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

Thursday, May 9, 2019 3 min read
Key Takeaway: CRONOS GROUP INC. Unaudited Condensed Interim Consolidated Financial Statements For the Three Months Ended March 31, 2019 and March 31, 2018 (in thousands of Canadian dollars) Cronos Group Inc. Unaudited Condensed Interim Consolidated Financial Statements For the three months en

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CRONOS GROUP INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and March 31, 2018
(in thousands of Canadian dollars)
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
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 March 31, 2019 and December 31, 2018
(in thousands of CDN $)
Notes As at March 31, 2019 As at December 31, 2018
Assets
Current assets
Cash and cash equivalents 22(a) $ 2,418,277 $ 32,634
Interest receivable 22(a) 3,130 -
Accounts receivable 22(a) 5,559 4,163
Sales taxes receivable 5,594 3,419
Prepaid expenses and other assets 5,092 4,190
Biological assets 5 11,506 9,074
Inventory 5 25,150 11,584
Total current assets 2,474,308 65,064
Advances to joint ventures 6(a) 21,920 6,395
Net investments in equity accounted investees 6(b) 2,185 4,038
Other investments 7,22(c) 300 705
Property, plant and equipment 8 184,570 171,720
Right-of-use assets 3(a),11(a) 1,875 171
Intangible assets 9(a) 11,087 11,234
Goodwill 9(b) 1,792 1,792
Total assets $ 2,698,037 $ 261,119
Liabilities
Current liabilities
Bank indebtedness 22(b) $ 422 $ -
Accounts payable and other liabilities 22(b) 45,016 15,372
Holdbacks payable 22(b) 8,482 7,887
Government remittances payable 22(b) 1,313 1,123
Current portion of lease obligations 11,22(b) 134 41
Derivative liabilities 13,22(b) 1,664,275 -
Construction loan payable 12,22(b) - 20,951
Total current liabilities 1,719,642 45,374
Lease obligations 11,22(b) 1,827 119
Due to non-controlling interests 10,22(b) 2,247 2,136
Deferred income tax liability 20 4,371 1,850
Total liabilities 1,728,087 49,479
Shareholders' equity
Share capital 14(a) 556,930 225,500
Warrants 15(a) 845 1,548
Stock options 15(b) 6,631 6,241
Retained earnings (accumulated deficit) 404,499 (22,715 )
Accumulated other comprehensive income 1,049 930
Total equity attributable to shareholders of Cronos Group 969,954 211,504
Non-controlling interests 10 (4 ) 136
Total shareholders' equity 969,950 211,640
Total liabilities and shareholders' equity $ 2,698,037 $ 261,119
Commitments and contingencies 19
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 months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except share and per share amounts)
Three Months Ended March 31,
Notes 2019 2018
Gross revenue 16 $ 6,985 $ 2,945
Excise taxes (515 ) -
Net revenue 6,470 2,945
Cost of sales
Cost of sales before fair value adjustments 4(b) 2,984 1,567
Gross profit before fair value adjustments 3,486 1,378
Fair value adjustments
Unrealized change in fair value of biological assets 4(b) (13,553 ) (2,744 )
Realized fair value adjustments on inventory sold in the period 4(b) 3,722 2,194
Total fair value adjustments (9,831 ) (550 )
Gross profit 13,317 1,928
Operating expenses
Sales and marketing 1,500 586
Research and development 1,557 -
General and administrative 9,611 2,461
Share-based payments 15(b),18 737 774
Depreciation and amortization 8,9(a),11(a) 470 285
Total operating expenses 13,875 4,106
Operating loss (558 ) (2,178 )
Other income (expense)
Interest income (expense) 2,720 (22 )
Financing costs 12,13 (29,561 ) -
Gain on revaluation of derivative liabilities 13 436,383 -
Share of income (loss) from investments in equity accounted investees 6 (264 ) 41
Gain on disposal of Whistler 6 20,606 -
Gain on other investments 7 924 221
Total other income 430,808 240
Income (loss) before income taxes 430,250 (1,938 )
Deferred income tax expense (recovery) 20 2,557 (888 )
Net income (loss) $ 427,693 $ (1,050 )
Net income (loss) attributable to:
Cronos Group $ 427,829 $ (1,050 )
Non-controlling interests 10 (136 ) -
$ 427,693 $ (1,050 )
Other comprehensive income (loss)
Gain (loss) on revaluation and disposal of other investments, net of tax 7,20 $ 103 $ (35 )
Foreign exchange gain on translation of foreign operations 2(d),10 16 -
Total other comprehensive income (loss) 119 (35 )
Comprehensive income (loss) $ 427,812 $ (1,085 )
Comprehensive income (loss) attributable to:
Cronos Group $ 427,948 $ (1,085 )
Non-controlling interests 10 (136 ) -
