Cronos Group Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-38403
__________________________
CRONOS GROUP INC.
(Exact name of registrant as specified in its charter)
__________________________
British Columbia, Canada | N/A | |||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification No.) | |||||||
| 111 Peter St. Suite 300 | ||||||||
Toronto, Ontario | M5V 2H1 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
416-504-0004
(Registrant’s telephone number, including area code)
| N/A | ||||||||||||||
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Shares, no par value | CRON | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | o | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of May 9, 2022, there were 375,579,171 common shares of the registrant issued and outstanding.
1
Table of Contents | ||||||||||||||
PART I | ||||||||||||||
| FINANCIAL INFORMATION | ||||||||||||||
| Item 1. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| PART II | ||||||||||||||
| OTHER INFORMATION | ||||||||||||||
| Item 1. | ||||||||||||||
| Item 1A. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 5. | ||||||||||||||
| Item 6. | ||||||||||||||
Unless otherwise noted or the context indicates otherwise, references in this Quarterly Report on Form 10-Q (this “Quarterly Report”) to the “Company”, “Cronos Group”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect wholly owned subsidiaries and, if applicable, its joint ventures and investments accounted for by the equity method; the term “cannabis” means the plant of any species or subspecies of genus Cannabis and any part of that plant, including all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers; the term “U.S. hemp” has the meaning given to term “hemp” in the U.S. Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), including hemp-derived cannabidiol (“CBD”); and the term “U.S. Schedule I cannabis” means cannabis excluding U.S. hemp.
This Quarterly Report contains references to our trademarks and trade names and to trademarks and trade names belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks or trade names to imply a relationship with, or endorsement or sponsorship of us or our business by, any other companies. In addition, this Quarterly Report includes website addresses. These website addresses are intended to provide inactive, textual references only. The information on or referred to on these websites is not part of or incorporated into this Quarterly Report.
All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars; all references to “C$” are to Canadian dollars; all references to “A$” are to Australian dollars; and all references to “ILS” are to New Israeli Shekels.
| (Exchange rates are shown as C$ per $) | As of | ||||||||||||||||
| March 31, 2022 | March 31, 2021 | December 31, 2021 | |||||||||||||||
| Average rate | 1.2665 | 1.2665 | N/A | ||||||||||||||
| Spot rate | 1.2507 | 1.2563 | 1.2746 | ||||||||||||||
All summaries of agreements described herein are qualified by the full text of such agreements (certain of which have been filed as exhibits with the U.S. Securities and Exchange Commission).
2
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. Financial Statements
| Table of Contents | |||||
| 6 | |||||
3
| Cronos Group Inc. | |||||
| Condensed Consolidated Balance Sheets | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Assets | (Unaudited) | (Audited) | |||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 861,535 | $ | 886,973 | |||||||
| Short-term investments | 119,933 | 117,684 | |||||||||
| Accounts receivable, net | 25,814 | 22,067 | |||||||||
| Other receivables | 3,297 | 5,765 | |||||||||
| Current portion of loans receivable, net | 6,235 | 5,460 | |||||||||
| Inventory, net | 37,054 | 32,802 | |||||||||
| Prepaids and other current assets | 9,537 | 8,967 | |||||||||
| Total current assets | 1,063,405 | 1,079,718 | |||||||||
| Investments in equity accounted investees, net | 17,084 | 16,764 | |||||||||
| Other investments | 111,761 | 118,392 | |||||||||
| Non-current portion of loans receivable, net | 81,529 | 80,635 | |||||||||
| Property, plant and equipment, net | 71,828 | 74,070 | |||||||||
| Right-of-use assets | 6,325 | 8,882 | |||||||||
| Goodwill | 1,119 | 1,098 | |||||||||
| Intangible assets, net | 17,880 | 18,079 | |||||||||
| Other assets | 70 | 100 | |||||||||
| Total assets | $ | 1,371,001 | $ | 1,397,738 | |||||||
| Liabilities | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 10,904 | $ | 11,218 | |||||||
| Accrued liabilities | 23,076 | 26,069 | |||||||||
| Current portion of lease obligation | 2,173 | 2,711 | |||||||||
| Derivative liabilities | 4,099 | 14,375 | |||||||||
| Total current liabilities | 40,252 | 54,373 | |||||||||
| Due to non-controlling interests | 1,888 | 1,913 | |||||||||
| Non-current portion of lease obligation | 7,094 | 7,095 | |||||||||
| Deferred income tax liability | 396 | 81 | |||||||||
| Total liabilities | 49,630 | 63,462 | |||||||||
| Shareholders’ equity | |||||||||||
Share capital (authorized for issue as of March 31, 2022 and December 31, 2021: unlimited; shares outstanding as of March 31, 2022 and December 31, 2021: 375,299,980 and 374,952,693, respectively) | 596,368 | 595,497 | |||||||||
| Additional paid-in capital | 35,365 | 32,465 | |||||||||
| Retained earnings | 626,778 | 659,416 | |||||||||
| Accumulated other comprehensive income | 66,088 | 49,865 | |||||||||
| Total equity attributable to shareholders of Cronos Group | 1,324,599 | 1,337,243 | |||||||||
| Non-controlling interests | (3,228) | (2,967) | |||||||||
| Total shareholders’ equity | 1,321,371 | 1,334,276 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,371,001 | $ | 1,397,738 | |||||||
See notes to condensed consolidated interim financial statements.
4
| Cronos Group Inc. | |||||
| Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) | |||||
(In thousands of U.S dollars, except share and per share amounts, unaudited) | |||||
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenue, before excise taxes | $ | 29,406 | $ | 14,654 | |||||||
| Excise taxes | (4,373) | (2,043) | |||||||||
| Net revenue | 25,033 | 12,611 | |||||||||
| Cost of sales | 18,107 | 15,574 | |||||||||
| Gross profit | 6,926 | (2,963) | |||||||||
| Operating expenses | |||||||||||
| Sales and marketing | 5,012 | 10,254 | |||||||||
| Research and development | 4,039 | 5,102 | |||||||||
| General and administrative | 22,368 | 21,906 | |||||||||
| Restructuring costs | 3,084 | — | |||||||||
| Share-based compensation | 3,686 | 2,499 | |||||||||
| Depreciation and amortization | 1,293 | 735 | |||||||||
| Impairment loss on long-lived assets | 3,493 | 1,741 | |||||||||
| Total operating expenses | 42,975 | 42,237 | |||||||||
| Operating loss | (36,049) | (45,200) | |||||||||
| Other income (expense) | |||||||||||
| Interest income, net | 2,046 | 2,329 | |||||||||
| Gain (loss) on revaluation of derivative liabilities | 10,419 | (116,874) | |||||||||
| Share of loss from equity accounted investments | — | (1,643) | |||||||||
| Gain (loss) on revaluation of financial instruments | 4,268 | (200) | |||||||||
| Impairment loss on other investments | (11,238) | — | |||||||||
| Foreign currency transaction loss | (1,872) | — | |||||||||
| Other, net | 135 | (16) | |||||||||
| Total other income (expense) | 3,758 | (116,404) | |||||||||
| Loss before income taxes | (32,291) | (161,604) | |||||||||
| Income tax expense | 362 | — | |||||||||
| Loss from continuing operations | (32,653) | (161,604) | |||||||||
| Loss from discontinued operations | — | (21) | |||||||||
| Net loss | (32,653) | (161,625) | |||||||||
| Net loss attributable to non-controlling interest | (15) | (313) | |||||||||
| Net loss attributable to Cronos Group | $ | (32,638) | $ | (161,312) | |||||||
| Comprehensive loss | |||||||||||
| Net loss | $ | (32,653) | $ | (161,625) | |||||||
| Other comprehensive income | |||||||||||
| Foreign exchange gain on translation | 15,977 | 16,284 | |||||||||
| Comprehensive loss | (16,676) | (145,341) | |||||||||
| Comprehensive income (loss) attributable to non-controlling interests | (261) | 826 | |||||||||
| Comprehensive loss attributable to Cronos Group | $ | (16,415) | $ | (146,167) | |||||||
| Net loss from continuing operations per share | |||||||||||
| Basic - continuing operations | $ | (0.09) | $ | (0.44) | |||||||
| Diluted - continuing operations | (0.09) | (0.44) | |||||||||
See notes to condensed consolidated interim financial statements.
5
| Cronos Group Inc. | |||||
| Condensed Consolidated Statements of Changes in Equity | |||||
| For the three months ended March 31, 2022 and 2021 | |||||
| (In thousands of U.S. dollars, except share amounts, unaudited) | |||||
| Number of shares | Share capital | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Non-controlling interests | Total shareholders’ equity | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | 374,952,693 | $ | 595,497 | $ | 32,465 | $ | 659,416 | $ | 49,865 | $ | (2,967) | $ | 1,334,276 | ||||||||||||||||||||||||||||
| Activities relating to share-based compensation | 347,287 | 871 | 2,900 | — | — | — | 3,771 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (32,638) | — | (15) | (32,653) | ||||||||||||||||||||||||||||||||||
| Foreign exchange gain (loss) on translation | — | — | — | — | 16,223 | (246) | 15,977 | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 375,299,980 | $ | 596,368 | $ | 35,365 | $ | 626,778 | $ | 66,088 | $ | (3,228) | $ | 1,321,371 | ||||||||||||||||||||||||||||
| Number of shares | Share capital | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Non-controlling interests | Total shareholders’ equity | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | 360,253,332 | $ | 569,260 | $ | 34,596 | $ | 1,064,509 | $ | 42,999 | $ | (3,196) | $ | 1,708,168 | ||||||||||||||||||||||||||||
| Activities relating to share-based compensation | 11,403,258 | 15,652 | (2,506) | (7,694) | — | — | 5,452 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (161,312) | — | (313) | (161,625) | ||||||||||||||||||||||||||||||||||
| Foreign exchange gain on translation | — | — | — | — | 15,145 | 1,139 | 16,284 | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 371,656,590 | $ | 584,912 | $ | 32,090 | $ | 895,503 | $ | 58,144 | $ | (2,370) | $ | 1,568,279 | ||||||||||||||||||||||||||||
See notes to condensed consolidated interim financial statements.
6
| Cronos Group Inc. | |||||
| Condensed Consolidated Statements of Cash Flows | |||||
| (In thousands of U.S. dollars, except share amounts, unaudited) | |||||
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | (32,653) | $ | (161,625) | |||||||
| Adjustments to reconcile net loss to cash used in operating activities: | |||||||||||
| Share-based compensation | 3,686 | 2,499 | |||||||||
| Depreciation and amortization | 2,824 | 1,880 | |||||||||
| Impairment loss on long-lived assets | 3,493 | 1,741 | |||||||||
| Impairment loss on other investments | 11,238 | — | |||||||||
| Share of loss from investments in equity accounted investees | — | 1,643 | |||||||||
| Gain (loss) on revaluation of derivative liabilities | (10,419) | 116,874 | |||||||||
| Expected credit losses on long-term financial assets | — | 416 | |||||||||
| Foreign currency transaction loss | 1,872 | — | |||||||||
| Other non-cash operating activities, net | (4,467) | 106 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | (3,530) | 1,931 | |||||||||
| Other receivables | 2,435 | 5,687 | |||||||||
| Prepaids and other current assets | (1,195) | (3,737) | |||||||||
| Inventory | (3,867) | (742) | |||||||||
| Accounts payable | (178) | (3,119) | |||||||||
| Accrued liabilities | (3,150) | (10,169) | |||||||||
| Cash flows used in operating activities | (33,911) | (46,615) | |||||||||
| Investing activities | |||||||||||
| Proceeds from dissolution of joint venture | 44 | — | |||||||||
| Proceeds from repayment of loans receivable | 790 | — | |||||||||
| Purchase of property, plant and equipment | (711) | (6,680) | |||||||||
| Purchase of intangible assets | (23) | (392) | |||||||||
| Advances on loans receivable | — | (2,645) | |||||||||
| Cash flows provided by (used in) investing activities | 100 | (9,717) | |||||||||
| Financing activities | |||||||||||
| Withholding taxes paid on share-based awards | (534) | (8,673) | |||||||||
| Other financing activities, net | 70 | 10 | |||||||||
| Cash flows used in financing activities | (464) | (8,663) | |||||||||
| Effect of foreign currency translation on cash and cash equivalents | 8,837 | 11,422 | |||||||||
| Net change in cash and cash equivalents | (25,438) | (53,573) | |||||||||
| Cash and cash equivalents, beginning of period | 886,973 | 1,078,023 | |||||||||
| Cash and cash equivalents, end of period | $ | 861,535 | $ | 1,024,450 | |||||||
| Supplemental cash flow information | |||||||||||
| Interest received | 822 | 1,157 | |||||||||
| Income taxes paid | 66 | 624 | |||||||||
See notes to condensed consolidated interim financial statements.
