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

Thursday, August 8, 2019 3 min read
Key Takeaway: CRONOS GROUP INC. Unaudited Condensed Interim Consolidated Financial Statements For the Three and Six Months Ended June 30, 2019 and June 30, 2018 (in thousands of Canadian dollars) Cronos Group Inc. Unaudited Condensed Interim Consolidated Financial Statements For the three and

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CRONOS GROUP INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2019 and June 30, 2018
(in thousands of Canadian dollars)
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 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 June 30, 2019 and December 31, 2018
(in thousands of CDN $)
Notes As at June 30, 2019 As at December 31, 2018
Assets
Current assets
Cash and cash equivalents 22(a) $ 1,579,231 $ 32,634
Short-term investments 22(a) 744,936 -
Interest receivable 22(a) 5,751 -
Accounts receivable 22(a) 11,960 4,163
Sales taxes receivable 7,936 3,419
Prepaid expenses and other assets 7,079 3,876
Biological assets 4 10,032 9,074
Inventory 4 41,667 11,584
Total current assets 2,408,592 64,750
Advances to joint ventures 5,22(a) 26,608 6,395
Net investments in equity accounted investees 5 2,025 4,038
Other investments 6 300 705
Loans receivable 7,22(a) 16,664 314
Property, plant and equipment 8 196,718 171,720
Right-of-use assets 3,11 3,359 171
Intangible assets 9 11,461 11,234
Goodwill 9 1,792 1,792
Total assets $ 2,667,519 $ 261,119
Liabilities
Current liabilities
Accounts payable and other liabilities 22(b) 30,747 15,372
Holdbacks payable 22(b) 2,274 7,887
Government remittances payable 22(b) 630 1,123
Current portion of lease obligations 3,11,22(b) 417 41
Construction loan payable 12,22(b) - 20,951
Derivative liabilities 13,22(b) 1,399,594 -
Total current liabilities 1,433,662 45,374
Lease obligations 3,11,22(b) 3,109 119
Due to non-controlling interests 10,22(b) 2,249 2,136
Deferred income tax liability 20 4,036 1,850
Total liabilities $ 1,443,056 $ 49,479
Shareholders' equity
Share capital 14(a) 559,296 225,500
Warrants 15(a) 754 1,548
Stock options 15(b) 8,573 6,241
Retained earnings (accumulated deficit) 655,047 (22,715 )
Accumulated other comprehensive income 944 930
Total equity attributable to shareholders of Cronos Group 1,224,614 211,504
Non-controlling interests 3,10 (151 ) 136
Total shareholders' equity 1,224,463 211,640
Total liabilities and shareholders' equity $ 2,667,519 $ 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 and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
Notes 2019 2018 2019 2018
Gross revenue 16 $ 10,787 $ 3,394 $ 17,772 $ 6,339
Excise taxes (550 ) - (1,065 ) -
Net revenue 10,237 3,394 16,707 6,339
Cost of sales
Cost of sales before fair value adjustments 4,762 1,254 7,746 2,821
Gross profit before fair value adjustments 5,475 2,140 8,961 3,518
Fair value adjustments
Unrealized change in fair value of biological assets 4 (4,024 ) (6,831 ) (17,577 ) (9,575 )
Realized fair value adjustments on inventory sold in the period 3,557 2,625 7,279 4,819
Total fair value adjustments (467 ) (4,206 ) (10,298 ) (4,756 )
Gross profit 5,942 6,346 19,259 8,274
Operating expenses
Sales and marketing 5,358 364 6,858 950
Research and development 3,076 - 4,633 -
