CRONOS GROUP INC.
ANNUAL INFORMATION FORM
For the year ended December 31, 2018
DATED: March 25, 2019
TABLE OF CONTENTS
GENERAL MATTERS ............................................................................................................................................... 3
FORWARD LOOKING INFORMATION ............................................................................................................... 3
CORPORATE STRUCTURE .................................................................................................................................... 6
GENERAL DEVELOPMENT OF THE BUSINESS ............................................................................................... 7
DESCRIPTION OF THE BUSINESS ..................................................................................................................... 13
ALTRIA STRATEGIC INVESTMENT ................................................................................................................. 39
RISK FACTORS ....................................................................................................................................................... 43
DIVIDENDS AND DISTRIBUTIONS ..................................................................................................................... 76
CAPITAL STRUCTURE .......................................................................................................................................... 76
MARKET FOR SECURITIES ................................................................................................................................. 76
PRIOR SALES ........................................................................................................................................................... 78
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER .............. 78
DIRECTORS AND OFFICERS ............................................................................................................................... 79
PROMOTERS ........................................................................................................................................................... 88
LEGAL PROCEEDINGS AND REGULATORY ACTIONS ............................................................................... 88
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS.................................... 89
TRANSFER AGENT AND REGISTRAR .............................................................................................................. 90
MATERIAL CONTRACTS ..................................................................................................................................... 90
AUDIT COMMITTEE INFORMATION ............................................................................................................... 91
INTERESTS OF EXPERTS ..................................................................................................................................... 92
ADDITIONAL INFORMATION ............................................................................................................................. 92
SCHEDULE “A” .................................................................................................................................................... 93
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GENERAL MATTERS
Unless otherwise noted or the context indicates otherwise, in this Annual Information Form (this “AIF”) 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, and the term
“cannabis” has the meaning given to such term in the Cannabis Act (Canada) (the “Cannabis Act”).
All currency amounts in this AIF are stated in Canadian dollars, unless otherwise noted. All references to “dollars” or
“$” are to Canadian dollars and all references to “US$” are to United States dollars.
All information in this AIF is given as of the date hereof, unless otherwise indicated.
FORWARD LOOKING INFORMATION
This AIF contains certain 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 the Company’s current internal expectations, estimates, projections, assumptions and beliefs. All
information contained herein 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 discussions 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 in this AIF include, but are not limited to, statements with respect to:
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the performance of the Company’s business and operations;
expectations regarding revenues, expenses and anticipated cash needs;
expectations regarding cash flow, liquidity and sources of funding;
the Company’s international activities and joint venture interests, including required regulatory approvals and
licensing, anticipated costs and timing, and expected impact;
the intended expansion of the Company’s facilities, the costs and timing associated therewith and the receipt of
approval from Health Canada to increase the maximum production limits and sales from the expanded facilities;
the expected growth in the number of customers using the Company’s cannabis;
the expected growth in the Company’s growing, cultivation and production capacities;
expectations with respect to future production costs;
expectations with respect to future sales and distribution channels, including the ability to secure additional
provincial listings;
the expected methods to be used by the Company to distribute and sell cannabis;
the competitive conditions of the industry;
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expectations regarding the ongoing impact on the Company of the legalization of cannabis for adult-use in Canada
and the Company’s ability to participate in such market;
the legalization of additional cannabis types and forms for adult-use in Canada, including federal, provincial,
territorial and municipal regulations pertaining thereto, the related timing and impact thereof and the Company’s
intentions to participate in such markets;
the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related
timing and impact thereof and the Company’s intentions to participate in such markets outside of Canada, if and
when such use is legalized;
laws and regulations and any amendments thereto applicable to the business of the Company and the impact
thereof;
the ability of the Company to execute on its strategy and the anticipated benefits of such strategy;
the competitive advantages and business strategies of the Company;
the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any
amendments thereof;
the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis;
the Company’s future product offerings;
the anticipated future gross margins of the Company’s operations;
expectations regarding capital expenditures;
accounting standards and estimates;
expectations regarding the resolution of litigation and legal proceedings;
expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment
(as defined herein);
expectations regarding the potential success of, and the costs and benefits associated with, the Company’s joint
ventures and strategic alliances, including the Ginkgo Strategic Partnership (as defined herein);
the anticipated benefits and impact of the Altria Investment; and
the potential exercise of the Altria Warrant (as defined herein), including proceeds to the Company that may result
therefrom.
Certain of the Forward-Looking Statements contained herein concerning the cannabis industry are based on estimates
prepared by Cronos Group using data from publicly available governmental sources, market research, industry
analysis and assumptions based on data and knowledge of this industry which Cronos Group believes to be reasonable.
However, although generally indicative of relative market positions, market shares and performance characteristics,
such data is inherently imprecise. While Cronos Group is not aware of any misstatement regarding any industry or
government data or other information presented herein that is based on such data, the cannabis industry involves risks
and uncertainties that are subject to change based on various factors, which factors are described further below.
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) management’s perceptions of historical trends,
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current conditions and expected future developments; (ii) the Company’s ability to generate cash flow from operations
and obtain necessary financing on acceptable terms; (iii) general economic, financial market, regulatory and political
conditions in which the Company operates; (iv) the output from Peace Naturals Project Inc. (“Peace Naturals”),
Original BC Ltd. (“OGBC”) and the Company’s joint ventures and strategic alliances; (v) consumer interest in the
Company’s products; (vi) competition; (vii) anticipated and unanticipated costs; (viii) government regulation of the
Company’s activities and products and in the areas of taxation and environmental protection; (ix) the timely receipt
of any required regulatory authorizations, approvals, consents, permits and/or licenses; (x) the Company’s ability to
obtain qualified staff, equipment and services in a timely and cost efficient manner; (xi) the Company’s ability to
conduct operations in a safe, efficient and effective manner; (xii) the Company’s construction plans and timeframe for
completion of such plans; and (xiii) other considerations that are believed to be appropriate in the circumstances,
including that the foregoing factors, collectively, are not expected to have a material impact on the Company. While
management of the Company 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 the Company’s
control, could cause actual results to differ materially from the Forward-Looking Statements in this AIF. Such factors
include, without limitation, 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; disruption from the Altria Investment making it more
difficult to maintain relationships with customers, employees or suppliers; future levels of revenues; consumer demand
for cannabis products; the Company’s ability to manage disruptions in credit markets or changes to its credit rating;
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 the Company’s capital resources and liquidity,
including but not limited to, availability of sufficient cash flow to execute the Company’s business plan (either within
the expected timeframe or at all); the potential effects of judicial or other proceedings on the Company’s business,
financial condition, results of operations and cash flows; continued or further 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; 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, self-
regulatory organizations or plaintiffs in litigation; and the factors discussed under the heading “Risk Factors” in this
AIF. 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 at 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 that the Forward-
Looking Statements may not be appropriate for any other purpose. While the Company believes 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 contained herein are made as of the date of this AIF and are based on the beliefs, estimates,
expectations and opinions of management on the date such Forward-Looking Statements are made. The Company
undertakes no obligation to update or revise any Forward-Looking Statements, whether as a 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, except as required by applicable law. The Forward-Looking
Statements contained in this AIF are expressly qualified in their entirety by this cautionary statement.
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Name, Address and Incorporation
CORPORATE STRUCTURE
Cronos Group Inc. was originally incorporated on August 21, 2012 under the Business Corporations Act (Ontario) as
2339498 Ontario Inc. Prior to completing its qualifying transaction, the Company was classified as a Capital Pool
Company pursuant to Policy 2.4 of the TSX Venture Exchange (the “TSX-V”). Cronos Group was incorporated with
the intention of developing a business based on capitalizing companies that were applying to Health Canada to become
licensed producers of medical cannabis in Canada.
Pursuant to articles of amendment dated October 18, 2012, the Company changed its name from 2339498 Ontario Inc.
to Searchtech Ventures Inc. Pursuant to articles of amendment dated June 24, 2014, the Company amended its articles
to remove certain restrictions on the transfer of its common shares. On December 10, 2014, Cronos Group closed its
qualifying transaction (the “Qualifying Transaction”) with Hortican Inc. (“Hortican”), a company whose business
model was to invest in medical cannabis companies in Canada, pursuant to which the shareholders of Hortican
completed a reverse takeover of the Company. Immediately prior to the completion of the Qualifying Transaction,
pursuant to articles of amendment dated December 10, 2014, the Company amended its articles to change its name to
PharmaCan Capital Corp. and to consolidate its shares on a one for seven (1:7) basis. Following these changes,
Hortican amalgamated with 8996741 Canada Inc., a wholly owned subsidiary of the Company formed solely for the
purpose of facilitating the Qualifying Transaction. Pursuant to the amalgamation, the Company indirectly acquired
all of the issued and outstanding shares of Hortican and issued post-consolidation shares of the Company on the basis
of approximately 2.1339 post-consolidation shares for each one of Hortican’s shares. Hortican warrants, stock options,
and convertible debentures were also exchangeable at the same conversion ratio, and the exercise prices for such
securities were divided by the conversion ratio.
On October 6, 2016, the Company announced it would thereafter conduct business under the name “Cronos Group
Inc.” Shareholder approval for the name change was obtained at a special meeting of shareholders held on February
24, 2017. Articles of amendment effecting the change in name were filed on February 24, 2017, and approval from
the TSX-V for the change in name was received on March 1, 2017.
The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and on the NASDAQ
Global Market (“NASDAQ”) under the trading symbol “CRON”.
The Company’s corporate and registered office is located at 720 King Street West, Suite 320, Toronto, Ontario M5V
2T3. The Company’s telephone number is +1.416.504.0004.
Intercorporate Relationships
Cronos Group is an innovative global cannabinoid company, with international production and distribution across five
continents. The Company is engaged in the cultivation, manufacture, and marketing of cannabis and cannabis-derived
products for the medical and adult-use markets. Cronos Group is committed to building disruptive intellectual property
by advancing cannabis research, technology and product development. With a passion for responsibly elevating the
consumer experience, Cronos Group is building an iconic brand portfolio. Cronos Group’s portfolio includes PEACE
NATURALS™, a global health and wellness brand, and two adult-use brands, COVE™ and Spinach™. Cronos Group
operates two wholly-owned license holders in Canada under the Cannabis Act (“License Holders”). Our License
Holders are Peace Naturals, which has production facilities near Stayner, Ontario, and OGBC, which has a production
facility in Armstrong, British Columbia. Cronos Group has also established five strategic joint ventures in Canada,
Israel, Australia and Colombia (see “Description of the Business – Joint Ventures and International Activities”).
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The following chart illustrates, as of the date of this AIF, the Company’s subsidiaries, including their respective
jurisdictions of incorporation and percentage of voting securities of each that are beneficially owned, controlled or
directed by the Company. The Company does not beneficially own, control or direct, directly or indirectly, any
restricted securities in any of its subsidiaries.
Notes:
(1) Other than these subsidiaries, no other subsidiary of the Company has total assets that exceed 10% of the consolidated assets of the
Company or revenue that exceeds 10% of the consolidated revenue of the Company.
(2) Cronos Global Holdings Inc. holds a 70% equity interest in the cultivation company and a 90% equity interest in each of the manufacturing,
distribution and pharmacies companies of Cronos Israel (as defined herein), a 50% equity interest in Cronos Australia (as defined herein)
and a 50% equity interest in NatuEra (as defined herein). See “Description of the Business – Joint Ventures and International Activities”.
(3) Cronos Canada Holdings Inc. holds a 50% equity interest in each of MedMen Canada and Cronos GrowCo (both as defined herein). See
“Description of the Business – Joint Ventures and International Activities”.
GENERAL DEVELOPMENT OF THE BUSINESS
Three Year History
Altria Investment
On March 8, 2019, the Company announced that the previously announced $2.4 billion investment in the Company
(the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7,
2018 (the “Subscription Agreement”), had closed. At closing, the Company issued to certain wholly-owned
subsidiaries of Altria 149,831,154 common shares of the Company and one warrant of the Company (the “Altria
Warrant”), which may be exercised in full or in part at any time on or prior to March 8, 2023, from time to time, and
entitles the holder thereof, upon valid exercise in full, to acquire an aggregate of 73,990,693 common shares of the
Company (subject to adjustment in accordance with the terms and conditions of the warrant certificate representing
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and evidencing the Altria Warrant (the “Altria Warrant Certificate”)) at an initial exercise price of $19.00 per
common share. As of the closing date, Altria beneficially held an approximately 45% ownership interest in the
Company (calculated on a non-diluted basis) and, if exercised in full on such date, the exercise of the Altria Warrant
would result in Altria holding a total ownership interest in the Company of approximately 55% (calculated on a non-
diluted basis). If fully exercised, the Altria Warrant would provide the Company with approximately $1.4 billion of
additional proceeds. The Company’s strategic partnership with Altria provides Cronos Group with additional financial
resources, product development and commercialization capabilities, and deep regulatory expertise to better position
the Company to compete in the global cannabis industry.
In connection with the closing of the Altria Investment, the Company and Altria entered into an investor rights
agreement (the “Investor Rights Agreement”) pursuant to which Altria has certain governance rights, including the
right to nominate a specified number of directors to the Company’s board of directors (the “Board”), approval rights
over certain Company actions and pre-emptive and top-up rights entitling Altria to maintain its pro rata beneficial
ownership in the Company. Under the Investor Rights Agreement, Altria has agreed to make Cronos Group its
exclusive partner for pursuing cannabis opportunities globally (subject to certain limited exceptions). Also in
connection with closing, the Company and Altria entered into certain commercial support arrangements (the
“Commercial Arrangements”) pursuant to which Altria provides the Company with strategic advisory and
consulting services on matters which may include research and development, marketing, advertising and brand
management, government relations and regulatory affairs, finance, tax planning, logistics and other corporate
administrative matters. See “Description of the Business – Arrangements with Altria”.
Acquisitions, Dispositions, Investments and Partnerships
The Company has entered into the following notable transactions, strategic investments and partnerships since January
1, 2016:
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Sale of Minority Interest in Whistler Medical Marijuana Corporation (“Whistler”). On January 14, 2019,
Aurora Cannabis Inc. (“Aurora”) entered into a letter of intent to acquire all of the issued and outstanding
shares of Whistler (the “Whistler Transaction”), a licensed producer and seller of cannabis with operations
in Whistler, British Columbia, in an all-share transaction valued at up to approximately $175 million,
including certain milestone payments. On March 4, 2019, the Company announced that it had sold all of its
common shares in the capital of Whistler, representing approximately 19.0% of Whistler’s issued and
outstanding common shares, to Aurora in connection with the Whistler Transaction. As a result of the closing
of the Whistler Transaction, the Company received approximately $24.7 million in value of Aurora common
shares, which the Company subsequently sold for approximately $25.6 million in cash. Subject to the
satisfaction of certain specified milestones, the Company expects to receive an additional approximately $7.6
million in value of Aurora common shares. Assuming all milestones are met, the Company expects that it
will have generated, in aggregate, an 8.7x return on its investment in Whistler, based on current market
conditions.
Technion Research and Development. On October 15, 2018, the Company announced it had entered into a
sponsored research agreement (the “Technion Research Agreement”) with Technion Research and
Development Foundation of the Technion – Israel Institute of Technology (“Technion”) to explore the use
of cannabinoids and their role in regulating skin health and skin disorders. The preclinical studies will be
conducted by Technion over a three-year period and will focus on three skin conditions: acne, psoriasis and
skin repair. See “Description of the Business – Research and Development Activities – Technion Research
Agreement”.
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Ginkgo Strategic Partnership. On September 4, 2018 the Company announced a strategic partnership (the
“Ginkgo Strategic Partnership”) with Ginkgo Bioworks, Inc. (“Ginkgo”) to produce at commercial scale
certain cultured cannabinoids, which are expected to be made at a fraction of the cost of those available
through current cultivation methods. If the Ginkgo Strategic Partnership is ultimately successful at
developing such cultured cannabinoids, Cronos Group expects to be able to produce large volumes of the
target cannabinoids from custom yeast strains by leveraging existing fermentation infrastructure (i.e.
breweries or pharmaceutical contract manufacturing operations) without incurring significant capital
expenditures to build new cultivation and extraction facilities. See “Description of the Business – Research
and Development Activities – Ginkgo Collaboration Agreement”.
NatuEra. On August 29, 2018, the Company announced a strategic joint venture with an affiliate of Agroidea
SAS (“AGI”), a leading Colombian agricultural services provider with over 30 years of research,
development and production operations and expertise managing industrial scale horticultural operations for
export from Colombia. Each of the Company and AGI owns a 50% equity interest in the joint venture,
NatuEra S.à.r.l (“NatuEra”). NatuEra intends to develop, cultivate, manufacture and export cannabis-based
medical and consumer products for the Latin American and global markets. See “Description of the Business
– Joint Ventures and International Activities”.
Cronos GrowCo. On July 18, 2018, the Company announced a strategic joint venture with a group of
investors led by Bert Mucci (the “Greenhouse Partners”), a leading Canadian large-scale greenhouse
operator. Each of the Company and the Greenhouse Partners owns a 50% equity interest in the joint venture,
Cronos Growing Company Inc. (“Cronos GrowCo”), and has equal representation on the board of directors
of Cronos GrowCo. Cronos GrowCo intends to develop, construct and operate a state-of-the-art 850,000 sq.
ft. purpose-built greenhouse for cannabis production. See “Description of the Business – Joint Ventures and
International Activities”.
MedMen Canada. On March 19, 2018, the Company announced a strategic joint venture with MedMen
Enterprises USA, LLC (“MedMen”). Each of the Company and MedMen owns a 50% equity interest in the
joint venture, MedMen Canada Inc. (“MedMen Canada”). MedMen Canada is focused on developing a
Canadian branded retail chain in provinces that permit private retailers, branded products and research and
development activities in Canada. MedMen Canada has access to the Company’s production facilities and
future expansions while leveraging MedMen’s brand recognition. See “Description of the Business – Joint
Ventures and International Activities”.
Cronos Australia. On February 5, 2018, the Company announced the launch of Cronos Australia Pty. Ltd.
(“Cronos Australia”), its Australian strategic joint venture with NewSouthern Capital Pty Ltd.
(“NewSouthern”), for the research, production, manufacture and distribution of medical cannabis. Each of
the Company and NewSouthern owns a 50% equity interest in Cronos Australia and has equal board
representation. See “Description of the Business – Joint Ventures and International Activities”.
Cronos Israel. On September 6, 2017, the Company announced its strategic joint venture (“Cronos Israel”)
with Kibbutz Gan Shmuel (“Gan Shmuel”) for the production, manufacture and global distribution of
medical cannabis. See “Description of the Business – Joint Ventures and International Activities”.
OGBC’s Acquisition of Land. On October 21, 2016, the Company acquired approximately 17 acres of land
adjacent to the 13-acre OGBC production campus in the Okanagan Valley of British Columbia for total
consideration of $600,000 cash payable at closing. The acquisition more than doubled the acreage of OGBC’s
production campus.
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Acquisition of Peace Naturals. On September 6, 2016, Hortican acquired the remaining issued and
outstanding shares of Peace Naturals, increasing its total holdings from 27.3% to 100% of Peace Naturals’
issued and outstanding shares. The purchase price payable for the acquisition of the shares not already held
by Hortican was approximately $11.8 million, of which (i) $2.9 million was payable at closing, by the
issuance, out of treasury, of the Company’s common shares, (ii) approximately $6.2 million was payable in
cash at closing and (iii) the balance was held back for a period of up to twelve (12) months following closing.
The purchase price was based on an enterprise value of Peace Naturals of approximately $22 million. On
September 25, 2017, the final holdback payments of the balance of the purchase price were completed in
connection with the closing of a loan facility with Romspen Investment Corporation. See “– Capital Markets
and Financing Activities”.
Capital Markets and Financing Activities
The Company has engaged in the following equity offerings and financing activities since January 1, 2016:
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Closing and Repayment of Credit Facility. On January 23, 2019, Cronos Group announced that it had entered
into a credit agreement with Canadian Imperial Bank of Commerce, as administrative agent and lender, and
the Bank of Montreal, as lender, in respect of a $65 million secured non-revolving term loan credit facility
(the “Credit Facility”). The Company used the funds available under the Credit Facility to repay the
Romspen Construction Loan (as defined herein) and for general corporate purposes pending the closing of
the Altria Investment. On March 8, 2019, the Credit Facility was repaid in full by the Company with a portion
of the proceeds from the Altria Investment.
April 2018 Bought Deal. On April 6, 2018, the Company announced the closing of a bought deal offering
pursuant to which the Company sold a total of 10,420,000 common shares at a price of $9.60 per common
share for aggregate gross proceeds of approximately $100.0 million (the “April 2018 Bought Deal”). The
common shares were offered in the United States (“U.S.”) pursuant to the Company’s effective registration
statement on Form F-10 filed with the U.S. Securities and Exchange Commission (“SEC”) and in Canada by
way of a short form prospectus offering.
January 2018 Bought Deal. On January 24, 2018, the Company announced the closing of a bought deal
offering pursuant to which the Company sold a total of 5,257,143 common shares at a price of $8.75 per
common share for aggregate gross proceeds of approximately $46.0 million. The bought deal was completed
by way of a short form prospectus offering in Canada.
November 2017 Bought Deal. On November 8, 2017, the Company announced the closing of a bought deal
offering pursuant to which the Company sold a total of 5,476,190 common shares at a price of $3.15 per
common share for aggregate gross proceeds of approximately $17.2 million. The bought deal was completed
by way of a short form prospectus offering in Canada.
September 2017 Private Placement. On September 26, 2017, the Company announced the closing of a non-
brokered private placement and on October 12, 2017, announced the TSX-V’s approval of the non-brokered
private placement, pursuant to which the Company sold a total of 6,671,112 common shares at a price of
$2.25 per common share for aggregate gross proceeds of approximately $15.0 million.
Romspen Debt Facility. On August 23, 2017, the Company announced that Peace Naturals had entered into
a commitment letter with Romspen for the provision of a $40,000,000 senior secured debt facility (the
“Romspen Construction Loan”). The Romspen Construction Loan was secured by a first ranking charge
on the real estate of each of Peace Naturals and OGBC. OGBC, Hortican, and the Company were also
guarantors of the Romspen Construction Loan. The Romspen Construction Loan closed on September 21,
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2017, and an approximately $6,300,000 (not taking into account fees and expenses) advance for working
capital purposes was drawn simultaneously on the date of closing. On January 23, 2019, the Company used
funds available under the Credit Facility to repay the Romspen Construction Loan in full.
March 2017 Bought Deal. On March 9, 2017, the Company announced the closing of a bought deal offering
pursuant to which the Company sold a total of 7,705,000 common shares at a price of $2.25 per common
share for aggregate gross proceeds of approximately $17.3 million. The bought deal was completed by way
of a short form prospectus offering in Canada.
August 2016 Private Placement. On August 11, 2016, the Company announced the closing of the first tranche
of a non-brokered private placement pursuant to which the Company sold 18,743,352 common shares at a
price of $0.35 per common share. The second tranche of the non-brokered private placement closed on
August 31, 2016 and resulted in the sale of 22,902,359 common shares at a price of $0.35 per common share.
The third and final tranche of the private placement closed on September 8, 2016 and resulted in the sale of
1,211,429 common shares at a price of $0.35 per common share, for aggregate gross proceeds of
approximately $15.0 million for the three tranches, taken together.
May 2016 Private Placement. On May 16, 2016, the Company announced the closing of the first tranche of
a non-brokered private placement pursuant to which the Company sold 10,810,812 common share units
(consisting of one common share and one common share purchase warrant which entitles the holder to
purchase one common share at a price of $0.245 per common share for a period of five years following the
closing of the offering) at a price of $0.185 per common share unit. The second and final tranche of the
private placement closed on May 27, 2016 and resulted in the sale of 21,621,613 common share units at a
price of $0.185 per common share unit, for aggregate gross proceeds of approximately $10,000,000 for the
two tranches, taken together.
Exchange Listings
The following developments have occurred with respect to the Company’s exchange listings since January 1, 2016:
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On May 22, 2018, the Company announced that the trading of its common shares in Canada would be
elevated from the TSX-V to the TSX. The Company’s common shares began trading on the TSX on May 23,
2018 under the trading symbol “CRON”.
On March 5, 2018, the Company announced that the Company was changing its trading symbol on the TSX-
V from “MJN” to “CRON”.
On February 26, 2018, the Company announced that trading of its common shares would be elevated from
the Nasdaq International Designation program to the NASDAQ. The common shares began trading on the
NASDAQ on February 27, 2018 under the trading symbol “CRON”.
On September 12, 2017, the Company announced that it was admitted into the Nasdaq International
Designation program under the symbol OTC – Nasdaq International Designation: PRMCF.
Operations
The following operational changes have taken place since January 1, 2016:
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Canadian Adult-Use Market and Provincial Supply Agreements. On October 17, 2018, Canada became the
first G7 country and the second country in the world to legalize cannabis sales at a federal level for adult-
use. On August 21, 2018, the Company announced that it had secured listings and signed binding master
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supply agreements (the “Master Supply Agreements”) with the Ontario Cannabis Retail Corporation and
the BC Liquor Distribution Branch. The Company also secured listings and has accepted supplier terms (the
“Supplier Terms and Conditions”) with the Nova Scotia Liquor Corporation and Prince Edward Island
Liquor Corporation and has secured listings with various private retailors in Saskatchewan. Together, these
five provinces represent approximately 58% of the Canadian population. Pursuant to these agreements,
Cronos Group currently offers dried flower, pre-rolls and its cannabis oils through both government-operated
retail stores and online platforms and private sector retailers. As the Company’s production capacity grows,
the Company intends to explore expanding its distribution into additional provinces and territories in Canada.
Second Adult-Use Brand – SpinachTM. On September 13, 2018, Cronos Group announced the launch of its
new adult-use brand, SpinachTM, its second cannabis brand for the Canadian adult-use market. SpinachTM
offers some of the most popular strains from Cronos Group’s genetic library. See “Description of the Business
– Principal Products”.
Supply Agreement with Cura. On August 9, 2018, Cronos Group announced a supply agreement (the “Cura
Supply Agreement”) with Cura Cannabis Solutions (“Cura”), a vertically integrated cannabis operator.
Cura signed a five year take-or-pay supply agreement to purchase a minimum of 20,000 kilograms of
cannabis per annum from Cronos GrowCo, starting from the end of the calendar quarter following the
calendar quarter in which Cura receives all necessary licenses from Health Canada.