7
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
1. Background, Basis of Presentation and Accounting Policies
(a)Background
Cronos Group Inc. (“Cronos Group” or the “Company”) is incorporated in the province of British Columbia and under the Business Corporations Act (British Columbia) with principal executive offices at 111 Peter St., Suite 300, Toronto, Ontario, M5V 2H1. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.”
Cronos Group is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach®, PEACE NATURALS®, Lord Jones®, Happy Dance® and PEACE+™.
(b)Basis of presentation
The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for any other reporting period.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”).
Certain prior year amounts have been reclassified to conform to the current year presentation of our condensed consolidated financial statements. These reclassifications had no effect on the reported results of operations and ending shareholders’ equity.
(c)Concentration of risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short-term investments, loans receivable, and advances to joint ventures. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $1,098,413 and $1,118,684 as of March 31, 2022 and December 31, 2021, respectively.
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan and a failure to make contractual payments for a period of greater than 120 days past due. As of March 31, 2022 and December 31, 2021, the Company had $9 and $8, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the Rest of World (“ROW”) segment. As of March 31, 2022 and December 31, 2021, the Company had $138 and $104, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the United States (“U.S.”) segment.
As of March 31, 2022, the Company assessed that there is a concentration of credit risk, as 72% of the Company’s accounts receivable were due from three customers with an established credit history with the Company. As of December 31, 2021, 88% of the Company’s accounts receivable were due from four customers with an established credit history with the Company.
The Company sells products to a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenue. During the three months ended March 31, 2022, the Company earned a total net revenue before excise taxes of $9,833 from two major customers in the ROW segment, together accounting for 33% of the Company’s total net revenue before excise taxes. During the three months ended March 31, 2021, the Rest of World segment earned a total net revenue before excise taxes of $8,963 from four major customers, together accounting for 61% of the Company’s total net revenues before excise taxes. During the three months ended March 31, 2022 and 2021, the U.S. segment had no major customers.
8
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
(d)Segment information
Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manage the business, make operating decisions and assess the Company’s performance. The Company determined that it has the following two reportable segments: U.S. (the “U.S. segment”) and ROW (the “ROW segment”). The U.S. operating segment consists of the manufacture and distribution of U.S. hemp-derived cannabinoid infused products. The ROW operating segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions regarding the allocation of resources using Adjusted EBITDA (as defined below) as the measure of segment profit or loss. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, non-cash items and items that do not reflect management’s assessment of ongoing business performance.
(e)Adoption of new accounting pronouncements
On January 1, 2022, the Company adopted ASU No. 2020-06, Debt –Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU No. 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The adoption of ASU No. 2020-06 did not have an impact on the Company’s interim condensed consolidated financial statements.
(f)New accounting pronouncements not yet adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASU No. 2022-02”). ASU No. 2022-02 eliminates the existing troubled debt restructuring recognition and measurement guidance, and instead aligns the accounting treatment to that of other loan modifications. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU No. 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and is to be adopted prospectively. The Company does not expect the adoption of ASU No. 2022-02 to have a material impact on its condensed consolidated financial statements.
2. Inventory, net
Inventory, net is comprised of the following items:
| As of March 31, 2022 | As of December 31, 2021 | |||||||||||||
| Raw materials | $ | 8,523 | $ | 9,211 | ||||||||||
| Work-in-progress | 12,353 | 12,405 | ||||||||||||
| Finished goods | 15,587 | 10,778 | ||||||||||||
| Supplies and consumables | 591 | 408 | ||||||||||||
| Total | $ | 37,054 | $ | 32,802 | ||||||||||
3. Investments
(a)Variable interest entities and investments in equity accounted investees, net
A reconciliation of the carrying amount of the investments in equity method investees, net is as follows:
| Ownership interest | As of March 31, 2022 | As of December 31, 2021 | |||||||||||||||
Cronos Growing Company Inc. (“Cronos GrowCo”) | 50% | $ | 17,084 | $ | 16,764 | ||||||||||||
| NatuEra S.à.r.l. (“Natuera”) | 50% | — | — | ||||||||||||||
| $ | 17,084 | $ | 16,764 | ||||||||||||||
9
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
The following is a summary of the Company’s share of net losses from equity investments accounted for under the equity method of accounting:
| For the three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cronos GrowCo | $ | — | $ | (299) | |||||||
| Natuera | — | (1,344) | |||||||||
| $ | — | $ | (1,643) | ||||||||
(b)Other investments
Other investments consist of investments in common shares and options of two companies in the cannabis industry.
PharmaCann, Inc.
In 2021, the Company purchased an option (the “PharmaCann Option”) to acquire 473,787 shares of Class A Common Stock of PharmaCann Inc. (“PharmaCann”), a vertically integrated cannabis company in the United States, which represented an ownership interest of approximately 10.5% as of December 31, 2021. The PharmaCann Option is classified as an equity security without a readily determinable fair value. The Company has elected to measure the fair value of the PharmaCann Option at cost less impairment, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. On February 28, 2022, PharmaCann closed the previously announced transaction with LivWell Holdings, Inc. (“LivWell”) pursuant to which PharmaCann acquired LivWell (the “LivWell Transaction”). LivWell is a multi-state cannabis cultivation and retail leader based in Colorado. As a result of the LivWell Transaction, the Company’s ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.4%. The decrease in ownership percentage does not materially affect the Company’s rights under the PharmaCann Option.
During the three months ended March 31, 2022, the Company identified indicators of impairment related to the PharmaCann Option and conducted an analysis comparing the PharmaCann Option’s carrying amount to its estimated fair value. The fair value was estimated using a combination of the market and income approaches. Under the income approach, significant inputs used in the discounted cash flow method include discount rate, growth rates, and cash flow projections. As a result of this analysis, the Company recorded a non-cash impairment charge of $11,238, as the difference between the carrying amount of the PharmaCann Option and its estimated fair value in the condensed consolidated statements of net income (loss) and comprehensive income (loss).
Cronos Australia Limited
The Company owns approximately 10% of the outstanding common shares of Cronos Australia Limited (“Cronos Australia”). The investment is considered an equity security with a readily determinable fair value. Changes in the fair value of the investment are recorded as gain (loss) on revaluation of financial instruments on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
The following table summarizes the Company’s other investments activity:
| As of December 31, 2021 | Unrealized gain | Impairment charges | Foreign exchange effect | As of March 31, 2022 | |||||||||||||||||||||||||
| PharmaCann | $ | 110,392 | $ | — | $ | (11,238) | $ | — | $ | 99,154 | |||||||||||||||||||
| Cronos Australia | 8,000 | 4,196 | — | 411 | 12,607 | ||||||||||||||||||||||||
| $ | 118,392 | $ | 4,196 | $ | (11,238) | $ | 411 | $ | 111,761 | ||||||||||||||||||||
During the three months ended March 31, 2021, the Company had no gain or loss on revaluation of other investments. As of March 31, 2022 and December 31, 2021, the Company did not hold any additional other investments.
10
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
4. Loans Receivable, net
Loans receivable, net consists of the following:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||||||||
GrowCo Facility(i) | $ | 3,198 | $ | 3,138 | |||||||||||||
| Add: Current portion of accrued interest | 3,037 | 2,322 | |||||||||||||||
| Total current portion of loans receivable | 6,235 | 5,460 | |||||||||||||||
GrowCo Facility(i) | 64,801 | 64,367 | |||||||||||||||
Mucci Promissory Note | 14,414 | 14,019 | |||||||||||||||
Cannasoul Collaboration Loan(ii) | 2,192 | 2,249 | |||||||||||||||
| Add: Long-term portion of accrued interest | 122 | — | |||||||||||||||
| Total long-term portion of loans receivable | 81,529 | 80,635 | |||||||||||||||
| Total loans receivable, net | $ | 87,764 | $ | 86,095 | |||||||||||||
(i)On August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into a senior secured credit agreement for an aggregate principal amount of C$100,000 (the “GrowCo Facility”). In August 2021, the GrowCo Facility was amended to increase the aggregate principal amount available to C$105,000. As of March 31, 2022 and December 31, 2021, Cronos GrowCo had outstanding borrowings of C$103,000 ($82,354) and C$104,000 ($81,598), respectively, from the GrowCo Facility. As of March 31, 2022, Cronos GrowCo had repaid C$1,000 ($800) under the terms of the GrowCo Facility. The available borrowing capacity under the GrowCo Facility was C$1,000 ($800) at March 31, 2022 and December 31, 2021.
(ii)As of March 31, 2022 and December 31, 2021, CLS has received ILS 8,297 ($2,600) and ILS 8,297 ($2,664), respectively, from the Cannasoul Collaboration Loan.
Expected credit loss allowances on the Company’s long-term financial assets was comprised of the following items:
| As of January 1, 2022 | Increase (decrease)(i) | Foreign exchange effect | As of March 31, 2022 | ||||||||||||||||||||
| GrowCo Facility | $ | 14,089 | $ | (4) | $ | 269 | $ | 14,354 | |||||||||||||||
| Mucci Promissory Note | 90 | 1 | 2 | 93 | |||||||||||||||||||
| Cannasoul Collaboration Loan | 415 | 3 | (9) | 409 | |||||||||||||||||||
| $ | 14,594 | $ | — | $ | 262 | $ | 14,856 | ||||||||||||||||
| As of January 1, 2021 | Increase (decrease)(i) | Foreign exchange effect | As of March 31, 2021 | ||||||||||||||||||||
| GrowCo Facility | $ | 1,546 | $ | — | $ | 23 | $ | 1,569 | |||||||||||||||
Natuera Series A Loan(ii) | 721 | 416 | 14 | 1,151 | |||||||||||||||||||
| Mucci Promissory Note | 270 | — | 4 | 274 | |||||||||||||||||||
| Cannasoul Collaboration Loan | 26 | — | — | 26 | |||||||||||||||||||
| $ | 2,563 | $ | 416 | $ | 41 | $ | 3,020 | ||||||||||||||||
(i)During the three months ended March 31, 2022 and 2021, $nil and $416, respectively, were recorded to general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses.
(ii)As of March 31, 2022 and December 31, 2021, loans receivable, net for the Natuera Series A Loan was $nil.
5. Derivative Liabilities
As of March 31, 2022, Altria Group Inc. (“Altria”) beneficially held 156,573,537 of the Company’s common shares, an approximate 42% ownership interest in the Company (calculated on a non-diluted basis) and one warrant of the Company (the “Altria Warrant”). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 52% (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria (the “Investor Rights Agreement”), entered into in connection with the closing of Altria’s investment in the Company (the “Altria Investment”) pursuant to a subscription agreement dated December 7, 2018, the Company granted Altria certain rights, among others, summarized in this note.