General and administrative 15,176 4,219 24,787 6,680
Share-based payments 15(b) 2,002 950 2,739 1,724
Depreciation and amortization 8,9,11 675 323 1,145 608
Total operating expenses 26,287 5,856 40,162 9,962
Operating loss (20,345 ) 490 (20,903 ) (1,688 )
Other income (expense)
Interest income (expense) 12,531 (37 ) 15,251 (59 )
Financing and transaction costs 12,13,25 (4,505 ) - (34,066 ) -
Gain on revaluation of derivative liabilities 13 263,943 - 700,326 -
Share of (loss) income from investments in equity accounted investees 5 (991 ) 3 (1,255 ) 44
Gain on disposal of Whistler 5 - - 20,606 -
Gain on other investments 6 - - 924 221
Total other income 270,978 (34 ) 701,786 206
Income (loss) before income taxes 250,633 456 680,883 (1,482 )
Deferred income tax (recovery) expense 20 (335 ) (267 ) 2,222 (1,155 )
Net income (loss) $ 250,968 $ 723 $ 678,661 $ (327 )
Net income (loss) attributable to:
Cronos Group $ 251,117 $ 723 $ 678,946 $ (327 )
Non-controlling interests 10 (149 ) - (285 ) -
$ 250,968 $ 723 $ 678,661 $ (327 )
Other comprehensive income (loss)
Gain on revaluation and disposal of other investments, net of tax 6,20 $ - $ 39 $ 103 $ 4
Foreign exchange loss on translation of foreign operations 2(a),10 (104 ) - (87 ) -
Total other comprehensive income (loss) (104 ) 39 16 4
Comprehensive income (loss) $ 250,864 $ 762 $ 678,677 $ (323 )
Comprehensive income (loss) attributable to:
Cronos Group $ 251,011 $ 762 $ 678,960 $ (323 )
Non-controlling interests 10 (147 ) - (283 ) -
$ 250,864 $ 762 $ 678,677 $ (323 )
Earnings (loss) per share
Basic 17 $ 0.75 $ 0.00 $ 2.14 $ (0.00 )
Diluted 17 $ 0.22 $ 0.00 $ 0.58 $ (0.00 )
Weighted average number of outstanding shares
Basic 17 334,665,873 175,529,196 317,940,749 166,343,078
Diluted 17 374,676,595 211,524,230 364,872,093 166,343,078
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 six months ended June 30, 2019 and June 30, 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 - - - - - (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 14(a) - (5,002 ) - - - - - - (5,002 )
Warrants exercised 15(a) 7,390,961 2,709 - (794 ) - - - - 1,915
Vesting of options 15(b) - - - - 2,739 - - - 2,739
Options exercised 15(b) 5,325 25 - - (8 ) - - - 17
Share appreciation rights exercised 15(b) 146,143 399 - - (399 ) (1,116 ) - - (1,116 )
Top-up Rights exercised 13(c),14(b) 50,938 1,566 - - - - - - 1,566
Net income (loss) - - - - - 678,946 - (285 ) 678,661
Other comprehensive income - - - - - - 14 2 16
Balance at June 30, 2019 336,144,543 $ 559,296 $ - $ 754 $ 8,573 $ 655,047 $ 944 $ (151 ) $ 1,224,463
Balance at January 1, 2018 149,360,603 $ 83,559 $ - $ 3,364 $ 2,289 $ (3,724 ) $ 880 $ - $ 86,368
Shares issued 14(a) 15,677,143 146,032 - - - - - - 146,032
Share issuance costs - (9,444 ) - - - - - - (9,444 )
Shares to be issued - - 17 - - - - - 17
Warrants exercised 15(a) 11,364,335 3,852 - (1,496 ) - - - - 2,356
Vesting of options 15(b) - - - - 1,724 - - - 1,724
Options exercised 15(b) 353,339 682 - - (142 ) - - - 540
Share appreciation rights exercised 15(b) 150,215 61 - - (61 ) - - - -
Net loss - - - - - (327 ) - - (327 )
Other comprehensive income - - - - - - 4 - 4
Balance at June 30, 2018 176,905,635 $ 224,742 $ 17 $ 1,868 $ 3,810 $ (4,051 ) $ 884 $ - $ 227,270