$ 427,812 $ (1,085 )
Earnings (loss) per share
Basic 17 $ 1.95 $ (0.01 )
Diluted 17 $ 0.48 $ (0.01 )
Weighted average number of outstanding shares
Basic 17 218,949,590 157,054,891
Diluted 17 271,086,575 157,054,891
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 months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except number of share amounts)
Share-based reserve Retained earnings Accumulated other Non-
Notes Number of shares Share capital Shares to be issued Warrants Stock options (accumulated deficit) comprehensive income controlling interests Total
Balance at January 1, 2019 as previously reported 178,720,022 $ 225,500 $ - $ 1,548 $ 6,241 $ (22,715 ) $ 930 $ 136 $ 211,640
Adoption of IFRS 16 3(a) - - - - - (68 ) - (4 ) (72 )
Balance at January 1, 2019 as restated 178,720,022 225,500 - 1,548 6,241 (22,783 ) 930 132 211,568
Shares issued 14(a) 149,831,154 334,099 - - - - - - 334,099
Share issuance costs - (4,901 ) - - - - - - (4,901 )
Warrants exercised 15(a) 4,390,961 1,884 - (703 ) - - - - 1,181
Vesting of options 15(b) - - - - 737 - - - 737
Options exercised 15(b) 375 2 - - (1 ) - - - 1
Share appreciation rights exercised 15(b) 77,865 346 - - (346 ) (547 ) - - (547 )
Net income (loss) - - - - - 427,829 - (136 ) 427,693
Other comprehensive income - - - - - - 119 - 119
Balance at March 31, 2019 333,020,377 $ 556,930 $ - $ 845 $ 6,631 $ 404,499 $ 1,049 $ (4 ) $ 969,950
Balance at January 1, 2018 149,360,603 $ 83,559 $ - $ 3,364 $ 2,289 $ (3,724 ) $ 880 $ - $ 86,368
Shares issued 14(a) 5,257,143 46,000 - - - - - - 46,000
Share issuance costs - (3,081 ) - - - - - - (3,081 )
Shares to be issued 14(b) - 961 - - - - - 961
Warrants exercised 15(a) 6,972,479 1,966 - (686 ) - - - - 1,280
Vesting of options 15(b) - - - - 774 - - - 774
Options exercised 15(b) 42,256 106 - - (33 ) - - - 73
Net loss - - - - - (1,050 ) - - (1,050 )
Other comprehensive loss - - - - - - (35 ) - (35 )
Balance at March 31, 2018 161,632,481 $ 128,550 $ 961 $ 2,678 $ 3,030 $ (4,774 ) $ 845 $ - $ 131,290
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 months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $)
Three Months Ended March 31,
Notes 2019 2018
Operating activities
Net income (loss) $ 427,693 $ (1,050 )
Items not affecting cash and cash equivalents:
Unrealized change in fair value of biological assets 4(b) (13,553 ) (2,744 )
Realized fair value adjustments on inventory sold in the period 4(b) 3,722 2,194
Share-based payments 15(b),18 737 774
Depreciation and amortization 8,9(a),11(a) 470 285
Depreciation relieved on inventory sold 235 169
Share of loss (income) from investments in equity accounted investees 6 264 (41 )
Gain on disposal of Whistler 6 (20,606 ) -
Gain on other investments 7 (924 ) (221 )
Gain on revaluation of derivative liabilities 13 (436,383 ) -
Deferred income tax expense (recovery) 20 2,557 (888 )
Foreign exchange loss (gain) 67 (16 )
Net changes in non-cash working capital 21 17,320 (12,212 )
Cash and cash equivalents used in operating activities (18,401 ) (13,750 )
Investing activities
Investments in equity accounted investees 6 (2,200 ) -
Advances to joint ventures 6 (15,812 ) -
Proceeds from sale of other investments 7 26,078 687
Payment to exercise ABcann warrants 7 - (113 )
Purchase of property, plant and equipment 8 (13,454 ) (7,642 )
Purchase of intangible assets 9(a) (51 ) (131 )
Advance to Cronos Israel 2(a),10 - (926 )
Cash and cash equivalents used in investing activities (5,439 ) (8,125 )
Financing activities
Increase in bank indebtedness 422 -
Advance from non-controlling interests 10 111 -
Repayment of lease obligations 11 (32 ) (13 )
Repayment of construction loan payable 12 (21,311 ) -
Payment of accrued interest on construction loan payable 12 (121 ) (185 )
Advance under Credit Facility 12 65,000 -
Repayment of Credit Facility 12 (65,000 ) -
Proceeds from Altria Investment 13,14(a) 2,434,757 -
Proceeds from share issuance 14(a) - 46,000
Share issuance costs (4,901 ) (3,081 )
Proceeds from shares to be issued 14(b) - 961
Proceeds from exercise of warrants and options 15(a),(b) 1,182 1,353
Withholding taxes paid on share appreciation rights 15(b) (547 ) -
Cash and cash equivalents provided by financing activities 2,409,560 45,035
Net change in cash and cash equivalents 2,385,720 23,160
Cash and cash equivalents - beginning of period 32,634 9,208
Effects of foreign exchange on cash (77 ) -