11
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable.
a.The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10% of the common shares of Cronos (83,399,995 common shares as of March 31, 2022) at a per share exercise price of C$19.00, which expires on March 8, 2023.
b.The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the research and development (“R&D”) partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”)), the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance; provided that if the consideration paid in connection with any such issuance is non-cash, the price per common share of the Company that would have been received had such common shares been issued for cash consideration will be determined by an independent committee (acting reasonably and in good faith); provided further that the price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Strategic Partnership will be C$16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%.
c.In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”).
Reconciliation of the Company’s derivative liabilities activity are as follows:
| As of January 1, 2022 | Revaluation gain | Exercise of rights | Foreign exchange effect | As of March 31, 2022 | |||||||||||||||||||||||||
| (a) Altria Warrant | $ | 13,720 | $ | (10,011) | $ | — | $ | 136 | $ | 3,845 | |||||||||||||||||||
| (b) Pre-emptive Rights | 180 | (115) | — | 2 | 67 | ||||||||||||||||||||||||
| (c) Top-up Rights | 475 | (293) | — | 5 | 187 | ||||||||||||||||||||||||
| $ | 14,375 | $ | (10,419) | $ | — | $ | 143 | $ | 4,099 | ||||||||||||||||||||
| As of January 1, 2021 | Revaluation loss | Exercise of rights | Foreign exchange effect | As of March 31, 2021 | |||||||||||||||||||||||||
| (a) Altria Warrant | $ | 138,858 | $ | 92,964 | $ | — | $ | 2,834 | $ | 234,656 | |||||||||||||||||||
| (b) Pre-emptive Rights | 12,095 | 7,833 | — | 245 | 20,173 | ||||||||||||||||||||||||
| (c) Top-up Rights | 12,457 | 16,077 | (11,278) | 215 | 17,471 | ||||||||||||||||||||||||
| $ | 163,410 | $ | 116,874 | $ | (11,278) | $ | 3,294 | $ | 272,300 | ||||||||||||||||||||
Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments.
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
The fair values of the derivative liabilities were determined using the Black-Scholes pricing model using the following inputs:
| As of March 31, 2022 | |||||||||||||||||
| Altria Warrant | Pre-emptive Rights | Top-up Rights | |||||||||||||||
| Share price at valuation date (per share in C$) | $4.85 | $4.85 | $4.85 | ||||||||||||||
| Subscription price (per share in C$) | $19 | $16.25 | $16.25 | ||||||||||||||
Weighted-average risk-free interest rate(i) | 1.84% | 1.31% | 1.38% | ||||||||||||||
Weighted-average expected life (in years)(ii) | 0.94 | 0.50 | 0.75 | ||||||||||||||
Expected annualized volatility(iii) | 71% | 71% | 71% | ||||||||||||||
| Expected dividend yield | —% | —% | —% | ||||||||||||||
| As of December 31, 2021 | |||||||||||||||||
| Altria Warrant | Pre-emptive Rights | Top-up Rights | |||||||||||||||
| Share price at valuation date (per share in C$) | $4.98 | $4.98 | $4.98 | ||||||||||||||
| Subscription price (per share in C$) | $19.00 | $16.25 | $16.25 | ||||||||||||||
Weighted-average risk-free interest rate(i) | 0.79% | 0.39% | 0.50% | ||||||||||||||
Weighted-average expected life (in years)(ii) | 1.18 | 0.50 | 0.80 | ||||||||||||||
Expected annualized volatility(iii) | 80% | 80% | 80% | ||||||||||||||
| Expected dividend yield | —% | —% | —% | ||||||||||||||
(i)The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. As of March 31, 2022 and December 31, 2021, the risk-free interest rate uses a range of approximately 0.60% to 2.28% and 0.16% to 1.10%, respectively, for the Pre-emptive Rights and Top-up Rights.
(ii)The expected life represents the period of time, in years, that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. As of March 31, 2022 and December 31, 2021, the expected life uses a range of approximately 0.25 years to 3.50 years and 0.25 years to 3.75 years, respectively, for the Pre-emptive Rights and Top-up Rights.
(iii)Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company.
The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. While a decrease in the inputs noted below would cause a decrease in the carrying amount of the derivative liability, there would also be an equal and opposite impact on net income (loss).
| 10% decrease as of March 31, 2022 | |||||||||||||||||
| Altria Warrant | Pre-emptive Rights | Top-up Rights | |||||||||||||||
| Share price | $ | 1,445 | $ | 34 | $ | 53 | |||||||||||
| Weighted-average expected life | 1,114 | 65 | 60 | ||||||||||||||
| Expected annualized volatility | 1,930 | 41 | 67 | ||||||||||||||
| 10% decrease as of December 31, 2021 | |||||||||||||||||
| Altria Warrant | Pre-emptive Rights | Top-up Rights | |||||||||||||||
| Share price | $ | 3,970 | $ | 80 | $ | 123 | |||||||||||
| Weighted-average expected life | 2,971 | 171 | 133 | ||||||||||||||
| Expected annualized volatility | 5,402 | 96 | 155 | ||||||||||||||
These inputs are classified as Level 3 on the fair value hierarchy and are subject to volatility and several factors outside the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods.
13
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
6. Restructuring
In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). As part of the Realignment, on February 28, 2022, the Board approved plans to leverage the Company’s strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting its production facility in Stayner, Ontario, Canada (the “Stayner Facility”). The organizational and cost reduction initiatives being undertaken are intended to position the Company to drive profitable and sustainable growth over time.
The Company expects to spend approximately $5,800 in connection with the Realignment and the planned exit of the Stayner Facility, of which $3,084 has been incurred as of March 31, 2022. Estimated charges related to the exit of the Stayner Facility include employee-related costs such as severance, relocation and other termination benefits, as well as contract termination and other related costs. The Company expects to incur approximately $2,700 in additional charges related to the planned exit of the Stayner Facility, primarily in the second half of 2022.
In addition, the Company anticipates capital expenditures of approximately $2,500 to modernize information technology systems and build distribution capabilities. These anticipated charges and capital expenditures are subject to a number of assumptions, including product costs, the timing of certain events, market factors and others. As a result of these assumptions, actual results may differ materially.
The Company incurred the following restructuring costs by reportable segment:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Rest of World | $ | 2,031 | $ | — | |||||||
| United States | 1,053 | — | |||||||||
| Total | $ | 3,084 | $ | — | |||||||
The following table summarizes the Company’s restructuring activity for the three months ended March 31, 2022:
| Accrual as of December 31, 2021 | Year-to-date expense | Payments | Accrual as of March 31, 2022 | ||||||||||||||||||||
| Employee termination benefits | $ | — | $ | 2,503 | $ | (1,249) | $ | 1,254 | |||||||||||||||
| Other restructuring costs | — | 581 | (437) | 144 | |||||||||||||||||||
| Total | $ | — | $ | 3,084 | $ | (1,686) | $ | 1,398 | |||||||||||||||
7. Share-based Compensation
(a)Share-based award plans
The Company has granted stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees and non-employee directors under the Stock Option Plan dated May 26, 2015 (the “2015 Stock Option Plan”), the 2018 Stock Option Plan dated June 28, 2018 (the “2018 Stock Option Plan” and, together with the 2015 Stock Option Plan, the “Prior Option Plans”), the Employment Inducement Award Plan #1 (the “Employment Inducement Award Plan”), the 2020 Omnibus Equity Incentive Plan dated March 29, 2020 (the “2020 Omnibus Plan”) and the DSU Plan dated August 10, 2019 (the “DSU Plan”). The Company can no longer make grants under the Prior Option Plans or the Employment Inducement Award Plan.
The following table summarizes the total share-based compensation expense associated with the Company’s stock options and RSUs:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Stock options | $ | 1,729 | $ | 2,064 | |||||||
| RSUs | 1,957 | 435 | |||||||||
| Total share-based compensation | $ | 3,686 | $ | 2,499 | |||||||
During the three months ended March 31, 2022, the Company recognized $1,583 of share-based compensation expense related to the severance of certain executives.
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
(b)Stock options
Vesting conditions for grants of options are determined by the Compensation Committee of the Company’s Board of Directors. The typical vesting for stock option grants made under the 2020 Omnibus Plan is annual vesting over to five years with a maximum term of ten years. The typical vesting for stock option grants made under the Prior Option Plans is quarterly vesting over to with a maximum term of seven years. The Prior Option Plans did not, and the 2020 Omnibus Plan does not, authorize grants of options with an exercise price below fair market value.
The following is a summary of the changes in stock options:
Weighted-average exercise price (C$) (i) | Number of options | Weighted-average remaining contractual term (years) | |||||||||||||||
| Balance as of January 1, 2022 | $ | 7.75 | 8,939,330 | 2.70 | |||||||||||||
| Exercise of options | 3.14 | (1,356,875) | |||||||||||||||
| Cancellation, forfeiture and expiry of options | 12.46 | (55,791) | |||||||||||||||
| Balance as of March 31, 2022 | $ | 8.55 | 7,526,664 | 1.72 | |||||||||||||
| Exercisable as of March 31, 2022 | $ | 7.96 | 4,654,574 | 1.14 | |||||||||||||
Weighted-average exercise price (C$) (i) | Number of options | Weighted-average remaining contractual term (years) | |||||||||||||||
| Balance as of January 1, 2021 | $ | 5.40 | 13,755,148 | 2.30 | |||||||||||||
| Exercise of options | 2.13 | (5,230,550) | |||||||||||||||
| Cancellation, forfeiture and expiry of options | 14.71 | (25,771) | |||||||||||||||
| Balance as of March 31, 2021 | $ | 7.38 | 8,498,827 | 2.82 | |||||||||||||
| Exercisable as of March 31, 2021 | $ | 5.75 | 4,896,820 | 1.46 | |||||||||||||
(i)The weighted-average exercise price reflects the conversion of foreign currency-denominated stock options translated into C$ using the average foreign exchange rate as of the date of issuance.
The following table summarizes stock options outstanding:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| 2020 Omnibus Plan | 2,900,000 | 2,900,000 | |||||||||
| 2018 Stock Option Plan | 1,523,449 | 1,550,074 | |||||||||
| 2015 Stock Option Plan | 3,103,215 | 4,489,256 | |||||||||
| Total stock options outstanding | 7,526,664 | 8,939,330 | |||||||||
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
(c)Restricted share units
The following is a summary of the changes in RSUs:
Weighted-average grant date fair value (C$)(i) | Number of RSUs | ||||||||||
| Balance as of January 1, 2022 | $ | 9.22 | 1,225,870 | ||||||||
Granted(i) | 3.52 | 3,950,334 | |||||||||
| Vested and issued | 10.81 | (78,631) | |||||||||
| Cancellation and forfeitures | 7.92 | (55,479) | |||||||||
| Balance as of March 31, 2022 | $ | 4.74 | 5,042,094 | ||||||||
Weighted-average grant date fair value (C$)(ii) | Number of RSUs | ||||||||||
| Balance as of January 1, 2021 | $ | 7.66 | 948,357 | ||||||||
Granted(i) | 13.27 | 265,904 | |||||||||
| Balance as of March 31, 2021 | $ | 8.89 | 1,214,261 | ||||||||
(i)RSUs granted in the period vest annually in equal installments over a three-year period from the grant date or vest after a or five year “cliff-period.” All RSUs are subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria.
(ii)The weighted-average grant date fair value reflects the conversion of foreign currency-denominated RSUs translated into C$ using the foreign exchange rate as of the date of issuance.
