 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: Nov 13, 2018