Cash and cash equivalents - end of period $ 2,418,277 $ 32,368
Supplemental cash flow information
Interest paid $ 675 $ 307
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 months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
1. Nature of business
Cronos Group Inc. ( "Cronos Group" or the "Company" ) was incorporated under the Business Corporations Act (Ontario). Cronos Group is a public corporation, with its head office located at 720 King Street West, Suite 320, Toronto, Ontario, M5V 2T3. The Company's common shares are listed on the Nasdaq Global Market and on the Toronto Stock Exchange ( "TSX" ) under the ticker symbol ( "CRON" ).
Cronos Group is an innovative global cannabinoid company, with international production and distribution across five continents. The Company is engaged in the cultivation, manufacturing, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group's brand portfolio includes PEACE NATURALS , a global health and wellness brand, and two adult-use brands, COVE and Spinach . The Company operates two wholly-owned license holders ( "License Holders" ) under the Cannabis Act (Canada) and its relevant regulations (the "Cannabis Act" ). The Company's License Holders are Peace Naturals Project Inc. ( "Peace Naturals" ), which has production facilities near Stayner, Ontario, and Original BC Ltd. ( "OGBC" ), which has a production facility in Armstrong, British Columbia.
Cronos Group has also established five strategic joint ventures in Canada, Israel, Australia, and Colombia, and holds minority interests in cannabis-related companies and License Holders. One of these strategic joint ventures is considered a subsidiary for financial reporting purposes, refer to Note 2(a).
2. Basis of presentation
These unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019 and March 31, 2018 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, 2018, except for the adoption of new standards effective as of January 1, 2019. The Company has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. The Company applied, as of January 1, 2019, International Financial Reporting Standard ( "IFRS" ) 16, Leases and Interpretation of the IFRS Interpretations Committee ( "IFRIC" ) 23, Uncertainty over income tax treatments. As required by IAS 34, the nature and effect of these changes are disclosed in Note 3.
These 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 for annual financial statements. Accordingly, these unaudited condensed interim consolidated financial statements should be read in conjunction with the Company's December 31, 2018 audited annual consolidated financial statements and notes.
These unaudited condensed interim consolidated financial statements were approved by the Board of Directors (the "Board" ) on May 8, 2019.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(a) Basis of consolidation
These unaudited condensed interim consolidated financial statements include the accounts of Cronos Group Inc. and its subsidiaries, summarized in the following chart:
Subsidiaries Jurisdiction of incorporation Incorporation date Ownership interest
Hortican Inc. ( "Hortican" ) Canada January 17, 2013 100%
Peace Naturals Canada November 21, 2012 100%
OGBC Canada March 15, 2013 100%
Cronos Canada Holdings Inc. Canada March 13, 2018 100%
Cronos Global Holdings Inc. Canada April 25, 2017 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. Pharmacies Ltd. (i) Israel February 15, 2018 90%
Cronos Labs Ltd. ( "Cronos Device Labs" ) Israel March 14, 2019 100%
Cronos Group Celtic Holdings Ltd. Ireland February 6, 2018 100%
Cronos Malta Holdings Ltd. Malta October 25, 2018 100%
(i) These Israeli entities are collectively referred to as "Cronos Israel" .
In the unaudited condensed interim consolidated statements of operations and comprehensive income (loss), net income (loss) and other comprehensive income (loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of Cronos Israel are presented separately in the shareholders' equity section of the unaudited condensed interim consolidated statements of financial position and the unaudited condensed interim consolidated statements of changes in equity.
(b) Investments in equity accounted investees
Investees in which the Company has significant influence or joint control are accounted for using the equity method. The Company's interests in equity accounted investees as at March 31, 2019 are summarized in the following chart.