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Cronos Group Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $)
Three Months Ended June 30, Six Months Ended June 30,
Notes 2019 2018 2019 2018
Operating activities
Net income (loss) $ 250,968 $ 723 $ 678,661 $ (327 )
Items not affecting cash and cash equivalents:
Unrealized change in fair value of biological assets 4 (4,024 ) (6,831 ) (17,577 ) (9,575 )
Realized fair value adjustments on inventory sold in the period 3,557 2,625 7,279 4,819
Share-based payments 15(b) 2,002 950 2,739 1,724
Depreciation and amortization 8,9,11 675 323 1,145 608
Depreciation relieved on inventory sold 21 363 47 598 216
Gain on revaluation of derivative liabilities 13 (263,943 ) - (700,326 ) -
Share of loss (income) from investments in equity accounted investees 5 991 (3 ) 1,255 (44 )
Gain on disposal of Whistler 5 - - (20,606 ) -
Gain on other investments 6 - - (924 ) (221 )
Deferred income tax (recovery) expense 20 (335 ) (267 ) 2,222 (1,155 )
Foreign exchange loss (gain) 178 4 92 (12 )
Net changes in non-cash working capital 21 (47,860 ) (4,437 ) (30,541 ) (16,662 )
Cash and cash equivalents used in operating activities (57,428 ) (6,866 ) (75,983 ) (20,629 )
Investing activities
Purchase of short-term investments (744,936 ) - (744,936 ) -
Advances to joint ventures 5 (5,481 ) - (21,293 ) -
Investments in equity accounted investees 5 - - (2,200 ) -
Proceeds from sale of other investments 6 - 280 26,078 967
Payment to exercise ABcann warrants 6 - - - (113 )
Advances on loans receivable 7 (16,350 ) - (16,350 ) -
Purchase of property, plant and equipment 8 (14,445 ) (30,025 ) (27,899 ) (37,667 )
Purchase of intangible assets 9 (577 ) (38 ) (628 ) (169 )
Advance to Cronos Israel 10 - (378 ) - (1,304 )
Cash and cash equivalents used in investing activities (781,789 ) (30,161 ) (787,228 ) (38,286 )
Financing activities
Advance from non-controlling interests 10 2 - 113 -
Repayment of lease obligations 11 (184 ) - (216 ) -
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) - 100,032 - 146,032
Share issuance costs 14(a) (101 ) (6,363 ) (5,002 ) (9,444 )
Proceeds from exercise of warrants and options 15(a),(b) 750 599 1,932 2,913
Withholding taxes paid on share appreciation rights 15(b) (569 ) - (1,116 ) -
Proceeds from exercise of Top-up Rights 13(c),14(b) 828 - 828 -
Cash and cash equivalents provided by financing activities 726 94,268 2,409,864 139,316
Net change in cash and cash equivalents (838,491 ) 57,241 1,546,653 80,401
Cash and cash equivalents - beginning of period 2,417,855 32,368 32,634 9,208
Effects of foreign exchange on cash and cash equivalents (133 ) - (56 ) -
Cash and cash equivalents - end of period $ 1,579,231 $ 89,609 $ 1,579,231 $ 89,609
Supplemental cash flow information
Interest paid $ 77 $ 189 $ 752 $ 496
Interest received 10,054 - 10,054 -
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
1. Nature of business
Cronos Group Inc. ( "Cronos Group" or the "Company" ) was incorporated under the Business Corporations Act (Ontario). Cronos Group is a public corporation, with its head office located at 720 King Street West, Suite 320, Toronto, Ontario, M5V 2T3. The Company's common shares are listed on the Nasdaq Global Market ( "NASDAQ" ) and on the Toronto Stock Exchange ( "TSX" ) under the ticker symbol ( "CRON" ).