Partnership with Delfarma. On June 25, 2018, Cronos Group entered into a strategic distribution partnership
with Delfarma Sp. Zo.o (“Delfarma”). Delfarma is a pharmaceutical wholesaler with a distribution network
of over 5,000 pharmacies and more than 200 hospitals that collectively reaches approximately 40% of the
Polish domestic market. Under the five-year exclusive distribution agreement, Cronos Group will supply
PEACE NATURALSTM branded cannabis products to Delfarma for distribution the Polish medical market.
The Company and Delfarma are currently in the process of obtaining the necessary regulatory approvals to
sell cannabis products in Poland.
First Adult-Use Brand – COVETM. In May 2018, the Company previewed its first premium adult-use brand,
COVE™, at the LIFT Conference. The COVE™ brand was born in the Okanagan Valley in British
Columbia, which is known for producing some of the world’s finest cannabis. See “Description of the
Business – Principal Products”.
Partnership with Pohl-Boskamp. On October 12, 2017, the Company announced its strategic partnership and
five-year exclusive distribution agreement with G. Pohl-Boskamp GmbH & Co. KG (“Pohl-Boskamp”), an
international European pharmaceutical manufacturer and distributor with a German distribution network of
pharmacies, to distribute PEACE NATURALSTM branded cannabis products within the German medical
market. The Company currently exports dried cannabis to Germany and announced its first shipment to Pohl-
Boskamp on December 27, 2017.
Peace Naturals Capacity Expansion. On May 23, 2017, the Company announced breaking ground on its
315,000 sq. ft. capacity expansion project at Peace Naturals premises. The expansion includes a state-of-the-
art 286,000 sq. ft. production facility (“Building 4”), a 28,000 sq. ft. greenhouse (the “Peace Naturals
Greenhouse”), and an additional 2,257 sq. ft. extraction laboratory. The Peace Naturals Greenhouse’s first
harvest occurred in June 2018, and the facility is currently fully operational. In August 2018, Peace Naturals
received authorization from Health Canada to cultivate cannabis in Building 4, and the building is expected
to become operational in phases. Currently, Building 4 engages in the cultivation of cannabis and produced
its first harvest in December 2018. The Company expects all flower rooms to be populated in the first half of
2019 and thereafter anticipates further improvements in yields towards full run-rate capacity as a result of
increasing efficiencies over time. Building 4 also engages in tissue culture and micro propagation, processing,
12
•
•
•
finishing and packaging and shipping activities. It is expected that Building 4 will also engage in extraction,
formulation and R&D activities following receipt of the applicable regulatory approvals or amendments to
the Peace Naturals Production Licenses (as defined herein). While construction of Building 4 is complete,
the Good Manufacturing Practice (“GMP”) and industrial-grade kitchen and certain additional cultivation
and processing areas are in the process of being equipped and made operational in phases. Certain R&D areas
and laboratory areas in Building 4 are in final design phases. See “Description of the Business – Production
Facilities”.
Peace Naturals Voluntary Recall. On May 5, 2017, Peace Naturals announced a voluntary recall with the
support of Health Canada for products sold between November 26, 2015 to March 13, 2017. Peace Naturals
was notified by Health Canada that upon testing a random cannabis leaf sample, trace levels of Piperonyl
Butoxide (“PBO”) were discovered at 0.78 parts per million (ppm). PBO is an organic compound known as
a synergist. Root cause analysis conducted by Peace Naturals concluded that this was the result of cross-
contamination from a sanitation protocol that is no longer practiced at Peace Naturals. The source of the PBO
was a Pest Management Regulatory Agency approved product that was used to sanitize empty rooms between
harvests. The sanitation protocol has not been practiced since new management implemented an improved
production methodology after taking control of Peace Naturals.
Good Manufacturing Practice Certification. On May 2, 2017, the Company announced that, following a
comprehensive audit performed by German regulators, Peace Naturals was issued a GMP certification in
relation to its facilities and processes for the production of dried cannabis flower in accordance with the rules
governing pharmaceutical production in the European Union. This GMP certification requires adherence to
quality standards that extend well beyond current Health Canada requirements. The certification enables
Peace Naturals to distribute medical cannabis across the European Union, which only permits importation of
medical products produced by GMP-certified manufacturers.
OGBC Sales Licenses. On January 11, 2017, the Company announced that OGBC was approved by Health
Canada to sell medical cannabis. This sales license granted to OGBC supplements its prior cultivation license
and as a result, OGBC is allowed to sell cannabis directly to medical patients throughout Canada. Upon
obtaining its license, OGBC became the Company’s second wholly-owned licensed producer to receive a
sales license. On November 9, 2018, OGBC’s sales license was transitioned under the Cannabis Act into the
OGBC Production Licenses (as defined herein). See “Description of the Business – Regulatory Framework
in Canada – Licenses and Regulatory Framework”.
DESCRIPTION OF THE BUSINESS
Overview
Currently, Cronos Group sells dried cannabis, pre-rolls and cannabis oils through wholesale and direct-to-client
channels under its health and wellness brand, PEACE NATURALSTM, and under its two adult-use brands, COVETM
and SpinachTM. Cronos Group operates two wholly-owned License Holders, Peace Naturals and OGBC (see “–
Canadian License Holders”). Cronos Group has also established five strategic joint ventures in Canada, Israel,
Australia and Colombia (see “– Joint Ventures and International Activities”).
Canadian License Holders
Cronos Group operates two wholly-owned License Holders, namely, Peace Naturals, which has production facilities
near Stayner, Ontario, and OGBC, which has a production facility in Armstrong, British Columbia.
13
Peace Naturals
On October 31, 2013, Health Canada issued an initial license to Peace Naturals for activities related to the production
and sale of dried cannabis flower, which license has since been amended, supplemented and transitioned under the
Cannabis Act. In connection with this transition, Health Canada issued a standard cultivation license, standard
processing license and license for sale for medical purposes to Peace Naturals under the Cannabis Act, pursuant to
which Peace Naturals has the right to engage in, among other things, the cultivation, processing, distribution and sale
of dried cannabis flower, cannabis resin, cannabis seeds, cannabis plants and cannabis oil, among other prescribed
activities (the “Peace Naturals Production Licenses”).
On January 22, 2018, the Company announced that Peace Naturals received a dealer’s license pursuant to the Narcotic
Control Regulations (“NCR”) and the Controlled Drug and Substances Act (the “CDSA”) from Health Canada for
the possession, sale, transportation and delivery of controlled substances under the CDSA, including cannabis,
tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”), which license has since been transitioned under the
Cannabis Act. In connection with this transition, Health Canada issued a cannabis drug license to Peace Naturals under
the Cannabis Act (the “Peace Naturals Drug License,” together with the Peace Naturals Production Licenses, the
“Peace Naturals Licenses”), pursuant to which Peace Naturals has the right to engage in, among other things, the
possession of cannabis and sale of drugs containing cannabis.
OGBC
On February 26, 2014, Health Canada issued an initial cultivation license to OGBC, which license has since been
amended, supplemented and transitioned under the Cannabis Act. In connection with this transition, Health Canada
issued a standard cultivation license, a standard processing license and a license for sale for medical purposes to OGBC
under the Cannabis Act (the “OGBC Production Licenses”), pursuant to which OGBC has the right to engage in the
cultivation, processing, distribution and sale of dried cannabis flower, cannabis seeds, and cannabis plants among
other prescribed activities.
Joint Ventures and International Activities
The Company has entered into five strategic joint ventures:
• NatuEra Joint Venture. In August 2018, the Company announced a strategic joint venture with AGI, a leading
Colombian agricultural services provider with over 30 years of research, development and production operations
and expertise managing industrial scale horticultural operations for export from Colombia. Each of the Company
and AGI owns a 50% equity interest in NatuEra. Cronos Group will have three manager nominees on the board
of managers of NatuEra, while AGI will have four manager nominees on the board of managers. NatuEra intends
to develop, cultivate, manufacture and export cannabis-based medical and consumer products for the Latin
American and global markets. NatuEra plans to develop its initial cultivation and manufacturing operations with
a purpose-built, GMP-standard facility located in Cundinamarca, Colombia. Design of the facility is currently
underway, and construction of the facility remains subject to obtaining the relevant permits and other customary
approvals. In the second half of 2018, a wholly-owned subsidiary of NatuEra was granted a license to cultivate
non-psychoactive cannabis plants for production of seeds for planting and the manufacture of derivative products,
and a license to manufacture cannabis derivative products for domestic use and export. NatuEra is awaiting the
grant of a license to cultivate psychoactive cannabis. Commencement of operations at the facility will be subject
to obtaining the remaining appropriate licenses under applicable law. See “ – Licenses and Regulatory Framework
in Colombia – NatuEra Licenses” and “ – Production Facilities”.
14
• Cronos GrowCo Joint Venture. In July 2018, the Company announced a strategic joint venture with the
Greenhouse Partners, a leading Canadian large-scale greenhouse operator. Each of the Company and the
Greenhouse Partners owns a 50% equity interest in Cronos GrowCo and has equal representation on the board of
directors of Cronos GrowCo. Cronos GrowCo is constructing an 850,000 sq. ft. purpose-built, GMP-standard
greenhouse on approximately 100 acres of land acquired by Cronos GrowCo in Kingsville, Ontario. Once fully
operational, the greenhouse is expected to produce up to 70,000 kilograms of cannabis annually. The Company
expects to complete the superstructure of the greenhouse in the second half of 2019 and expects the greenhouse
to become operational in phases in 2020. Completed construction of the greenhouse is subject to obtaining the
necessary funding, the relevant building/occupancy permits and other customary approvals. Commencement of
operations at Cronos GrowCo will be subject to obtaining the appropriate licenses under applicable law. Cronos
GrowCo expects to utilize debt to fund a portion of the facility build-out. See “ – Regulatory Framework in
Canada” and “ – Production Facilities”.
• MedMen Canada. In March 2018, the Company announced a strategic joint venture with MedMen. Each of the
Company and MedMen owns a 50% equity interest in MedMen Canada and has equal representation on the board
of directors. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term
of 20 years. MedMen Canada is currently in the process of obtaining the necessary licenses, permits and retail
locations to create a premium MedMen branded retail chain in Canada, modelled after MedMen’s iconic retail
concept in Los Angeles, Las Vegas and Manhattan, in provinces where private retail cannabis sales are permitted
under applicable law. Commencement of operations will be subject to obtaining such licenses and permits. See
“Risk Factors – The laws, regulations and guidelines generally applicable to the cannabis industry are changing
and may change in ways currently unforeseen by us”.
• Cronos Australia. In February 2018, the Company announced a strategic joint venture in Australia with
NewSouthern for the research, production, manufacture and distribution of medical cannabis. Each of the
Company and NewSouthern owns a 50% equity interest in Cronos Australia and has equal representation on the
board of directors of Cronos Australia. The Company believes that Cronos Australia will serve as its hub for
Australia, New Zealand and South East Asia, bolstering the Company’s supply capabilities and distribution
network in the Australia and Asia-Pacific region. The Company is currently reviewing alternative facility designs
given current and anticipated market opportunities, which may include an expansion of the previously announced
plans for a 20,000 sq. ft. purpose-built indoor facility. In February 2018, the Company also announced the grant
of a medicinal cannabis cultivation license and a cannabis research license by the Australian ODC to Cronos
Australia. On June 19, 2018, the Company announced that Cronos Australia has been granted a medicinal
cannabis manufacture license by the Australian ODC. This is the final license necessary for domestic production
in Australia, which includes the medicinal cannabis cultivation license and research license. Cronos Australia has
received an import license from the ODC, together with all necessary permits, to import PEACE NATURALSTM
branded products for sale in the Australian medical market, under the terms of the relevant permits, while
construction of the Cronos Australia production facility is being completed. Arrangements for imports are in
progress. Cronos Australia has also received an export license from the ODC to export certain medicinal cannabis
products, subject to the receipt of all necessary permits. See “ – License and Regulatory Framework in Australia
– Cronos Australia Licenses” and “ – Production Facilities”.
• Cronos Israel. In September 2017, the Company announced a strategic joint venture in Israel with the Israeli
agricultural collective settlement Gan Shmuel for the production, manufacture and distribution of medical
cannabis. Cronos Israel consists of four companies: (i) cultivation (encompassing nursery and cultivation
operations), (ii) manufacturing, (iii) distribution and (iv) pharmacies. The Company holds a 70% equity interest
in the cultivation company and a 90% equity interest in each of the manufacturing, distribution and pharmacies
companies of Cronos Israel. Gan Shmuel holds the remaining equity interest in each of the four companies. Each
15
of Cronos Group and Gan Shmuel has one board member nominee on the board of directors of each of the four
companies, and Cronos Group has the right to nominate a further two members to the board of each company. As
long as Cronos Group has not exercised its right to nominate an additional director, its nominated director shall
have two votes. The initial phase of construction of Cronos Israel involves the construction of a 45,000 sq. ft.
greenhouse that is expected to produce up to 5,000 kilograms of cannabis annually and a 17,000 sq. ft.
manufacturing facility that will be utilized for analytics, formulation and research and development (“R&D”).
The Company anticipates that construction of the greenhouse will be complete in the first half of 2019 and
construction of the manufacturing facility will be complete in the second half of 2019. In early 2017, the Medical
Cannabis Unit of the Israeli Ministry of Health (the “Yakar”) granted Gan Shmuel preliminary licenses (“Israel
Codes”) to establish four distinct cannabis commercial operations: (i) propagation and breeding, (ii) commercial
cannabis cultivation, (iii) extraction, formulation and packaging and (iv) patient care and distribution. The Israel
Codes were successfully transferred to Cronos Israel on May 10, 2018. These Israel Codes are preliminary
licenses granted to successful applicants to construct facilities for cannabis operations. Commencement of
cultivation, manufacturing and distribution operations in Cronos Israel is subject to final inspection by the Yakar
and the issuance of final cannabis licenses. Subject to obtaining all necessary licenses and permits, the Company
intends to export medical cannabis products from Cronos Israel once production operations commence. See “ –
License and Regulatory Framework in Israel – Cronos Israel Licenses” and “ – Production Facilities”.
No U.S. Cannabis-Related Activities
On December 20, 2018 the Agricultural Improvement Act of 2018 was signed into law in the U.S., removing cannabis
with a dry weight THC concentration of less than 0.3% (“Hemp”) from the list of Schedule I controlled substances
under the U.S. Controlled Substances Act (the “CSA”). While a number of states in the U.S. have authorized the
cultivation, distribution or possession of cannabis to various degrees and subject to various requirements or conditions,
cannabis other than Hemp continues to be categorized in the U.S. as a controlled substance under the CSA. As such,
the cultivation, distribution and possession of cannabis other than Hemp violates federal law in the U.S. unless a U.S.
federal agency (e.g. the Drug Enforcement Agency) grants licenses for a specific use, such as research with cannabis.
The Company currently does not engage in any commercial activities related to the cultivation, distribution or
possession of cannabis in the U.S. The Ginkgo Strategic Partnership contemplates the performance of licensed R&D
activities in the U.S., in order to produce cultured cannabinoids, in full compliance with all applicable laws regarding
controlled substances.
Other International Operations
License Holders are permitted to export their intellectual property and genetics to other jurisdictions (subject to all
applicable import and export permits and requirements). The Company is focused on developing international
alliances and expansion. By leveraging the Company’s operational, manufacturing and educational outreach expertise,
quality assurance capabilities and experience in submitting regulatory licensing applications, the Company believes
that it is well-positioned to effectively penetrate international markets.
The Company believes there is an opportunity to leverage its expertise and its business model in other legal cannabis
markets around the world. Subject to regulatory approvals, strategic international business opportunities pursued by
the Company could include:
•
ownership of cannabis cultivation, sales operations and brands in countries outside of Canada (which have passed
legislation to legalize the cultivation, distribution and possession of cannabis at all relevant levels of government);
and
16
•
the export of medical cannabis to third-parties in countries outside of Canada (which permit the import of medical
cannabis).
The Company will only conduct business in jurisdictions where it is federally legal to do so and legislation permitting
the cultivation, distribution or possession of cannabis has been adopted at all applicable levels of government. The
Company believes that operating and investing in markets where such activity is federally illegal would breach the
Company’s legal and regulatory obligations; put the Company at risk of government regulatory actions or
investigations, penalties, fines and sanctions; increase exposure to reputational risk; limit the Company’s ability to
operate freely; potentially jeopardize the Company’s listing on major exchanges now and in the future; and limit the
Company’s access to capital. In addition, the Company remains committed to conducting business in jurisdictions
outside of Canada where such operations remain compliant with the Company’s Canadian listing obligations with the
TSX and NASDAQ.
Principal Products
Peace Naturals currently produces and sells numerous strain varieties of cannabis in three main product lines: dried
cannabis, pre-rolls and cannabis oil. OGBC currently produces and sells numerous strain varieties of dried cannabis
in bulk via intercompany sales to Peace Naturals for sales to its customers. Peace Naturals currently offers a variety
of strains of dried cannabis flower and strain specific cannabis oils. It intends to continue to establish a variety of
strains to cater to patient needs. OGBC has access to a smaller number of strains currently; however, strain sharing
between Peace Naturals and OGBC allows OGBC access to particular strains on an as needed basis.
The Company has a health and wellness brand for the Canadian and international medical markets. PEACE
NATURALS™ is a global health and wellness brand committed to producing high-quality cannabis and cannabis
products. PEACE NATURALS™ is focused on building and shaping the global medical cannabis market and
promoting a whole health approach to wellness, which emphasizes diet and lifestyle. The brand’s goal is to improve
the lives of others, one patient at a time.
In 2018, the Company launched two brands for the Canadian adult-use market:
• COVE™ is a premium positioned brand that was born in the Okanagan Valley in British Columbia, which is
known for producing some of the world’s finest cannabis. COVE™ products are hand-trimmed using only the
best colas of each harvest. By avoiding shortcuts like harsh refining processes, COVE™ is able to maintain the
natural balance of the plant across all of the brand’s terpene-rich cannabis extracts and brings the highest in quality
products to its consumers. The goal of this premium brand is to make each experience a discovery.
• Spinach™ is positioned as a mainstream adult-use brand with High Expectations™, geared towards a wide range
of consumers that don’t take life too seriously and are looking for entertaining, fun ways to enhance activities. A
fun, lighthearted and playful brand, Spinach™ is focused on offering Farm-To-Bowl™ products that bring friends
together and make experiences more enjoyable. Get Your Greens™.
The Company currently supplies the German market with dried cannabis flower through its distribution partner Pohl-
Boskamp and anticipates supplying other product forms (such as cannabis oils) upon receipt of the necessary
regulatory approvals and certifications (such as GMP certification for production processes related to cannabis oils).
The Company intends to develop new product formulations for cannabis-based products (such as edibles) if and when
authorized by Health Canada.
17
Principal Markets
Canadian Domestic Market
Currently, the Company, through its PEACE NATURALS™ brand, acquires Canadian medical clients through
physician and clinic referrals or by word-of-mouth recommendations from existing clients.
As the adult-use of cannabis products has been legalized in Canada, the Company has positioned itself to take
advantage of such market opportunities through the launch of the Company’s two brands for the Canadian adult-use
market: COVETM and SpinachTM. The Company currently sells cannabis for adult-use to the cannabis control
authorities in Ontario, British Columbia, Nova Scotia and Prince Edward Island and has secured listings with various
private retailers in Saskatchewan. Together, these five provinces represent approximately 58% of the Canadian
population. As the Company’s production capacity grows, the Company intends to explore expanding its distribution
into additional provinces and territories in Canada.
International Markets
The Company currently addresses medical cannabis markets in Germany by exporting dried cannabis flower produced
by Peace Naturals to its distribution partner Pohl-Boskamp. The Company also intends to distribute to the Israeli
medical cannabis market through the operations of Cronos Israel, once Cronos Israel is fully licensed and operational,
to the Latin American medical cannabis market through the operations of NatuEra, once NatuEra is fully licensed and
operational, and to the Polish market by exporting cannabis products through its distribution partner Delfarma, once
all necessary regulatory approvals to sell cannabis products in Poland are obtained. Finally, the Company intends to
meet demand in the Australian and Asian-Pacific medical cannabis markets through the operations of Cronos
Australia, once fully operational and licensed. In the interim, Cronos Australia has received an import license from
the ODC, together with all necessary permits, to import PEACE NATURALSTM branded products for sale in the
Australian medical market, under the terms of the relevant permits, while construction of the Cronos Australia
production facility is being completed. Arrangements for imports are in progress. Cronos Australia has also received
an export license from the ODC to export certain medicinal cannabis products, subject to the receipt of all necessary
permits. See “– Licenses and Regulatory Framework in Australia,” “– Licenses and Regulatory Framework in
Israel,”, “– Regulatory Framework in Germany for Imports.” and “ – Regulatory Framework in Poland for Imports.”
The Company continues to seek new international distribution channels in jurisdictions with federally legal medical
cannabis regulatory frameworks.
Distribution Methods
Cronos Group is developing a diversified global sales and distribution network by leveraging established partners for
their scale, salesforce and market expertise. The Company is also building a domestic distribution footprint through
the direct-to-client medical market and the adult-use market in Canada.
Distribution in Canada
Medical cannabis patients order product from the Company primarily through the Peace Naturals’ website or by phone.
Medical cannabis is and will continue to be delivered by secured courier and other methods permitted by the Cannabis
Act or future regulation. Peace Naturals’ prices vary based on growth time, cultivar type and market conditions.
Peace Naturals may from time to time offer volume discounts or promotional pricing permitted by the Cannabis Act.
18
Peace Naturals is also authorized for wholesale shipping of medical cannabis dried flower and cannabis oil to other
License Holders. Peace Naturals has completed several sales through its wholesale distribution channel and based on
current costs, the Company expects to continue with its wholesale distribution strategy, including through the Cura
Supply Agreement. This sales channel requires minimal selling, general and administrative costs over and above the
cost to produce plant cuttings and dried flower.
The Company currently conducts distribution of its two adult-use brands, COVETM and SpinachTM, in accordance with
the regulatory framework for adult-use cannabis established under the Cannabis Act. The Company has secured
listings and entered into binding Master Supply Agreements with the Ontario Cannabis Retail Corporation and the BC
Liquor Distribution Branch, has secured listings and Supplier Terms and Conditions with the Nova Scotia Liquor
Corporation and Prince Edward Island Liquor Corporation and has secured listings with various private retailers in
Saskatchewan. Pursuant to these agreements, Cronos Group currently offers dried flower, pre-rolls and cannabis oils
through both government-operated retail stores and online platforms and to private-sector retailers. As the Company’s
production capacity grows, the Company intends to explore expanding its distribution into additional provinces and
territories in Canada.
MedMen Canada is currently in the process of obtaining the necessary licenses, permits and retail locations to create
a premium MedMen branded retail chain in Canada, modelled after MedMen’s iconic retail concept in Los Angeles,
Las Vegas and Manhattan, in provinces where private retail cannabis sales are permitted under applicable law.
Commencement of distribution from MedMen Canada is subject to obtaining the necessary licenses and permits.
International Distribution Channels
Peace Naturals currently exports dried cannabis flower to Germany, and it is expected that Peace Naturals will export
dried cannabis to Poland, pursuant to export permits issued by Health Canada. PEACE NATURALSTM products are
distributed in the domestic German market through the Company’s distribution partner, Pohl-Boskamp, via its network
of pharmacies in Germany. PEACE NATURALSTM products are anticipated to be distributed in the domestic Polish
market through the Company’s distribution partner, Delfarma, via its network of pharmacies in Poland.
Currently in Israel, medical cannabis is provided to patients on a “direct to patient” distribution model, whereby
patients purchase medical cannabis directly from authorized medical cannabis suppliers after receiving a license from
the Israeli Health Ministry. In September 2017, a first class of physicians completed a course for approval of use of
medical cannabis, and 81 physicians were authorized to grant prescriptions for medical cannabis treatment. Cronos
Israel anticipates distributing medical cannabis products to patients directly once operations have commenced and
product is available. In addition, in April 2018 the Israeli Health Ministry launched a pilot project with the
participation of several pharmacies, which are allowed to supply medical cannabis products directly to patients by
prescription. The Company continues to monitor the regulatory framework in Israel if and when distribution by
pharmacies is more broadly permitted by the Israeli Ministry of Health.
Currently in Australia, medicinal cannabis is provided directly to patients and to physicians who have received
authorization to procure unregistered medicinal cannabis products. Subject to the completion of Cronos Australia’s
planned cultivation and manufacturing facility, the Company anticipates selling cannabis products into the domestic
Australian market directly to authorized patients and prescribing physicians. In addition, Cronos Australia has received
an import license from the ODC, together with all necessary permits from applicable Australian regulatory authorities,
to import PEACE NATURALSTM branded medicinal cannabis products for sale in the Australian market, under the
terms of the relevant permits, while the planned cultivation and manufacturing facilities are being constructed.
Arrangements for imports are in progress. Cronos Australia has also received an export license from the ODC to
export certain medicinal cannabis products, subject to the receipt of all necessary permits.
19
Production Facilities
Cronos Group is focused on establishing an efficient global production footprint by leveraging methodologies and
processes developed at Peace Naturals, the Company’s center of excellence, and then using such proprietary know-
how, best practices and procedures to inform and create production partnerships domestically and internationally.
The following chart summarizes the existing and anticipated production capacity at each of the Company’s facilities
that is currently constructed or under construction:
Facility(1)
Existing Capacity(3)
Peace Naturals – Buildings 1, 2, 3, 4(4)
Peace Naturals – Greenhouse
OGBC
Existing Capacity
Capacity in Progress
Cronos Israel – Phase I
Cronos Australia – Phase I
Cronos GrowCo
NatuEra(5)
Capacity in Progress
Pro Forma Capacity
Location
Stayner, ON, Canada
Stayner, ON, Canada
Armstrong, BC, Canada
Grow Type
Indoor
Greenhouse
Indoor
Hadera, Israel
Melbourne, VIC, Australia
Kingsville, ON, Canada
Cundinamarca, Colombia
Greenhouse
Indoor
Greenhouse
Greenhouse
Estimated
Annual Rated
Capacity
(in kg)(2)
38,500
1,500
150
40,150
5,000
2,000
70,000
*
77,000
Square
Footage
325,000
28,000
2,500
355,500
45,000
20,000
850,000
*
915,000
1,270,500
117,150
(1)
(2)
(3)
(4)
See “Corporate Structure – Intercorporate Relationships” for information related to the Company’s ownership interest in the above
facilities.