Equity accounted investees Jurisdiction of incorporation Ownership interest
Cronos Australia Limited ( "Cronos Australia" ) Australia 50%
MedMen Canada Inc. ( "MedMen Canada" ) Canada 50%
Cronos Growing Company Inc. ( "Cronos GrowCo" ) Canada 50%
NatuEra S. r.l Luxembourg 50%
As at December 31, 2018, the Company held a 19% ownership interest in Whistler Medical Marijuana Company ( "Whistler" ). During the three months ended March 31, 2019, the Company divested of its investment in Whistler.
(c) Basis of measurement
Apart from biological assets, other investments, and derivative liabilities, which are measured at fair value, the unaudited condensed interim consolidated financial statements have been presented and prepared on the basis of historical cost.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(d) Functional and presentation currency
These unaudited condensed interim consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company. The functional currency of all subsidiaries is the national currency of the respective jurisdiction of incorporation. Refer to Note 2(a).
3. Adoption of new accounting pronouncements
(a) IFRS 16, Leases
IFRS 16 was issued in January 2016 and replaces the previous guidance on leases, predominantly IAS 17, Leases. The Company has applied IFRS 16 with an initial application date of January 1, 2019, in accordance with the transitional provisions specified in IFRS 16. As a result, the Company has changed its accounting policy for lease contracts as detailed below. The Company has applied the following practical expedients:
(i) The Company applied the simplified transition approach and did not restate comparative information. As a result, the Company recognized the cumulative effect of initially applying IFRS 16 as an adjustment to the accumulated deficit as at January 1, 2019.
(ii) On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Company applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17, and IFRIC 4, Determining whether an arrangement contains a lease, were not reassessed for whether there is a lease. The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
In accordance with the practical expedients applied, the Company has recognized lease liabilities and right-of-use assets at the date of initial application for leases previously classified as operating leases in accordance with IAS 17. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company has elected to measure the right-of-use assets at the carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Company's incremental borrowing rate at the date of initial application. For the lease previously classified as a finance lease under IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of initial application is equal to the carrying amount of the leased asset and lease liability immediately before the date of initial application.
As at January 1, 2019 As previously reported under IAS 17 Adjustments (i) As restated under IFRS 16
Right-of-use assets $ 217 $ 1,890 $ 2,107
Accumulated depreciation 46 144 190
Current lease liabilities 41 303 344
Non-current lease liabilities 119 1,515 1,634
Accumulated deficit (22,715 ) (68 ) (22,783 )
Non-controlling interests 136 (4 ) 132
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
The following is the Company's policy for accounting for lease contracts in accordance with IFRS 16:
At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. In addition, the right-of-use assets are adjusted for impairment losses, if any. The estimated useful lives and recoverable amounts of right-of-use assets are determined on the same basis as those of property and equipment. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective interest method. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
(b) IFRIC 23, Uncertainty over income tax treatments
IFRIC 23 clarifies the application of recognition and measurement requirements in IAS 12, Income taxes, when there is uncertainty over income tax treatments. It specifically addresses whether an entity considers each tax treatment independently or collectively, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and how an entity considers changes in facts and circumstances. IFRIC 23 became effective for fiscal years beginning on or after January 1, 2019, with earlier application permitted. The Company has adopted this interpretation as of its effective date and has assessed no significant impact as a result of the adoption of this interpretation.
4. Accounting changes
(a) Change in estimate
During the three months ended March 31, 2018, the Company revised its estimate of the useful life of the Health Canada licenses, and assessed that the licenses have an estimated useful life equal to the remaining useful life of the corresponding facilities described in Note 9(a). Previously, the Company estimated that the Health Canada Licenses had an indefinite life. 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.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(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 period, 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 unaudited condensed interim consolidated statement of financial position, or the unaudited condensed interim consolidated statement of changes in equity on the current or any prior period, upon retrospective application.