Cronos Group is an innovative global cannabinoid company, with an international supply chain and distribution across five continents. The Company is engaged in the cultivation, manufacturing, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group's brand portfolio includes PEACE NATURALS , a global health and wellness platform, 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 and six months ended June 30, 2019 and June 30, 2018 have been prepared in accordance with International Accounting Standard ( "IAS" ) 34, Interim Financial Reporting. The accounting policies adopted in the preparation of the 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 ( "IASB" ) 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 August 7, 2019.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 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 Device Labs Ltd. ( "Cronos Device Labs" ) Israel March 14, 2019 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 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 ( "NatuEra" ) Luxembourg 50%
As at December 31, 2018, the company held a 19% ownership interest in Whistler Marijuana Company ( "Whistler" ). During the six months ended June 30, 2019, the Company divested 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 and six months ended June 30, 2019 and June 30, 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 ( "CDN" ), which is the functional currency of the Company. The functional currency of all subsidiaries is the national currency of the respective jurisdiction of incorporation. 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 they contain a lease. The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
In accordance with the practical expedients applied, the Company has recognized lease liabilities and right-of-use assets at the date of initial application for leases previously classified as operating leases in accordance with IAS 17. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (lease term of 12 months or less) and leases for which the underlying asset is of low value. The Company has elected to measure the right-of-use assets at the carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the Company's incremental borrowing rate at the date of initial application. For the lease previously classified as a finance lease under IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of initial application is equal to the carrying amount of the leased asset and lease liability immediately before the date of initial application.
As at January 1, 2019 As previously reported under IAS 17 Adjustments (i) As restated under IFRS 16
Right-of-use assets $ 217 $ 1,890 $ 2,107
Accumulated depreciation 46 144 190
Current lease liabilities 41 303 344
Non-current lease liabilities 119 1,515 1,634
Accumulated deficit (22,715 ) (68 ) (22,783 )
Non-controlling interests 136 (4 ) 132
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 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. 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 June 30, Six Months Ended June 30,
2019 2018 2019 2018
Balance - beginning of period $ 11,506 $ 4,490 $ 9,074 $ 3,722
Capitalization of production costs 5,498 1,996 8,836 3,710
Unrealized change in fair value of biological assets 4,024 6,831 17,577 9,575
Transferred to inventory upon harvest (10,996 ) (6,418 ) (25,455 ) (10,108 )
Balance - end of period $ 10,032 $ 6,899 $ 10,032 $ 6,899
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
4. Biological assets and inventory (continued)
(a) Biological assets (continued)
As at June 30, 2019, the Company has 81,874 plants classified as biological assets which are expected to ultimately yield 4,585 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 June 30, 2019, the plants were on average 7 weeks into the growing cycle, 47% complete, and were ascribed approximately 47% (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 June 30, 2019 As at December 31, 2018
Dry cannabis
Finished goods 379 kg $ 2,129 187 kg $ 972
Work-in-process 3,932 kg 18,853 1,789 kg 7,733
20,982 8,705
Cannabis oils (i)
Finished goods 387 kg 2,272 115 kg 656
Work-in-process 3,567 kg 16,121 220 kg 1,250
18,393 1,906
Raw materials (ii) 167 (ii) 171
Supplies and consumables 2,125 802
$ 41,667 $ 11,584
(i) Cannabis oils are expressed in dry cannabis gram equivalents. Refer to Note 4(d) for the equivalency factor applied.
(ii) As at June 30, 2019 and December 31, 2018, raw materials consisted of 0.267 kg of seeds held by the Company.
As at June 30, 2019, the Company held 54 kg (December 31, 2018 - 29 kg) of dry cannabis and 17 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 and six months ended June 30, 2019 and June 30, 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 the fair value less costs to sell, excluding capitalized production costs, are presented as unrealized changes in the fair value of biological assets. At the point of harvest, agricultural produce consisting of cannabis is considered inventory. The fair value less costs to sell becomes the cost base of inventory. Any subsequent post-harvest costs ( "processing costs" ), including direct costs attributable to processing and related overhead, are capitalized to inventory as they are incurred. Upon ultimate sale of inventory, the associated production and processing costs are presented as cost of sales before fair value adjustments; the remaining cost of inventory, associated with fair value less costs to sell prior to harvest, is presented as realized fair value adjustments on inventory sold in the period.