Estimated annual capacity is based on the Company’s experience growing a variety of cannabis strains at its facilities. Material
assumptions to derive estimated rated capacity for a given facility include, but are not limited to: the yield per square foot per
harvest, the number of harvests per year and the square feet of cultivation space occupied by the plants immediately prior to harvest.
Existing capacity is defined as facilities where construction is substantially complete, regulatory approvals required to commence
operations have been received and cannabis cultivation has commenced.
Building 4 is expected to become operational in phases. While construction of Building 4 is complete, the GMP-grade and
industrial-grade kitchen and certain additional cultivation and processing areas are in the process of being equipped and made
operational in phases. Certain research and development and laboratory areas in Building 4 are in final design phases.
(5) NatuEra is still in the design phase and initial planned capacity is yet to be finalized.
Peace Naturals
Situated on approximately 90 acres of land zoned and licensed for cannabis production, Peace Naturals operates four
fully operational production buildings (Building 1, Building 2, Building 3 and the Peace Naturals Greenhouse). The
Company recently completed the construction of Building 4, a partially-licensed 286,0000 sq. ft. production facility.
Peace Naturals’ production processes are GMP-certified under relevant European Economic Area GMP directives by
the national competent authority of Germany.
Buildings 1, 2 and 3, totaling approximately 39,000 sq. ft. of production space, are engaged in cultivation, processing,
extraction, finishing and packaging and shipping activities. The Peace Naturals Greenhouse is a 28,000 sq. ft.
greenhouse providing a year-round, low-cost supply of cannabis flower for extraction. The Peace Naturals Greenhouse
is designated as a research facility to pilot various production technologies. Any tests yielding favorable operational
improvements may then be disseminated to the Company’s other domestic and international facilities.
In August 2018, Peace Naturals received authorization from Health Canada to cultivate cannabis in Building 4, and
the building is expected to become operational in phases. Currently, Building 4 engages in the cultivation of cannabis
and produced its first harvest in December 2018. The Company expects all flower rooms to be populated in the first
20
half of 2019 and thereafter anticipates further improvements in yields towards full run-rate capacity as a result of
increasing efficiencies over time. Building 4 also engages in tissue culture and micro propagation, processing,
finishing and packaging and shipping activities.
It is expected that Building 4 will also engage in extraction, formulation and R&D activities following receipt of the
applicable regulatory approvals or amendments to the Peace Naturals Production Licenses. While construction of
Building 4 is complete, the GMP-grade and industrial-grade kitchen and certain additional cultivation and processing
areas are in the process of being equipped and made operational in phases. The R&D areas and certain laboratory
areas in Building 4 are in final design phases. In addition to the cultivation areas, Building 4 is expected to include:
•
designated areas for proprietary genetic breeding and genomic testing;
•
a GMP-grade cannabinoid and terpene extraction, processing and bottling facility;
•
a GMP-grade analytical testing laboratory for Canadian, European and other pharmacopeia standards;
•
a GMP-grade analytical and chemical laboratory for formulation, delivery system and product development;
• R&D grow and dry areas with compartmentalized chambers to conduct experiments on yield, genetic markers,
and metabolite/terpene enhancement techniques; and
a GMP-grade and industrial-grade kitchen.
•
OGBC
Situated on 30 acres of land, 13 acres of which are zoned and licensed for cannabis production, OGBC’s facility
primarily engages in cultivation and processing operations. OGBC currently engages in inter-company bulk transfers
of dried cannabis flower to Peace Naturals, where it is processed and packaged for sale at the Peace Naturals facility
and sold under the Company’s brand portfolio.
Cronos Australia
Cronos Australia’s first production campus will be located on 120 acres of land. It was anticipated that the initial phase
of Cronos Australia’s production platform would consist of a 20,000 sq. ft. purpose-built indoor facility with an
expected annual production capacity of 2,000 kilograms of cannabis. The Company is currently reviewing alternative
facility designs for Cronos Australia given current and anticipated market opportunities, which may include an
expansion of the previously announced plans for the 20,000 sq. ft. purpose-built indoor facility.
Cronos Israel
The initial phase of construction of Cronos Israel involves the construction of a 45,000 sq. ft. greenhouse that is
expected to produce up to 5,000 kilograms of cannabis annually and a 17,000 sq. ft. manufacturing facility that will
be utilized for analytics, formulation and R&D. The Company anticipates that construction of the greenhouse will be
complete in the first half of 2019 and construction of the manufacturing facility will be complete in the second half of
2019.
Cronos GrowCo
Cronos GrowCo is constructing an 850,000 sq. ft. purpose-built, GMP-standard greenhouse on approximately 100
acres of land acquired by Cronos GrowCo in Kingsville, Ontario. Once fully operational, the greenhouse is expected
to produce up to 70,000 kilograms of cannabis annually. The Company expects to complete the superstructure of the
greenhouse in the second half of 2019 and expects the greenhouse to become operational in phases in 2020. Completed
construction of the greenhouse is subject to obtaining the necessary funding, the relevant building/occupancy permits
and other customary approvals. Commencement of operations at Cronos GrowCo will be subject to obtaining the
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appropriate licenses under applicable law. Cronos GrowCo expects to utilize debt to fund a portion of the facility
build-out.
NatuEra
NatuEra plans to develop its initial cultivation and manufacturing operations with a purpose-built, GMP-standard
facility located in Cundinamarca, Colombia. Design of the facility is currently underway and construction of the
facility remains subject to obtaining the relevant permits and other customary approvals.
Research and Development Activities
Ginkgo Collaboration Agreement
In September 2018, the Company announced an R&D partnership with Ginkgo that could ultimately enable the
Company to produce certain cultured cannabinoids at commercial scale at a fraction of the cost of traditional
cultivation. These cultured cannabinoid molecules are identical to those produced by plants grown with traditional
cultivation, but are created by leveraging the power of biological manufacturing via fermentation. In addition to THC
and CBD, these cultured cannabinoids include rare cannabinoids that are economically impractical or nearly
impossible to produce at high purity and scale through traditional cultivation.
If the Ginkgo Strategic Partnership is ultimately successful, Cronos Group expects to be able to produce large volumes
of these cultured cannabinoids from custom yeast strains by leveraging existing fermentation infrastructure (i.e.
breweries or pharmaceutical contract manufacturing operations) without incurring significant capital expenditures to
build new cultivation and extraction facilities.
Pursuant to the collaboration and license agreement dated September 1, 2018 between Ginkgo and the Company (the
“Ginkgo Collaboration Agreement”), Ginkgo will work with the Company on the R&D of microorganisms capable
of producing certain target cannabinoids in a scalable and highly efficient manner. The Company will have the
exclusive right to use and commercialize the key patented intellectual property related to the production of the target
cannabinoids globally. Upon Ginkgo’s demonstration that the microorganisms are capable of producing the target
cannabinoids above the minimum productivity levels described below, the Company is required to issue up to
approximately 14.7 million common shares in the aggregate (subject to customary anti-dilution adjustments) in
accordance with the milestone allocations described below. The common shares allocated were based on the 60-day
volume weighted average closing price for the Company’s common shares of US$6.81 as of July 17, 2018, when the
letter of intent was executed by both parties. The transaction had an aggregate value of US$100.0 million as of July
17, 2018 assuming all milestones are met. Tranches of these common shares will be issued once each of the target
cannabinoids can be produced for less than US$1,000 per kilogram of pure cannabinoid at a scale of at least 200 liters
as follows: THC(A), 20%; CBD(A), 15%; CBC(A), 10%; CBG(A), 10%; THCV(A), 15%; CBGV(A), 10%;
CBDV(A), 10%; CBCV(A), 10% (each, an “Equity Milestone Event”). The Company and Ginkgo have targeted
three years to reach the Equity Milestone Events for each of the target cannabinoids. The Company will also fund
certain R&D and foundry expenses throughout the development process, which are expected to amount to
approximately US$22.0 million, subject to the achievement of certain milestones.
Ginkgo has undertaken to perform all of its R&D work in compliance with all applicable laws regarding controlled
substances. In November 2018, Ginkgo received from the U.S. Drug Enforcement Agency (the “DEA”) a DEA
Researcher (I) Controlled Substance Registration Certificate and a Researcher Controlled Substance Registration
Certificate from the Massachusetts Department of Public Health for the conduct of the specified research involving
cannabinoids. The Company intends to produce and distribute the target cannabinoids globally, where legally
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permissible, and has received confirmation from Health Canada that this method of production is permitted under the
Cannabis Act.
Technion Research Agreement
In October 2018, the Company announced it had entered into a sponsored research agreement with Technion to explore
the use of cannabinoids and their role in regulating skin health and skin disorders. The preclinical studies will be
conducted by Technion over a three-year period and will focus on three skin conditions: acne, psoriasis and skin repair.
Research will be led by Technion faculty members Dr. David “Dedi” Meiri and Dr. Yaron Fuchs, two of the world’s
leading researchers in cannabis and skin stem cell research, respectively. Dr. Meiri heads the Laboratory of Cannabis
and Cancer Research with vast experience in cannabis and endocannabinoid research. Dr. Fuchs heads the Laboratory
of Stem Cell Biology and Regenerative Medicine with years of experience in the biology of the skin and its
pathologies. Development and implementation of the research will be conducted at Technion’s Laboratory of Cancer
Biology and Cannabis Research and the Lorry I. Lokey Interdisciplinary Center of Life Sciences and Engineering in
Haifa, Israel.
Specialized Knowledge, Skills, Resources & Equipment
Knowledge with respect to cultivating and growing cannabis is important in the cannabis industry. The nature of
growing cannabis is not substantially different from the nature of growing other agricultural products. Variables such
as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to
produce consistent product and to avoid contamination. The product is cut, sorted and dried under defined conditions
that are established to protect the activity and purity of the product. The post-processing of the Company’s cannabis
into dried flower, pre-rolls and oils involves specialized skills and knowledge with respect to procurement,
manufacturing, automation, assembly line optimization as well as bottling, packaging and labeling. Once processing
is complete, each and every processing batch is subject to full testing against stringent quality specifications set for
activity and purity.
The Company grows the primary component of its finished products, namely cannabis. The Company’s cultivation
operations are dependent on a number of key inputs and their related costs including raw materials and supplies related
to its growing operations, as well as electricity, water and other utilities. See “Risk Factors – Risks Related to the
Industry and the Company’s Business - Our cannabis cultivation operations are vulnerable to rising energy costs and
dependent upon key inputs”.
Staff with suitable horticultural and quality assurance expertise are generally available on the market in the
jurisdictions in which the Company currently has or anticipates cultivation activity, including in Canada, Israel,
Australia and Colombia. The Company also requires client care staff, which will grow as its business grows.
Customer care staff is a skillset that is also generally available in the market in the jurisdictions in which the Company
currently houses or anticipates housing such staff, including in Canada, Israel, Australia and Colombia.
Equipment used is specialized but is readily available and not specific to the cultivation of cannabis. Cronos Group
uses a mix of automated and semi-automated equipment to process and package its products, and the Company is
designing continuous flow automation lines and customized machinery to produce pre-rolls in order to increase
capacity and efficiency. The Company does not anticipate any difficulty in obtaining equipment as needed in the
jurisdictions in which the Company anticipates need for such equipment, including in Canada, Israel, Australia and
Colombia.
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The Company anticipates an increased demand for skilled manpower, energy resources and equipment as Building 4
continues to become fully operational and in connection with Cronos Israel and Cronos GrowCo facilities currently
under construction. The Company has recruited and will continue to recruit managers with food, pharmaceutical,
manufacturing, engineering, and logistics experience to further scale its manufacturing and production operations.
Competitive Conditions
To the knowledge of the Company, only a limited number of licenses are issued to new License Holders by Health
Canada on a monthly basis, if any, and the application process takes a significant amount of time to complete. Further,
as Health Canada licenses are limited to individual properties, if a License Holder reaches production capacity at its
licensed site, it must apply to Health Canada for a new license in order to expand production to another site. More
information on the current list of License Holders can be found on Health Canada’s website.
On October 17, 2018, the Cannabis Act came into force. For additional information, see “– Regulatory Framework in
Canada – Recent Regulatory Developments”. The introduction of an adult-use model for cannabis production and
distribution may impact the medical cannabis market. The impact of this development may be negative for the
Company and could result in increased levels of competition in its existing medical market and/or the entry of new
competitors in the overall cannabis market in which the Company operates.
The Company believes that, due to the extensive regulatory restrictions and significant capital required for facilities
and operations, the number of License Holders will remain relatively small in the short term, however Health Canada
may accelerate its processing of applications which may result in the acceleration of the rate at which applicants
become License Holders. Further, under the Cannabis Act, production licenses have been split into various categories,
which may result in additional standard and micro cultivation licenses being issued. As the demand for cannabis
increases as a result of the legalization of adult-use cannabis, application volumes increase and the application backlog
with Health Canada is processed, the Company believes that new competitors will enter the market. The principal
competitive factors on which the Company competes with other License Holders are the price and quality of its
cannabis-based products (and associated goodwill and brand recognition), physician familiarity and willingness to
prescribe the Company’s cannabis-based products, and the Company’s customer services. While the Company prices
its cannabis products according to the Company’s perception of market demand, given its relatively low cost of
production (based on management’s assessment of the Company’s own financial information against that of all
publicly-traded License Holders), it is expected that the Company will be able to enjoy pricing flexibility while
maintaining its margins.
In addition, the Cannabis Act contemplates holders of cultivation licenses conducting both outdoor and indoor
cultivation of cannabis. The implications of outdoor cultivation are not yet known, but such a development could be
significant as it may reduce start-up capital required for new entrants in the cannabis industry. It may also ultimately
lower prices as capital expenditure requirements related to growing outside are typically much lower than those
associated with indoor cultivation.
The Company has an established relationship with German based pharmaceutical manufacturer and distributor, Pohl-
Boskamp. The Company is engaged in active exports of medicinal cannabis products from Canada to Germany for
distribution by Pohl-Boskamp to authorized medicinal patients, through Pohl-Boskamp’s existing pharmacy customer
network. Medicinal cannabis in Germany is regulated as a pharmaceutical raw-material, as opposed to a finished
medicine requiring clinical trials. The barriers to entry in Germany for a medicinal cannabis company differ from
those in Canada, whereby the manufacturer of the medicinal cannabis products must be a GMP certified manufacturer
from a federal certifying authority. In addition, a foreign manufacturer must identify a licensed importer of record
who is licensed to hold the relevant types of pharmaceutical products, then work with that importer to obtain import
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and marketing authorizations for the specific products. The medicinal cannabis products themselves must meet the
strict requirements of cannabis drug monographs which are created and published by the relevant German health
ministries. Currently there are only a handful of Canadian companies that meet the requirements to manufacture
medicinal cannabis products for sale to the German market.
The ongoing tender process in Germany commenced in 2018, pursuant to which companies were able to apply to the
Federal Institute for Drugs and Medical Devices (the “BfArM”) to receive authorization to cultivate a limited quantity
of medicinal cannabis in Germany to be sold domestically to authorized medicinal patients. The BfArM has announced
that a decision with respect to tenders will be made in the second quarter of 2019 and that first harvests of cannabis
cultivated in Germany are expected at the end of 2020. However, the BfArM clarified that the import of medicinal
cannabis will still be possible.
Protection of Intangible Assets
The ownership and protection of our intellectual property rights is a significant aspect of our future success. Currently
we rely on trade secrets, technical know-how and proprietary information. We protect our intellectual property by
seeking and obtaining registered protection where possible, developing and implementing standard operating
procedures to protect trade secrets, technical know-how and proprietary information and entering into agreements
with parties that have access to our inventions, trade secrets, technical know-how and proprietary information, such
as our partners, collaborators, employees and consultants, to protect confidentiality and ownership. We also seek to
preserve the integrity and confidentiality of our inventions, trade secrets, trademarks, technical know-how and
proprietary information by maintaining physical security of our premises and physical and electronic security of our
information technology systems.
In addition, we have sought trademark protection in many countries, including Canada, Australia and countries in the
European Union. Our ability to obtain registered trademark protection for cannabis-related goods and services, in
particular for cannabis itself, may be limited in certain countries outside of Canada, including the U.S., where
registered federal trademark protection is currently unavailable for trademarks covering the sale of cannabis products
(a controlled substance); and including the European Union, where laws on the legality of cannabis use are not
uniform, and trademarks cannot be obtained for products that are “contrary to public policy or accepted principles of
morality”. Accordingly, our ability to obtain intellectual property rights or enforce intellectual property rights against
third party uses of similar trademarks may be limited in certain countries.
Germplasm, including seeds, clones and cuttings, is the genetic material used in new cannabis varieties and hybrids.
We use advanced breeding technologies to produce cannabis germplasm (hybrids and varieties) with superior
performance. We rely on parental varieties for the success of our breeding program. We seek to protect our parental
germplasm as appropriate, relying on intellectual property rights, including rights related to inventions (patents and
plant breeders’ rights), trade secrets, technical know-how, trademarks and proprietary information.
We also seek to protect our parental germplasm, hybrids and varieties from pests and diseases and enhance plant
productivity and fertility, and we research products to protect against crop pests and fungus.
Employees
As of December 31, 2018, Cronos Group Inc. employed 37 employees and six fulltime contractors, Peace Naturals
employed 244 employees, and OGBC employed 10 employees.
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Senior Management and Board of Directors
The Board was reconstituted in connection with and effective as of the closing of the Altria Investment, whereby the
number of directors on the Board was increased from five to seven, Mr. Michael Coates and Mr. Alan Friedman
resigned as directors and Mr. Kevin C. Crosthwaite, Ms. Bronwen Evans, Mr. Murray R. Garnick and Mr. Bruce A.
Gates were appointed to serve as directors on the Board. As of the date of this AIF, the Board has seven members and
is comprised of Mr. Michael Gorenstein (Chair of the Board), Mr. Jason Adler (a member of the Audit Committee),
Mr. James Rudyk (Lead Director, Chair of the Audit Committee and a member of the Compensation Committee), Mr.
Kevin C. Crosthwaite (Chair of the Compensation Committee), Ms. Bronwen Evans (a member of the Audit
Committee), Mr. Murray R. Garnick and Mr. Bruce A. Gates. Mr. Michael Coates will continue to serve as a Canadian
regulatory advisor to the Board.
As of the date of this AIF, the Company’s executive officers consist of Mr. Michael Gorenstein (Chief Executive
Officer and President), Mr. William Hilson (Chief Financial Officer), Mr. David Hsu (Chief Operating Officer) and
Ms. Xiuming Shum (General Counsel and Corporate Secretary). Effective April 15, 2019, Jerry Barbato, most recently
Senior Director of Corporate Strategy at Altria, will assume the role of Chief Financial Officer of the Company from
William Hilson, who as of April 15, 2019 will serve as the Company’s Chief Commercial Officer, a newly created
role. As Chief Commercial Officer, Mr. Hilson will report to the Chief Executive Officer and be responsible for further
enhancing the commercial strategy as well as the product and research development priorities of the Company.
Minority Investments
Prior to the acquisition of OGBC in November of 2014 (as described above), the Company exclusively invested in
companies either licensed, or actively seeking a license, to produce legal medical cannabis. As of the date of this AIF,
the Company has divested its previously held minority interests in most investees with active licenses under the
Cannabis Act in Canada.
See Notes 10 and 11 of the Company’s audited consolidated financial statements as at and for the fiscal years ended
December 31, 2018 and 2017 (the “Annual Financial Statements”) for additional information.
Regulatory Framework in Canada
Licenses and Regulatory Framework
On October 17, 2018, the Cannabis Act and the Cannabis Regulations (the “Cannabis Regulations”) came into force.
The Cannabis Regulations establish six classes of licenses: (i) cultivation; (ii) processing; (iii) sale for medical
purposes; (iv) analytical testing; (v) research; and (vi) cannabis drug. The Cannabis Regulations also create subclasses
for cultivation licenses (standard cultivation, micro-cultivation and nursery) and processing licenses (standard
processing and micro-processing). Different licenses and each sub-class therein carry differing rules and requirements
that are intended to be proportional to the public health and safety risks posed by each category and sub-class. The
Cannabis Act includes transitional provisions applicable to previous licenses. Due to the repeal of the Access to
Cannabis for Medical Purposes Regulations (“ACMPR”) and the amendment of the CDSA and NCR, the Cannabis
Act provides that certain licenses issued under that legislation are deemed to be licenses under the Cannabis Act. Peace
Naturals and OGBC have successfully transitioned their licenses through the Cannabis Tracking and Licensing System
(the “CTLS”) to various licenses under the Cannabis Act, which permit them to conduct the activities described below,
among others.
The Peace Naturals Production Licences and Peace Naturals Drug Licence permits Peace Naturals to engage in a
number of regulated activities under the Cannabis Act, including the cultivation, processing and medical sale of dried
26
cannabis, fresh cannabis, cannabis plants, cannabis plant seeds and cannabis oil, as well as the sale of drugs containing
cannabis, subject to certain conditions.
The OGBC Production Licences permit OGBC to engage in a number of regulated activities under the Cannabis Act,
including the cultivation, processing and medical sale of dried cannabis, fresh cannabis, cannabis plants, and cannabis
plant seeds, subject to certain conditions.
Recent Regulatory Developments
Federal Developments
The Cannabis Act provides a licensing and permitting scheme for, among other things, the cultivation, processing,
testing, packaging, labelling, distribution, sale, possession and disposal of adult-use cannabis, implemented by
regulations made under the Cannabis Act. As discussed below, the Cannabis Regulations include, among other things,
strict specifications for the plain packaging and labelling and analytical testing of all cannabis products as well as
stringent physical and personnel security requirements for all federally licensed cultivation, processing and sales sites.
Security Clearances
Certain people associated with licensed producers, including, but not limited to, directors and officers of a License
Holder and any organization that controls the License Holder, the key positions identified by license class (e.g. master
grower, quality assurance person, head of security), and any individual or position specified by the Minister pursuant
to Section 67(2) of the Cannabis Act must hold a valid security clearance issued by the Minister. Under the Cannabis
Regulations, the Minister may refuse to grant security clearances to individuals with associations to organized crime
or with past convictions for, or an association with, drug trafficking, corruption or violent offences, among other
reasons. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of
cannabis, or small-scale cultivation of cannabis plants) are not automatically precluded from participating in the legal
cannabis industry. The grant of security clearance to such individuals is at the discretion of the Minister and such
applications will be reviewed on a case-by-case basis.
Cannabis Tracking System and Reporting
Under the Cannabis Act, the Minister is authorized to establish and maintain a national cannabis tracking system.
The CTLS has since been established to create a seed to sale tracking system to track cannabis throughout the supply
chain to help prevent diversion of cannabis into, and out of, the illegal market. Under this tracking system, certain
License Holders are required to submit monthly reports to Health Canada, among other things. The CTLS applies to
•
•
•
holders of federally issued licenses for cultivation, processing and sale for medical purposes, which are
required to provide information to the Minister;
public provincial and territorial bodies that are authorized to sell cannabis under a provincial and territorial
act, which are required to provide information to the Minister; and
private distributors and retailers, which are required to provide data to the public body authorized to sell
cannabis or that authorizes sale under provincial and territorial legislation (typically a crown corporation or
a provincial ministry).
The information required to be reported pursuant to the CTLS is extensive.
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Cannabis Products
The Cannabis Act and the Cannabis Regulations set out certain requirements for the sale of cannabis products at the
retail level and will initially permit the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and
cannabis seeds, including in “pre-rolled” and capsule form. The THC content of oil and serving size of certain cannabis
products is limited by the Cannabis Regulations.
While the sale of dried cannabis, fresh cannabis, cannabis seeds, plants and oil is currently permitted under the
Cannabis Act, the sale of edibles containing cannabis and cannabis concentrates are not. On December 22, 2018, the
Canadian federal government published the draft of the proposed Regulations Amending the Cannabis Regulations in
the Canada Gazette (the “Further Regulations”). The Further Regulations propose amending the Cannabis Act and
Cannabis Regulations to, among other things, allow the production and sale of extracts (including concentrates),
edibles and topicals in addition to the currently permitted product forms. The Further Regulations were subject to a
60 day comment period which has now concluded, and they may be further amended before implementation based on
the comments received.
Packaging and Labelling
The Cannabis Regulations set out strict requirements pertaining to the packaging and labelling of cannabis products.
These requirements are intended to promote informed consumer choice and allow for the safe handling and
transportation of cannabis, while also reducing the appeal of cannabis to youth and promoting safe consumption.
Cannabis package labels must include specific information, including, among other things, the: (i) product source
information, including the class of cannabis and the name, phone number, and email of the cultivator or processor, as
applicable; (ii) a mandatory health warning, rotating between Health Canada’s list of standard health warnings; (iii)
the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. The
Cannabis Regulations also establish strict limits that apply to the use of colors, images, and brand elements that may
prevent or inhibit product differentiation.
Advertising and Promotions
The Cannabis Act prohibits any promotion, packaging and labelling of cannabis that could be appealing to young
persons or encourage its consumption, while allowing consumers to have access to information with which they can
make informed decisions about the consumption of cannabis. In particular, the Cannabis Act provides for broad
restrictions on the promotion, packaging and labelling, display, and sale and distribution of cannabis and cannabis
accessories. Subject to additional restrictions imposed by the provinces and territories, the promotion, packaging and
labelling, display and sale and distribution of cannabis and cannabis accessories is strictly controlled to prevent persons
under the age of 18 from being exposed to such activities and to prevent the encouragement of consumption of
cannabis. As such, the promotion, packaging and labelling, display and sale and distribution of cannabis and cannabis
accessories takes place in a highly regulated environment which will restrict persons to brand and market their products
in a manner consistent with other industries which are not subject to such controls.
Cannabis for Medical Purposes
Part 14 of the Cannabis Regulations sets out the regime for medical cannabis following legalization, which is similar
to the ACMPR, with adjustments to create consistency with rules for non-medical use, improve patient access, and
reduce the risk of abuse within the medical access system. Patients who have the authorization of their healthcare
practitioner will continue to have access to medical cannabis, either purchased directly from a License Holder, or by
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registering to produce a limited amount of cannabis for their own medical purposes or designating someone to produce
cannabis for them.