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
Original accounting policy New accounting policy Original accounting policy New accounting policy
Unaudited condensed interim consolidated statement of operations and comprehensive income (loss)
Cost of sales
Cost of sales before fair value adjustments $ 1,684 $ 2,984 $ 521 $ 1,567
Production costs 3,338 - 1,714 -
Total cost of sales 5,022 2,984 2,235 1,567
Gross profit before fair value adjustments 1,448 3,486 710 1,378
Fair value adjustments:
Unrealized change in fair value of biological assets (16,891 ) (13,553 ) (4,458 ) (2,744 )
Realized fair value adjustments on inventory sold in the period 5,022 3,722 3,240 2,194
Total fair value adjustments (11,869 ) (9,831 ) (1,218 ) (550 )
Gross profit $ 13,317 $ 13,317 $ 1,928 $ 1,928
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
Original accounting policy New accounting policy Original accounting policy New accounting policy
Unaudited condensed interim consolidated statement of cash flows
Operating activities
Items not affecting cash:
Unrealized change in fair value of biological assets $ (16,891 ) $ (13,553 ) $ (4,458 ) $ (2,744 )
Realized fair value adjustments on inventory sold in the period 5,022 3,722 3,240 2,194
Net changes in non-cash working capital:
Biological assets 15,033 11,695 3,740 2,026
Inventory (18,501 ) (17,201 ) (3,802 ) (2,756 )
Net effect on cash flows used in operating activities $ (15,337 ) $ (15,337 ) $ (1,280 ) $ (1,280 )
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
5. Biological assets and inventory
(a) Biological assets
The Company's biological assets consist of cannabis plants. The changes in the carrying amounts of the biological assets are as follows:
Three Months Ended March 31,
2019 (Note 4) 2018 (Note 4)
Biological assets - beginning of period $ 9,074 $ 3,722
Capitalization of production costs 3,338 1,714
Unrealized change in fair value of biological assets 13,553 2,744
Transferred to inventory upon harvest (14,459 ) (3,690 )
Biological assets - end of period $ 11,506 $ 4,490
As at March 31, 2019, the Company has 67,635 plants classified as biological assets which are expected to ultimately yield 6,155 kg of dry cannabis (December 31, 2018 - 46,004 plants which were expected to ultimately yield 6,303 kg of dry cannabis).
The Company measures its biological assets at fair value less costs to sell. This valuation is based on the expected harvest yield (on a grams per plant basis) for plants currently being cultivated, adjusted for the expected net selling price less post-harvest costs attributable to bringing a harvested gram of cannabis to a saleable condition and ultimate sale (on a per gram basis). The Company accretes the fair value of each cannabis plant on a straight-line basis over the expected growing cycle. As at March 31, 2019, the plants were on average 5 weeks into the growing cycle, 38% complete, and were ascribed approximately 38% (December 31, 2018 - 6 weeks, 37%, and 37%, respectively) of their expected fair value at harvest date.
(b) Inventory
Inventory consisted of the following:
As at March 31, 2019 As at December 31, 2018
Dry cannabis
Finished goods 181 kg $ 1,014 187 kg $ 972
Work-in-process 3,261 kg 16,222 1,789 kg 7,733
17,236 8,705
Cannabis oils (i)
Finished goods 200 kg 1,054 115 kg 656
Work-in-process 1,175 kg 5,372 220 kg 1,250
6,426 1,906
Raw materials (ii) 169 (ii) 171
Supplies and consumables 1,319 802
$ 25,150 $ 11,584
(i) Cannabis oils are expressed in dry cannabis gram equivalents. Refer to Note 5(d) for the equivalency factor applied.
(ii) As at March 31, 2019 and December 31, 2018, raw materials consisted of 0.267 kg of seeds held by the Company.
As at March 31, 2019, the Company held 40 kg (December 31, 2018 - 29 kg) of dry cannabis and 5 kg (December 31, 2018 - 4 kg) of cannabis oils as retention samples, which are valued at $nil.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(c) Direct and indirect cost allocations
Costs incurred to transform biological assets up to the point of harvest ( "production costs" ) are capitalized as they are incurred, which become the cost basis of the biological assets. These costs include direct costs such as nutrients, soil, and seeds, as well as other indirect costs such as utilities, an allocation of indirect labour, property taxes, and depreciation of equipment used in the growing process. The biological assets are then revalued to fair value less costs to sell immediately prior to harvest and at the end of each reporting period. Gains or losses arising from changes in fair value less costs to sell, excluding capitalized production costs, are presented as unrealized change in fair value of biological assets. At the point of harvest, agricultural produce consisting of cannabis is considered inventory. The fair value less costs to sell becomes the cost base of inventory. Any subsequent post-harvest costs ( "processing costs" ), including direct costs attributable to processing and related overhead, are capitalized to inventory as they are incurred. Upon ultimate sale of inventory, the associated production and processing costs are presented as cost of sales before fair value adjustments; the remaining cost of inventory, associated with fair value less costs to sell prior to harvest, is presented as realized fair value adjustments on inventory sold in the period.