(d)Deferred share units
The following is a summary of the changes in DSUs:
| Financial liability | Number of DSUs | ||||||||||
| Balance as of January 1, 2022 | $ | 408 | 104,442 | ||||||||
| Gain on revaluation | (66) | — | |||||||||
| Balance as of March 31, 2022 | $ | 342 | 104,442 | ||||||||
| Financial liability | Number of DSUs | ||||||||||
| Balance as of January 1, 2021 | $ | 577 | 83,293 | ||||||||
| Loss on revaluation | 211 | — | |||||||||
| Balance as of March 31, 2021 | $ | 788 | 83,293 | ||||||||
(e)Warrants
The following is a summary of the changes in warrants:
| Weighted-average exercise price (C$) | Number of warrants | ||||||||||
| Balance as of January 1, 2021 | $ | 0.25 | 7,987,349 | ||||||||
| Exercise of warrants | 0.25 | (7,977,349) | |||||||||
| Balance as of March 31, 2021 | $ | 0.25 | 10,000 | ||||||||
As of March 31, 2022, there are no warrants outstanding other than the Altria Warrant. See Note 5 “Derivative Liabilities” for further description of the Altria Warrant.
16
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
8. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share from continuing and discontinued operations are calculated as follows (in thousands, except share and per share amounts):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Basic and diluted loss per share computation | |||||||||||
| Net loss from continuing operations attributable to the shareholders of Cronos Group | $ | (32,638) | $ | (161,291) | |||||||
Weighted-average number of common shares outstanding for computation for basic and diluted earnings per share(i) | 375,022,724 | 363,012,740 | |||||||||
| Basic loss from continuing operations per share | $ | (0.09) | $ | (0.44) | |||||||
| Diluted loss from continuing operations per share | $ | (0.09) | $ | (0.44) | |||||||
| Loss from discontinued operations attributable to the shareholders of Cronos Group | $ | — | $ | (21) | |||||||
| Weighted-average number of common shares outstanding from computation for basic and diluted earnings per share | 375,022,724 | 363,012,740 | |||||||||
| Basic loss from discontinued operations per share | $ | 0.00 | $ | 0.00 | |||||||
| Diluted loss from discontinued operations per share | $ | 0.00 | $ | 0.00 | |||||||
(i)In computing diluted earnings per share, incremental common shares are not considered in periods in which a net loss is reported as the inclusion of the common share equivalents would be anti-dilutive.
Total securities of 118,224,080 and 136,945,023 were not included in the computation of diluted shares outstanding for the three months ended March 31, 2022 and, 2021, respectively, because the effect would be anti-dilutive.
9. Segment Information
The tables below set forth our condensed consolidated results of operations by segment. The Company’s condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that the Company will achieve in future periods. Segment data was as follows for the three months ended March 31, 2022 and 2021:
| Three months ended March 31, 2022 | |||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Cannabis flower | $ | — | $ | 18,625 | $ | — | $ | 18,625 | |||||||||||||||
| Cannabis extracts | 2,328 | 3,988 | — | 6,316 | |||||||||||||||||||
| Other | — | 92 | — | 92 | |||||||||||||||||||
| Net revenue | $ | 2,328 | $ | 22,705 | $ | — | $ | 25,033 | |||||||||||||||
| Total assets | $ | 441,064 | $ | 283,182 | $ | 646,755 | $ | 1,371,001 | |||||||||||||||
| Depreciation and amortization | 96 | 1,197 | — | 1,293 | |||||||||||||||||||
| Adjusted EBITDA | (7,086) | (3,425) | (8,389) | (18,900) | |||||||||||||||||||
| Purchase of property, plant and equipment, net | — | 711 | — | 711 | |||||||||||||||||||
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Cannabis flower | $ | — | $ | 9,434 | $ | — | $ | 9,434 | |||||||||||||||
| Cannabis extracts | 2,441 | 703 | — | 3,144 | |||||||||||||||||||
| Other | — | 33 | — | 33 | |||||||||||||||||||
| Net revenue | $ | 2,441 | $ | 10,170 | $ | — | $ | 12,611 | |||||||||||||||
| Share of loss from equity accounted investees | $ | — | $ | 1,643 | $ | — | $ | 1,643 | |||||||||||||||
| Total assets | $ | 252,449 | $ | 394,442 | $ | 1,234,391 | $ | 1,881,282 | |||||||||||||||
| Depreciation and amortization | 71 | 664 | — | 735 | |||||||||||||||||||
| Loss from discontinued operations | — | 21 | — | 21 | |||||||||||||||||||
| Adjusted EBITDA | (9,510) | (22,184) | (4,880) | (36,574) | |||||||||||||||||||
| Purchase of property, plant and equipment, net | 80 | 6,600 | — | 6,680 | |||||||||||||||||||
The following tables set forth a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated:
| Three months ended March 31, 2022 | |||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Net income (loss) | $ | (22,216) | $ | 2,014 | $ | (12,451) | $ | (32,653) | |||||||||||||||
| Interest income, net | (29) | (2,017) | — | (2,046) | |||||||||||||||||||
| Income tax expense | — | 362 | — | 362 | |||||||||||||||||||
Impairment loss on long-lived assets(i) | — | 3,493 | — | 3,493 | |||||||||||||||||||
Gain on revaluation of derivative liabilities(ii) | — | (10,419) | — | (10,419) | |||||||||||||||||||
Gain on revaluation of financial instruments(iv) | — | (4,268) | — | (4,268) | |||||||||||||||||||
Impairment loss on other investment(v) | 11,238 | — | — | 11,238 | |||||||||||||||||||
| Foreign currency transaction loss | — | 1,872 | — | 1,872 | |||||||||||||||||||
Other, net(vi) | — | (135) | — | (135) | |||||||||||||||||||
Restructuring costs(viii) | 1,053 | 2,031 | — | 3,084 | |||||||||||||||||||
Share-based compensation(ix) | 2,436 | 1,250 | — | 3,686 | |||||||||||||||||||
Financial statement review costs(x) | — | — | 4,062 | 4,062 | |||||||||||||||||||
| Depreciation and amortization | 432 | 2,392 | — | 2,824 | |||||||||||||||||||
| Adjusted EBITDA | $ | (7,086) | $ | (3,425) | $ | (8,389) | $ | (18,900) | |||||||||||||||
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Net loss | $ | (12,092) | $ | (142,147) | $ | (7,386) | $ | (161,625) | |||||||||||||||
| Interest income, net | (3) | (2,326) | — | (2,329) | |||||||||||||||||||
| Share of loss from equity accounted investments | — | 1,643 | — | 1,643 | |||||||||||||||||||
Impairment loss on long-lived assets(i) | 1,741 | — | — | 1,741 | |||||||||||||||||||
Loss on revaluation of derivative liabilities(ii) | — | 116,874 | — | 116,874 | |||||||||||||||||||
Transaction costs(iii) | — | — | 501 | 501 | |||||||||||||||||||
Loss on revaluation of financial instruments(iv) | — | 200 | — | 200 | |||||||||||||||||||
Other, net(vi) | — | 16 | — | 16 | |||||||||||||||||||
Loss from discontinued operations(vii) | — | 21 | — | 21 | |||||||||||||||||||
Share-based compensation(ix) | 745 | 1,754 | — | 2,499 | |||||||||||||||||||
Financial statement review costs(x) | — | — | 2,005 | 2,005 | |||||||||||||||||||
| Depreciation and amortization | 99 | 1,781 | — | 1,880 | |||||||||||||||||||
| Adjusted EBITDA | $ | (9,510) | $ | (22,184) | $ | (4,880) | $ | (36,574) | |||||||||||||||
(i)For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space located in Toronto, Ontario, Canada. For the three months ended March 31, 2021, impairment loss on long-lived assets related to an impairment on leased premises in the U.S. segment. See Note 12 “Impairment Loss on Long-lived Assets.”
(ii)For the three months ended March 31, 2022 and 2021, (gain) loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 5 “Derivative Liabilities.”
(iii)For the three months ended March 31, 2021, transaction costs represent legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
(iv)For the three months ended March 31, 2022, gain on revaluation of financial instruments related primarily to the Company’s equity securities in Cronos Australia. For the three months ended March 31, 2021, loss on revaluation of financial instruments related primarily to revaluations of financial liabilities resulting from DSUs.
(v)For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount. See Note 3 “Investments.”
(vi)For the three months ended March 31, 2022 and 2021, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets.
(vii)For the three months ended March 31, 2021, loss from discontinued operations related to the discontinuance of Original B.C. Ltd. (“OGBC”).
(viii)For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment and the exit of the Stayner Facility. See Note 6 “Restructuring.”
(ix)For the three months ended March 31, 2022 and 2021, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7 “Share-based Compensation.”
(x)For the three months ended March 31, 2022 and 2021, financial statement review costs include costs related to the restatements of the Company’s 2019 and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.
Net revenue attributed to a geographic region based on the location of the customer were as follows:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Canada | $ | 13,576 | $ | 7,582 | |||||||
| Israel | 9,128 | 2,518 | |||||||||
| United States | 2,329 | 2,441 | |||||||||
| Other countries | — | 70 | |||||||||
| Net revenue | $ | 25,033 | $ | 12,611 | |||||||
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
Property, plant and equipment, net were physically located in the following geographic regions:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Canada | $ | 47,717 | $ | 49,117 | |||||||
| Israel | 23,823 | 24,473 | |||||||||
| United States | 288 | 480 | |||||||||
| Total | $ | 71,828 | $ | 74,070 | |||||||
10. Commitments and Contingencies
(a)Commitments
There have been no material changes in the information regarding commitments as disclosed in the Company’s Annual Report.
(b)Contingencies
The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution and sale of its products. Many of these legal proceedings are in the early stages of litigation and seek damages that are unspecified or not quantified. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe these legal proceedings, individually or in the aggregate, will have a material adverse effect on its financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results for that quarter.
(i)Class action complaints relating to restatement of 2019 interim financial statements
On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in the U.S. District Court for the Eastern District of New York against the Company and its Chief Executive Officer and now former Chief Financial Officer. The court has consolidated the cases, and the consolidated amended complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The consolidated amended complaint generally alleges that certain of the Company’s prior public statements about revenues and internal control were incorrect based on the Company’s disclosures relating to the Audit Committee of the Board of Directors’ (the “Board”) review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel. The consolidated amended complaint does not quantify a damage request. Defendants moved to dismiss on February 8, 2021.
On June 3, 2020, an alleged shareholder filed a Statement of Claim, as amended on August 12, 2020, in the Ontario Superior Court of Justice in Toronto, Ontario, Canada, seeking, among other things, an order certifying the action as a class action on behalf of a putative class of shareholders and damages of an unspecified amount. The Amended Statement of Claim names (i) the Company, (ii) its Chief Executive Officer, (iii) now former Chief Financial Officer, (iv) former Chief Financial Officer and Chief Commercial Officer, and (v) current and former members of the Board as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Amended Statement of Claim generally alleges that certain of the Company’s prior public statements about revenues and internal control were misrepresentations based on the Company’s March 2, 2020 disclosure that the Audit Committee of the Board was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Amended Statement of Claim does not quantify a damage request. On June 28, 2021, the Court dismissed motions brought by the plaintiff for leave to commence a claim for misrepresentation under the Ontario Securities Act and for certification of the action as a class action. The plaintiff has appealed the Court’s dismissal of the motions only with respect to the Company, the Chief Executive Officer, and the now former Chief Financial Officer; the remaining defendants were dismissed from the matter with prejudice, and the Company and all individual defendants agreed not to seek costs from plaintiff in connection with the dismissal of the motions.