With respect to starting materials for personal production, such as plants or seeds, they must be obtained from License
Holders. It is possible that this could significantly reduce the addressable market for the Company’s products and
could materially and adversely affect the business, financial condition and results of operations of the Company. That
said, management of the Company believes that many patients may be deterred from opting to proceed with these
options since such steps require applying for and obtaining registration from Health Canada to grow cannabis, as well
as the up-front costs of obtaining equipment and materials to produce such cannabis. See “– Competitive Conditions”.
Export Permits
Export permits issued by Health Canada are specific to each shipment and may only be obtained for medical of
scientific purposes. To apply for a permit to export cannabis, a License Holder must submit significant information
to the Minister including information about the substance to be exported (including description, intended use, quantity)
and the importer. As part of the application, applicants are also required to provide a copy of the import permit issued
by a competent authority in the jurisdiction of final destination and to make a declaration to the Minister that the
shipment does not contravene the laws of the jurisdiction of the final destination or any country of transit or
transshipment. Export permits are time limited and the Minister of Health may include conditions that the export
permit holder must meet in order to comply with an international obligation, or reduce any potential public health,
safety or security risk, including the risk of the exported substance being diverted to an illicit market or use. Moreover,
the jurisdiction of import may impose additional obligations on a Canadian exporter. Export permit holders must
also comply with post-export reporting requirements.
Provincial and Territorial Developments
While the Cannabis Act provides for the regulation by the Canadian federal government of, among other things, the
commercial cultivation and processing of cannabis and the sale of medical cannabis, the various provinces and
territories of Canada regulate certain aspects of adult-use cannabis, such as distribution, sale, minimum age
requirements, places where cannabis can be consumed, and a range of other matters.
The governments of every Canadian province and territory have implemented their regulatory regimes for the
distribution and sale of cannabis for adult-use purposes. Most provinces and territories have announced a minimum
age for possession and consumption of 19 years old, except for Québec and Alberta, where the minimum age is 21
and 18, respectively. A summary of the legislative framework in each province and territory is set out below. There is
no guarantee that the provincial and territorial frameworks supporting the legalization of cannabis for adult-use in
Canada will continue on the terms outlined below or at all, or will not be amended or supplemented by additional
legislation.
British Columbia
The distribution and sale of adult-use cannabis in British Columbia is primarily governed by the Cannabis Control
and Licensing Act, the Cannabis Distribution Act and the related regulations. The British Columbia Liquor
Distribution Branch is the province’s wholesale distributor of cannabis and operates retail and online sales. Private
retail stores are permitted and are licensed by the British Columbia Liquor and Cannabis Regulation Branch.
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Alberta
The distribution and sale of adult-use cannabis in Alberta is primarily governed by the Gaming, Liquor and Cannabis
Act and the related regulations. The Alberta Gaming, Liquor and Cannabis Commission (the “AGLC”) is the sole
wholesale distributor of cannabis in the province. Sales of cannabis are permitted through privately run retail stores
and online by the AGLC.
Saskatchewan
The distribution and sale of adult-use cannabis in Saskatchewan is primarily governed by The Cannabis Control
(Saskatchewan) Act and the related regulations. Both the wholesale and retail sale of cannabis (both instore and online)
are conducted by private companies in Saskatchewan, which are regulated by the Saskatchewan Liquor and Gaming
Authority.
Manitoba
The distribution and sale of adult-use cannabis in Manitoba is primarily governed by the Liquor, Gaming and
Cannabis Control Act and the related regulations. Cannabis in the province is distributed by the Manitoba Liquor and
Lotteries Corporation. Retail and online sales of cannabis are conducted by private retailers under the regulation of
the Liquor, Gaming and Cannabis Authority of Manitoba.
Ontario
The distribution and sale of adult-use cannabis in Ontario is primarily governed by the Cannabis Control Act, 2017,
the Cannabis Licence Act, 2018 and the related regulations. The Ontario Cannabis Retail Corporation is the wholesale
distributor of cannabis and conducts all online sales in the province. Private retail is expected to be permitted by April
2019 and will be regulated by the Alcohol and Gaming Commission of Ontario (the “AGCO”). Only twenty-five
private stores will be licensed by the AGCO for an initial period, with more expected to follow. The Ontario Cannabis
Store provides online sales of adult-use cannabis in the interim.
Québec
The distribution and sale of adult-use cannabis in Quebec is primarily governed by the Cannabis Regulation Act and
the related regulations. The Société Québécoise du Cannabis is the exclusive distributor of cannabis in the province
and is the sole retail and online vendor.
New Brunswick
The distribution and sale of adult-use cannabis in New Brunswick is primarily governed by the Cannabis Control Act
and the related regulations. The distribution and sale of cannabis, both online and instore, is exclusively conducted by
the New Brunswick Cannabis Management Corporation.
Nova Scotia
The distribution and sale of adult-use cannabis in Nova Scotia is primarily governed by the Cannabis Control Act and
the related regulations. Adult-use cannabis is distributed and sold at retail locations and online by the Nova Scotia
Liquor Corporation.
30
Newfoundland and Labrador
The distribution and sale of adult-use cannabis in Newfoundland and Labrador is primarily governed by the Cannabis
Control Act and the related regulations. Adult-use cannabis is sold through private stores, with the Newfoundland and
Labrador Liquor Corporation (“NLC”) conducting online sales and regulating distribution. The NLC also has the
option to open public stores in areas that do not attract private retailers.
Prince Edward Island
The distribution and sale of adult-use cannabis in Prince Edward Island is primarily governed by the Cannabis Control
Act and the related regulations. Cannabis is sold at retail locations and online by the PEI Cannabis Management
Corporation.
Yukon
The distribution and sale of adult-use cannabis in Yukon is primarily governed by the Cannabis Control and
Regulation Act and the related regulations. The Yukon Liquor Corporation is responsible for distributing and selling
cannabis instore and online, with private retail contemplated in the future.
The Northwest Territories
The distribution and sale of adult-use cannabis in the Northwest Territories is primarily governed by the Cannabis
Products Act and related regulations. The Northwest Territories Liquor Commission is responsible for the distribution
and sale of cannabis through existing liquor stores and online sales, with private retail contemplated in the future.
Nunavut
The distribution and sale of adult-use cannabis in Nunavut is primarily governed by the territorial Cannabis Act. At
this time, the Nunavut Liquor and Cannabis Commission has designated an agent to provide cannabis in the territory
through online sales but has issued a request for proposals for other potential suppliers.
Licenses and Regulatory Framework in Australia
Legislation to permit the cultivation of cannabis for medicinal and related research purposes was passed by the
Australian Parliament on February 29, 2016, with amendments related to licensed domestic cultivation coming into
effect on October 30, 2016.
Access by patients to medicinal cannabis in Australia is highly regulated. The two principal governmental agencies
which oversee the federal medicinal cannabis regime are the Therapeutic Goods Administration (the “TGA”) and the
Australian Office of Drug Control (the “ODC”) (although there is also a secondary level of permits issued by state
level governments). Similar to the legislation in Canada, the legislation which governs the use of medicinal cannabis
in Australia creates exemptions to existing narcotic control laws overseen by the TGA, which permit patients to access
cannabis through a prescribed process under the supervision of a treating physician, known as the “Special Access
Scheme”.
Cannabis grown for medicinal purposes in Australia is subject to stringent security and quality control measures. In
order to cultivate, produce and manufacture medicinal cannabis and medicinal cannabis-related products in Australia,
a license granted by the Australian federal government is required. There are three categories of licenses relating to
the cultivation and manufacture of cannabis-derived medications – medicinal cannabis (cultivation and production),
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cannabis research (cultivation and production) and manufacturing. Cultivation and production permits regulate
matters such as the types of cannabis plants that can be cultivated and the quantities of cannabis and cannabis resin
that can be produced. Manufacturing permits regulate the types and quantities of drugs that can be manufactured.
The ODC grants such licenses to applicants after an application and review process. The ODC also grants specific
cannabis research licenses for research activities relating to cannabis.
In order to export cannabis from Canada to Australia for sale through licensed channels, an applicant is required to
obtain permits in both Canada and Australia. In Australia, the ODC issues import licenses to an applicant which is
capable of receiving and storing narcotics and issues import permits that authorize the import of specific shipments of
cannabis or cannabis-derived medication into Australia. In Canada, Health Canada issues export licenses under the
Cannabis Act. Assuming an applicant has obtained the necessary Australian import license, and is otherwise in
compliance with applicable laws (including export laws of its local jurisdiction), it may import products into Australia
for sale. Regulatory requirements in Australia also require an importer to be the “sponsor” of the medicinal cannabis
products with the TGA. A sponsor is responsible for ensuring their medicinal cannabis products comply with all
applicable quality and manufacturing standards in addition to TGA requirements, including pharmacovigilance
reporting.
Cronos Australia Licenses
Cronos Australia – Operations Pty Ltd (Cronos Australia) , a wholly-owned subsidiary of Cronos Australia has been
granted a medicinal cannabis cultivation license under Section 8F, a cannabis research license under Section 9J and a
manufacture license under section 11H of the Narcotic Drugs Act 1976 (collectively, the “Cronos Australia
Licenses”) by the ODC. As a consequence of the receipt of the Cronos Australia Licenses, Cronos Australia will be
able to commence cultivation, sale or distribution of medicinal cannabis in Australia (subject to receipt of all necessary
permits from the ODC) once the construction of the Cronos Australia facility is completed.
Cronos Australia has also received an import license from the ODC, together with all necessary permits from
applicable Australian regulatory authorities, to allow it to import PEACE NATURALSTM branded medicinal products
for sale in the Australian market, under the terms of the relevant permits, while construction of the Cronos Australia
production facility is being completed. Cronos Australia has also received an export license from the ODC to export
certain medicinal cannabis products, subject to the receipt all necessary permits.
Under the Narcotic Drugs Act 1967 and the Narcotic Drugs Regulation 2016, a medicinal cannabis license holder is
required to comply with several conditions and requirements under the act and the regulations, including:
• Security: license holders are required to demonstrate experience and capabilities to ensure employee and
community safety during the production of medicinal cannabis. This includes the physical security of the
premises and facilities. License holders must provide a detailed security plan highlighting a sophisticated
infrastructure to ensure compliance with state and federal security requirements. The license holder must also
provide detailed evidence of established relationships and engagement with any third-party providers, including
but not limited to security monitoring stations, waste management services, and transportation/distribution
services.
• Personnel: license holders are required to detail their process for identifying and maintaining suitable staff for the
period of their license, to mitigate potential risks and to ensure compliance at all times under the Narcotic Drugs
Act 1976. This includes establishing a proven staffing policy with specific requirements for new employees and
continuous checks of existing employees.
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• Record-keeping: license holders are required to provide detailed processes and solutions for maintaining pertinent
records for the reconciliation and oversight of all activities, produced batches, and cannabis sales. The license
holder is required to demonstrate a thorough understanding of operational workflow with controlled substances,
provide insight into the stages at which records are taken and the systems through which those records are taken
and maintained.
• Quality assurance: license holders are required to demonstrate their commitment to quality control and quality
assurance for the products being produced by providing detailed plans and standard operating procedures for
facility design, workflow, sanitation, and control check-points. The license holder is also required to show
established agreements with testing facilities, as well as detailed descriptions of the types of product testing being
performed. Additionally, the TGA also requires manufacturers of medicinal cannabis to hold a GMP license.
• Corporate control: individuals who will have control over the organization, including but not limited to directors,
officers and majority shareholders, must complete national criminal record checks. The individual must show
evidence of the contractual obligation to one another and to the organization. These individuals are required to
complete ongoing record checks at regular intervals, and any changes to the structure must be submitted and
approved by the ODC. Those issued a license have demonstrated that key stakeholders meet the strict
requirements set forth by the ODC.
• Commitment to on-going research (in relation to the cannabis research license): license holders are required to
provide a full and complete research proposal before they can be issued a cannabis research license. The research
proposal is reviewed in its entirety, and identifies the third-parties and committees who will be involved in the
research, and analyses of the results, to be undertaken at the premises. The ODC and delegates review these
research proposals for efficacy and ensure that the research aligns with the objectives of advancing the Australian
medicinal cannabis industry.
Licenses and Regulatory Framework in Israel
In March 2017, the Israeli Health Ministry announced a new cannabis licensing regime, under which new market
entrants were encouraged to apply for various licenses which were no longer vertically integrated. Previously, in June
2016, alongside the growing use and demand for medical cannabis, the Israeli government published Resolution No.
1587, which established a new regulatory framework for the “medicalization” of cannabis (“Resolution 1587”). The
competent regulatory authority in Israel is the Yakar, the medical cannabis unit within the Israeli Health Ministry.
Since March 2017, the Yakar has issued a number of provisional cultivation licenses to applicants to develop
production facilities. Final approvals for all stages of the cultivation, production, marketing and distribution of
cannabis products are subject to compliance with all regulatory requirements. This process involves agricultural,
security and production protocols and standards. Once applicants have completed construction of their production
facilities and meet all required agricultural and security rules, the Yakar will grant approval to commence and conduct
actual cannabis operations.
In December 2018, the Israeli Parliament (the “Knesset”) approved an amendment to the Dangerous Drugs Ordinance
– 1973, which, amongst other matters, regulates medical cannabis (the “Dangerous Drugs Ordinance
Amendment"). The Dangerous Drugs Ordinance Amendment will enter into effect on May 1, 2019. The Dangerous
Drugs Ordinance Amendment sets the authorities and enforcement responsibilities of each of the Israeli Health
Ministry and the Israeli Police relating to the matter. The Dangerous Drugs Ordinance Amendment provides that the
Director General of the Israeli Health Ministry (or his or her designee) has the authority to grant licenses to engage in
the various stages of cultivating, developing and commercializing cannabis, based on his/her discretion. The grant of
33
any such licenses will be conditioned upon meeting certain security and protection conditions to be set by an
authorized officer of the Israeli Police. Further, the Director General of the Israeli Health Ministry (or his or her
designee) may grant any license for cannabis operations only after the authorized officer of the Israeli Police has
recommended and approved the grant of such license.
In order to enforce the provisions of the Dangerous Drugs Ordinance Amendment, the Israeli Police has the authority,
in respect of any given license holder, to enter into its place of business, carry out necessary examinations, demand
documents from and, if needed, act in order to halt the activity of the license holder’s operations.
In January 2019, the Israeli government approved the export of medical cannabis products from Israel (the “Israeli
Government Export Approval”). As part of the Israeli Government Export Approval, the Israeli government decided
to allow medical cannabis license holders that meet the quality standards set forth in Resolution 1587 for the applicable
stages (cultivation, production, storage, distribution and security) for which they received a license, to export medical
cannabis products under the strict supervision of the Israeli authorities. Export licenses may be granted for a limited
period and may be canceled at any time or not extended upon expiration. Pursuant to the Israeli Government Export
Approval a medical cannabis license holder may apply for an export license, provided that such holder meets all the
export requirements (including the requirement applicable to the export of dangerous drugs and plant substances). The
Israeli Health Ministry will only allow the export of products that meet the standards relating to products that can be
directly marketed to patients (including smoking products, oils, and vaporizer products). Export of plant substances
(i.e. seeds, tissue cultures) will not be permitted.
The Israeli Government Export Approval sets forth that export will only be permitted to those countries that have
signed the United Nations Single Convention on Narcotic Drugs of 1961 (“UN Single Convention”), and that have
explicitly approved the import of cannabis.
On July 27, 2018, a bill to decriminalize the adult-use of cannabis, imposing fines rather than criminal penalties for
first- and second-time possession offenses, was passed by the Knesset. The bill will enter into effect on April 1, 2019
and will be in effect until March 31, 2022.
Currently in Israel, medical cannabis is provided to patients on a “direct to patient” distribution model, whereby
patients purchase medical cannabis directly from authorized medical cannabis suppliers after receiving a license from
the Israeli Health Ministry. In September 2017, a first class of physicians completed a course for approval of use of
medical cannabis, and 81 physicians were authorized to grant prescriptions for medical cannabis treatment. In April
2018, the Israeli Health Ministry launched a pilot project with the participation of several pharmacies, which are
allowed to supply medical cannabis products directly to patients by prescription.
Cronos Israel Licenses
In early 2017, the Yakar granted Gan Shmuel Israel Codes to establish four distinct cannabis commercial operations:
(i) propagation and breeding, (ii) commercial cannabis cultivation, (iii) extraction, formulation and packaging and (iv)
patient care and distribution. These Israel Codes are preliminary licenses granted to successful applicants to construct
facilities for cannabis operations. Applicants at this stage are not yet officially permitted to propagate, cultivate,
process or distribute cannabis until the nursery, cultivation and manufacturing facilities are constructed and pass
inspections by the Yakar, after which point, assuming the facilities pass inspections, the Yakar will issue the final
cannabis licenses for each operation.
The Israel Codes were successfully transferred to Cronos Israel on May 10, 2018. After construction of the greenhouse
(for nursery and cultivation operations) and the manufacturing facility (for extraction, production and packaging
34
operations) is completed, the facilities will be inspected by the Yakar against various requirements and protocols set
out in the directives promulgated under Resolution No. 1587 (including security standards, quality standards of
cultivation, manufacturing and storage / delivery). Assuming the facilities pass the inspection, Cronos Israel expects
to receive the final cannabis licenses for each of the operations from the Yakar. The Yakar has not provided a timeline
for the issuance of such final cannabis licenses after inspection of the completed facilities.
Licenses and Regulatory Framework in Colombia
In 2016 Colombia’s Congress adopted Law 1787 with the purpose of creating a regulatory framework allowing the
safe and informed access to medical and scientific use of cannabis and its derivatives within the Colombian territory.
Law 1787 granted authority to the Colombian Government to control and regulate the activities of cultivation,
processing, fabrication, acquisition, import, export, transport and commercialization of cannabis and its derivatives
for medicinal and scientific purposes. Law 1787 amended articles 375, 376 and 377 of the Colombian Criminal Code
to remove sanctions against the medical and scientific use of cannabis used under a license duly granted by the relevant
authorities according to Colombian laws. This amendment was required given that the Colombian Criminal Code
expressly provided a general prohibition to the cultivation, conservation or financing of marijuana plantations among
other related activities. Based on Law 1787 of 2016, the Colombian Government-issued Decree 613 of 2017, whereby
it defined the different types of licenses that may be granted in respect of permissible activities related to medical
cannabis including: (i) cultivation of psychoactive cannabis plants, (ii) cultivation of non-psychoactive cannabis
plants, (iii) use of seeds for planting and (iv) manufacturing of cannabis derivatives. Decree 613 also sets out the
requirements and criteria for the assignment of quotas for cultivation of psychoactive cannabis plants and
manufacturing of cannabis derivatives in favor of holders of licenses and other related activities including the main
obligations to be complied with by the licensees.
The administration of the law and its related regulations is overseen by several governmental bodies including the
Ministry of Health and Social Protection (the “Colombia Ministry of Health”), the Ministry of Justice and Law (the
“Colombia Ministry of Justice”), and the National Narcotics Fund. The Colombia Ministry of Health is the entity
responsible for granting licenses for the production of cannabis derivatives, while the Colombia Ministry of Justice is
the entity responsible for granting licenses for the use of seeds for planting, cultivation of psychoactive cannabis
plants, and cultivation of non-psychoactive cannabis plants. In addition, the Colombian Agricultural Institute (“ICA”)
is the entity regulating the registration, protection and use of cannabis seeds, and the National Institute for Medicines
and Food Overseeing (“Invima”) is the entity overseeing the production of medicines for human consumption.
The Colombia Ministry of Justice established three resolutions, namely:
(i)
(ii)
Resolution No. 577 of 2017 setting forth the rules for the supervision and monitoring of the licenses for the
(a) sowing of cannabis seeds; (b) cultivation of psychoactive cannabis plants; and (c) cultivation of non-
psychoactive cannabis plants. Resolution 577 also regulates the basis upon which a license may be amended,
the security protocol in harvest areas, and the production and manufacturing quotas;
Resolution No. 578 of 2017, setting the tariffs applicable to the different processes concerning the cannabis
licenses, such as applications, modifications, extraordinary authorizations, and allocation of additional
production and manufacturing quotas. These tariffs were updated by the Colombia Ministry of Justice by
regulations dated January 2, 2019; and
(iii)
Resolution No. 579 of 2017, defining that small and medium licensed growers are those who grow or cultivate
cannabis in an area of 0.5 hectares or less. In an effort to ensure the sustainability of small-scale growers,
35
holders of cannabis derivative production licenses, except in the research modality, are required to process
at least 10% of their assigned annual cannabis quota from a small or medium licensed grower.
In addition, the Colombia Ministry of Health issued Resolution No. 2891 of 2017 and Resolution No. 2892 of 2017.
Resolution No. 2891 establishes the tariff manual for evaluation, monitoring and control applicable to licenses for the
manufacture of cannabis derivatives for medicinal and scientific use. Resolution No. 2892 sets out technical
regulations for the granting of the license to manufacture cannabis by-products, including additional obligations of
the licensee, grounds for modification of the license, and rules related to the production and manufacturing quotas.
The first licenses were issued in Colombia in 2016 (under the prior applicable legal regime set forth in Decree 2467
of 2015). As of November 22, 2018, 170 licenses have been issued by the Colombia Ministry of Justice for the
cultivation of psychoactive and non-psychoactive plants, as well as for the use of seeds. As of January 28, 2019, 84
licenses have been issued by the Colombia Ministry of Health for the manufacturing of cannabis derivatives.
Colombia’s Congress has not indicated any intention of considering the legalization of adult-use cannabis at this time.
NatuEra Licenses
In the second half of 2018, a wholly-owned subsidiary of NatuEra was granted a license to cultivate non-psychoactive
cannabis plants for production of seeds for planting and the manufacture of derivative products, and a license to
manufacture cannabis derivative products for domestic use and export. NatuEra is awaiting the grant of a license to
cultivate psychoactive cannabis.
Regulatory Framework in Germany for Imports
The current regulatory regime in Germany permits the import of cannabis plants and plant parts for medical purposes
under state control subject to the requirements under the UN Single Convention. Current German legislation does not
set up quantitative restrictions on imports, but requires importers to be licensed under the Federal Narcotics Act
(Betäubungsmittelgesetz, “BtMG”). A person wishing to cultivate, produce or trade in narcotic drugs, or without
engaging in their trade, to import, export, supply, sell, otherwise place on the market, or acquire narcotic drugs,
requires a license issued by the BfArM. Permissions under such a license may be restricted in relation to:
(1) the kind of narcotic drugs and of the trade in narcotic drugs;
(2) the annual quantity and the stock of narcotic drugs;
(3) the location of the sites; and
(4) the production process and the starting, intermediate and finished products involved, even if they are not
narcotic drugs.
In addition to a narcotics import license, an importer, in each case, is required to submit an application for import
authorization to the BfArM. Applications for import permits must include the specifics of the contemplated shipment.
Import permits are issued on a shipment-specific basis and usually have a three-month validity period (six months for
seaborne import). The import permit, once granted, will specify, among other details, for each shipment:
(1) the importer;
(2) the exporter;
(3) for every narcotic to be imported:
a.
the central pharmaceutical number (if available);
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b.
the number of package units;
c.
the number of dosage units; and
d.
the name of the narcotic and concentration of active substances.
Medical cannabis imported under the UN Single Convention subject to a license under the BtMG is placed on the
market for the final consumer by pharmacists as individual preparation upon individual prescription. Typical
preparations are for inhalation upon evaporation or as teas. Medical doctors may issue prescriptions of dried cannabis
flowers of up to 100,000 mg, or 1,000 mg of cannabis extracts – the latter on a THC content basis – per patient every
30 days.
Cannabis extracts stemming from production for medical purposes under the UN Single Convention may be lawfully
manufactured in or imported to Germany, subject to a license under the BtMG. Prescriptions by medical doctors are
limited to 1,000 mg on a THC content basis per patient every 30 days. Cannabis oils for patient use may be prepared
in pharmacies from oils delivered as starting materials.
Regulatory Framework in Poland for Imports
The use and importation of cannabis for medical purposes in Poland is governed by international, European and Polish
law, including:
(1) the UN Single Convention;
(2) Directive 2001/83/EC of the European Parliament and of the Council of November 6, 2001 on the
Community Code relating to medical products for human use;
(3) the Pharmaceutical Law (Prawo farmaceutyczne, “PrFarm”); and
(4) the Act on prevention of drug abuse (Ustawa o przeciwdziałaniu narkomaniu, “NarkU”).
The UN Single Convention sets out general rules on trade and use of narcotic drugs for medical purposes. The import
and manufacturing of cannabis plants other than fibrous and dried plant parts for medical purposes became legal in
Poland on November 1, 2017, by the amendment to NarkU. The NarkU allowed the marketing of cannabis plants
other than fibrous extracts of the plants, resin and medical tincture, while cultivation remains prohibited. Therefore,
imports or delivery within the European Union is required to facilitate the availability of medical cannabis on the
Polish market. This applies to both forms regulated by NarkU: active substance for manufacturing of pharmaceutical
raw material and pharmaceutical raw material.
For each of these actions, manufacturing has been defined differently. Manufacturing of an active substance for
manufacturing pharmaceutical raw material is defined as fragmentation of dried parts, physicochemical processing
(including extraction) and collective packaging, while for raw pharmaceutical material, manufacturing means
repackaging of the active substance to smaller packages that are delivered to pharmacies. The final product is prepared
and sold by the pharmacies by prescription.
In order to market cannabis in the form of pharmaceutical raw material in Poland, the following administrative
approvals are required, in accordance with PrFarm:
(1) Marketing Authorization (MA) issued by the President of the Office for Registration of Medicinal Products,
Medical Devices and Biocides (Urząd Rejestracji Produktów Leczniczych, Wyrobów Medycznych i
Produktów Biobójczych) in a national procedure; and
37
(2) an import or manufacturing license issued by the Main Pharmaceutical Inspector (Główny Inspektor
Farmaceutyczny, “GIF”) which should be attached to the application for marketing authorization.
Both administrative approvals are issued in the course of the same process applicable to regular medicinal products.
Applications for import authorization are required to include detailed information on the:
(1) applying entity;
(2) cannabis-based product including its form and presentation;
(3) site; and
(4) scope of import.
Import authorizations for an individual medicinal product are typically issued within 90 days of application for an
indefinite period of time on condition that the entity applying for authorization fulfills the requirements of GMP and
employs a qualified person for the duration of all importation activities. The granting of the import authorization
results in the entry to the Register of Manufacturers and Importers of Medicinal Products kept by GIF.