Nature of cost Allocation basis
Consumables (insect control, fertilizers, soil) 100% allocated to production costs because these costs are incurred to support plant growth
Labour costs (including salaries and benefits) Allocated based on job descriptions of various personnel 40% allocated to processing costs; 40% allocated to production costs; 20% allocated to operating expenses (2018 - 20%; 60%; and 20%; respectively)
Supplies and small tools 80% allocated to production costs; 20% allocated to processing costs
Utilities Allocated based on estimates of usage 10% allocated to processing costs; 90% allocated to production costs
Property taxes, depreciation, security Allocated based on estimates of square footage 20% allocated to processing costs; 50% allocated to production costs; 30% allocated to operating expenses
Packaging costs 100% allocated to processing costs
(d) Significant inputs and sensitivity analyses
The Company has made the following estimates related to significant inputs in the valuation model:
Significant inputs Definition
Net selling price per gram Estimated net selling price per gram of dry cannabis based on historical sales and anticipated prices, after adjustment for excise taxes
Harvest yield per plant Expected grams of dry cannabis to be harvested from a cannabis plant, based on the weighted average historical yields by plant strain
Stage of growth Weighted average plant age (in weeks) out of the 14 week (December 31, 2018 - 16 week) growing cycle as of the period end date
Processing costs per gram Estimated post-harvest costs per gram to bring a gram of harvested cannabis to its saleable condition, including drying, curing, testing and packaging, and overhead allocation; estimated based on post-harvest costs incurred during the period divided by number of grams processed during the period
Selling costs per gram Estimated shipping, order fulfillment, and labelling costs per gram; calculated as selling costs incurred during the period divided by number of grams sold during the period
Equivalency factor Estimated grams of dry cannabis required to produce one millilitre of cannabis oil; estimated based on historical conversion results
Mass multipliers Estimated multiples of crude extract and isolate mass in diluted cannabis oil products
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
These inputs are level 3 on the fair value hierarchy, and are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets and inventory in future periods.
The following table quantifies each of the significant unobservable inputs described above and provides a sensitivity analysis of the impact on the reported values of biological assets and inventory. The sensitivity analysis for each significant input is performed by assuming a 5% decrease in the input while other significant inputs remain constant at management's best estimate as of the period end date.
Increase (decrease) as at March 31, 2019 Increase (decrease) as at December 31, 2018
As at March 31, 2019 Biological assets Inventory As at December 31, 2018 Biological assets Inventory
Net selling price per gram $5.97/g $ (708 ) $ (705 ) $5.58/g $ (673 ) $ (640 )
Harvest yield per plant 91 g (572 ) - 137 g (446 ) -
Stage of growth 5 weeks (572 ) - 6 weeks (446 ) -
Processing costs per gram $0.76/g 90 83 $1.98/g 175 65
Selling costs per gram $0.40/g 47 47 $0.43/g 52 50
Equivalency factor 0.3 g/mL (48 ) (138 ) 0.3 g/mL (45 ) (104 )
Mass multipliers 35x - 50x (35 ) (222 ) 30x - 50x (5 ) (24 )
6. Equity accounted investees
(a) Advances to joint ventures
Advances to joint ventures are unsecured, non-interest bearing, and have no terms of repayment, unless otherwise specified. The joint ventures are solely funded by their shareholders and the advances are considered an extension of the Company's investments therein. As such, losses recognized in excess of the Company's capital contributions are applied against the respective advances.
As at March 31, 2019 Natuera Colombia (v) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) Total
Gross advances to joint ventures $ 302 $ 1,856 $ 19,115 $ 1,480 $ 22,753
Less: advances to joint ventures applied to carrying amount of investments - (167 ) - (666 ) (833 )
Advances to joint ventures $ 302 $ 1,689 $ 19,115 $ 814 $ 21,920
As at December 31, 2018 Natuera Colombia (v) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) Total
Gross advances to joint ventures $ - $ 1,871 $ 4,080 $ 990 $ 6,941
Less: advances to joint ventures applied to carrying amount of investments - (175 ) (29 ) (342 ) (546 )
Advances to joint ventures $ - $ 1,696 $ 4,051 $ 648 $ 6,395
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(b) Net investment in equity accounted investees
A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows:
Whistler (i) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) Total
As at January 1, 2019 $ 4,038 $ - $ - $ - $ 4,038
Share of net income (loss) 38 8 14 (324 ) (264 )
Contribution to (disposal of) investment (4,076 ) - 2,200 - (1,876 )
Advances to joint ventures applied to (transferred from) carrying amount of investments - (8 ) (29 ) 324 287
As at March 31, 2019 $ - $ - $ 2,185 $ - $ 2,185
Whistler (i) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) Total
As at January 1, 2018 $ 3,807 $ - $ - $ - $ 3,807
Share of net income 41 - - - 41
As at March 31, 2018 $ 3,848 $ - $ - $ - $ 3,848
(i) Whistler was incorporated in British Columbia, Canada and is a License Holder with production facilities in British Columbia, Canada. Although the Company held less than 20% of the ownership interest and voting control of Whistler as at December 31, 2018, the Company had the ability to exercise significant influence through both its power to elect board members, and aggregately, with affiliated shareholders, the Company held over 20% of the voting control of Whistler.