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
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(d) Significant inputs and sensitivity analyses
The Company has made the following estimates related to significant inputs in the valuation model:
Significant inputs Definition
Net selling price per gram Estimated net selling price per gram of dry cannabis based on historical sales of dry cannabis, excluding sales of cannabis oil, and anticipated prices, after adjustment for excise taxes
Harvest yield per plant Expected grams of dry cannabis to be harvested from a cannabis plant, based on the weighted average historical yields by plant strain
Stage of growth Weighted average plant age (in weeks) out of the 14 week (December 31, 2018 - 16 week) growing cycle as of the period end date
Processing costs per gram Estimated post-harvest costs per gram to bring a gram of harvested cannabis to its saleable condition, including drying, curing, testing and packaging, and overhead allocation; estimated based on post-harvest costs incurred during the period divided by number of grams processed during the period
Selling costs per gram Estimated shipping, order fulfillment, and labelling costs per gram; calculated as selling costs incurred during the period divided by number of grams sold during the period
Equivalency factor Estimated grams of dry cannabis required to produce one millilitre of cannabis oil; estimated based on historical conversion results
Mass multipliers Estimated multiples of crude extract and isolate mass in diluted cannabis oil products
As at June 30, Increase (decrease) as at June 30, 2019 As at December 31, Increase (decrease) as at December 31, 2018
2019 Biological assets Inventory 2018 Biological assets Inventory
Net selling price per gram $5.93/g $ (643 ) $ (1,219 ) $5.58/g $ (673 ) $ (640 )
Harvest yield per plant 56 g (500 ) - 137 g (446 ) -
Stage of growth 7 weeks (500 ) - 6 weeks (446 ) -
Processing costs per gram $1.26/g 112 105 $1.98/g 175 65
Selling costs per gram $0.29/g 31 59 $0.43/g 52 50
Equivalency factor 0.3 g/mL (208 ) (1,105 ) 0.3 g/mL (45 ) (104 )
Mass multipliers 35x - 50x (144 ) (792 ) 30x - 50x (5 ) (24 )
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
5. Equity accounted investees
(a) Advances to joint ventures
Advances to joint ventures are unsecured, non-interest bearing, and have no terms of repayment, unless otherwise specified. The joint ventures are solely funded by their shareholders and the advances are considered an extension of the Company's investments therein. As such, losses recognized in excess of the Company's capital contributions are applied against the respective advances.
As at June 30, 2019 MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) NatuEra (v) Total
Gross advances to joint ventures $ 1,859 $ 24,642 $ 1,474 $ 297 $ 28,272
Less: advances to joint ventures applied to carrying amount of investments (169 ) - (1,198 ) (297 ) (1,664 )
Advances to joint ventures $ 1,690 $ 24,642 $ 276 $ - $ 26,608
As at December 31, 2018 MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) NatuEra (v) 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
(b) Net investment in equity accounted investees
A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows:
Whistler (i) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) NatuEra (v) Total
As at January 1, 2019 $ 4,038 $ - $ - $ - $ - $ 4,038
Share of net income (loss) 38 6 (36 ) (856 ) (407 ) (1,255 )
Contribution to (disposal of) investment (4,076 ) - 2,200 - - (1,876 )
Advances to joint ventures applied to (transferred from) carrying amount of investments - (6 ) (29 ) 856 297 1,118
As at June 30, 2019 $ - $ - $ 2,135 $ - $ (110 ) $ 2,025
Whistler (i) MedMen Canada (ii) Cronos GrowCo (iii) Cronos Australia (iv) NatuEra (v) Total
As at January 1, 2018 $ 3,807 $ - $ - $ - $ - $ 3,807
Share of net income 44 - - - - 44
As at June 30, 2018 $ 3,851 $ - $ - $ - $ - $ 3,851
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
(i) Whistler was incorporated in British Columbia, Canada and is a License Holder with production facilities in British Columbia, Canada. Although the Company held less than 20% of the ownership interest and voting control of Whistler as at December 31, 2018, the Company had the ability to exercise significant influence through both its power to elect board members, and aggregately, with affiliated shareholders, the Company held over 20% of the voting control of Whistler.
On March 4, 2019, the Company sold all 2,563 shares of Whistler, representing approximately 19.0% of Whistler's issued and outstanding common shares, to Aurora Cannabis Inc. ( "Aurora" ), in connection with Aurora's acquisition of Whistler (the "Whistler Transaction" ). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares with an aggregate value of approximately $24,682. The closing of the Whistler Transaction resulted in a gain of $20,606 recognized in net income, with the Aurora common shares received being measured at fair value through profit or loss. Refer to Note 6. In addition, the Company expects to receive further Aurora common shares valued at an aggregate of approximately $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.