(ii)Regulatory reviews relating to restatements
The Company has been responding to requests for information from various regulatory authorities relating to its previously disclosed restatement of its financial statements for the first three quarters of 2019 as well as the previously disclosed restatement of the second quarter of 2021 interim financial statements. The Company is responding to all such requests for information and cooperating with all regulatory authorities. The Company cannot predict the outcome of any such regulatory review or investigation and it is possible that additional investigations or one or more formal proceedings may be commenced against the Company and its current and former officers and directors in connection with these regulatory reviews and investigations.
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
(iii)Litigation relating to marketing, distribution and sale of products
On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. On December 4, 2020, a Third Amended Statement of Claim was filed, which added a second alleged consumer. The Third Amended Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Third Amended Statement of Claim seeks a total of C$500 million for breach of contract, compensatory damages, and unjust enrichment or such other amount as may be proven in trial and C$5 million in punitive damages against each defendant, including the Company. The Third Amended Statement of Claim also seeks interest and costs associated with the action. The Company has not responded to the Third Amended Statement of Claim. On January 31, 2022, upon consent of the Company and the plaintiffs, the court dismissed the case in its entirety as to the Company.
A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business alleging, among other things, violations of state consumer protection, health and advertising laws. On April 8, 2020, a putative class action complaint was filed in the U.S. District Court for the Central District of California against Redwood Holding Group, LLC (“Redwood”), alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and breaches of the California Commercial Code for breach of express warranties and implied warranty of merchantability with respect to Redwood’s marketing and sale of U.S. hemp products. The complaint did not quantify a damage request. On April 10, 2020, the class action complaint was dismissed for certain pleading deficiencies and the plaintiff was granted leave until April 24, 2020 to amend the complaint to establish federal subject matter jurisdiction. On April 28, 2020, the action was dismissed without prejudice for failure to prosecute and for failure to comply with a court order. As of the date of this Quarterly Report, the plaintiff has not refiled the complaint.
The Company expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase.
11. Fair Value Measurements
The Company complies with ASC 820 Fair Value Measurements for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values are determined by:
•Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves.
•Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis:
| March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | 861,535 | $ | — | $ | — | $ | 861,535 | |||||||||||||||
| Short-term investments | 119,933 | — | — | 119,933 | |||||||||||||||||||
Other investments(i) | 12,607 | — | — | 12,607 | |||||||||||||||||||
| Derivative liabilities | — | — | 4,099 | 4,099 | |||||||||||||||||||
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| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | 886,973 | $ | — | $ | — | $ | 886,973 | |||||||||||||||
| Short-term investments | 117,684 | — | — | 117,684 | |||||||||||||||||||
Other investments(i) | 8,000 | — | — | 8,000 | |||||||||||||||||||
| Derivative liabilities | — | — | 14,375 | 14,375 | |||||||||||||||||||
(i)As of March 31, 2022 and December 31, 2021, the Company’s influence on Cronos Australia is deemed non-significant and the investment is considered an equity security with a readily determinable fair value. See Note 3 “Investments” for additional information.
There were no transfers between fair value categories during the periods presented.
12. Impairment Loss on Long-lived Assets
(a)Right-of-use assets and property, plant, and equipment, net
During the three months ended March 31, 2022, the Company recognized an impairment charge of $1,986 related to the right-of-use lease asset associated with the Company’s corporate headquarters, encompassing approximately 29,000 square feet, in Toronto, Ontario, Canada, for which the Company determined it would seek a sublease. In addition, the Company recognized an impairment charge of $1,507 during the three months ended March 31, 2022 related to leasehold improvements and other office equipment that it plans to include in any potential sublease agreement. The determination to seek a sublease of the property and include leasehold improvements and other office equipment in any potential sublease agreement triggered the impairment charges. Both of the impairment charges are recognized as impairment loss on long-lived assets on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
During the three months ended March 31, 2021, the Company recognized an impairment charge of $1,039 related to leasehold improvements located within leased premises, encompassing approximately 6,000 square feet, in Los Angeles, California, which the Company determined it no longer had plans to use. The significant change in the extent and manner in which the leasehold improvements are being used and the expectation that, more likely than not, the leasehold improvements will be disposed of before the end of their useful life triggered an impairment. The right-of-use lease asset associated with the leasehold improvements was also written down as a result of the Company’s decision to no longer use the leased premise. The Company recognized an impairment charge on the de-recognition of the right-of use asset of $702 during the three months ended March 31, 2021. Both the impairment charges are recognized as impairment loss on long-lived assets on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
13. Related Party Transactions
(a)Altria
On March 8, 2019, in connection with the Altria Investment, Altria, through certain of its wholly owned subsidiaries, purchased a 45% equity interest in the Company. As of March 31, 2022, Altria beneficially held an approximately 42% ownership interest in the Company (calculated on a non-diluted basis).
The Company incurred the following expenses for consulting services from Altria Pinnacle LLC, a subsidiary of Altria (“Altria Pinnacle”):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Altria Pinnacle - expense | $ | 28 | $ | 8 | |||||||
As of March 31, 2022 and December 31, 2021, the Company had payables outstanding to Altria Pinnacle of $13 and $nil, respectively.
22
| Cronos Group Inc. | |||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||||
| (In thousands of U.S. dollars, except share amounts) | |||||
(b)Cronos GrowCo
The Company holds a variable interest in Cronos GrowCo through its ownership of 50% of Cronos GrowCo’s common shares and senior secured debt in Cronos GrowCo. See Note 3 “Investments” for additional information.
The Company made the following purchases of cannabis products from Cronos GrowCo:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cronos GrowCo - purchases | $ | 3,218 | $ | — | |||||||
There were $nil and $82 amounts payable to Cronos GrowCo as of March 31, 2022 and December 31, 2021, respectively.
Additionally, on August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into the GrowCo Facility. See Note 4 “Loans Receivable, net” for additional information.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report.
Forward-Looking Statements
This Quarterly Report, the documents incorporated into this Quarterly Report by reference, other reports we file with, or furnish to, the U.S. Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon our current internal expectations, estimates, projections, assumptions and beliefs. All information that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology, such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussion of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of historical fact.
Forward-Looking Statements include, but are not limited to, statements with respect to:
•the impact of the ongoing military conflict between Russia and Ukraine (and resulting sanctions) on our business, financial condition and results of operations or cash flows;
•the uncertainties associated with the COVID-19 pandemic, including our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic, the ability to continue our production, distribution and sale of our products, and demand for and the use of our products by consumers;
•laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty regarding the application of United States (“U.S.”) state and federal law to U.S. hemp (including CBD and other U.S. hemp-derived cannabinoids) products and the scope of any regulations by the U.S. Food and Drug Administration (the “FDA”), the U.S. Drug Enforcement Administration (the “DEA”), the U.S. Federal Trade Commission (the “FTC”), the U.S. Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S. hemp (including CBD and other U.S. hemp-derived cannabinoids) products;
•the laws and regulations and any amendments thereto relating to the U.S. hemp industry in the U.S., including the promulgation of regulations for the U.S. hemp industry by the U.S. Department of Agriculture (the “USDA”) and relevant state regulatory authorities;
•expectations related to our announced realignment (the “Realignment”) and any progress, challenges and effects related thereto as well as changes in strategy, metrics, investments, reporting structure, costs, operating expenses, employee turnover and other changes with respect thereto;
•the timing of our exit from our facility in Stayner, Ontario (the “Stayner Facility”) and the expected costs and benefits from the wind-down of the Stayner Facility;
•our ability to effectively wind-down the Stayner Facility in an organized fashion and acquire raw materials from other suppliers, including Cronos Growing Company Inc. (“Cronos GrowCo”) and the costs and timing associated therewith;
•the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof;
•our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact;
•our ability to successfully create and launch brands and further create, launch and scale U.S. hemp-derived cannabinoid consumer products and cannabis products;
•the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids;
•expectations regarding the implementation and effectiveness of key personnel changes;
•the anticipated benefits and impact of Altria Group Inc.’s investment in the Company (the “Altria Investment”), pursuant to a subscription agreement dated December 7, 2018;
•the potential exercise of one warrant of the Company included as part of the Altria Investment (the “Altria Warrant”), pre-emptive rights and/or top-up rights in connection with the Altria Investment, including proceeds to us that may result therefrom;
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•expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment;
•the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized;
•expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic alliances and equity investments, including the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”);
•our ability to execute on our strategy and the anticipated benefits of such strategy;
•expectations of the amount or frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill;
•the ongoing impact of the legalization of additional cannabis product types and forms for adult-use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets;
•the future performance of our business and operations;
•our competitive advantages and business strategies;
•the competitive conditions of the industry;
•the expected growth in the number of customers using our products;
•our ability or plans to identify, develop, commercialize or expand our technology and research and development (“R&D”) initiatives in cannabinoids, or the success thereof;
•expectations regarding acquisitions and dispositions and the anticipated benefits therefrom;
•uncertainties as to our ability to exercise our option (the “PharmaCann Option”) in PharmaCann Inc. (“PharmaCann”), in the near term or the future, in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S. and our ability to realize the anticipated benefits of the transaction with PharmaCann;
•expectations regarding revenues, expenses and anticipated cash needs;
•expectations regarding cash flow, liquidity and sources of funding;
•expectations regarding capital expenditures;
•expectations regarding our future production and manufacturing strategy and operations, the costs and timing associated therewith and the receipt of applicable production and sale licenses;
•expectations regarding our growing, production and supply chain capacities;
•expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations;
•expectations with respect to future production costs;
•expectations with respect to future sales and distribution channels and networks;
•the expected methods to be used to distribute and sell our products;
•the anticipated future gross margins of our operations;
•accounting standards and estimates;
•our ability to timely and effectively remediate any material weaknesses in our internal control over financial reporting; and
•expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third party supply and manufacturing agreements.
Certain of the Forward-Looking Statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below.
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The Forward-Looking Statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including: (i) our ability to efficiently and effectively exit the Stayner Facility, receive the benefits of the Stayner Facility wind down and acquire raw materials on a timely and cost-effective basis from third parties, including Cronos GrowCo; (ii) our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic and the ability to continue our production, distribution and sale of our products and customer demand for and use of our products; (iii) management’s perceptions of historical trends, current conditions and expected future developments; (iv) our ability to generate cash flow from operations; (v) general economic, financial market, regulatory and political conditions in which we operate; (vi) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments; (vii) consumer interest in our products; (viii) competition; (ix) anticipated and unanticipated costs; (x) government regulation of our activities and products including, but not limited to, the areas of taxation and environmental protection; (xi) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (xii) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xiii) our ability to conduct operations in a safe, efficient and effective manner; (xiv) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations; (xv) our ability to realize the expected cost-savings, efficiencies and other benefits of our Realignment and employee turnover related thereto; (xvi) our ability to complete planned dispositions, and, if completed, obtain our anticipated sales price; (xvii) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann; and (xviii) other considerations that management believes to be appropriate in the circumstances. While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.
By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf. Such factors include, without limitation, that we may not be able to exit the Stayner Facility in an organized fashion or achieve the anticipated benefits of the exit or be able to access raw materials on a timely and cost-effective basis from third parties, including Cronos GrowCo; the risk that the COVID-19 pandemic and the military conflict between Russia and Ukraine may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products; the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected; the risk that we will not complete planned dispositions, or, if completed, obtain our anticipated sales price; the implementation and effectiveness of key personnel changes; the risks that our Realignment, the closure of the Stayner Facility and our further leveraging of our strategic partnerships will not result in the expected cost-savings, efficiencies and other benefits or will result in greater than anticipated turnover in personnel; future levels of revenues; consumer demand for cannabis and U.S. hemp products; our ability to manage disruptions in credit markets or changes to our credit ratings; future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses; the success or timing of completion of ongoing or anticipated capital or maintenance projects; business strategies, growth opportunities and expected investment; the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all); the potential effects of judicial, regulatory or other proceedings, or threatened litigation or proceedings, on our business, financial condition, results of operations and cash flows; volatility in and/or degradation of general economic, market, industry or business conditions; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; the anticipated effects of actions of third parties such as competitors, activist investors or federal (including U.S. federal), state, provincial, territorial or local regulatory authorities or self-regulatory organizations; changes in regulatory requirements in relation to our business and products; legal or regulatory obstacles that could prevent us from being able to exercise the PharmaCann Option and thereby realizing the anticipated benefits of the transaction with PharmaCann; dilution of our fully-diluted ownership of PharmaCann and the loss of our rights as a result of that dilution; our remediation of material weaknesses in our internal control over financial reporting and the improvement of our control environment and our systems, processes and procedures; and the factors discussed under Part I, Item 1A “Risk Factors” of the Annual Report. Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements.
Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned not to place undue reliance on these Forward-Looking Statements because of their inherent uncertainty and to appreciate the limited purposes for which they are being used by management. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. Forward-Looking Statements are made as of the date they are made and are based on the beliefs, estimates, expectations and opinions of management on that date. We undertake no obligation to update or revise any Forward-Looking Statements, whether as a
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result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements. The Forward-Looking Statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements.
Foreign currency exchange rates
All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2022, March 31, 2021 and December 31, 2021. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The condensed consolidated statements of net income (loss) and comprehensive income (loss) and condensed consolidated statements of cash flows of our foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period as reported on Bloomberg.
The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below:
| (Exchange rates are shown as C$ per $) | As of | ||||||||||||||||
| March 31, 2022 | March 31, 2021 | December 31, 2021 | |||||||||||||||
| Average rate | 1.2665 | 1.2665 | N/A | ||||||||||||||
| Spot rate | 1.2507 | 1.2563 | 1.2746 | ||||||||||||||
Business Overview
Cronos Group is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach®, PEACE NATURALS®, Lord Jones®, Happy Dance® and PEACE+™.
Strategy
Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities:
•growing a portfolio of iconic brands that responsibly elevate the consumer experience;
•developing a diversified global sales and distribution network;
•establishing an efficient global supply chain; and
•creating and monetizing disruptive intellectual property.
Business segments
We report through two segments: “United States” (the “U.S. segment”) and “Rest of World” (the “ROW segment”). These two segments represent the geographic regions in which we operate and the different product offerings within each geographic region.
The U.S. segment manufactures, markets and distributes U.S. hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States under the brands Lord Jones®, Happy Dance® and PEACE+™.
The ROW segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. In Canada, Cronos Group operates two wholly owned license holders under the Cannabis Act (Canada) (the “Cannabis Act”), Peace Naturals Project Inc. (“Peace Naturals”), which has production facilities near Stayner, Ontario (the “Stayner Facility”), and Thanos Holdings Ltd., known as Cronos Fermentation (“Cronos Fermentation”), which has a production facility in Winnipeg, Manitoba. In Israel, the Company operates under the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and cannabis oils in the Israeli medical market. Cronos Group has established three strategic joint ventures in Canada, Israel and Colombia. Additionally, as of March 31, 2022, Cronos Group held approximately 10% of the issued capital of Cronos Australia Limited (“Cronos Australia”), which is listed on the Australian Securities Exchange under the trading symbol “CAU.” Cronos Group currently exports cannabis products to two of the countries that permit the import of such products: Germany and Israel.
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Recent Developments
COVID-19 update
In December 2019, an outbreak of a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. Since then, COVID-19 has spread across the globe, including the U.S., Canada and Israel, and other countries in which Cronos Group or its affiliates operate (including Australia and Colombia) and was recognized as a pandemic by the World Health Organization. The COVID-19 pandemic resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets. In response to the pandemic, the governments of many countries, provinces, states, municipalities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures. Such measures were eased or lifted in varying degrees by different governments of various countries, states and municipalities throughout 2020 and 2021, but the continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway and re-impose quarantines, border closures, closure of certain businesses and stay-at-home orders.
The COVID-19 pandemic continues to impact the global economy and, specifically, the U.S., Canada, Israel, and the other countries in which Cronos Group or its affiliates operate (including Australia and Colombia). We continue to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the health and safety of our employees remains one of our top priorities.
In the U.S., numerous states have continued to remove their COVID-19 related restrictions. This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell our products. Any reinstatement of restrictions on the operations of retail outlets could negatively impact our short-term results of operations in the U.S. Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which we operate. Although we have not yet seen a significant impact from supply chain disruptions, we continue to monitor our supply chain closely.
In Canada, COVID-19 restrictions began gradually easing at the end of June 2021 as the vaccination rate increased. The lockdown measures taken in the first six months of 2021 to slow infection rates negatively impacted our short-term revenue growth in Canada in 2021. The increase in cases related to the Omicron variant of COVID-19 beginning in December 2021 caused the reinstatement of some restrictions on non-essential retail stores in some provinces, including Quebec, in early 2022; however, those restrictions have eased in most other provinces. Each province is responsible for implementing re-opening plans and certain provinces, including Ontario, are progressing through phases of re-opening which may permit continued increases to the allowance of in-person shopping, typically in the form of percentage of store capacity. All provinces have some form of cannabis retail open to consumers, whether it be restricted in-person shopping, curb-side pickup or delivery. Most provinces have lifted the requirement that retail shoppers show proof of vaccination before entering retail stores. The potential for recurring retail restrictions is ongoing, which could negatively impact our results of operations.
In Israel, most COVID-19 restrictions have been removed as vaccination rates have increased. Occupancy limitations in retail outlets have been removed, including those that sell our products. We do not expect the remaining COVID-19 restrictions to have a material impact on our short-term revenue growth in Israel.
Collectively, the effects of the COVID-19 pandemic have adversely affected our results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect or supply chains continue to be challenged. At this time, neither the duration nor scope of the disruption can be predicted; therefore, the ultimate impact to our business cannot be reasonably estimated, but such impact could materially adversely affect our business, financial condition and results of operations.
Despite the impacts of the COVID-19 pandemic, we believe that our significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months. The impact of reduced interest rates has inhibited our ability to generate interest income, but this has not had, and is not expected to have, a material impact on our liquidity or capital resources.
Strategic and Organizational Update
In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). The organizational and cost reduction initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time. The program consists of the following:
1.Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;
2.Evaluating the Company’s global supply chain and reducing complexity and fixed expenses, which resulted in the announcement of the planned exit of the Stayner Facility in Stayner, Ontario, and the Company’s ongoing review of product, pricing and distribution optimization; and
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3.Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry.
Brand and Product Portfolio
In April 2022, the Company expanded its SOURZ by Spinach™ gummy portfolio with a new flavor, Cherry Lime, in a five piece per pack format with 2mg of THC per piece. The Company now has five SKUs in the gummy category across its SOURZ by Spinach™ and Spinach FEELZ™ sub-brands.
Global Supply Chain
In the first quarter of 2022, the Company began to leverage Cronos GrowCo’s capabilities as part of the Realignment. These activities include, among others, the transfer of certain manufacturing equipment to Cronos GrowCo from the Stayner Facility. In April 2022, the Company began building dedicated space within Cronos GrowCo for various manufacturing and R&D activities.
Appointments
In March 2022, the Board of Directors appointed Cronos Group’s founder, Mike Gorenstein, as Chairman, President and Chief Executive Officer, in connection with Kurt Schmidt’s retirement. Mr. Gorenstein previously served as Chairman, President and Chief Executive Officer of Cronos until September 2020, when he transitioned to the Executive Chairman role.
In April 2022, the Company appointed Terry Doucet as Senior Vice President, Legal, Regulatory Affairs and Corporate Secretary, after serving in an interim capacity since December 2021. Mr. Doucet has been with Cronos since 2018 and has guided Cronos through significant growth over the last few years, including the build-out of the Company’s Legal and Regulatory Affairs teams, the Altria Investment, the Ginkgo Strategic Partnership, the PharmaCann Option and various product commercialization initiatives.
Consolidated Results of Operations
The tables below sets forth our condensed consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods.
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenue before excise taxes | $ | 29,406 | $ | 14,654 | |||||||
| Excise taxes | (4,373) | (2,043) | |||||||||
| Net revenue | 25,033 | 12,611 | |||||||||
| Cost of sales | 18,107 | 15,574 | |||||||||
| Gross profit | 6,926 | (2,963) | |||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 5,012 | 10,254 | |||||||||
| Research and development | 4,039 | 5,102 | |||||||||
| General and administrative | 22,368 | 21,906 | |||||||||
| Restructuring costs | 3,084 | — | |||||||||
| Share-based compensation | 3,686 | 2,499 | |||||||||
| Depreciation and amortization | 1,293 | 735 | |||||||||
| Impairment loss on long-lived assets | 3,493 | 1,741 | |||||||||
| Total operating expenses | 42,975 | 42,237 | |||||||||
| Operating loss | (36,049) | (45,200) | |||||||||
| Other income (expense) | 3,758 | (116,404) | |||||||||
| Income tax expense | (362) | — | |||||||||
| Loss from discontinued operations | — | (21) | |||||||||
| Net loss | (32,653) | (161,625) | |||||||||
| Net loss attributable to non-controlling interest | (15) | (313) | |||||||||
| Net loss attributable to Cronos Group | $ | (32,638) | $ | (161,312) | |||||||
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Summary of select financial results
| Three months ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Net revenue | $ | 25,033 | $ | 12,611 | $ | 12,422 | 99 | % | |||||||||||||||
| Cost of sales | 18,107 | 15,574 | 2,533 | 16 | % | ||||||||||||||||||
| Gross profit | 6,926 | (2,963) | 9,889 | 334 | % | ||||||||||||||||||
Gross margin(i) | 28 | % | (23) | % | N/A | 51 | pp | ||||||||||||||||
(i)Gross margin is defined as gross profit divided by net revenue.
Net revenue
For the three months ended March 31, 2022, we reported consolidated net revenue of $25.0 million, representing an increase of $12.4 million from the three months ended March 31, 2021. The increase was primarily due to an increase in net revenue in the ROW segment driven by growth in the Israeli medical market and the Canadian adult-use market.
Cost of sales
For the three months ended March 31, 2022, we reported consolidated cost of sales of $18.1 million, representing an increase of approximately $2.5 million from the three months ended March 31, 2021. The increase was primarily due to higher sales volumes in the ROW segment, partially offset by lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.
Gross profit
For the three months ended March 31, 2022, we reported gross profit of $6.9 million, representing an increase in gross profit of $9.9 million compared to the three months ended March 31, 2021. For the three month comparative period, the change was primarily due to increased cannabis flower revenue in the ROW segment, the introduction of additional cannabis extract products in the ROW segment that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.
Operating expenses
| Three months ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Sales and marketing | $ | 5,012 | $ | 10,254 | $ | (5,242) | (51) | % | |||||||||||||||
| Research and development | 4,039 | 5,102 | (1,063) | (21) | % | ||||||||||||||||||
| General and administrative | 22,368 | 21,906 | 462 | 2 | % | ||||||||||||||||||
| Restructuring costs | 3,084 | — | 3,084 | N/A | |||||||||||||||||||
| Share-based compensation | 3,686 | 2,499 | 1,187 | 47 | % | ||||||||||||||||||
| Depreciation and amortization | 1,293 | 735 | 558 | 76 | % | ||||||||||||||||||
| Impairment loss on long-lived assets | 3,493 | 1,741 | 1,752 | 101 | % | ||||||||||||||||||
| Total operating expenses | $ | 42,975 | $ | 42,237 | $ | 738 | 2 | % | |||||||||||||||
Sales and marketing
For the three months ended March 31, 2022, sales and marketing expenses were $5.0 million, representing a decrease of $5.2 million from the three months ended March 31, 2021. The decrease was primarily due to the implementation of the Realignment operating expense targets driving more focused investment towards the highest return spend.