On March 4, 2019, the Company sold all 2,563 shares of Whistler, representing approximately 19.0% of Whistler's issued and outstanding common shares, to Aurora Cannabis Inc. ( "Aurora" ), in connection with Aurora's acquisition of Whistler (the "Whistler Transaction" ). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares with an aggregate value of approximately $24,682. The closing of the Whistler Transaction resulted in a gain of $20,606 recognized in net income, with the Aurora common shares received being measured at fair value through profit or loss. Refer to Note 7. In addition, the Company expects to further receive Aurora common shares valued at an aggregate of approximately $7,600 upon the satisfaction of certain specified milestones, which has not been recognized in these unaudited condensed interim consolidated financial statements. The exact number of Aurora common shares to be issued to the Company following the satisfaction of each such milestone will be determined in reference to the five-day volume weighted average price of Aurora common shares immediately prior to the achievement of the applicable milestone.
(ii) MedMen Canada was incorporated under the Canada Business Corporations Act (" CBCA ") on March 13, 2018, with the objective of distribution, sale, and marketing of cannabis products in Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 20 years, commencing from 2018.
(iii) Cronos GrowCo was incorporated under the CBCA on June 14, 2018, with the objective of building a cannabis production greenhouse, applying for cannabis licenses under the Cannabis Act, and growing, cultivating, extracting, producing, selling, and distributing cannabis in accordance with such licenses.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(iv) Cronos Australia Pty. Ltd. was incorporated under the Corporations Act 2001 (Australia) on December 6, 2016. On September 27, 2018, Cronos Australia Pty. Ltd. underwent a restructuring, resulting in the incorporation of Cronos Australia Limited on that date, which became the ultimate holding company of the group, owning 100% of Cronos Australia Group Pty. Ltd., which in turn owns 100% of Cronos Australia - Marketing & Distribution Pty. Ltd., Cronos Australia - Operations Pty. Ltd, and Cronos Australia - New Zealand Ltd. Cronos Group has committed to provide 50% of the capital expenditure and operating expense funding requirements, amounting to approximately $10,000. The timing of these funding obligations has not been determined as of March 31, 2019.
Advances are denominated in Australian dollars ( "AUD" ). $1,480 ($1,500 AUD) (December 31, 2018 - $940 ($1,000 AUD)) is governed by an unsecured loan bearing interest at a rate of 12% per annum, calculated and compounded daily, in arrears, on the amounts advanced from the date of each advance. The loan is due at the earlier of Cronos Australia's initial public offering date and December 1, 2020. If the loan is overdue, the outstanding amount bears interest at an additional 2% per annum.
(v) The Company indirectly holds a 50% interest in NatuEra Colombia S.A.S. ( "NatuEra Colombia" ) through the Company's joint venture, NatuEra S. r.l. NatuEra Colombia is a wholly owned subsidiary of NatuEra S. r.l., incorporated in Colombia. Advances are denominated in United States dollars ( "USD" ). $302 ($226 USD) (December 31, 2018 - $nil) is governed by an unsecured promissory note bearing interest at a rate of 1% per annum. The loan is due January 25, 2020.
7. Other investments
Other investments consist of investments in common shares and warrants of companies in the cannabis industry. These investments, with the exception of shares of Evergreen Medicinal Supply Inc. ( "Evergreen" ) and warrants of ABcann Global Corporation (now known as "VIVO Cannabis Inc." ) ( "ABcann" ), were quoted in an active market as of the relevant period end date and, as a result, had a reliably measurable fair value as of such period end dates.
As at March 31, 2019 As at December 31, 2018
Fair value through other comprehensive income investments
Canopy Growth Corporation ( "Canopy" ) (i) $ - $ 405
Evergreen (ii) 300 300
$ 300 $ 705
Three Months Ended March 31,
2019 2018
Gain recognized in net income (loss)
Aurora (iii) $ 924 $ -
ABcann - share warrants (iv) - 221
$ 924 $ 221
Three Months Ended March 31,
2019 2018
Gain (loss) recognized in other comprehensive income (loss) before taxes
Canopy (i) $ 67 $ 182
ABcann - shares (iv) - (190 )
$ 67 $ (8 )
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(i) During the three months ended March 31, 2019, the Company sold all remaining 11,062 common shares of Canopy for gross proceeds of $472 (2018 - 18,436 shares for gross proceeds of $687).