(iii) Cronos GrowCo was incorporated under the CBCA on June 14, 2018, with the objective of building a cannabis production greenhouse, applying for cannabis licenses under the Cannabis Act, and growing, cultivating, extracting, producing, selling, and distributing cannabis in accordance with such licenses.
(iv) Cronos Australia Pty. Ltd. was incorporated under the Corporations Act 2001 (Australia) on December 6, 2016. On September 27, 2018, Cronos Australia Pty. Ltd. underwent a restructuring, resulting in the incorporation of Cronos Australia Limited on that date, which became the ultimate holding company of the group, owning 100% of Cronos Australia Group Pty. Ltd., which in turn owns 100% of Cronos Australia - Marketing & Distribution Pty. Ltd., Cronos Australia - Operations Pty. Ltd, and Cronos Australia - New Zealand Ltd. 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 June 30, 2019.
Advances are denominated in Australian dollars ( "AUD" ). $1,474 ($1,500 AUD) (December 31, 2018 - $990 ($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. NatuEra Colombia is a wholly owned subsidiary of NatuEra, incorporated in Colombia. Advances are denominated in United States dollars ( "USD" ). $297 ($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.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
6. Other investments
Other investments consist of investments in common shares and warrants of companies in the cannabis industry. These investments, with the exception of shares of Evergreen Medicinal Supply Inc. ( "Evergreen" ) and warrants of ABcann Global Corporation (now known as "VIVO Cannabis Inc." ) ( "ABcann" ), were quoted in an active market as of the relevant period end date and, as a result, had a reliably measurable fair value as of such period end dates.
As at June 30, 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 June 30, Six Months Ended June 30,
2019 2018 2019 2018
Gain recognized in net income (loss)
Aurora (iv) $ - $ - $ 924 $ -
ABcann - share warrants (iii) - - - 221
$ - $ - $ 924 $ 221
Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Gain (loss) recognized in other comprehensive income (loss) before taxes
Canopy (i) $ - $ 53 $ 67 $ 235
ABcann - shares (iii) - (34 ) - (224 )
$ - $ 19 $ 67 $ 11
(i) During the six months ended June 30, 2019, the Company sold all remaining 11,062 common shares of Canopy for gross proceeds of $472 (2018 - 18,436 shares for gross proceeds of $687).
(ii) 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) During the six months ended June 30, 2018, the Company exercised 182,927 share warrants for aggregate consideration of $113, for additional shares of ABcann. Prior to the exercise, the share warrants were revalued to fair value using the Black-Scholes option pricing model. Subsequently, the Company sold all of its shares of ABcann for proceeds of $280.
(iv) In connection with the Whistler Transaction described in Note 5, the Company received 2,524,341 common shares of Aurora. During the six months ended June 30, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $25,606.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 2018
(in thousands of CDN $, except where otherwise noted, and share, per share, weight, volume and plant amounts)
As at June 30, 2019 As at December 31, 2018
Loan receivable from 2645485 Ontario Inc. ( "Mucci" ) (i) $ 16,350 $ -
Loan receivable from Evergreen (ii) 265 265
Add: Accrued interest 49 49
Total loans receivable $ 16,664 $ 314
(i) On June 28, 2019, the Company entered into a promissory note receivable agreement (the "promissory note" ) for $16,350 with Mucci, the other 50% shareholder of Cronos GrowCo. The outstanding principal amount of the promissory note bears interest at 3.95% due within 90 days of demand. The Company does not intend to demand the loan within 12 months. Interest accrued under the promissory note until July 1, 2021 shall be satisfied by a way of capitalization on the principal amount and interest thereafter shall be paid in cash on a quarterly basis. The loan is secured by a general security agreement covering all assets of Mucci.
(ii) The loan is due on demand. The loan accrued interest at 8% per year, up to March 31, 2017, calculated and payable annually in arrears. Refer to Note 6(ii) for details.