The importation of active substances for manufacturing of pharmaceutical raw material is subject to other provisions
of PrFarm and requires a previous registration on the National Register of Manufacturers, Importers and Distributors
of Active Substances kept by GIF. The importer is also subject to GMP and multiple disclosure requirements.
Medicinal products, including active substances based on cannabis, are classified as “Rpw” – dispensed on individual
physician’s prescription, containing narcotic agents. This classification applies to all medicinal products produced in
either factories of pharmaceutical companies or the pharmacies from pharmaceutical raw material. This special
category allows for stricter control of the trade of medicinal products containing all narcotic agents and psychotropic
substances, including cannabis.
Under the applicable regulations, each patient may receive not more than three prescriptions for a period not exceeding
90 days of use in the aggregate. Any such prescription cannot contain any other medicinal products.
Exports to Germany and Poland by Peace Naturals
Peace Naturals exports dried cannabis flower to Germany and it is expected that Peace Naturals will export dried
cannabis to Poland pursuant to export permits issued by Health Canada under the Cannabis Act for each shipment.
Health Canada requires License Holders to submit, among other things, copies of valid import permits issued by a
competent authority in the country of destination in each application for an export permit. Import permits for
shipments are applied for and obtained by Pohl-Boskamp, our German strategic distribution partner, from the BfArM
and by Delfarma, our Polish strategic distribution partner, from the GIF, and once such import permits are received,
Peace Naturals applies for and obtains (or in the case of expected exports to Poland, expects to apply for and obtain)
export permits from Health Canada prior to export to Germany or Poland, as applicable.
Regulatory Framework Applicable to the Ginkgo Strategic Partnership
Ginkgo has undertaken to perform all of its R&D work pursuant to the Ginkgo Collaboration Agreement in compliance
with all applicable laws regarding controlled substances. In November 2018, Ginkgo received a DEA Researcher (I)
Controlled Substance Registration Certificate and a Researcher Controlled Substance Registration Certification from
the Massachusetts Department of Public Health that allow Ginkgo to lawfully conduct the specified research involving
cannabinoids, including all “coincident activities” authorized by law. Until such licenses, permits and authorizations
were obtained, no R&D work involving or resulting in the creation of controlled substances under the CSA was
undertaken. The strategic partnership with Ginkgo is not intended to involve any cannabinoid production activities in
38
the United States beyond what is lawful for a DEA-registered researcher or any cannabinoid production activities in
any other jurisdiction in which cannabis is not legalized.
ALTRIA STRATEGIC INVESTMENT
Altria Investment
Pursuant to the Subscription Agreement dated December 7, 2018, on March 8, 2019 the Company issued to certain
wholly-owned subsidiaries of Altria, 149,831,154 common shares of the Company and the Altria Warrant, which may
be exercised in full or in part at any time on or prior to March 8, 2023, from time to time, and entitles the holder
thereof, upon valid exercise in full, to acquire an aggregate of 73,990,693 common shares of the Company (subject to
adjustment in accordance with the terms and conditions of the Altria Warrant Certificate) at an initial exercise price
of $19.00 per common share. As of the closing date of the Altria Investment, Altria beneficially held an approximately
45% ownership interest in the Company (calculated on a non-diluted basis) and, if exercised in full on such date, the
exercise of the Altria Warrant would result in Altria holding a total ownership interest in the Company of
approximately 55% (calculated on a non-diluted basis).
Investor Rights Agreement
On March 8, 2019, in connection with the closing of the Altria Investment, the Company and Altria entered into the
Investor Rights Agreement pursuant to which Altria received certain governance rights.
Board Representation
The Investor Rights Agreement provides that, for so long as Altria and its affiliates (the “Altria Group”) continue to
beneficially own at least 40% of the issued and outstanding common shares of the Company and the size of the Board
is seven directors, the Company agrees to nominate for election as directors to the Board four individuals designated
by Altria (the “Altria Nominees”). In addition, for so long as Altria Group continues to beneficially own greater than
10% but less than 40% of the issued and outstanding common shares of the Company, Altria shall be entitled to
nominate a number of Altria Nominees that represents its proportionate share of the number of directors comprising
the Board (rounded up to the next whole number) based on the percentage of the issued and outstanding common
shares of the Company beneficially owned by the Altria Group at the relevant time. At least one Altria Nominee shall
be independent as long as Atria has the right to designate at least three Altria Nominees and Altria Group beneficially
owns less than 50% of the issued and outstanding common shares of the Company.
The Investor Rights Agreement also provides that, subject to certain exceptions, for so long as Altria is entitled to
designate one or more Altria Nominees, Altria may appoint to each committee established by the Board such number
of Altria Nominees that represents Altria’s proportionate share of the number of directors comprising the applicable
Board committee based on the percentage of issued and outstanding common shares of the Company beneficially
owned by the Altria Group at the relevant time.
Approval Rights
The Investor Rights Agreement also grants Altria, until Altria Group beneficially owns less than 10% of the issued
and outstanding common shares of the Company, approval rights over certain transactions that may be taken by the
Company. The Company has agreed that it will not, without the prior written consent of Altria:
(i)
consolidate or merge into or with another person or enter into any similar business combination;
39
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
acquire any shares or similar equity interests, instruments convertible into or exchangeable for
shares or similar equity interests, assets, business or operations with an aggregate value of more
than $100,000,000, in a single transaction or a series of related transactions;
subject to certain exceptions, adopt any plan or proposal for a complete or partial liquidation,
dissolution or winding up of the Company or any of its significant subsidiaries, or any reorganization
or recapitalization of the Company or any of its significant subsidiaries, or commence any claim
seeking relief under any applicable laws relating to bankruptcy, insolvency, conservatorship or relief
of debtors;
sell, transfer, caused to be transferred, exclusively license, lease, pledge or otherwise dispose of any
of its or any of its significant subsidiaries’ assets, business or operations in the aggregate with a
value of more than $60,000,000;
except as required by applicable law, make any changes to the Company’s policy with respect to
the declaration and payment of any dividends on the Company’s common shares;
subject to certain exceptions, enter into any contract or other agreement, arrangement, or
understanding with respect to, or consummate, any transaction or series of related transactions
between the Company or any of its subsidiaries, on the one hand, and any related parties, on the
other hand, involving consideration or any other transfer of value required to be disclosed pursuant
to Item 404 of Regulation S-K promulgated pursuant to the United States Securities Act of 1933, as
amended (the “U.S. Securities Act”);
enter into any contract or other agreement, arrangement or understanding with respect to, or
consummate, any transaction or series of related transactions between the Company or any of its
subsidiaries, on the one hand, and certain specified persons; or
engage in the production, cultivation, advertisement, marketing, promotion, sale or distribution of
cannabis or any Related Products and Services (as defined herein) in any jurisdiction, including the
United States, where such activity is prohibited by applicable law as of the date of the Investor
Rights Agreement (subject to certain limitations).
Exclusivity Covenant
Pursuant to the terms of the Investor Rights Agreement, until the earlier of:
(i)
the six-month anniversary of the date that the Altria Group beneficially owns less than 10% of the
issued and outstanding common shares of the Company; and
(ii)
the six-month anniversary of the termination of the Investor Rights Agreement,
Altria has agreed to make the Company its exclusive partner for pursuing cannabis opportunities throughout the world
(subject to certain limited exceptions).
In particular, Altria has agreed not to, directly or indirectly, and shall cause the other members of the Altria Group not
to, directly or indirectly:
(i)
develop, produce, manufacture, cultivate, advertise, market, promote, sell or distribute any cannabis
or products derived from or intended to be used in connection with cannabis or services intended to
40
relate to cannabis (such products and services, collectively, “Related Products and Services”)
anywhere in the world, other than (A) pursuant to any Commercial Arrangement, or (B) pursuant to
a contract approved by an independent committee of the Board (or, at any time when Altria
Nominees do not represent a majority of the Board, if fully disclosed to and approved by a majority
of the independent members of the Board), entered into by and among or by and between, the
Company and/or one or more of its subsidiaries, on the one hand, and any one or more members of
the Altria Group, on the other hand (such other contract, an “Approved Company Agreement”);
(ii)
(iii)
acquire or make any investment in or otherwise beneficially own any interests in, or lend any money
or provide any guarantee to, any person that develops, produces, manufactures, cultivates,
advertises, markets, promotes, sells and/or distributes cannabis or any Related Products and
Services, other than (A) pursuant to any Commercial Arrangement, on the terms and subject to the
conditions of the Investor Rights Agreement, Subscription Agreement and the Altria Warrant
Certificate, or (B) to the Company and/or any of its subsidiaries, so long as any such acquisition or
investment is pursuant to an Approved Company Agreement;
use or allow the use of any of their respective trade names, trademarks, trade-secrets or other
intellectual property rights in connection with any person that develops, produces, manufactures,
cultivates, advertises, markets, promotes, sells and/or distributes cannabis or any Related Products
and Services, other than (A) pursuant to any Commercial Arrangement, or on the terms and subject
to the conditions of the Investor Rights Agreement, Subscription Agreement, the Altria Warrant
Certificate and the Commercial Arrangement, or (B) to the Company and/or any of its subsidiaries,
so long as any such use of trade names, trademarks, trade-secrets or other intellectual property rights
with the Company and/or any of its subsidiaries is pursuant to an Approved Company Agreement;
or
(iv)
contract with or arrange for any third party (other than the Company or any of its subsidiaries) to do
any of the foregoing.
Pre-Emptive Rights and Top-Up Rights
Pursuant to the terms of the Investor Rights Agreement, Altria, provided the Altria Group continues to beneficially
own at least 20% of the issued and outstanding common shares of the Company, will have a right to purchase, directly
or indirectly by another member of Altria Group, upon the occurrence of certain issuances of common shares by the
Company (including issuances of common shares to Ginkgo under the Ginkgo Collaboration Agreement (each, a
“Ginkgo Issuance”)) (each, a “Triggering Event”) and subject to obtaining the necessary approvals, up to such
number of common shares issuable in connection with the Triggering Event which will, when added to the common
shares beneficially owned by the Altria Group immediately prior to the Triggering Event, result in the Altria Group
beneficially owning the same percentage of issued and outstanding common shares of the Company that the Altria
Group beneficially owned immediately prior to the Triggering Event (in each case, calculated on a non-diluted basis).
The price per common share to be paid by Altria pursuant to the exercise of its pre-emptive rights will be, subject to
certain limited exceptions, the same price per common share at which the common shares are sold in the relevant
Triggering Event; provided that the price per common share to be paid by Altria pursuant to the exercise of its pre-
emptive rights in connection with a Ginkgo Issuance will be $16.25 per common share.
In addition, the Investor Rights Agreement provides Altria with top-up rights, exercisable on a quarterly basis,
whereby, subject to obtaining the necessary approvals and for so long as Altria Group beneficially owns at least 20%
of the issued and outstanding common shares of the Company, Altria shall have the right to subscribe for such number
of common shares in connection with any Top-Up Securities (as defined below) that the Company may, from time to
41
time, issue after the date of the Investor Rights Agreement, as will, when added to the common shares beneficially
owned by the Altria Group prior to such issuance, result in the Altria Group beneficially owning the same percentage
of issued and outstanding common shares of the Company that the Altria Group beneficially owned immediately prior
to such issuance. “Top-Up Securities” means any common shares of the Company issued:
(i)
on the exercise, conversion or exchange of convertible securities of the Company issued prior to the
date of the Investor Rights Agreement or on the exercise, conversion or exchange of convertible
securities of the Company issued after the date of the Investor Rights Agreement in compliance with
the terms of the Investor Rights Agreement, in each case, excluding any convertible securities of
the Company owned by any member of the Altria Group;
(ii)
pursuant to any share incentive plan of the Company;
(iii)
(iv)
(v)
on the exercise of any right granted by the Company pro rata to all shareholders to purchase
additional common shares and/or other securities of the Company (other than a right issued in a
rights offering in which Altria had the right to participate);
in connection with bona fide bank debt, equipment financing or non-equity interim financing
transactions with lenders to the Company, in each case, with an equity component; or
in connection with bona fide acquisitions (including acquisitions of assets or rights under a license
or otherwise), mergers or similar business combination transactions or joint ventures undertaken
and completed by the Company,
in each case, other than (A) common shares issued pursuant to Altria’s pre-emptive right and (B) common shares
issued pursuant to the Ginkgo Collaboration Agreement.
The price per common share to be paid by Altria pursuant to the exercise of its top-up rights will be, subject to certain
limited exceptions, the 10-day volume-weighted average price of the common shares of the Company on the TSX at
the time of exercise; provided that the price per common share to be paid by Altria pursuant to the exercise of its top-
up rights in connection with the issuance of common shares pursuant to the exercise of options or warrants that were
outstanding on the date of closing of the Altria Investment will be $16.25 per common share.
Covenant of Altria
For a period commencing on the date of the Investor Rights Agreement and ending on the earlier of (i) the date on
which the Altria Warrant has been exercised in full by Altria, and (ii) the expiry or termination of the Altria Warrant,
the Investor Rights Agreement provides that, without the prior approval of an independent committee of the Board,
no member of the Altria Group shall, directly or indirectly, acquire common shares of the Company (other than upon
settlement of any common shares issued, sold and delivered pursuant to the proper exercise of rights contemplated by
the Altria Warrant Certificate or the exercise of pre-emptive rights or top-up rights): (A) on the TSX, the NASDAQ
or any other stock exchange, marketplace or trading market on which the common shares are then listed; (B) through
private agreement transactions with existing holders of common shares; or (C) in any other manner or take any action
which would require any public announcement with respect to any of the foregoing; provided that nothing shall
prohibit any member of the Altria Group from making a take-over bid or commencing a tender offer, in each case, to
acquire not less than all of the issued and outstanding common shares (other than any such common shares beneficially
owned by any member of the Altria Group and its affiliates) in accordance with applicable law.
42
Registration Rights
The Investor Rights Agreement provides Altria with the right, subject to certain limitations and to the extent permitted
by applicable law, to require the Company to use reasonable commercial efforts to file a prospectus under applicable
securities laws and/or a registration statement, qualifying common shares of the Company held by Altria for
distribution in Canada and/or the United States. In addition, the Investor Rights Agreement provides Altria with the
right to require the Company to include common shares of the Company held by Altria in any proposed distribution
of common shares in Canada and/or the United States by the Company for its own account.
Commercial Arrangements
In connection with the Altria Investment, the Company and Altria have entered into the Commercial Arrangements,
pursuant to which Altria provides the Company with strategic advisory and consulting services on matters which may
include research and development, marketing, advertising and brand management, government relations and
regulatory affairs, finance, tax planning, logistics and other corporate administrative matters. The services under the
Commercial Arrangements are provided on customary terms and for a services fee payable by the Company that is
equal to Altria’s reasonably allocated costs plus 5%.
RISK FACTORS
An investment in the Company involves a number of risks. In addition to the other information contained in this AIF,
investors should give careful consideration to the following risk factors. Any of the matters highlighted in these risk
factors could adversely affect our business and financial condition, causing an investor to lose all, or part of, its, his
or her investment. The risks and uncertainties described below are those we currently believe to be material, but they
are not the only ones we face. If any of the following risks, 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. In addition, a discussion of the risks affecting the Company and our business
appears under the heading “Risks and Uncertainties” in management’s discussion and analysis for the fiscal year
ended December 31, 2018.
Risks Related to the Industry and the Company’s Business
We are reliant on our licenses, authorizations, approvals and permits for our ability to grow, store and sell cannabis
and other products derived therefrom and such licenses are subject to ongoing compliance, reporting and renewal
requirements.
Our ability to grow, process, store and sell cannabis in Canada is dependent on our licenses from Health Canada, and
in particular the Peace Naturals Licenses and the OGBC Production Licenses. Failure to comply with the requirements
of the licenses or failure to maintain the licenses would have a material adverse impact on our business, financial
condition and results of operations. Although Peace Naturals and OGBC believe they will meet the requirements of
the Cannabis Act for extension of their respective licenses, there can be no guarantee that Health Canada will extend
or renew the licenses or, if they are extended or renewed, that they will be extended or renewed on the same or similar
terms or that Health Canada will not revoke the licenses. Should we fail to comply with requirements of the licenses
or should Health Canada not extend or renew the licenses, or should we renew the licenses on different terms or not
allow for anticipated capacity increases, or should we revoke the licenses, our business, financial condition and results
of the operations will be materially adversely affected.
Our ability to cultivate medical cannabis, manufacture and process cannabis-related products, conduct research related
to cannabis in Australia, import and sell cannabis in Australia and export cannabis from Australia, is dependent on
43
our licenses from the ODC, and in particular the Cronos Australia Licenses. Failure to comply with the requirements
of the licenses or failure to maintain the licenses would have a material adverse impact on our business, financial
condition and results of operations. Although Cronos Australia believes it will meet the requirements for extension of
their licenses, there can be no guarantee that the ODC will extend or renew the licenses or, if they are extended or
renewed, that they will be extended or renewed on the same or similar terms or that the ODC will not revoke the
licenses. Should we fail to comply with requirements of the licenses or should the ODC not extend or renew the
licenses, or should we renew the licenses on different terms or not allow for anticipated capacity increases, or should
we revoke the licenses, our business, financial condition and results of the operations will be materially adversely
affected.
Failure to comply with the requirements of the licenses or failure to maintain the licenses would have a material
adverse impact on our business, financial condition and results of operations. Our ability to propagate, cultivate,
process and distribute cannabis in Israel is dependent on being granted additional licenses from the Yakar authorizing
such activities once Cronos Israel’s facilities pass inspections; however, there is no assurance that we will be able to
obtain such licenses on commercially reasonable terms, if at all. Our ability to export products from Cronos Israel is
also dependent on obtaining the relevant export permits.
Our ability to construct our Cronos GrowCo cannabis facility in Kingsville, Ontario is dependent on Cronos GrowCo
being granted the relevant customary building and construction permits from the relevant municipalities and
townships. In addition, our ability to grow, transport and process cannabis at the facility depends on being granted the
appropriate licenses from Health Canada. However, there is no assurance that Cronos GrowCo will be able to obtain
such permits or licenses on commercially reasonable terms, if at all.
Our ability to construct the NatuEra cannabis facility in Colombia is dependent on NatuEra being granted the relevant
customary building and construction permits from local authorities. In addition, our ability to propagate, cultivate,
process and distribute cannabis in Colombia is dependent on being granted the appropriate licenses from the Ministry
of Health and Social Security. However, there is no assurance that NatuEra will be able to obtain such permits or
licenses on commercially reasonable terms, if at all. Our ability to export products from NatuEra is dependent on our
ability to obtain the relevant export permits.
In the United States, despite cannabis possession and use having been legalized at the state level for medical use in
many states and for adult-use in a number of states, most forms of cannabis (other than Hemp) continue to be
categorized as a Schedule I controlled substance under the CSA and subject to the Controlled Substances Import and
Export Act (“CSIEA”). Ginkgo’s ability to conduct certain R&D activities under the Ginkgo Collaboration
Agreement is conditional on Ginkgo continuing to maintain all necessary licenses, permits and approvals required for
Ginkgo to perform such R&D activities. In November 2018, Ginkgo received a DEA Researcher (I) Controlled
Substance Registration Certificate and a Researcher Controlled Substance Registration Certificate from the
Massachusetts Department of Public Health that allow Ginkgo to lawfully conduct the specified research involving
cannabinoids, including all “coincident activities” authorized by law. However, there are no assurances that Ginkgo
will be able to maintain such licenses, permits and approvals and, to the extent such licenses, permits and approvals
are not maintained, we may not realize the expected benefits of the Ginkgo Strategic Partnership. Violations of any
U.S. federal laws and regulations, such as the CSA and the CSIEA, could result in civil, criminal and/or administrative
enforcement actions, which could result in fines, penalties, and other sanctions, including but not limited to, cessation
of business activities. While the Company has received confirmation from Health Canada that the method of
production for the target cannabinoids under the Ginkgo Strategic Partnership is permitted under the Cannabis Act,
the Cannabis Act is new legislation and may be subject to changes in interpretation over time. In addition, while the
Company intends to produce and distribute the target cannabinoids developed under the Ginkgo Strategic Partnership
in all jurisdictions where such distribution is legally permissible, there can be no guarantee that the Company will
44
obtain the relevant licenses, permits and approvals to produce and distribute such products or derivative products in
any jurisdiction. See “Description of the Business – Regulatory Framework Applicable to the Ginkgo Strategic
Partnership”.
Additional government licenses are currently, and in the future, may be, required in connection with our operations,
in addition to other unknown permits and approvals which may be required, including with respect to our Canadian
and foreign operations. To the extent such permits and approvals are required and not obtained, we may be prevented
from operating and/or expanding our business, which could have a material adverse effect on our business, financial
condition and results of operations.
We operate in a highly regulated sector and may not always succeed in complying fully with applicable regulatory
requirements in all jurisdictions where we carry on business.
Our business and activities are heavily regulated in all jurisdictions where we carry on business. Our operations are
subject to various laws, regulations and guidelines by governmental authorities (including, in Canada, Health Canada)
relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of cannabis
and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct
of operations and the protection of the environment. Laws and regulations, applied generally, grant government
agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or
restrict business activities as well as impose additional disclosure requirements on our products and services.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted
by these governmental authorities and obtaining all necessary regulatory approvals for the production, storage,
transportation, sale, import and export, as applicable, of our products. The commercial cannabis industry is still a new
industry and, in Canada, in particular the Cannabis Act, is a new regime that has no close precedent in Canadian law.
The effect of relevant governmental authorities’ administration, application and enforcement of their respective
regulatory regimes and delays in obtaining, or failure to obtain, applicable regulatory approvals which may be required
may significantly delay or impact the development of markets, products and sales initiatives and could have a material
adverse effect on our business, financial condition and results of operations.
While we endeavor to comply with all relevant laws, regulations and guidelines and, to our knowledge, we are in
compliance or are in the process of being assessed for compliance with all such laws, regulations and guidelines, any
failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions
including the revocation or imposition of additional conditions on licenses to operate our business; the suspension or
expulsion from a particular market or jurisdiction or of our key personnel; the imposition of additional or more
stringent inspection, testing and reporting requirements; and the imposition of fines and censures. In addition, changes
in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to
our operations, increase compliance costs or give rise to material liabilities or a revocation of our licenses and other
permits, which could have a material adverse effect on our business, results of operations and financial condition.
Furthermore, governmental authorities may change their administration, application or enforcement procedures at any
time, which may adversely impact our ongoing costs relating to regulatory compliance.
License Holders, including us, are constrained by law in our ability to market our products.
The development of our business and results of operations may be hindered by applicable regulatory restrictions on
sales and marketing activities. For example, the regulatory environment in Canada limits our ability to compete for
market share in a manner similar to other industries. If we are unable to effectively market our products and compete
for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through
increased selling prices for our products, our sales and results of operations could be adversely affected. See
45
“Description of the Business - Regulatory Framework in Canada – Recent Regulatory Developments – Federal
Developments – Packaging and Labelling”.
The laws, regulations and guidelines generally applicable to the cannabis industry are changing and may change
in ways currently unforeseen by us.
Our operations are subject to the Cannabis Act and various other laws, regulations and guidelines relating to the
marketing, acquisition, manufacture, packaging/labelling, management, transportation, storage, sale and disposal of
cannabis but also including laws and regulations relating to health and safety, the conduct of operations and the
protection of the environment. To our knowledge, other than routine corrections that may be required by Health
Canada from time to time, we are currently in material compliance with all existing applicable laws, regulations and
guidelines. If any changes to such laws, regulations and guidelines occur (and in Canada the laws and regulations are
currently changing at a rapid pace), which are matters beyond our control, we may incur significant costs in complying
with such changes or we may be unable to comply therewith, which in turn may result in a material adverse effect on
our business, financial condition and results of operations.
While the production of cannabis in Canada is under the regulatory oversight of the Government of Canada, the
distribution of adult-use cannabis in Canada is the responsibility of the provincial and territorial governments. The
distribution and sale of adult-use cannabis in Ontario is primarily governed by the Cannabis Control Act, 2017, the
Cannabis Licence Act, 2018 and the related regulations. The Ontario Cannabis Retail Corporation is the wholesale
distributor of cannabis and conducts all online sales in the province. Private retail is expected to be permitted by April
2019 and will be regulated by the AGCO. Only twenty-five private stores will be licensed by the AGCO for an initial
period, with more expected to follow. The Ontario Cannabis Retail Corporation provides online sales of adult-use
cannabis in the interim. The impact of this new legislative regime, and of the legislation regulating adult-use cannabis
passed in other provinces and territories, on the cannabis industry and our business plans and operations is uncertain.
There is no guarantee that the applicable legislation regulating the distribution and sale of cannabis for adult-use purposes
will create or allow for the growth opportunities we currently anticipate.
Changes in the regulations governing cannabis outside of Canada may adversely impact our business.
Our growth strategy with respect to international operations continues to evolve as regulations governing the cannabis
industry in the foreign jurisdictions in which we operate become more fully developed. Interpretation of these laws,
rules and regulations and their application to our operations is ongoing. Although, to our knowledge, we are currently
in material compliance with all applicable laws, regulations and guidelines in such international jurisdictions, no
assurance can be given that new laws, regulations and guidelines will not be enacted or that existing laws, regulations
and guidelines will not be interpreted or applied in a manner which could limit or curtail our operations in such
countries. Amendments to current laws, regulations and guidelines governing the production, sale and use of cannabis
and cannabis-based products, more stringent implementation or enforcement thereof or other unanticipated events,
including changes in political regimes or political instability, currency controls, fluctuations in currency exchange
rates and rates of inflation, labour unrest, changes in taxation laws, regulations and policies, restrictions on foreign
exchange and repatriation, changing political conditions and governmental regulations relating to foreign investment
and the cannabis business more generally, and changes in attitudes toward cannabis, are beyond our control and could
require extensive changes to our international operations, which in turn may result in a material adverse effect on our
business, financial condition and results of operations. Specifically, our operations may be affected in varying degrees
by government regulations with respect to, but not limited to, restrictions on advertising, production, price controls,
export controls, controls on currency remittance, increased income taxes, restrictions on foreign investment, land and
water use restrictions and government policies rewarding contracts to local competitors or requiring domestic
producers or vendors to purchase supplies from a particular jurisdiction. Failure to comply strictly with applicable
laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other
46
expenses being levied on our international operations, as well as other potential adverse consequences such as the loss
of necessary permits or governmental approvals.