Research and development
For the three months ended March 31, 2022, research and development expenses were $4.0 million, representing a decrease of $1.1 million from the three months ended March 31, 2021. The decrease was primarily due to the implementation of the Realignment, which includes operating expense targets driving more focused investment towards margin accretive innovation.
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General and administrative
For the three months ended March 31, 2022, general and administrative expenses were $22.4 million, representing an increase of $0.5 million from the three months ended March 31, 2021. The increase was primarily due to higher professional fees related to financial statement review costs and employee-related costs.
Restructuring costs
For the three months ended March 31, 2022, restructuring costs were $3.1 million, related to the Realignment, including the planned exit of the Stayner Facility.
Share-based compensation
For the three months ended March 31, 2022, share-based compensation expenses were $3.7 million, representing an increase of $1.2 million from the three months ended March 31, 2021. The increase was primarily due to the acceleration of equity grants to certain executive employees in connection with their separation from the Company.
Depreciation and amortization
For the three months ended March 31, 2022, depreciation and amortization expenses were $1.3 million, representing an increase of $0.6 million from the three months ended March 31, 2021. The change was primarily due to assets placed into service during the latter part of the year ended December 31, 2021.
Impairment loss on long-lived assets
For the three months ended March 31, 2022, impairment loss on long-lived assets was $3.5 million, representing an increase of $1.8 million from the three months ended March 31, 2021. For the three months ended March 31, 2022, $2.0 million was related to a right-of-use lease asset and $1.5 million related to leasehold improvements as a result of our decision to seek a sublease for the Company’s corporate headquarters in Toronto, Canada. During the three months ended March 31, 2021, we recognized impairment charges of $0.7 million related to a right-of-use lease asset and $1.0 million related to leasehold improvements as a result of our decision to no longer use certain leased premises located in Los Angeles, California. See Note 12 “Impairment Loss on Long-lived Assets” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
Other income (loss), income tax expense and discontinued operations
| Three months ended March 31, | Change(i) | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Interest income, net | $ | 2,046 | $ | 2,329 | $ | (283) | (12) | % | |||||||||||||||
| Gain (loss) on revaluation of derivative liabilities | 10,419 | (116,874) | 127,293 | 109 | % | ||||||||||||||||||
| Share of loss from equity accounted investments | — | (1,643) | 1,643 | 100 | % | ||||||||||||||||||
| Gain (loss) on revaluation of financial instruments | 4,268 | (200) | 4,468 | N/M | |||||||||||||||||||
| Impairment loss on other investments | (11,238) | — | (11,238) | N/A | |||||||||||||||||||
| Foreign currency transaction loss | (1,872) | — | (1,872) | N/A | |||||||||||||||||||
| Other, net | 135 | (16) | 151 | N/M | |||||||||||||||||||
| Total other income (loss) | 3,758 | (116,404) | 120,162 | 103 | % | ||||||||||||||||||
| Income tax expense | (362) | — | (362) | N/A | |||||||||||||||||||
| Loss from discontinued operations | — | (21) | 21 | 100 | % | ||||||||||||||||||
| Net loss | $ | (32,653) | $ | (161,625) | $ | 128,972 | 80 | % | |||||||||||||||
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(i)“N/M” is defined as not meaningful.
Interest income, net
For the three months ended March 31, 2022, interest income, net was $2.0 million, representing a decrease of $0.3 million from the three months ended March 31, 2021. The decrease in net interest income was primarily due to lower invested balances during the comparative periods.
Gain (loss) on revaluation of derivative liabilities
For the three months ended March 31, 2022, the gain on revaluation of derivative liabilities was $10.4 million, representing an increase of $127.3 million from the three months ended March 31, 2021. We expect continued changes in derivative valuations as our share price fluctuates period to period. For further information, see Note 5 “Derivative Liabilities” to the condensed consolidated financial statements under Item 1 “Financial Statements” of this Quarterly Report.
Share of loss from equity accounted investments
For the three months ended March 31, 2022, share of loss from equity accounted investments was $nil, representing a decrease in losses of $1.6 million from the three months ended March 31, 2021. The change was due to a decrease in losses in equity accounted investments during the three months ended March 31, 2022.
Gain (loss) on revaluation of financial instruments
For the three months ended March 31, 2022 and 2021, the gain (loss) on revaluation of financial instruments was $4.3 million, representing an increase of $4.5 million from the three months ended March 31, 2021. The increase primarily related to the change in fair value of our investment in Cronos Australia during the quarter since becoming an equity security with a readily determinable fair value in connection with its merger with CDA Health Pty Ltd, an Australian medicinal cannabis company, in December 2021. Prior to the merger, Cronos Australia was accounted for under the equity method of accounting.
Impairment loss on other investments
For the three months ended March 31, 2022, the impairment loss on other investments of $11.2 million was driven by an impairment of the PharmaCann Option for the difference between its estimated fair value and the carrying amount of the PharmaCann Option. Refer to Note 3 “Investments” in our condensed consolidated financial statements under Item 1 of this Quarterly Report.
Foreign currency transaction loss
For the three months ended March 31, 2022, the foreign currency transaction loss was $1.9 million, which related to certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future.
Other, net
For the three months ended March 31, 2022, other, net was $0.1 million, representing an increase of $0.2 million from the three months ended March 31, 2021.
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Results of Operations by Business Segment:
The tables below set forth our condensed consolidated results of operations by our two business segments: the ROW segment and the U.S. segment, expressed in U.S. dollars and in thousands for the periods presented. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods. Certain totals in the tables below will not sum to exactly 100% due to rounding.
Summary of select financial results – ROW
| Three months ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Net revenue | $ | 22,705 | $ | 10,170 | $ | 12,535 | 123 | % | |||||||||||||||
| Cost of sales | 15,995 | 14,309 | 1,686 | 12 | % | ||||||||||||||||||
| Gross profit | 6,710 | (4,139) | 10,849 | 262 | % | ||||||||||||||||||
| Gross margin | 30 | % | (41) | % | N/A | 71 | pp | ||||||||||||||||
Net revenue – ROW
| Three months ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Cannabis flower | $ | 18,625 | $ | 9,434 | $ | 9,191 | 97 | % | |||||||||||||||
| Cannabis extracts | 3,988 | 703 | 3,285 | 467 | % | ||||||||||||||||||
| Other | 92 | 33 | 59 | 179 | % | ||||||||||||||||||
| Net revenue | $ | 22,705 | $ | 10,170 | $ | 12,535 | 123 | % | |||||||||||||||
For the three months ended March 31, 2022, the ROW segment reported net revenue of $22.7 million, representing an increase of $12.5 million from the three months ended March 31, 2021. The change was primarily due to an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extracts used in edibles and vaporizers.
Cost of sales – ROW
For the three months ended March 31, 2022, the ROW segment reported cost of sales of $16.0 million, representing an increase of $1.7 million from the three months ended March 31, 2021. The increase was primarily due to higher sales volumes, partially offset by lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.
Gross profit – ROW
For the three months ended March 31, 2022, the ROW segment reported gross profit of $6.7 million, representing an increase in gross profit of $10.8 million from the three months ended March 31, 2021. For the three month comparative period, the change was primarily due to increased cannabis flower revenue, the introduction of additional cannabis extract products that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.
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Summary of select financial results – U.S.
| Three months ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Net revenue | $ | 2,328 | $ | 2,441 | $ | (113) | (5) | % | |||||||||||||||
| Cost of sales | 2,112 | 1,265 | 847 | 67 | % | ||||||||||||||||||
| Gross profit | 216 | 1,176 | (960) | (82) | % | ||||||||||||||||||
| Gross margin | 9 | % | 48 | % | N/A | (39) | pp | ||||||||||||||||
Net revenue – U.S.
For the three months ended March 31, 2022, the U.S. segment reported net revenue of $2.3 million, representing a decrease of $0.1 million from the three months ended March 31, 2021. The decrease was primarily driven by a reduction in sales as a result of a decrease in promotional spend as the Company works through its review of the U.S. business as part of the Realignment.
Cost of sales – U.S.
For the three months ended March 31, 2022, the U.S. segment reported cost of sales of $2.1 million, representing an increase of $0.8 million from the three months ended March 31, 2021. The increase was primarily due to increased inventory valuation adjustments, higher shipping costs and unfavorable sales mix.
Gross profit – U.S.
For the three months ended March 31, 2022, the U.S. segment reported gross profit of $0.2 million, representing a decrease of $1.0 million from the three months ended March 31, 2021. For the three months ended March 31, 2022, gross profit was negatively impacted by higher cost of sales.
Non-GAAP Measures
Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This Quarterly Report refers to measures not recognized under U.S. GAAP (“non-GAAP measures”). These non-GAAP measures do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these non-GAAP measures are provided as a supplement to corresponding U.S. GAAP measures to provide additional information regarding the results of operations from management’s perspective. Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. All non-GAAP measures presented in this Quarterly Report are reconciled to their closest reported U.S. GAAP measure. Reconciliations of historical adjusted financial measures to corresponding U.S. GAAP measures are provided below.
Adjusted EBITDA
Management reviews Adjusted EBITDA, a non-GAAP measure, which excludes non-cash items and items that do not reflect management’s assessment of ongoing business performance of our operating segments. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and intangible assets; impairment loss on long-lived assets; (gain) loss on revaluation of derivative liabilities; (gain) loss on revaluation of financial instruments; transaction costs related to strategic projects; impairment loss on other investments; foreign currency transaction loss; other, net; loss from discontinued operations; restructuring costs; share-based compensation; and review costs related to the restatements of our 2019 and 2021 interim financial statements, including the costs related to our responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement (see Part II, Item 1 “Legal Proceedings” of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements and the regulatory reviews relating to the restatements of the second quarter 2021 interim financial statements). Impairment loss on other investments has been included as an adjustment to Adjusted EBITDA due to the PharmaCann Option impairment analysis. Foreign currency transaction loss has been included as an adjustment to Adjusted EBITDA for the anticipated settlement of intercompany loans denominated in foreign currencies. Additionally, restructuring costs have been included as an adjustment to Adjusted EBITDA in light of the Realignment and the exit from the Stayner Facility.
Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of period-over-period results. Management uses Adjusted EBITDA for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.