The Company has revised its assessment of the loan receivable from Evergreen and now expects to realize its investment in the long term. The comparative balance has been adjusted to conform to current period classifications.
Cost As at January 1, 2019 Additions (i) Transfers As at June 30, 2019
Land $ 3,207 $ 17 $ - $ 3,224
Building structures 21,652 14,788 135,767 172,207
Furniture and equipment 676 309 - 985
Computer equipment 464 436 - 900
Security equipment 985 217 - 1,202
Production equipment 4,823 2,607 - 7,430
Road 137 - - 137
Leasehold improvements 1,584 260 - 1,844
Construction in progress 141,473 9,800 (135,767 ) 15,506
$ 175,001 $ 28,434 $ - $ 203,435
Accumulated depreciation As at January 1, 2019 Additions (ii) Transfers As at June 30, 2019
Building structures $ 1,184 $ 2,596 $ - $ 3,780
Furniture and equipment 121 76 - 197
Computer equipment 169 121 - 290
Security equipment 384 112 - 496
Production equipment 896 423 - 1,319
Road 17 2 - 19
Leasehold improvements 510 106 - 616
$ 3,281 $ 3,436 $ - $ 6,717
Net book value $ 171,720 $ 196,718
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 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 June 30, 2018
Land $ 1,558 $ 19 $ - $ 1,577
Building structures 11,518 1,780 - 13,298
Furniture and equipment 134 293 - 427
Computer equipment 148 87 - 235
Security equipment 886 64 - 950
Production equipment 2,481 246 - 2,727
Road 137 - - 137
Leasehold improvements 1,497 87 - 1,584
Construction in progress 39,337 35,474 - 74,811
$ 57,696 $ 38,050 $ - $ 95,746
Accumulated depreciation As at January 1, 2018 Additions (ii) Transfers As at June 30, 2018
Building structures $ 433 $ 308 $ - $ 741
Furniture and equipment 43 28 - 71
Computer equipment 75 27 - 102
Security equipment 196 91 - 287
Production equipment 431 210 - 641
Road 10 3 - 13
Leasehold improvements 336 84 - 420
$ 1,524 $ 751 $ - $ 2,275
Net book value $ 56,172 $ 93,471
(i) During the six months ended June 30, 2019, there were non-cash additions from the amortization of capitalized transaction costs and the capitalization of accrued interest to construction in progress and building structures amounting to $481 (2018 - $383). Refer to Note 12. In addition, advances from non-controlling interests accrued interest of $54 (2018 - $nil) which was capitalized to construction in progress during the six months ended June 30, 2019. Refer to Note 10.
(ii) During the six months ended June 30, 2019, $86 (2018 - $392) of the current period's depreciation expense was recorded as part of cost of sales. An additional $2,799 (2018 - $115) of depreciation expense was capitalized to biological assets and inventory.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
For the three and six months ended June 30, 2019 and June 30, 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 June 30, 2019
Software $ 360 $ 628 $ 988
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 $ 628 $ 12,569
Accumulated amortization As at January 1, 2019 Amortization As at June 30, 2019
Software $ 73 $ 84 $ 157
Health Canada Licenses - OGBC 101 50 151
Health Canada Licenses - Peace Naturals 533 267 800
$ 707 $ 401 $ 1,108
Net book value $ 11,234 $ 11,461
Cost As at January 1, 2018 Additions As at June 30, 2018
Software $ - $ 169 $ 169
Health Canada Licenses - OGBC 1,611 - 1,611
Health Canada Licenses - Peace Naturals 9,596 - 9,596
$ 11,207 $ 169 $ 11,376
Accumulated amortization As at January 1, 2018 Amortization As at June 30, 2018
Software $ - $ 16 $ 16
Health Canada Licenses - OGBC - 50 50
Health Canada Licenses - Peace Naturals - 267 267
$ - $ 333 $ 333
Net book value $ 11,207 $ 11,043
Notes to Unaudited Condensed Interim Consolidated Financial Statements
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Last updated: Aug 8, 2019