Furthermore, additional countries continue to pass laws that allow for the production and distribution of cannabis in
some form or another. We have some international strategic alliances in place, which may be affected if more countries
legalize cannabis. Increased international competition and limitations placed on us by Canadian regulations might
lower the demand for our products on a global scale. We also face competition in each international jurisdiction that
we have international strategic alliances with from foreign companies that have more experience, more in-depth
knowledge of local markets or applicable laws, regulations and guidelines or longer operating histories in such
jurisdictions.
There can be no assurance that the legislation governing adult-use cannabis in Canada will allow for growth.
There is no guarantee that the existing federal, provincial and territorial legislation regulating the cultivation,
distribution and sale of adult-use cannabis in Canada will not be amended or repealed and new legislation may come
into force that may not provide for or may restrict the growth opportunities that are currently anticipated. While the
impact of any new legislative framework for the regulation of adult-use cannabis in Canada is uncertain, any of the
foregoing could result in a material adverse effect on our business, financial condition and results of operations.
The effect of the legalization of adult-use cannabis in Canada on the medical cannabis industry is still uncertain,
and it may have a significant negative effect upon our medical cannabis business if our existing or future medical
use customers decide to purchase products available in the adult-use market instead of purchasing medical use
products from us.
The Cannabis Act allows individuals over the age of 18 to legally purchase, process and cultivate limited amounts of
cannabis for adult-use in Canada, subject to provincial and territorial age restrictions. As a result, individuals who rely
upon the medical cannabis market to supply their medical cannabis and cannabis-based products may cease this
reliance, and instead turn to the adult-use cannabis market to supply their cannabis and cannabis-based products.
Factors that will influence this decision include the price of medical cannabis products in relation to similar adult-use
cannabis products, the amount of active ingredients in medical cannabis products in relation to similar adult-use
cannabis products, the types of cannabis products available to adult users and limitations on access to adult-use
cannabis products imposed by the regulations under the Cannabis Act and the legislation governing distribution of
cannabis that has been enacted by the individual provinces and territories of Canada.
The impact of the legalization of adult-use cannabis in Canada on the medical cannabis industry is still being
determined. A decrease in the overall size of the medical cannabis market as a result of the adoption of the Cannabis
Act and the legal adult-use market in Canada may reduce our medical sales and revenue prospects in Canada.
We may be unsuccessful in competing in the legal adult-use cannabis market in Canada.
We face competition from existing License Holders licensed under the Cannabis Act. Certain of these competitors
may have significantly greater financial, production, marketing, R&D and technical and human resources than we do.
As a result, our competitors may be more successful than us in gaining market penetration and market share in the
adult-use cannabis industry in Canada. Our commercial opportunity in the adult-use market could be reduced or
eliminated if our competitors produce and commercialize products for the adult-use market that, among other things,
are safer, more effective, more convenient or less expensive than the products that we may produce, have greater sales,
marketing and distribution support than our products, enjoy enhanced timing of market introduction and perceived
effectiveness advantages over our products and receive more favorable publicity than our products. If our adult-use
47
products do not achieve an adequate level of acceptance by the adult-use market, we may not generate sufficient
revenue from these products, and our proposed adult-use business may not become profitable.
The Cannabis Act proposes to allow individuals to cultivate, propagate, harvest and distribute up to four cannabis
plants per household, despite certain provincial restrictions, provided that each plant meets certain requirements. If
we are unable to effectively compete with other suppliers to the adult-use cannabis market, or a significant number of
individuals take advantage of the ability to cultivate and use their own cannabis, our success in the adult-use business
may be limited and may not fulfill the expectations of management.
The Cannabis Act also imposes further packaging, labelling and advertising restrictions on License Holders in the
adult-use market. If we are unable to effectively market our products and compete for market share, or if the costs of
compliance with government legislation and regulation cannot be absorbed through increased selling prices for our
products, then our sales and operating results could be adversely affected. Further, if we fail to comply with the
packaging, labelling and advertising restrictions, we will be subject to monetary penalties, required to suspend sale of
noncompliant products and/or be disqualified as a vendor by government-run provincial distributors.
Future clinical research studies on the effects of medical cannabis may lead to conclusions that dispute or conflict
with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis.
Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and
social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have
been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). The
statements made in this AIF concerning the potential medical benefits of cannabinoids are based on published articles
and reports. As a result, the statements made in this AIF are subject to the experimental parameters, qualifications and
limitations in such studies that have been completed.
Although we believe that the articles, reports and studies support our beliefs regarding the medical benefits, viability,
safety, efficacy, dosing and social acceptance of cannabis as set out in this AIF, future research and clinical trials may
prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given
these risks, uncertainties and assumptions, undue reliance should not be placed on such articles and reports.
Future research studies and clinical trials may draw opposing conclusions to those stated in this AIF or reach negative
conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and
perceptions related to medical cannabis, which could have a material adverse effect on the demand for our products
with the potential to lead to a material adverse effect on our business, financial condition and results of operations.
Our expansion into jurisdictions outside of Canada is subject to risks.
There can be no assurance that any market for our products will develop in any jurisdiction outside of Canada. We
may face new or unexpected risks or significantly increase our exposure to one or more existing risk factors, including
economic instability, political instability, changes in laws and regulations and the effects of competition. These factors
may limit our capability to successfully expand our operations into such jurisdictions and may have a material adverse
effect on our business, financial condition and results of operations.
48
Investments and joint ventures outside of Canada are subject to the risks normally associated with any conduct of
business in foreign countries, including varying degrees of political, legal and economic risk.
Our investments and joint ventures outside of Canada are subject to the risks normally associated with any conduct of
business in foreign and/or emerging countries including political risks; civil disturbance risks; changes in laws or
policies of particular countries, including those relating to royalties, duties, imports, exports and currency; the
cancellation or renegotiation of contracts; the imposition of royalties, net profits payments, tax increases or other
claims by government entities, including retroactive claims; a disregard for due process and the rule of law by local
courts; the risk of expropriation and nationalization; delays in obtaining or the inability to obtain necessary
governmental permits or the reimbursement of refundable tax from fiscal authorities.
Threats or instability in a country caused by political events including elections, change in government, changes in
personnel or legislative bodies, foreign relations or military control present serious political and social risk and
instability causing interruptions to the flow of business negotiations and influencing relationships with government
officials. Changes in policy or law may have a material adverse effect on our business, financial condition and results
of operations. The risks include increased “unpaid” state participation, higher energy costs, higher taxation levels and
potential expropriation.
Other risks include the potential for fraud and corruption by suppliers or personnel or government officials which may
implicate us, compliance with applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and
the Corruption of Foreign Public Officials Act (Canada) by virtue of our operating in jurisdictions that may be
vulnerable to the possibility of bribery, collusion, kickbacks, theft, improper commissions, facilitation payments,
conflicts of interest and related party transactions and our possible failure to identify, manage and mitigate instances
of fraud, corruption, or violations of our code of conduct and applicable regulatory requirements.
There is also the risk of increased disclosure requirements; currency fluctuations; restrictions on the ability of local
operating companies to hold Canadian dollars, U.S. dollars or other foreign currencies in offshore bank accounts;
import and export regulations; increased regulatory requirements and restrictions; limitations on the repatriation of
earnings or on our ability to assist in minimizing our expatriate workforce’s exposure to double taxation in both the
home and host jurisdictions; and increased financing costs.
These risks may limit or disrupt our joint ventures, strategic alliances or investments, restrict the movement of funds,
cause us to have to expend more funds than previously expected or required, or result in the deprivation of contract
rights or the taking of property by nationalization or expropriation without fair compensation, and may materially
adversely affect our financial position and/or results of operations. In addition, the enforcement by us of our legal
rights in foreign countries, including rights to exploit our properties or utilize our permits and licenses and contractual
rights may not be recognized by the court systems in such foreign countries or enforced in accordance with the rule
of law.
We may invest in companies, or engage in joint ventures, in countries with developing economies. It is difficult to
predict the future political, social and economic direction of the countries in which we operate, and the impact
government decisions may have on our business. Any political or economic instability in the countries in which we
operate could have a material and adverse effect on our business, financial condition and results of operations.
If we choose to engage in other R&D activities outside of Canada, controlled substance and other legislation and
treaties may restrict or limit our ability to research, manufacture and develop a commercial market for our
products.
Approximately 250 substances, including cannabis, are listed in the Schedules annexed to the UN Single Convention,
the Convention on Psychotropic Substances (Vienna, 1971) and the Convention against Illicit Traffic in Narcotic
49
Drugs and Psychotropic Substances (introducing control on precursors) (Vienna, 1988). The purpose of these listings
is to control and limit the use of these drugs according to a classification of their therapeutic value, risk of abuse and
health dangers, and to minimize the diversion of precursor chemicals to illegal drug manufacturers. The 1961 UN
Single Convention on Narcotic Drugs, as amended in 1972 classifies cannabis as Schedule I (“substances with
addictive properties, presenting a serious risk of abuse”) and as Schedule IV (“the most dangerous substances, already
listed in Schedule I, which are particularly harmful and of extremely limited medical or therapeutic value”) narcotic
drug. The 1971 UN Convention on Psychotropic Substances classifies THC – the principal psychoactive cannabinoid
of cannabis – as a Schedule I psychotropic substance (substances presenting a high risk of abuse, posing a particularly,
serious threat to public health which are of very little or no therapeutic value). Many countries are parties to these
conventions, which govern international trade and domestic control of these substances, including cannabis. They may
interpret and implement their obligations in a way that creates a legal obstacle to us obtaining manufacturing and/or
marketing approval for our products in those countries. These countries may not be willing or able to amend or
otherwise modify their laws and regulations to permit our products to be manufactured and/or marketed, or achieving
such amendments to the laws and regulations may take a prolonged period of time. For a description of the regulatory
framework applicable to the Ginkgo Strategic Partnership, see “Description of the Business – Regulatory Framework
Applicable to Ginkgo Strategic Partnership”.
Our use of joint ventures may expose us to risks associated with jointly owned investments.
We currently operate parts of our business through joint ventures with other companies, and we may enter into
additional joint ventures and strategic alliances in the future. Joint venture investments may involve risks not
otherwise present for investments made solely by us, including: (i) we may not control the joint ventures; (ii) our joint
venture partners may not agree to distributions that we believe are appropriate; (iii) where we do not have substantial
decision-making authority, we may experience impasses or disputes with our joint venture partners on certain
decisions, which could require us to expend additional resources to resolve such impasses or disputes, including
litigation or arbitration; (iv) our joint venture partners may become insolvent or bankrupt, fail to fund their share of
required capital contributions or fail to fulfil their obligations as a joint venture partner; (v) the arrangements governing
our joint ventures may contain certain conditions or milestone events that may never be satisfied or achieved; (vi) our
joint venture partners may have business or economic interests that are inconsistent with ours and may take actions
contrary to our interests; (vii) we may suffer losses as a result of actions taken by our joint venture partners with
respect to our joint venture investments; and (viii) it may be difficult for us to exit a joint venture if an impasse arises
or if we desire to sell our interest for any reason. Any of the foregoing risks could have a material adverse effect on
our business, financial condition and results of operations. In addition, we may, in certain circumstances, be liable for
the actions of our joint venture partners.
There can be no assurance that our current and future strategic alliances or expansions of scope of existing
relationships will have a beneficial impact on our business, financial condition and results of operations.
We currently have, and may in the future enter into, additional strategic alliances with third parties that we believe
will complement or augment our existing business. Our ability to complete strategic alliances is dependent upon, and
may be limited by, the availability of suitable candidates and capital. In addition, strategic alliances could present
unforeseen integration obstacles or costs, may not enhance our business, and may involve risks that could adversely
affect us, including significant amounts of management time that may be diverted from operations in order to pursue
and complete such transactions or maintain such strategic alliances. Future strategic alliances could result in the
incurrence of additional debt, costs and contingent liabilities, and there can be no assurance that future strategic
alliances will achieve, or that our existing strategic alliances will continue to achieve, the expected benefits to our
business or that we will be able to consummate future strategic alliances on satisfactory terms, or at all. Any of the
foregoing could have a material adverse effect on our business, financial condition and results of operations.
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In the case of the Ginkgo Strategic Partnership, the Company will have, pursuant to the Ginkgo Collaboration
Agreement, the exclusive right to use and commercialize the key patented intellectual property related to the
production of the target cannabinoids globally. However, there can be no assurance that Ginkgo will be able to develop
microorganisms that we will be able to commercialize or to obtain patents relating to production of the target
cannabinoids, or that third parties will not develop similar microorganisms or obtain patents that may restrict our
ability to commercialize the microorganisms developed by Ginkgo, and, as a result, there can be no assurance that we
will be able to realize the expected benefits of the Ginkgo Strategic Partnership. Even if we are able to commercialize,
there may not be demand for such products or the cultured cannabinoids developed therefrom.
Pursuant to the Ginkgo Collaboration Agreement, upon Ginkgo’s demonstration that the microorganisms are capable
of producing the target cannabinoids above a minimum productivity level, the Company will issue to Ginkgo up to
approximately 14.7 million common shares in the aggregate. Tranches of these common shares will be issued as each
of the Equity Milestone Events is reached. The issuance of such common shares, if any, would dilute holders of
common shares.
In addition, pursuant to the Ginkgo Collaboration Agreement, if the Company undergoes a change of control that is
approved by the Board, Ginkgo may elect to receive cash payments, totalling up to US$100 million, in lieu of the
common shares that would otherwise become issuable in connection with any Equity Milestone Events achieved
following such election (the “Milestone Cash Election”). If the Company undergoes a change in control that has not
been approved by the Board, then Ginkgo will have the ability to terminate the Ginkgo Collaboration Agreement
immediately, in which case, among other things: (i) all rights or licenses granted to the Company by Ginkgo under the
Ginkgo Collaboration Agreement will terminate; (ii) certain expenses and costs incurred by Ginkgo will be accelerated
and become due and payable by the Company; (iii) the then-outstanding and unpaid portion of all cash payments from
the Company to Ginkgo for the achievement of R&D milestones by Ginkgo shall be due immediately as if all R&D
milestones had been achieved; and (iv) a lump sum cash payment equal to the aggregate of all Milestone Cash Election
amounts in respect of which the relevant Equity Milestone Events have not yet been achieved will be immediately due
and payable by the Company. We may not have enough cash to pay any cash obligations with respect to any change
of control contemplated by the Ginkgo Collaboration Agreement. In such event, we would need to finance such
payment through additional debt or equity financing, which might not be available on acceptable terms, or at all. In
addition, should Ginkgo terminate the Ginkgo Collaboration Agreement upon a change of control, we will no longer
be able to use or commercialize the key patented intellectual property related to the production of the target
cannabinoids, which could have a material adverse effect on our business, financial condition and results of operations.
See “Description of Business – Recent Company Developments - Strategic Partnership with Ginkgo”.
In the case of the Technion Research Agreement, the Company will have access to the results of preclinical studies
conducted by Technion over a three-year period, focusing on acne, psoriasis and skin repair. However, there can be
no assurance that the preclinical studies will provide any actionable findings, as a result, there can be no assurance
that we will be able to realize the expected benefits of the Technion Research Agreement. Even if the results are
actionable, and we are able to develop commercial products based on such research, there may not be demand for such
products. See “Description of Business – Recent Company Developments – Technion Research Agreement”.
We and certain of our subsidiaries have limited operating history and therefore we are subject to many of the risks
common to early-stage enterprises.
We began carrying on business in 2013; Peace Naturals began operations in 2012 and generated its first revenues in
2013; OGBC began operations in 2014 and generated its first revenue in 2017 (inter-company bulk transfer). In
addition, our joint ventures are not yet operational and may not become operational for some time, if at all. We are
therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash
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shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no
assurance that we will be successful in achieving a return on shareholders’ investment and the likelihood of success
must be considered in light of the early stage of operations. See “Description of the Business – Business of the
Company – Joint Ventures and International Activities.”
Our existing production facilities in Canada are integral to our operations and any adverse changes or
developments affecting our facilities may impact our business, financial condition and results of operations.
Our activities and resources are focused on the Peace Naturals facility near Stayner, Ontario, which includes three
fully operational cultivation buildings, and the OGBC facility in Armstrong, British Columbia, which includes one
operational cultivation building. The Peace Naturals Licenses and the OGBC Production Licenses are specific to those
facilities. Adverse changes or developments affecting either facility, including but not limited to a breach of security
or a force majeure event, could have a material and adverse effect on our business, financial condition and prospects.
Any breach of the security measures and other facility requirements, including any failure to comply with
recommendations or requirements arising from inspections by Health Canada, could also have an impact on our ability
to continue operating under our licenses or the prospect of renewing our licenses or could result in a revocation of our
licenses.
We own both of our facilities and bear the responsibility for all of the costs of maintenance and upkeep. Our operations
and financial performance may be adversely affected if either Peace Naturals or OGBC are unable to keep up with
maintenance requirements.
We may not successfully execute our production capacity expansion strategy.
We may not be successful in executing our strategy to expand production capacity at our facilities and joint ventures.
Building 4 may not become fully operational in a timely fashion, or at all. We may also not be successful in expanding
production at Cronos Israel’s facilities or completing construction of Cronos Australia’s initial production campus. In
addition, commencement of construction of the proposed production facilities of NatuEra and Cronos Australia will
be subject to obtaining the relevant building permits and other customary approvals, and the commencement of
operations of Cronos GrowCo will be subject to obtaining the appropriate licenses from Health Canada. Construction
delays or cost over-runs in respect of such build-outs, howsoever caused, could have a material adverse effect on our
business, financial condition and results of operations.
In addition, no assurance can be given that Health Canada will approve any amendment to the Peace Naturals Licenses
to increase production volumes or permit sales of cannabis-based medical products under such license. We may also
not be successful in obtaining the necessary approvals required to export or import our products to or from the
jurisdictions in which we operate. If we are unable to secure necessary production licenses in respect of our facilities
and joint ventures, the expectations of management with respect to the increased future cultivation and growing
capacity may not be borne out, which could have a material adverse effect on our business, financial condition and
results of operations.
The cannabis industry and markets are relatively new in Canada and in other jurisdictions, and this industry and
market may not continue to exist or grow as anticipated or we may ultimately be unable to succeed in this industry
and market.
We are operating our business in a relatively new industry and market. In addition to being subject to general business
risks, a business involving an agricultural product and a regulated consumer product, we need to continue to build
brand awareness in this industry and market through significant investments in our strategy, our production capacity,
quality assurance and compliance with regulations. These activities may not promote our brand and products as
effectively as intended, or at all. Competitive conditions, consumer tastes, patient requirements and spending patterns
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in this new industry and market are relatively unknown and may have unique circumstances that differ from existing
industries and markets.
Accordingly, there are no assurances that this industry and market will continue to exist or grow as currently estimated
or anticipated, or function and evolve in a manner consistent with management’s expectations and assumptions. Any
event or circumstance that affects the cannabis industry and market could have a material adverse effect on our
business, financial condition and results of operations.
The Canadian excise duty framework may affect profitability.
Canada's excise duty framework imposes an excise duty and various regulatory-like restrictions on certain cannabis
products sold in Canada. We currently hold all licenses issued by the Canada Revenue Agency (“CRA”) required to
comply with this excise framework. Although we believe we will meet the requirements of the Excise Act, 2001 and
the regulations thereunder for maintenance and extension of our licenses, there can be no guarantee that CRA will
extend or renew the licenses or that CRA will not revoke the licenses. Should CRA not extend or renew the licenses,
or should we have the licenses revoked, our business, financial condition and results of operations will be materially
adversely affected. Additionally, any change in the rates or application of excise duty to cannabis products sold by
us, and any restrictive interpretations by the CRA or the courts of the regulatory-like restrictions contained in the
Excise Act, 2001 (which may be different than those contained in the Cannabis Act) may affect our profitability and
ability to compete in the market.
We are dependent on our senior management.
Our success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management.
While employment agreements are customarily used as a primary method of retaining the services of key employees,
these agreements cannot assure the continued services of our senior management team. Qualified individuals are in
high demand, and we may incur significant costs to attract and retain them. The loss of the services of a member of
senior management, or an inability to attract other suitably qualified persons when needed, could have a material
adverse effect on our ability to execute on our business plan and strategy, and we may be unable to find adequate
replacements on a timely basis, or at all. We do not maintain key-person insurance on the lives of any of our officers
or employees.
We may be subject to product liability claims.
As a manufacturer and distributor of products designed to be ingested by humans, we face an inherent risk of exposure
to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss
or injury. In addition, the manufacture and sale of cannabis products involve the risk of injury to consumers due to
tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting
from human consumption of cannabis products alone or in combination with other medications or substances could
occur. We may be subject to various product liability claims, including, among others, that the products produced by
Peace Naturals and OGBC caused injury or illness, include inadequate instructions for use or include inadequate
warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory
action against us could result in increased costs, could adversely affect our reputation with our clients and consumers
generally, and could have a material adverse effect on our business, financial condition and results of operations.
There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the
future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could prevent or inhibit the commercialization of products.
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Our products may be subject to recalls.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety
of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other
substances, packaging safety and inadequate or inaccurate labeling disclosure. If one or more of our products are
recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense
of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount
of sales and may not be able to replace those sales at an acceptable margin, or at all. In addition, a product recall may
require significant management attention. Although we have detailed procedures in place for testing finished products,
there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid
unforeseen product recalls, regulatory action or lawsuits. Additionally, if one or more of our products were subject to
recall, the public perception of that product and us could be harmed. A recall for any of the foregoing reasons could
lead to decreased demand for products produced by us and could have a material adverse effect on our business,
financial condition and results of operations. Additionally, product recalls may lead to increased scrutiny of our
operations by Health Canada or other regulatory agencies, requiring further management attention and potential legal
fees and other expenses. Furthermore, any product recall affecting the cannabis industry more broadly could lead
consumers to lose confidence in the safety and security of the products sold by License Holders generally, which could
have a material adverse effect on our business, financial condition and results of operations.
We may be unable to attract or retain skilled labor and personnel with experience in the cannabis sector, and may
be unable to attract, develop and retain additional employees required for our operations and future developments.
We may be unable to attract or retain employees with sufficient experience in the cannabis industry, and may prove
unable to attract, develop and retain additional employees required for our development and future success.
Our success is currently largely dependent on the performance of our skilled employees. Our future success depends
on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified
individuals are in high demand, and we may incur significant costs to attract and retain them.
Further, certain shareholders, directors, officers and employees may require security clearance from Health Canada.
Under the Cannabis Act, a security clearance cannot be valid for more than five years and must be renewed before the
expiry of a current security clearance. There is no assurance that any of our existing personnel who presently or may
in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who
require a security clearance will be able to obtain one. A failure by an employee to maintain or renew his or her
security clearance would result in a material adverse effect on our business, financial condition and results of
operations. In addition, if an employee with security clearance leaves and we are unable to find a suitable replacement
that has a security clearance required by the Cannabis Act in a timely manner, or at all, there could occur a material
adverse effect on our business, financial condition and results of operations.
We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative
consumer perception.
We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and
quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific
research or findings, regulatory investigations, litigation, media attention, market rumours or speculation and other
publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research,
findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable
to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings,
regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that
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question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our
business, financial condition and results of operations. Our dependence upon consumer perceptions means that adverse
scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or
not accurate or with merit, could have a material adverse effect on our business, financial condition and results of
operations, the demand for products, and our business, results of operations, financial condition and cash flows.
Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis in
general, or our products specifically, or associating the consumption of cannabis with illness or other negative effects
or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could
arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such
products legally, appropriately or as directed.
The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated
content and to connect with other users has made it increasingly easier for individuals and groups to communicate and
share opinions and views on our operations and activities, whether true or not, and the cannabis industry in general,
whether true or not. Social media permits user generated content to be distributed to a broad audience which can
respond or react, in near real time, with comments that are often not filtered or checked for accuracy. Accordingly,
the speed with which negative publicity (whether true or not) can be disseminated has increased dramatically with the
expansion of social media. The dissemination of negative or inaccurate posts, comments or other user-generated
content about us on social media (including those published by third-parties) could damage our brand, image and
reputation or how the cannabis industry is perceived generally, which could have a detrimental impact on the market
for our products and thus on our business, financial condition and results of operations.
In addition, certain well-funded and significant businesses may have strong economic opposition to the cannabis
industry. Lobbying by such groups, and any resulting inroads they might make in halting or rolling back the cannabis
movement, could affect how the cannabis industry is perceived by others and could have a detrimental impact on the
market for our products and thus on our business, financial condition and results of operations.
Although we believe that we operate in a manner that is respectful to all stakeholders and that we take care in protecting
our image and reputation, we do not ultimately have direct control over how we or the cannabis industry is perceived
by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and
maintaining community relations and an impediment to our overall ability to advance our business strategy and realize
on our growth prospects, thereby having a material adverse impact on our business, financial condition and results of
operations.
We may not be able to successfully develop new products or find a market for their sale.
The legal cannabis industry in Canada is in its early stages of development and it is likely that we, and our competitors,
will seek to introduce new products in the future. In attempting to keep pace with any new market developments, we
may need to spend significant amounts of capital in order to successfully develop and generate revenues from new
products we introduce. As well, we may be required to obtain additional regulatory approvals from Health Canada
and any other applicable regulatory authority, which may take significant amounts of time. We may not be successful
in developing effective and safe new products, bringing such products to market in time to be effectively
commercialized, or obtaining any required regulatory approvals, and, in the event we are successful, it is possible that
there may be little or no demand for the products we develop, which, together with any capital expenditures made in
the course of such product development and regulatory approval processes, may have a material adverse effect on our
business, financial condition and results of operations.
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The technologies, process and formulations we use may face competition or become obsolete.
Rapidly changing markets, technology, emerging industry standards and frequent introduction of new products
characterize our business. The introduction of new products embodying new technologies, including new
manufacturing processes or formulations, and the emergence of new industry standards may render our products
obsolete, less competitive or less marketable. The process of developing our products is complex and requires
significant continuing costs, development efforts and third-party commitments, including licensees, researchers,
collaborators and lenders. Our failure to develop new technologies and products and the obsolescence of existing
technologies or processes could adversely affect our business, financial condition and results of operations. We may
be unable to anticipate changes in our potential customer requirements that could make our existing technology,
processes or formulations obsolete. Our success will depend in part, on our ability to continue to enhance our existing
technologies, develop new technology that addresses the increasing sophistication and varied news of the market, and
respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis.