(ii) 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 common 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) In connection with the Whistler Transaction described in Note 6, the Company received 2,524,341 common shares of Aurora. During the three months ended March 31, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $25,606.
(iv) During the three months ended March 31, 2018, the Company exercised 182,927 share warrants for aggregate consideration of $113, for additional common shares of ABcann. Prior to the exercise, the share warrants were revalued to fair value using the Black-Scholes option pricing model. These ABcann shares were revalued to their fair value at the end of the period.
Cost As at January 1, 2019 Additions (i) Transfers As at March 31, 2019
Land $ 3,207 $ 28 $ - $ 3,235
Building structures 21,652 9,394 106,766 137,812
Furniture and equipment 676 143 - 819
Computer equipment 464 227 - 691
Security equipment 985 117 - 1,102
Production equipment 4,823 222 - 5,045
Road 137 - - 137
Leasehold improvements 1,584 165 - 1,749
Construction in progress 141,473 3,665 (106,766 ) 38,372
$ 175,001 $ 13,961 $ - $ 188,962
Accumulated depreciation As at January 1, 2019 Additions (ii) Transfers As at March 31, 2019
Building structures $ 1,184 $ 745 $ - $ 1,929
Furniture and equipment 121 35 - 156
Computer equipment 169 53 - 222
Security equipment 384 54 - 438
Production equipment 896 173 - 1,069
Road 17 1 - 18
Leasehold improvements 510 50 - 560
$ 3,281 $ 1,111 $ - $ 4,392
Net book value $ 171,720 $ 184,570
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
Cost As at January 1, 2018 Additions (i) Transfers As at March 31, 2018
Land $ 1,558 $ 19 $ - $ 1,577
Building structures 11,518 1,134 - 12,652
Furniture and equipment 134 229 - 363
Computer equipment 148 57 - 205
Security equipment 886 10 - 896
Production equipment 2,481 181 - 2,662
Road 137 - - 137
Leasehold improvements 1,497 49 - 1,546
Construction in progress 39,337 6,186 - 45,523
$ 57,696 $ 7,865 $ - $ 65,561
Accumulated depreciation As at January 1, 2018 Additions (ii) Transfers As at March 31, 2018
Building structures $ 433 $ 152 $ - $ 585
Furniture and equipment 43 13 - 56
Computer equipment 75 13 - 88
Security equipment 196 45 - 241
Production equipment 431 104 - 535
Road 10 1 - 11
Leasehold improvements 336 41 - 377
$ 1,524 $ 369 $ - $ 1,893
Net book value $ 56,172 $ 63,668
(i) During the three months ended March 31, 2019, there were non-cash additions from the amortization of capitalized transaction costs and the capitalization of accrued interest to construction in progress and building structures amounting to $481 (2018 - $223). Refer to Note 12. In addition, advances from non-controlling interests accrued interest of $26 (2018 - $nil) which was capitalized to construction in progress during the three months ended March 31, 2019. Refer to Note 10.
(ii) During the three months ended March 31, 2019, $3 (2018 - $nil) of the current period's depreciation expense was recorded as part of cost of sales. An additional $892 (2018 - $255) of depreciation expense was capitalized to biological assets and inventory.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2019 and March 31, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
9. Intangible assets and goodwill
(a) Intangible assets
Cost As at January 1, 2019 Additions As at March 31, 2019
Software $ 360 $ 51 $ 411
Health Canada Licenses - OGBC 1,611 - 1,611
Health Canada Licenses - Peace Naturals 9,596 - 9,596
Israeli Cannabis Code - Cronos Israel G.S. Cultivations Ltd. (i) 156 - 156
Israeli Cannabis Code - Cronos Israel G.S. Manufacturing Ltd. (i) 218 - 218
$ 11,941 $ 51 $ 11,992
Accumulated amortization As at January 1, 2019 Additions As at March 31, 2019
Software $ 73 $ 40 $ 113
Health Canada Licenses - OGBC 101 25 126
Health Canada Licenses - Peace Naturals 533 133 666
$ 707 $ 198 $ 905
Net book value $ 11,234 $ 11,087
Cost As at January 1, 2018 Additions As at March 31, 2018
Software $ - $ 131 $ 131
Health Canada Licenses - OGBC 1,611 - 1,611
Health Canada Licenses - Peace Naturals 9,596 - 9,596
$ 11,207 $ 131 $ 11,338
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Last updated: May 9, 2019