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Adjusted EBITDA is reconciled to net income (loss) as follows:
| (In thousands of U.S. dollars) | Three months ended March 31, 2022 | ||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Net income (loss) | $ | (22,216) | $ | 2,014 | $ | (12,451) | $ | (32,653) | |||||||||||||||
| Interest income, net | (29) | (2,017) | — | (2,046) | |||||||||||||||||||
| Income tax expense | — | 362 | — | 362 | |||||||||||||||||||
Impairment loss on long-lived assets(i) | — | 3,493 | — | 3,493 | |||||||||||||||||||
Gain on revaluation of derivative liabilities(ii) | — | (10,419) | — | (10,419) | |||||||||||||||||||
Gain on revaluation of financial instruments(iv) | — | (4,268) | — | (4,268) | |||||||||||||||||||
Impairment loss on other investment(v) | 11,238 | — | — | 11,238 | |||||||||||||||||||
| Foreign currency transaction loss | — | 1,872 | — | 1,872 | |||||||||||||||||||
Other, net(vi) | — | (135) | — | (135) | |||||||||||||||||||
Restructuring costs(viii) | 1,053 | 2,031 | — | 3,084 | |||||||||||||||||||
Share-based compensation(ix) | 2,436 | 1,250 | — | 3,686 | |||||||||||||||||||
Financial statement review costs(x) | — | — | 4,062 | 4,062 | |||||||||||||||||||
| Depreciation and amortization | 432 | 2,392 | — | 2,824 | |||||||||||||||||||
| Adjusted EBITDA | $ | (7,086) | $ | (3,425) | $ | (8,389) | $ | (18,900) | |||||||||||||||
| (In thousands of U.S. dollars) | Three months ended March 31, 2021 | ||||||||||||||||||||||
| United States | Rest of World | Corporate | Total | ||||||||||||||||||||
| Net loss | $ | (12,092) | $ | (142,147) | $ | (7,386) | $ | (161,625) | |||||||||||||||
| Interest income, net | (3) | (2,326) | — | (2,329) | |||||||||||||||||||
| Share of loss from equity accounted investments | — | 1,643 | — | 1,643 | |||||||||||||||||||
Impairment loss on long-lived assets(i) | 1,741 | — | — | 1,741 | |||||||||||||||||||
Loss on revaluation of derivative liabilities(ii) | — | 116,874 | — | 116,874 | |||||||||||||||||||
Transaction costs(iii) | — | — | 501 | 501 | |||||||||||||||||||
Loss on revaluation of financial instruments(iv) | — | 200 | — | 200 | |||||||||||||||||||
Other, net(vi) | — | 16 | — | 16 | |||||||||||||||||||
Loss from discontinued operations(vii) | — | 21 | — | 21 | |||||||||||||||||||
Share-based compensation(ix) | 745 | 1,754 | — | 2,499 | |||||||||||||||||||
Financial statement review costs(x) | — | — | 2,005 | 2,005 | |||||||||||||||||||
| Depreciation and amortization | 99 | 1,781 | — | 1,880 | |||||||||||||||||||
| Adjusted EBITDA | $ | (9,510) | $ | (22,184) | $ | (4,880) | $ | (36,574) | |||||||||||||||
(i)For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space located in Toronto, Ontario, Canada. For the three months ended March 31, 2021, impairment loss on long-lived assets related to an impairment on leased premises in the U.S. segment. See Note 12 “Impairment Loss on Long-lived Assets” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
(ii)For the three months ended March 31, 2022 and 2021, the (gain) loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 5 “Derivative Liabilities” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
(iii)For the three months ended March 31, 2021, transaction costs represent legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss).
(iv)For the three months ended March 31, 2022, gain on revaluation of financial instruments related primarily to the Company’s equity securities in Cronos Australia. See Note 3 “Investments” to the condensed consolidated financial statements under Item 1 of this Quarterly Report. For the three months ended March 31, 2021, loss on revaluation of financial instruments related primarily to revaluations of financial liabilities resulting from DSUs.
(v)For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount. See Note 3 “Investments” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
(vi)For the three months ended March 31, 2022 and 2021, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets.
(vii)For the three months ended March 31, 2021, loss from discontinued operations related to the discontinuance of OGBC.
(viii)For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment and the exit of the Stayner Facility. See Note 6 “Restructuring” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
(ix)For the three months ended March 31, 2022 and 2021, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7 “Share-based Compensation” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.
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(x)For the three months ended March 31, 2022 and 2021, financial statement review costs include costs related to the restatements of the Company’s 2019 and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.
Liquidity and Capital Resources
As of March 31, 2022, we had $861.5 million in cash and cash equivalents and $119.9 million in short-term investments, which comprise the majority of the Company’s cash position. We believe that the existing cash and cash equivalents and the short-term investments will be sufficient to fund the business operations and capital expenditures over the next twelve months. The following table summarizes the cash flows from operating, investing and financing activities:
| (In thousands of U.S. dollars) | Three months ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows used in operating activities | $ | (33,911) | $ | (46,615) | |||||||
| Cash provided by (used in) investing activities | 100 | (9,717) | |||||||||
| Cash used in financing activities | (464) | (8,663) | |||||||||
| Effect of foreign currency translation on cash and cash equivalents | 8,837 | 11,422 | |||||||||
| Net change in cash | $ | (25,438) | $ | (53,573) | |||||||
Comparison of cash flows between the three months ended March 31, 2022 and the three months ended March 31, 2021
Operating activities
During the three months ended March 31, 2022, we used $33.9 million of cash in operating activities as compared to cash used of $46.6 million in the three months ended March 31, 2021, representing decrease in cash used of $12.7 million. This change is primarily driven by a $12.0 million increase in net income after adjusting for non-cash items during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Investing activities
During the three months ended March 31, 2022, we generated $0.1 million of cash in investing activities, compared to $9.7 million of cash used in investing activities during the three months ended March 31, 2021, representing a decrease of $9.8 million in cash used by investing activities. This change is primarily driven by lower purchases of property, plant and equipment and a decrease in disbursements related to loans receivable with related parties for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Financing activities
During the three months ended March 31, 2022, cash used in financing activities was $0.5 million, compared to $8.7 million of cash used in financing activities during the three months ended March 31, 2021, representing a decrease of $8.2 million in cash used in financing activities. This change is primarily driven by a decrease of $8.1 million in withholding taxes paid on share-based awards during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Cash Requirements
The Company’s cash requirements have not changed significantly since the filing of the Annual Report.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Our critical accounting policies and estimates have not changed significantly since the filing of the Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to certain market risks, including changes from foreign currency exchange rates related to our international operations. The Company’s market risks have not changed significantly from that disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.
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Item 4. Controls and Procedures.
(a)Evaluation of Disclosure Controls and Procedures.
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of March 31, 2022. Based on that evaluation, management has concluded that, as of March 31, 2022, due to the existence of material weaknesses in the Company’s internal control over financial reporting described below, the disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Material Weakness in Internal Controls Over Financial Reporting
A material weakness is a deficiency, or combination of deficiencies in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), we have identified the following material weakness:
•Control Environment:
We did not maintain an effective control environment. Specifically, our control environment (i) did not ensure that senior personnel in our accounting function engaged consistently in appropriate professional conduct and conduct consistent with our Code of Business Conduct and Ethics; and (ii) lacked personnel in our accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting rules.
None of the personnel in the accounting function that engaged in misconduct were current or former executive officers of the Company. The control environment material weakness contributed to the goodwill and indefinite-lived intangible asset material weakness described below.
•Goodwill and Indefinite-lived Intangible Asset Impairment Testing:
We identified the following material weakness with respect to goodwill and indefinite-lived intangible asset impairment testing. We did not design and maintain effective controls to assess goodwill and indefinite-lived intangible assets for potential impairment as changes in the performance of and prospects for our U.S. reporting unit occurred. Specifically, we did not design and maintain effective controls to sufficiently assess the overall financial performance of and expectations for our U.S. reporting unit and certain macroeconomic, industry and market conditions when evaluating goodwill associated with our U.S. reporting unit and our Lord Jones® brand indefinite-lived intangible asset for potential impairment.
The material weakness in the control environment contributed to material misstatements related to the impairment of goodwill and indefinite-lived intangible assets that led to the restatement of the Company’s interim condensed consolidated financial statements for the three and six months ended June 30, 2021. The material weaknesses create a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. The lack of personnel in our accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting principles described above resulted in immaterial misstatements related to the accounting for derivatives, share-based compensation, earnings per share, and long-lived asset impairment.
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Remediation Plan and Status
As of the filing date, the Company has implemented or is in the process of implementing various initiatives intended to address the identified material weaknesses and strengthen our overall control environment. In this regard, some of our key remedial initiatives include:
| Material Weakness | Control, Control Enhancement or Mitigant | Implementation Status | Management Testing Status | Remediation Status | ||||||||||||||||||||||
| Control Environment | •The Company’s Chief Executive Officer and Chief Financial Officer have reinforced and will continue to reinforce on an ongoing basis the importance of adherence to the Company’s policies, procedures and standards of conduct, including identifying misconduct and raising and communicating concerns; | In Progress | Not Tested | Not Remediated | ||||||||||||||||||||||
•All accounting personnel that engaged in unprofessional conduct have been terminated or resigned from the Company and are in the process of being replaced with qualified personnel; | Completed | Not Tested | Not Remediated | |||||||||||||||||||||||
•We have enhanced our existing sub-certification process to include additional certifications regarding certain complex accounting topics and to include additional employees to increase accountability amongst Company personnel; | Completed | Not Tested | Not Remediated | |||||||||||||||||||||||
•We have expanded our compensation claw back provisions to incorporate all personnel who are subject to our enhanced sub-certification process; | Completed | Not Tested | Not Remediated | |||||||||||||||||||||||
•We have identified and are in the process of implementing organizational enhancements including (i) evaluating the sufficiency, experience and training of personnel within our accounting function and (ii) hiring accounting personnel with appropriate knowledge and experience in U.S. GAAP; | In Progress | Not Tested | Not Remediated | |||||||||||||||||||||||
•We are in the process of developing and implementing a training program for accounting and finance personnel to enhance their knowledge of U.S. GAAP outlined in our accounting policies, which are used in the preparation of the Company’s consolidated financial statements; and | In Progress | Not Tested | Not Remediated | |||||||||||||||||||||||
| Asset Impairment Testing | •We have evaluated and will continue to regularly evaluate our policies and procedures relating to certain complex accounting topics and have begun implementing improvements in those policies and procedures. | In Progress | Not Tested | Not Remediated | ||||||||||||||||||||||
The Company will continue to review, optimize, and enhance its financial reporting controls and procedures. As the Company continues to evaluate and work to improve its internal control over financial reporting, the Company may implement additional measures to address the material weaknesses or certain of the remediation measures described above may be enhanced or modified. The material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through further testing, that these controls are operating effectively.
(b)Changes in Internal Control over Financial Reporting
Other than those material weaknesses identified and measures described above to remediate the material weaknesses identified in the prior year, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), that occurred during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1: Legal Proceedings.
The information set forth under Note 10(b), Contingencies, to the Company’s condensed consolidated financial statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report is incorporated herein by reference.
Item 1 A: Risk Factors.
An investment in us involves a number of risks. A detailed discussion of our risk factors appears in Part I, Item 1A. Risk Factors of the Annual Report. Any of the matters highlighted in the risk factors described in the Annual Report and the risk factor below could adversely affect our business, results of operations and financial condition, causing an investor to lose all, or part of, its, his or her investment. The risks and uncertainties described in the Annual Report and below are those we currently believe to be material, but they are not the only ones we face. If any of the risks described in the Annual Report, the following risk factor, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected.
Our business, financial condition, results of operations and cash flows could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine.
The global economy has been negatively impacted by the military conflict between Russia and Ukraine. Furthermore, governments in the U.S., Canada United Kingdom, and European Union have each imposed export controls on certain products and financial and economic sanctions on certain industry sectors and parties in Russia. Although we do not have any customers or direct supplier relationships in Russia or Ukraine, businesses in the United States and globally have experienced shortages in materials and increased costs for transportation, energy, and raw material due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. Further escalation of geopolitical tensions related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business, financial condition, results of operations and cash flows.
We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business. Although our business has not been, to the date of this Quarterly Report, materially impacted by the ongoing military conflict in Ukraine, it is impossible to predict the extent to which our operations, or those of our suppliers and vendors, will be impacted in the short and long term, or the ways in which the conflict may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but may be substantial. In addition, the effects of the ongoing conflict could heighten any of our known risks described in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits
The exhibits listed in the Exhibit Index immediately below are filed as part of this Quarterly Report, which Exhibit Index is corporate by reference herein.
| Exhibit Number | Exhibit Index | |||||||
| 3.1 | ||||||||
| 10.1† | ||||||||
| 10.2† | ||||||||
| 10.3†* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
† Management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CRONOS GROUP INC. | ||||||||
| By: | /s/ Robert Madore | |||||||
Robert Madore Chief Financial Officer | ||||||||
| Date: May 10, 2022 | ||||||||
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