The development of our proprietary technology, processes and formulations entails significant technical and business
risks. We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting
our business to evolving customer or medical requirements or preference or emerging industry standards.
Clinical trials of cannabis-based medical products and treatments are novel terrain with very limited or non-
existent clinical trials history; we face a significant risk that any trials will not result in commercially viable
products and treatments.
Clinical trials are expensive, time consuming and difficult to design and implement. Regulatory authorities, may
suspend, delay or terminate any clinical trials we commence at any time, may require us, for various reasons, to
conduct additional clinical trials, or may require a particular clinical trial to continue for a longer duration than
originally planned. Clinical trials face many risks, including, among others:
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lack of effectiveness of any formulation or delivery system during clinical trials;
discovery of serious or unexpected toxicities or side effects experienced by trial participants or other safety
issues;
slower than expected subject recruitment and enrollment rates in clinical trials;
delays or inability in manufacturing or in obtaining sufficient quantities of materials for use in clinical trials
due to regulatory and manufacturing constraints;
delays in obtaining regulatory authorization to commence a trial, including licenses required for obtaining
and using cannabis for research, either before or after a trial is commenced;
unfavorable results from ongoing pre-clinical studies and clinical trials;
patients or investigators failing to comply with study protocols;
patients failing to return for post-treatment follow-up at the expected rate;
sites participating in an ongoing clinical study withdraw, requiring us to engage new sites; and
third-party clinical investigators decline to participate in our clinical studies, do not perform the clinical
studies on the anticipated schedule, or act in ways inconsistent with the established investigator agreement,
clinical study protocol or good clinical practices.
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Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
We may fail to retain existing customers or acquire new customers.
Our success depends on our ability to attract and retain clients. There are many factors which could affect our ability
to attract and retain clients, including but not limited to our ability to continually produce desirable and effective
product, the successful implementation of our client-acquisition plan and the continued growth in the aggregate
number of patients selecting medical cannabis as a treatment option. Moreover, even if we are successful at attracting
a new client, there is no guarantee that such client will continue to purchase product from us. For example, while
Peace Naturals has many registered patients, the actual number of patients purchasing products from Peace Naturals
may vary from time to time. Our failure to acquire and retain customers would have a material adverse effect on our
business, financial condition and results of operations.
We may not be able to achieve or maintain profitability and may continue to incur losses in the future.
We have incurred losses in recent periods. We may not be able to achieve or maintain profitability and may continue
to incur significant losses in the future. In addition, we expect to continue to increase operating expenses as we
implement initiatives to continue to grow our business. If our revenues do not increase to offset these expected
increases in costs and operating expenses, we will not be profitable. There is no assurance that future revenues will be
sufficient to generate the funds required to continue operations without external funding.
We may not be able to secure adequate or reliable sources of funding required to operate our business.
There is no guarantee that we will be able to achieve our business objectives. Our continued development may require
additional financing. The failure to raise such capital could result in a delay or indefinite postponement of our current
business objectives or cause us to go out of business. There can be no assurance that additional capital or other types
of financing will be available if needed or that, if available, the terms of such financing will be favorable to us. If
additional funds are raised through issuances of equity or convertible debt securities, existing shareholders could suffer
significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to
those of holders of common shares. In addition, from time to time, we may enter into transactions to acquire assets or
the shares of other corporations. These transactions may be financed wholly or partially with debt, which may
temporarily increase our debt levels above industry standards. Any debt financing secured in the future could involve
restrictive covenants relating to capital raising activities and other financial and operational matters, which may make
it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions
or other strategic joint venture opportunities.
We had negative operating cash flow for the fiscal years ending December 31, 2018, December 31, 2017,
December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013. If we continue to have negative
cash flow into the future, additional financing proceeds may need to be allocated to funding this negative cash flow in
addition to our operational expenses. We may require additional financing to fund our operations to the point where
we are generating positive cash flows. Continued negative cash flow may restrict our ability to pursue our business
objectives.
The adult-use cannabis market in Canada may become oversupplied following the recent implementation of the
Cannabis Act and the related legalization of cannabis for adult-use.
As a result of the recent implementation of the Cannabis Act and the legalization of adult cannabis use, numerous
additional cannabis producers may enter the Canadian market. We and such other cannabis producers may produce
more cannabis than is needed to satisfy the collective demand of the Canadian medical and proposed adult-use
markets, and we may be unable to export that over-supply into other markets where cannabis use is fully legal under
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all federal and state or provincial laws. As a result, the available supply of cannabis could exceed demand, resulting
in a significant decline in the market price for cannabis. If this were to occur, there is no assurance that we would be
able to generate sufficient revenue from the sale of adult-use cannabis to result in profitability, which could have a
material adverse effect on our business, financial condition and results of operations.
We must rely largely on our own market research to forecast sales and market demand which may not materialize.
We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable
from other sources at this early stage of the cannabis industry in Canada or in other international jurisdictions. A
failure in the demand for our products to materialize as a result of competition, technological change or other factors
could have a material adverse effect on our business, financial condition and results of operations.
We may experience breaches of security at our facilities or fraudulent or unpermitted data access or other cyber-
security breaches, which may cause our customers to lose confidence in our security and data protection measures
and may expose us to risks related to breaches of applicable privacy laws.
Given the nature of our product and our lack of legal availability outside of channels approved by the Government of
Canada, as well as the concentration of inventory in our facilities, despite meeting or exceeding Health Canada’s
security requirements, there remains a risk of shrinkage as well as theft. A security breach at one of our facilities could
expose us to additional liability and to potentially costly litigation, increase expenses relating to the resolution and
future prevention of these breaches and may deter potential customers from choosing our products.
In addition, we collect and store personal information about our customers and are responsible for protecting that
information from privacy breaches. A privacy breach may occur through a variety of sources, including, without
limitation procedural or process failure, information technology malfunction, deliberate unauthorized intrusions,
computer viruses, cyber-attacks and other electronic security breaches. Theft of data for competitive purposes, such
as customer lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or
through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on our business,
financial condition and results of operations.
We are dependent upon information technology systems in the conduct of our operations and we collect, store and use
certain sensitive data, intellectual property, our proprietary business information and certain personally identifiable
information of our employees and customers on our networks. Any fraudulent, malicious or accidental breach of our
data security could result in unintentional disclosure of, or unauthorized access to, third party, customer, vendor,
employee or other confidential or sensitive data or information, which could potentially result in additional costs to
the Company to enhance security or to respond to occurrences, lost sales, violations of privacy or other laws, penalties,
fines, regulatory action or litigation. In addition, media or other reports of perceived security vulnerabilities to our
systems or those of our third-party suppliers, even if no breach has been attempted or occurred, could adversely impact
our brand and reputation and customers could lose confidence in our security measures and reliability, which would
harm our ability to retain customers and gain new ones. If any of these were to occur, it could have a material adverse
effect on our business and results of operations.
In addition, there are a number of federal and provincial laws protecting the confidentiality of certain patient health
information, including patient records, and restricting the use and disclosure of that protected information. The privacy
rules under the Personal Information Protection and Electronics Documents Act (Canada) (“PIPEDA”) protect
medical records and other personal health information by limiting their use and disclosure of health information to the
minimum level reasonably necessary to accomplish the intended purpose. If we were to be found to be in violation of
the privacy or security rules under PIPEDA or other laws protecting the confidentiality of patient health information,
we could be subject to sanctions and civil or criminal penalties, which could increase our liabilities, harm our
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reputation and have a material adverse effect on our business, results of operations and financial condition.
International jurisdictions in which we expand our operations also have similar privacy and security laws to which we
are subject, depending on the nature of our operations in such jurisdictions.
If we are not able to comply with all safety, health and environmental regulations applicable to our operations and
industry, we may be held liable for any breaches thereof.
Our operations are subject to environmental and safety laws and regulations concerning, among other things,
emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials
and wastes, and employee health and safety. We will incur ongoing costs and obligations related to compliance with
environmental and employee health and safety matters. Failure to comply with environmental and employee health
and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions on
our manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more
vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations or give
rise to material liabilities, which could have a material adverse effect on our business, financial condition and results
of operations.
We may become involved in regulatory or agency proceedings, investigations and audits.
Our business requires compliance with many laws and regulations. Failure to comply with these laws and regulations
could subject us to regulatory or agency proceedings or investigations and could also lead to damage awards, fines
and penalties. We may become involved in a number of government or agency proceedings, investigations and audits.
The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm our
reputation, require us to take, or refrain from taking, actions that could harm our operations or require us to pay
substantial amounts of money, harming our financial condition. There can be no assurance that any pending or future
regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of
management’s attention and resources or have a material adverse impact on our business, financial condition and
results of operations.
We may be subject to, or prosecute, litigation in the ordinary course of business.
We are subject to litigation, claims and other legal and regulatory proceedings from time to time in the ordinary course
of business, some of which may adversely affect our business, financial condition and results of operations. Plaintiffs
in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive
damages, which may remain unknown for substantial periods of time. Should any litigation in which we become
involved be determined against us, such a decision could adversely affect our ability to continue operating, the market
price for the common shares and could require the use of significant resources. Even if we are involved in litigation
and win, litigation can redirect significant resources. Litigation may also create a negative perception of our brand,
which could have an adverse effect on our business, financial condition and results of operations.
We may not be able to successfully manage our growth.
We are currently in an early development stage and may be subject to growth-related risks, including capacity
constraints and pressure on our internal systems and controls, which may place significant strain on our operational
and managerial resources. While our revenue has grown in recent years, our ability to manage and sustain revenue
growth will depend on a number of factors, many of which are beyond our control, including, but not limited to, the
availability of sufficient capital on suitable terms, changes in laws and regulations respecting the production of
cannabis products, competition from other License Holders, the size of the black market and the proposed legal adult-
use market, and our ability to produce sufficient volumes of our cannabis-based pharmaceutical products to meet
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patient demand. In addition, we are subject to a variety of business risks generally associated with developing
companies. Our ability to manage growth effectively will require us to continue to implement and improve our
operational and financial systems and to expand, train and manage our employee base. There can be no assurances
that we will be able to manage growth successfully. Any inability to manage growth successfully could have a material
adverse effect on our business, financial condition and results of operations.
We may compete for market share with other companies, both domestically and internationally, that may have
longer operating histories and more financial resources, manufacturing and marketing experience than us.
We do, and expect to continue to face, intense competition from other companies, some of which can be expected to
have longer operating histories and more financial resources, manufacturing and marketing experience than us. In
addition, there is potential that the cannabis industry will undergo consolidation, creating larger companies with
financial resources, manufacturing and marketing capabilities, and product offerings that are greater than ours. As a
result of this competition, we may be unable to maintain our operations or develop them as currently proposed on
terms we consider acceptable, or at all. Increased competition by larger, better-financed competitors with geographic
advantages could materially and adversely affect our business, financial condition and results of operations.
On the domestic front, the number of licenses granted and the number of License Holders ultimately authorized by
Health Canada could also have an impact on our operations. We expect to face additional competition from new
market entrants that are granted licenses under the Cannabis Act or existing License Holders which are not yet active
in the industry. If a significant number of new licenses are granted by Health Canada in the near term, we may
experience increased competition for market share and may experience downward price pressure on our products as
new entrants increase production. We also face competition from illegal dispensaries and the black market that are
unlicensed and unregulated, and that are selling cannabis and cannabis products, including products with higher
concentrations of active ingredients, and using delivery methods that we are prohibited from offering to individuals
as they are not currently permitted by the Cannabis Act. Any inability or unwillingness of law enforcement authorities
to enforce existing laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products could
result in the perpetuation of the black market for cannabis and/or have a material adverse effect on the perception of
cannabis use. Any or all of these events could have a material adverse effect on our business, financial condition and
results of operations.
If the number of users of cannabis for medical purposes in Canada increases, the demand for products will increase
and we expect that competition will become more intense, as current and future competitors begin to offer an
increasing number of diversified products. Further, the adult-use market may detract from medical sales. To remain
competitive, we will require a continued high level of investment in R&D, sales and customer support. We may not
have sufficient resources to maintain R&D, sales and customer support efforts on a competitive basis which could
have a material adverse effect on our business, financial condition and results of operations.
Furthermore, the federal authorization of home cultivation, outdoor grow, and the easing of other barriers to entry into
a Canadian adult-use cannabis market, could materially and adversely affect our business, financial condition and
results of operations. There is potential that we will face intense competition from other companies, some of which
can be expected to have longer operating histories and more financial resources, manufacturing and marketing
experience than us. Increased competition by larger and better financed competitors could materially and adversely
affect our business, financial condition and results of operations.
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We rely on third-party distributors to distribute our products, and those distributors may not perform their
obligations.
We rely on third-party distributors, including pharmaceutical distributors and other courier services, and may in the
future rely on other third parties, to distribute our products. If these distributors do not successfully carry out their
contractual duties, if there is a delay or interruption in the distribution of our products or if these third parties damage
our products, it could negatively impact our revenue. In addition, any damage to our products, such as product
spoilage, could expose us to potential product liability, damage our reputation and the reputation of our brands or
otherwise harm our business.
We may not supply the provinces and territories of Canada with our products in the quantities anticipated, or at
all.
We have entered into binding Master Supply Agreements with the Ontario Cannabis Retail Corporation and the British
Columbia Liquor Distribution Branch, have secured listings and Supplier Terms and Conditions with the Nova Scotia
Liquor Corporation and Prince Edward Island Liquor Corporation and have secured listings with various private
retailers in Saskatchewan. The Master Supply Agreements, each of which we understand to be substantially similar in
all material respects with the master supply agreements entered into with the other License Holders in the cannabis
industry, do not contain any binding minimum purchase obligations on the part of the relevant provincial purchaser.
Such Master Supply Agreements contain provisions stating that the relevant provincial purchaser has no obligation to
purchase any products from us. Similarly, the Supplier Terms and Conditions, which we understand to be substantially
similar in all material respects with the supplier terms and conditions provided to other License Holders in the cannabis
industry, do not contain any minimum purchaser obligations from either of the relevant provincial purchasers.
Given that the above-mentioned arrangements are intended to facilitate purchases on a continuing basis, rather than
provide for one-time purchases, we expect purchase orders to be primarily driven by end-consumer demand for our
products and the relevant provincial purchaser supply at the relevant time. Accordingly, we cannot predict the
quantities of our products that will be purchased by the provincial purchasers, or if our products will be purchased at
all. Any inability to secure purchase orders with the various provincial purchasers could have a material adverse effect
on our business, financial condition or results of operations.
Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result
of their relationship with us and may, as a result, refuse to do business with us.
The parties with which we do business may perceive that they are exposed to reputational risk as a result of our
cannabis business activities. Failure to establish or maintain business relationships could have a material adverse effect
on our business, financial condition and results of operations. Any third-party service provider could suspend or
withdraw its services to us if it perceives that the potential risks exceed the potential benefits to such services. For
example, we face challenges making U.S. dollar wire transfers or engaging any third-party supplier with a substantial
presence where cannabis is not federally legal (including the U.S.). While we have other banking relationships and
believe that the services can be procured from other institutions, we may in the future have difficulty maintaining
existing, or securing new, bank accounts or clearing services.
U.S. border officials could deny entry into the U.S. to our management, employees and/or investors.
Because cannabis remains illegal under U.S. federal law, those employed at or investing in legal and licensed Canadian
cannabis companies could face detention, denial of entry or lifetime bans from the U.S. for their business associations
with cannabis businesses. Entry happens at the sole discretion of the U.S. Customs and Border Protection officers on
duty, and these officers have wide latitude to ask questions to determine the admissibility of a foreign national. The
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government of Canada has started warning travelers on its website that previous use of cannabis, or any substance
prohibited by U.S. federal laws, could mean denial of entry to the U.S. Travellers attempting to enter the U.S. for
reasons related to the cannabis industry may be deemed inadmissible, and business or financial involvement in the
legal cannabis industry in Canada or in the U.S. could also be reason enough for U.S. border guards to deny entry.
Our cannabis cultivation operations are subject to risks inherent in an agricultural business.
Our business involves the growing of cannabis, an agricultural product. As such, the business is subject to the risks
inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks that may create crop
failures and supply interruptions for our customers. Although our current operational production facilities grow
products indoors under climate controlled conditions and we carefully monitor the growing conditions with trained
personnel, there can be no assurance that natural elements will not have a material adverse effect on the production of
our products.
Our cannabis cultivation operations are vulnerable to rising energy costs and dependent upon key inputs.
Our cannabis cultivation operations consume considerable energy, making us vulnerable to rising energy costs. Rising
or volatile energy costs may have a material adverse effect our business, financial condition and results of operations.
In addition, our business is dependent on a number of key inputs and their related costs including raw materials and
supplies related to our growing operations, as well as electricity, water and other utilities. Any significant interruption
or negative change in the availability or economics of the supply chain for key inputs could materially impact our
financial condition and results of operations. Any inability to secure required supplies and services or to do so on
appropriate terms could have a materially adverse impact on our business, financial condition and results of operations.
We are vulnerable to third party transportation risks.
Due to our direct to client shipping model, we depend on fast and efficient courier services to distribute our product.
Any prolonged disruption of this courier service may have a material adverse effect on our business, financial
condition and results of operations. Rising costs associated with the courier services used by us to ship our products
may also have a material adverse effect on our business, financial condition and results of operations.
Due to the nature of our products, security of the product during transportation to and from our facilities is of the
utmost concern. A breach of security during transport or delivery could have a material adverse effect on our business,
financial condition and results of operations. Any breach of the security measures during transport or delivery,
including any failure to comply with recommendations or requirements of Health Canada, could also have an impact
on our ability to continue operating under our licenses or the prospect of renewing our licenses.
We are subject to liability arising from any fraudulent or illegal activity by our employees, contractors and
consultants.
We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or
other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or
disclosure of unauthorized activities to us that violates: (i) government regulations; (ii) manufacturing standards;
(iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete
and accurate reporting of financial information or data. It is not always possible for us to identify and deter misconduct
by our employees and other third parties, and the precautions taken by us to detect and prevent this activity may not
be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations
or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such
actions are brought against us, and we are not successful in defending our self or asserting our rights, those actions
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could have a significant impact on our business, including the imposition of civil, criminal and administrative
penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings,
and the curtailment of our operations, any of which could have a material adverse effect on our business, financial
condition and results of operations.
We will seek to maintain adequate insurance coverage in respect of the risks we face, however, insurance premiums
for such insurance may not continue to be commercially justifiable and there may be coverage limitations and
other exclusions which may not be sufficient to cover our potential liabilities.
We have insurance to protect our assets, operations and employees. While we believe our insurance coverage
addresses all material risks to which we are exposed and is adequate and customary in our current state of operations,
such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which
we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities or
will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to
incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we
were to incur such liability at a time when we are not able to obtain liability insurance, there could be a material
adverse effect on our business, financial condition and results of operations.
We are subject to certain restrictions of the TSX which may constrain our ability to expand our business
internationally.
On May 23, 2018, our common shares commenced trading on the TSX. Being listed on the TSX creates exposure for
us at a higher level than what we experienced under the TSX-V. We must comply with the TSX guidelines when
conducting business, especially when pursuing international opportunities.
On October 16, 2017, the TSX provided clarity regarding the application of Section 306 (Minimum Listing
Requirements), Section 325 (Management) and Part VII (Halting of Trading, Suspension and Delisting of Securities)
of the TSX Company Manual (collectively, the “Requirements”) to TSX-listed issuers with business activities in the
cannabis sector. In TSX Staff Notice 2017- 0009, the TSX notes that issuers with ongoing business activities that
violate U.S. federal law regarding cannabis are not in compliance with the Requirements. The TSX reminded issuers
that, among other things, should the TSX find that a listed issuer is engaging in activities contrary to the Requirements,
the TSX has the discretion to initiate a delisting review. Failure to comply with the Requirements could have a material
adverse effect on our business, financial condition and results of operations.
Failure to establish and maintain effective internal control over financial reporting may result in us not being able
to accurately report our financial results, which could result in a loss of investor confidence and adversely affect
the market price of our common shares.
We are responsible for establishing and maintaining adequate internal control over financial reporting, which is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with IFRS. Because of our inherent limitations and the fact
that we are now a non-venture company and are implementing new financial control and management systems, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. A failure to prevent or
detect errors or misstatements may result in a decline in the price of our common shares and harm our ability to raise
capital in the future.
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If our management is unable to certify the effectiveness of our internal controls or if material weaknesses or significant
deficiencies in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public
confidence, which could harm our business and cause a decline in the price of our common shares. In addition, if we
do not maintain adequate financial and management personnel, processes and controls, we may not be able to
accurately report our financial performance on a timely basis, which could cause a decline in the price of our common
shares and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis
could also jeopardize our listing on the TSX or NASDAQ. Delisting of our common shares on any exchange would
reduce the liquidity of the market for our common shares, which would reduce the price of and increase the volatility
of the price of our common shares.
We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent
all error or fraud. A control system, no matter how well-designed and implemented, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due
to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues within an organization are detected. The inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also
be circumvented by individual acts of certain persons, by collusion of two or more people or by management override
of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and may not be detected in a timely manner or at all. If we cannot provide reliable financial reports or
prevent fraud, our reputation and operating results could be materially adversely affected, which could also cause
investors to lose confidence in our reported financial information, which in turn could result in a reduction in the
trading price of the common shares.
We are subject to risks related to the protection and enforcement of our intellectual property rights, and may become
subject to allegations that we are in violation of intellectual property rights of third parties.
The ownership and protection of our intellectual property rights is a significant aspect of our future success. Currently
we rely on trade secrets, technical know-how and proprietary information that are not protected by patents to maintain
our competitive position. We try to protect our intellectual property by seeking and obtaining registered protection
where possible, developing and implementing standard operating procedures to protect trade secrets, technical know-
how and proprietary information and entering into agreements with parties that have access to our inventions, trade
secrets, technical know-how and proprietary information, such as our partners, collaborators, employees and
consultants, to protect confidentiality and ownership. We also seek to preserve the integrity and confidentiality of our
inventions, trade secrets, trademarks technical know-how and proprietary information by maintaining physical
security of our premises and physical and electronic security of our information technology systems.
It is possible that we will fail to identify inventions, trade secrets, technical know-how, trademarks and proprietary
information, will fail to protect such inventions and information, will inadvertently disclose such intellectual property
or will fail to register rights in relation to such intellectual property.
In relation to our agreements with parties that have access to our intellectual property, any of these parties may breach
these agreements and we may not have adequate remedies for any specific breach. In relation to our security measures,
such security measures may be breached and we may not have adequate remedies for any such breach. In addition,
our intellectual property which has not yet been applied for or registered may otherwise become known to or be
independently developed by competitors, or may already be the subject of applications for intellectual property
registrations filed by our competitors, which may have a material adverse effect on our business, financial condition
and results of operations.
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We cannot provide any assurances that our inventions, trade secrets, trademarks, technical know-how and other
proprietary information will not be disclosed in violation of agreements or that competitors will not otherwise gain
access to our intellectual property or independently develop and file applications for intellectual property rights that
adversely impact our intellectual property rights. Unauthorized parties may attempt to replicate or otherwise obtain
and use our inventions, trade secrets, trademarks, technical know-how and proprietary information. Policing the
unauthorized use of our current or future intellectual property rights could be difficult, expensive, time-consuming
and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use
of intellectual property rights is difficult as we may be unable to effectively monitor and evaluate the products being
distributed by our competitors, including parties such as unlicensed dispensaries, and the processes used to produce
such products. Additionally, if the steps taken to identify and protect our intellectual property rights are deemed
inadequate, we may have insufficient recourse against third parties for enforcement of our intellectual property rights.
Furthermore, the laws and positions of intellectual property offices administering such laws regarding intellectual
property rights relating to cannabis and cannabis-related products are constantly evolving and there is uncertainty
regarding which countries’ laws prohibit the filing, prosecution and issuance of applications for intellectual property
registrations in relation to cannabis and cannabis-related products and which countries’ laws prohibit the enforcement
of rights under intellectual property registrations in relation to cannabis and cannabis-related products.
In addition, we have sought trademark protection in many countries, including Canada and others. Our ability to obtain
registered trademark protection for cannabis-related goods and services, in particular for cannabis itself, may be
limited in certain countries outside of Canada, including the U.S., where registered federal trademark protection is
currently unavailable for trademarks covering the sale of cannabis products (a controlled substance); and including
the European Union, where laws on the legality of cannabis use are not uniform, and trademarks cannot be obtained
for products that are “contrary to public policy or accepted principles of morality”. Accordingly, our ability to obtain
intellectual property rights or enforce intellectual property rights against third party uses of similar trademarks may
be limited in certain countries.
Moreover, in any infringement proceeding, some or all of our current or future trademarks, patents or other intellectual
property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for our
benefit, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or
defense proceedings could put one or more of our current or future trademarks, patents or other intellectual property
rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at
risk of not being issued. Any or all of these events could materially and adversely affect our business, financial
condition and results of operations.
We cannot offer any assurances about which, if any, patent applications will issue, the breadth of any such patent or
whether any issued patents will be found invalid or unenforceable or which of our products or processes will be found
to infringe upon the patents or other proprietary rights of third parties. Any successful opposition to future issued
patents could deprive us of rights necessary for the successful commercialization of any new products or processes
that we may develop.
Also, there is no guarantee that any patent or other intellectual property applications that we file will result in
registration or any enforceable intellectual property rights. Further, there is no assurance that we will find all
potentially relevant prior art relating to any patent applications that we file, which may prevent a patent from issuing
from a patent application or invalidate any patent that issues from such application. Even if patents do successfully
issue, and cover our products and processes, third parties may challenge their validity, enforceability, or scope, which
may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are
unchallenged, any patent applications and future patents may not adequately protect our intellectual property, provide
exclusivity for our products or processes, or prevent others from designing around any issued patent claims. Any of
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these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact
on our business.
In addition, other parties may claim that our products infringe on their proprietary and patent protected rights. There
may be third party patents or patent applications with claims to products or processes related to the manufacture, use
or sale of our products and processes. There may be currently pending patent applications, some of which may still be
confidential, that may later result in issued patents that our products or processes may infringe. In addition, third
parties may obtain patents in the future and claim that use of our inventions, trade secrets, technical know-how and
proprietary information, or the manufacture, use or sale of our products infringes upon those patents. Third parties
may also claim that our use of our trademarks infringes upon their trademark rights. Parties making claims against us
may obtain injunctive or other equitable relief, which may have an adverse impact on our business. Such claims,
whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees,
result in injunctions, temporary restraining orders and/or require the payment of damages. In addition, we may need
to obtain licenses from third parties who allege that we have infringed on their lawful rights. However, such licenses
may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize, on terms
that are favorable to us, or at all, licenses or other rights with respect to intellectual property that we do not own.
Germplasm, including seeds, clones and cuttings, is the genetic material used in new cannabis varieties and hybrids.
We use advanced breeding technologies to produce cannabis germplasm (hybrids and varieties) with superior
performance. We rely on parental varieties for the success of our breeding program. While we believe that the parental
germplasm is proprietary to us, we may need to obtain licenses from third parties who allege that we have appropriated
their germplasm or their rights to such germplasm. We seek to protect our parental germplasm as appropriate, relying
on intellectual property rights, including rights related to inventions (patents and plant breeders’ rights), trade secrets,
technical know-how, trademarks and proprietary information. There is a risk that we will fail to protect such
germplasm or that we will fail to register rights in relation to such germplasm.
We also seek to protect our parental germplasm, hybrids and varieties from pests and diseases and enhance plant
productivity and fertility, and we research products to protect against crop pests and fungus. There are a number of
reasons why new product concepts in these areas may be abandoned, including greater than anticipated development
costs, technical difficulties, regulatory obstacles, competition, inability to prove the original concept, lack of demand
and the need to divert focus, from time to time, to other initiatives with perceived opportunities for better returns. The
processes of breeding, development and trait integration are lengthy, and the germplasm we test may not be selected
for commercialization. The length of time and the risk associated with breeding may affect our business. Our sales
depend on our germplasm. Commercial success frequently depends on being the first company to the market, and
many of our competitors are also making considerable investments in similar new and improved cannabis germplasm
products. Consequently, there is no assurance that we will develop and deliver new cannabis germplasm products to
the markets we serve on a timely basis.
Finally, we seek to protect our germplasm, hybrids and varieties from accidental release, theft, misappropriation and
sabotage by maintaining physical security of our premises. However, such security measures may be breached and we
may not have adequate remedies in the case of any such breach.
We license some intellectual property rights, and the failure of the owner of such intellectual property to properly
maintain or enforce the intellectual property underlying such licenses could have a material adverse effect on our
business, financial condition and performance.
We are party to a number of licenses, including through MedMen Canada and the Ginkgo Strategic Partnership, that
give us rights to use third-party intellectual property that is necessary or useful to our business. Our success will
depend, in part, on the ability of the licensor to maintain and enforce its licensed intellectual property, in particular,
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those intellectual property rights to which we have secured exclusive rights. Without protection for the intellectual
property we have licensed, other companies might be able to offer substantially similar products for sale or utilize
substantially similar processes, which could have a material adverse effect on our business, financial condition and
results of operations.
Any of our licensors may allege that we have breached our license agreement, whether with or without merit, and
accordingly seek to terminate our license. If successful, this could result in our loss of the right to use the licensed
intellectual property, which could adversely affect our ability to commercialize our products or services, as well as
have a material adverse effect on our business, financial condition and results of operations.
Conflicts of interest may arise between us and our directors and officers, including as a result of the continuing
involvement of certain of our directors with Altria and its affiliates.
We may be subject to various potential conflicts of interest because of the fact that some of our directors and officers
may be engaged in a range of business activities. In addition, our executive officers and directors may devote time to
their outside business interests, so long as such activities do not materially or adversely interfere with their duties to
us. In some cases, our directors and executive officers may have fiduciary obligations associated with these business
interests that interfere with their ability to devote time to our business and affairs and that could adversely affect our
operations, including business obligations related to the employment or involvement of certain of our directors with
Altria and its affiliates. These business interests could require significant time and attention of our directors and
executive officers and could lead to conflicts of interests between us and our directors and officers, as described below.
We may also become involved in other transactions which conflict with the interests of our directors and officers who
may from time to time deal with persons, firms, institutions or corporations with which we may be dealing, or which
may be seeking investments similar to those desired by us. The interests of these persons could conflict with our
interests. In addition, from time to time, these persons may be competing with us for available investment
opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable
laws. In particular, in the event that such a conflict of interest arises at a meeting of our directors, a director who has
such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance
with applicable laws, our directors are required to act honestly, in good faith and in our best interests.
Tax and accounting requirements may change in ways that are unforeseen to us and we may face difficulty or be
unable to implement and/or comply with any such changes.
We are subject to numerous tax and accounting requirements, and changes in existing accounting or taxation rules or
practices, or varying interpretations of current rules or practices, could have a significant adverse effect on our
financial results, the manner in which we conduct our business or the marketability of any of our products. In the
future, the geographic scope of our business may expand, and such expansion will require us to comply with the tax
laws and regulations of multiple jurisdictions. Requirements as to taxation vary substantially among jurisdictions.
Complying with the tax laws of these jurisdictions can be time consuming and expensive and could potentially subject
us to penalties and fees in the future if we were to inadvertently fail to comply. In the event that we were to
inadvertently fail to comply with applicable tax laws, this could have a material adverse effect on our business,
financial condition and results of operations.
Our financial performance is subject to risks of foreign exchange rate fluctuation which could result in foreign
exchange losses.
We may be exposed to fluctuations of the Canadian dollar against certain other currencies because we publish our
financial statements in Canadian dollars, while a portion of our assets, liabilities, revenues and costs are or will be
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denominated in other currencies. Exchange rates for currencies of the countries in which we operate may fluctuate in
relation to the Canadian dollar, and such fluctuations may have a material adverse effect on our earnings or assets
when translating foreign currency into Canadian dollars.
The inability of our counterparties and customers to meet their financial obligations to us may result in financial
losses.
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting
in a financial loss to us. There are no assurances that our counterparties or customers will meet their contractual
obligations to us.
Natural disasters, unusual weather, pandemic outbreaks, boycotts and geo-political events or acts of terrorism
could adversely affect our operations and financial results.
The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse
weather, pandemic outbreaks, boycotts and geo-political events, such as civil unrest in countries in which our
operations are located and acts of terrorism, or similar disruptions could adversely affect our business, financial
condition and results of operations. These events could result in physical damage to one or more of our properties,
increases in fuel or other energy prices, the temporary or permanent closure of one or more of our facilities, the
temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products
from suppliers, the temporary disruption in the transport of goods, delay in the delivery of goods to our facilities, and
disruption to our information systems. These factors could otherwise disrupt our operations and could have an adverse
effect on our business, financial condition and results of operations.
Risks Relating to the Altria Investment
Altria has significant influence over us following closing of the Altria Investment.
Altria is our single largest shareholder. As of the closing date of the Altria Investment, Altria beneficially owned
approximately 45% of the Company’s issued and outstanding common shares (calculated on a non-diluted basis). In
light of such ownership, Altria is in a position to exercise significant influence over matters affecting shareholders or
requiring shareholder approval, including the election of the Board, amendments to the articles and by-laws of the
Company and the determination of significant corporate actions. In addition, pursuant to the Investor Rights
Agreement, Altria has certain rights, including the right to nominate a specified number of directors to the Board,
approval rights over certain Company actions and pre-emptive and top-up rights entitling Altria to maintain its pro
rata beneficial ownership in the Company. Further, as of the date hereof, four of the seven directors on the Board are
Altria Nominees. For more information see “Description of the Business – Arrangements with Altria – The Investor
Rights Agreement”.
Upon exercise of the Altria Warrant in full, assuming no other securities of the Company are issued, Altria will
beneficially hold in excess of a majority of the voting rights of the issued and outstanding common shares and would
have the right to elect the entire Board and be able to exercise a controlling influence over our business and affairs,
including the selection of our senior management, the acquisition or disposition of our assets, the payment of dividends
and any change of control of us, such as a merger or take-over.
Accordingly, Altria currently has significant influence over us and has the ability to increase this influence at any time
upon the exercise of the Altria Warrant. There can be no assurance that Altria’s interests will align with our interests
or the interests of other shareholders. In addition, such influence could limit the price that an acquirer might be willing
to pay in the future for common shares and it may have the effect of delaying or preventing a change of control of us,
such as a merger or take-over.
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We have discretion in the use of net proceeds from the Altria Investment and may not use them effectively.
Under the Subscription Agreement, we have discretion in the use of net proceeds from the Altria Investment, subject
to our obligation to consult with Altria, approval of Altria (such approval not to be unreasonably conditioned, withheld
or delayed) and certain other limitations regarding the use of net proceeds set forth in the Subscription Agreement.
Accordingly, shareholders may not agree with the manner in which management chooses to allocate and spend the
net proceeds. Our failure to apply the funds effectively could have a material adverse effect on our business and
financial condition.
As a result of the Altria Investment, we have cash on hand of approximately $2,419,669,635. There can be no
assurance that we will be able to deploy the available cash in an effective manner that is accretive to us, or at all. Until
such time as we are able to deploy the cash available to us, we anticipate holding the net proceeds as cash balances in
our bank account or investing in certificates of deposit and other instruments issued by banks or obligations of or
guaranteed by the Government of Canada or any province thereof or in U.S. Treasury securities or other obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Until such time as the cash from the
Altria Investment is deployed, there can be no assurance that we will earn any material revenue from the invested
cash.
We may not realize the benefits of our strategic partnership with Altria, which could have an adverse effect on our
business and results of operations.
We believe that the strategic partnership between us and Altria provides us with additional financial resources, product
development and commercialization capabilities, and deep regulatory expertise to better position us to compete, scale
and lead the rapidly growing global cannabis industry. We believe that the growth opportunities for us are significant
and extend across the globe as markets open. With Altria’s resources, we expect to be even better positioned to support
cannabinoid innovation, create differentiated products and brands across medical and adult-use categories, and expand
our global footprint and growing production capacity. Nevertheless, a number of risks and uncertainties are associated
with the expansion into such markets and the pursuit of these other growth opportunities. The successful
implementation of the Altria Investment is critical to our growth and capital funding. The failure to successfully
implement any of these strategic initiatives could have a material adverse effect on our business and results of
operations.
Any common shares issued pursuant to the exercise of the Altria Warrant will dilute shareholders.
The Altria Warrant may be exercised in full or in part at any time on or prior to March 8, 2023, from time to time, and
entitles the holder thereof, upon valid exercise in full thereof, to acquire, accept and receive from the Company an
aggregate of 73,990,693 common shares of the Company (subject to adjustment in accordance with the terms of the
Altria Warrant Certificate), which represents 40% of the issued and outstanding common shares as of December 31,
2018 or 22% of the issued and outstanding common shares immediately following the closing of the Altria Investment
(on a non-diluted basis). Any issuance of common shares pursuant to the exercise of the Altria Warrant would dilute
all other shareholders of the Company.
Altria’s significant interest in the Company may impact the liquidity of the common shares.
Our common shares may be less liquid and trade at a discount relative to the trading that could occur in circumstances
where Altria did not have the ability to significantly influence or determine matters affecting us. Additionally, Altria’s
significant voting interest in us may discourage transactions involving a change of control of us, including transactions
in which an investor, as a shareholder, might otherwise receive a premium for its common shares over the then-current
market price.
69
The change of control provisions in certain of our existing or future contractual arrangements may be triggered
upon the exercise of the Altria Warrant in part or in full.
Certain of our existing or future contractual arrangements may include change of control provisions requiring us to
make certain payments if the change of control trigger is fulfilled. The change of control provisions in certain of our
existing arrangements, including, but not limited to, compensatory arrangements, or agreements we may enter into in
the future, may be triggered upon the exercise of the Altria Warrant in part or in full.
Future sales of our common shares by Altria could cause the market price for our common shares to fall.
Sales of a substantial number of our common shares in the public market by Altria could occur at any time. Such sales,
or the market perception of such sales, could significantly reduce the market price of our common shares. We cannot
predict the effect, if any, that future public sales of the common shares of the Company beneficially owned by Altria
or the availability of these common shares for sale will have on the market price of our common shares. If the market
price of our common shares were to drop as a result, this might impede our ability to raise additional capital and might
cause a significant decline in the value of the investments of our other shareholders.
The intentions of Altria regarding its long-term economic ownership of our common shares are subject to change as
a result of changes in the circumstances of Altria or its affiliates, changes in our management and operation and
changes in tax laws, market conditions and our financial performance.
Risks relating to our Common Shares
The market price for the common shares may be volatile and subject to fluctuation in response to numerous factors,
many of which are beyond our control.
The market price for the common shares may be volatile and subject to wide fluctuations in response to many factors,
including:
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our results of operations;
changes in estimates of our future results of operations by us or securities research analysts;
changes in the economic performance or market valuations of other companies that investors deem
comparable to us;
addition or departure of our executive officers and other key personnel;
release or other transfer restrictions on outstanding common shares;
sales or perceived sales of additional common shares (see “ – Future sales of our common shares by
Altria could cause the market price for our common shares to fall.”);
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital
commitments by or involving us or our competitors;
news reports relating to trends, concerns or competitive developments, regulatory changes and other
related issues in our industry or target markets;
investors’ general perception of us and the public’s reaction to our press releases, our other public
announcements and our filings with the SEC and Canadian securities regulators; and
70
•
•
•
reports by industry analysts, investor perceptions, and market rumours or speculation;
negative announcements by our customers, competitors, suppliers regarding their own performance; and
the market’s reaction to our reduced disclosure as a result of being an emerging growth company under
the Jumpstart Our Business Startups (JOBS) Act (the “JOBS Act”).
For example, reports by industry analysts, investor perceptions, market rumors or speculation could trigger a sell-off
in our common shares. Any sales of substantial numbers of the common shares in the public market or the perception
that such sales might occur may cause the market price of the common shares to decline. In addition, to the extent that
other large companies within the cannabis industry experience declines in their stock price, the share price of the
common shares may decline as well. Moreover, when the market price of a company’s shares drops significantly,
shareholders often institute securities class action lawsuits against the company. Lawsuits against us could cause us
to incur substantial costs and could divert the time and attention of our management and other resources.
Financial markets continue to experience significant price and volume fluctuations that have particularly affected the
market prices of equity securities of companies and that have, in many cases, been unrelated to the operating
performance, underlying asset values or prospects of such companies. Accordingly, the market price of the common
shares may decline even if our results of operations, underlying asset values or prospects have not changed.
Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be
other than temporary, which may result in impairment losses. As well, certain institutional investors may base their
investment decisions on consideration of our environmental, governance, diversity and social practices and
performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria
may result in limited or no investment in the common shares by those institutions, which could adversely affect the
trading price of the common shares. There can be no assurance that continuing fluctuations in price and volume will
not occur. If such increased levels of volatility and market turmoil continue, our business and financial condition could
be adversely impacted and the trading price of the common shares may be adversely affected.
The listing of our common shares on the NASDAQ may increase the trading price volatility on the TSX and also
result in volatility of the trading price on the NASDAQ because trading will be split between the two markets, resulting
in less liquidity on both exchanges. In addition, different liquidity levels, volume of trading, currencies and market
conditions on the TSX and the NASDAQ may result in different prevailing trading prices.
Securities class action litigation often has been brought against companies following periods of volatility in the market
price of their securities. We have been the target of such litigation and may in the future be the target of similar
litigation. Regardless of merit, such litigation could result in substantial costs and damages and divert management’s
attention and resources, which could adversely affect our business. Any adverse determination in litigation against us
could also subject us to significant liabilities. See “ – Risks Related to the Industry and Our Business - We may be
subject to or prosecute litigation in the ordinary course of business”.
We are eligible to be treated as an “emerging growth company,” as defined in the JOBS Act, and we cannot be
certain if the reduced disclosure requirements applicable to emerging growth companies will make our securities
less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging
growth company, we may take advantage of exemptions from various reporting requirements that are applicable to
other public companies that are not emerging growth companies, including, but not limited to, not being required to
comply with the auditor attestation requirements of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”).
71
We could be an emerging growth company for up to five years, although circumstances could cause us to lose that
status earlier, including if we are deemed to be a “large accelerated filer” (as defined in Rule 12b-2 under the Exchange
Act) before that time or if we have total annual gross revenue of US$1.0 billion or more during any fiscal year before
that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if
we issue more than US$1.0 billion in non-convertible debt during any three-year period before that time, we would
cease to be an emerging growth company immediately. We cannot predict if investors will find the common shares
less attractive because we may rely on these exemptions. If some investors find the common shares less attractive as
a result, there may be a less active trading market for the common shares and the trading price of the common shares
may be more volatile.
We incur increased costs as a result of being a public company in the U.S., and our management is required to
devote substantial time to U.S. public company compliance programs.
As a public company in the U.S., we expect to incur significant additional legal, insurance, accounting and other
expenses. In addition, our administrative staff will be required to perform additional tasks. For example, as a result of
becoming a public company in the U.S., we are in the process of adopting additional internal controls and disclosure
controls and procedures, have retained a U.S. transfer agent, adopted a U.S. compliant insider trading policy and other
corporate governance programs and charters and bear all of the internal and external costs of preparing and distributing
periodic public reports in compliance with our obligations under U.S. securities laws. We intend to invest resources
to comply with evolving U.S. laws, regulations and standards, and this investment will result in increased general and
administrative expenses. These obligations will require substantial attention from our senior management and could
divert their attention away from the day-to-day management of our business. If our efforts to comply with U.S. laws,
regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities
related to practice, regulatory authorities or third-parties may initiate legal proceedings against us and our business
may be harmed. In connection with becoming a public company in the U.S., we increased our directors’ and officers’
insurance coverage, which will increase our insurance cost. In the future, it will be more expensive for us to obtain
director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially
higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified
members to our Board in the future, particularly to serve on our audit committee, and qualified executive officers.
In addition, in order to comply with the requirements of being a U.S. public company, we have undertaken various
actions, including relating to implementing new internal controls and procedures and hiring new accounting or internal
audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal
control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures
that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and
that information required to be disclosed in reports under the Exchange Act, is accumulated and communicated to our
principal executive and financial officers. Any failure to develop or maintain effective controls could adversely affect
the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with the
Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable
to produce timely or accurate financial statements, investors may lose confidence in our results of operations and the
trading price of our common shares could decline. In addition, if we are unable to continue to meet these requirements,
we may not be able to remain listed on the NASDAQ.
Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our
internal control over financial reporting until the later of our second annual report or the first annual report required
to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS
Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls
in the future.
72
As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer,
which may limit the information publicly available to our shareholders.
We are a “foreign private issuer,” as such term is defined in Rule 405 under the U.S. Securities Act, and are not subject
to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are
subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic
reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC,
although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file
in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt
from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our
shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or
sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the
furnishing and content of proxy statements. We are also exempt from Regulation FD, which prohibits issuers from
making selective disclosures of material non-public information. While we comply with the corresponding
requirements relating to proxy statements and disclosure of material non-public information under Canadian securities
laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not
expect to receive the same information at the same time as such information is provided by U.S. domestic companies.
In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices,
except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the
requirements we are not following and describe the Canadian practices we follow instead. We may in the future elect
to follow home country practices in Canada with regard to certain corporate governance matters. As a result, our
shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject
to all corporate governance requirements.
We may lose foreign private issuer status in the future, which could result in significant additional costs and
expenses to us.
As of the closing date of the Altria Investment, Altria beneficially owned approximately 45% of the issued and
outstanding common shares of the Company (calculated on a non-diluted basis) and, if exercised in full on such date,
the exercise of the Altria Warrant would result in Altria holding a total ownership interest in the Company of
approximately 55% of the issued and outstanding common shares of the Company (calculated on a non-diluted basis).
We will in the future lose our foreign private issuer status if a majority of our common shares are held by persons in
the United States and we fail to meet any of the additional requirements necessary to avoid loss of foreign private
issuer status, such as if: (i) a majority of our directors or executive officers are U.S. citizens or residents; (ii) a majority
of our assets are located in the United States; or (iii) our business is administered principally in the United States.
Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status
would make such provisions mandatory and would impose additional requirements.
The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer would be greater than
the costs incurred as a Canadian foreign private issuer. If we are not a foreign private issuer, we would need to begin
preparing our financial statements in compliance with U.S. Generally Accepted Accounting Principles rather than
International Financial Reporting Standards (“IFRS”), would not be eligible to use foreign issuer forms and would be
required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC,
which are generally more detailed and extensive than the forms available to foreign private issuers. In addition, we
may lose our ability to rely upon exemptions from certain corporate governance requirements on the NASDAQ that
are available to foreign private issuers.
73
We may require additional capital in the future and we cannot give any assurance that such capital will be available
at all or available on terms acceptable to us and, if it is available, additional capital raised by us may dilute holders
of our securities.
We may need to raise additional funds through public or private debt or equity financings in order to:
•
•
•
•
fund ongoing operations;
take advantage of opportunities, including more rapid expansion of our business or the acquisition of
complementary products, technologies or businesses;
develop new products; or
respond to competitive pressures.
Holders of common shares will have no pre-emptive rights in connection with such further issues. The Board has the
discretion to determine if an issuance of common shares is warranted, the price at which such issuance is effected and
the other terms of issue of common shares. Any additional capital raised through the sale of equity will dilute the
percentage ownership of holders of our common shares. Capital raised through debt financing would require us to
make periodic interest payments and may impose restrictive covenants on the conduct of our business.
A substantial number of our securities are owned by a limited number of existing shareholders.
Our management, directors and employees own a substantial number of our outstanding common shares (on a fully
diluted basis). In addition, as of the closing date of the Altria Investment, Altria beneficially owned approximately
45% of our outstanding common shares (calculated on a non-diluted basis). As such, our management, directors and
employees, as a group, each are in a position to exercise significant influence over matters requiring shareholder
approval, including the election of directors and the determination of significant corporate actions. In addition, these
shareholders could delay or prevent a change in control that could otherwise be beneficial to holders of common
shares.
It is not anticipated that any dividend will be paid to holders of common shares for the foreseeable future.
No dividends on the common shares have been paid to date. We currently intend to retain future earnings, if any, for
future operation, expansion and debt repayment. Any decision to declare and pay dividends in the future will be made
at the discretion of our Board and will depend on, among other things, financial results, cash requirements, contractual
restrictions and other factors that our Board may deem relevant. As a result, investors may not receive any return on
an investment in the common shares unless they sell their shares for a price greater than that which such investors
paid for them.
Investors in the U.S. may have difficulty bringing actions and enforcing judgments against us and others based on
securities law civil liability provisions.
We are incorporated under the laws of the Province of Ontario and our head office is located in the Province of Ontario.
Some of our directors and officers and some of the experts named in this AIF are residents of Canada or otherwise
reside outside of the U.S., and a substantial portion of their assets and our assets are located outside the U.S.
Consequently, it may be difficult for investors in the U.S. to bring an action against such directors, officers or experts
or to enforce against those persons or us a judgment obtained in a U.S. court predicated upon the civil liability
provisions of U.S. federal securities laws or other laws of the U.S.
74
If we are a passive foreign investment company for U.S. federal income tax purposes in any year, certain adverse
tax rules could apply to U.S. Holders of our common shares.
Based on current business plans and financial expectations, the Company does not expect to be a passive foreign
investment company (“PFIC”) for the current taxable year ending December 31, 2019 and does not expect to become
a PFIC in the foreseeable future. However, PFIC status is determined annually and depends upon the composition of
a company’s income and assets and the market value of its stock from time to time. Therefore, there can be no
assurance as to our PFIC status for the current taxable year or for future taxable years. The value of our assets will be
based, in part, on the then market value of common shares, which is subject to change. The Company will be classified
as a PFIC for any taxable year for U.S. federal income tax purposes if for a taxable year, (a) 75% or more of the gross
income of the Company is passive income or (b) 50% or more of the value of the Company’s assets either produce
passive income or are held for the production of passive income, based on the quarterly average of the fair market
value of such assets.
If we are a PFIC for any taxable year during which a U.S. Holder (as defined below) holds common shares of the
Company, such U.S. Holders could be subject to adverse U.S. federal income tax consequences (whether or not we
continue to be a PFIC). For example, U.S. Holders may become subject to increased tax liabilities under U.S. federal
income tax laws and regulations, and will become subject to burdensome reporting requirements. If we are a PFIC
during a taxable year in which a U.S. Holder holds common shares of the Company, such U.S. Holder may be able to
make a “qualified electing fund” election (a “QEF Election”) or, alternatively, a “mark-to-market” election that could
mitigate the adverse U.S. federal income tax consequences that would otherwise apply to such U.S. Holder. Upon
request of a U.S. Holder, we intend to provide the information necessary for a U.S. Holder to make applicable QEF
Elections. In addition, under certain attribution rules, if the Company is a PFIC, U.S. Holders will generally be deemed
to own their proportionate share of the Company’s direct or indirect equity interest in any company that is also a PFIC
(a “Subsidiary PFIC”). U.S. Holders may need to make one or more elections with respect to any Subsidiary PFIC
in order to mitigate the adverse U.S. federal income tax consequences.
As used herein, “U.S. Holder” means a beneficial owner of common shares of the Company that is (i) an individual
who is a citizen or resident of the U.S. for U.S. federal income tax purposes, (ii) a corporation (or other entity taxable
as a corporation for U.S. federal tax purposes) created or organized under the laws of the U.S. or any political
subdivision thereof, including the States and the District of Columbia, (iii) an estate the income of which is subject to
U.S. federal income tax regardless of its source, or (iv) a trust that (a) is subject to the primary supervision of a court
within the U.S. and for which one or more U.S. persons have authority to control all substantial decisions or (b) has a
valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. U.S. Holders are urged
to consult their own tax advisers as to whether we may be treated as a PFIC and the tax consequences thereof.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research about our
business, our share price and trading volume could decline.
The trading market for our common shares depends, in part, on the research and reports that securities or industry
analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common shares
or publish inaccurate or unfavorable research about our business, the trading price of the common shares would likely
decline. In addition, if our results of operations fail to meet the forecast of analysts, the trading price of the common
shares would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us
regularly, demand for our common shares could decrease, which might cause our trading price and trading volume to
decline.
75
DIVIDENDS AND DISTRIBUTIONS
As of the date of this AIF, the Company has not declared any dividends or made any distributions. Furthermore, the
Company has no current intention to declare dividends on its common shares in the foreseeable future. Any decision
to pay dividends on its common shares in the future will be at the discretion of the Board and will depend on, among
other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial
condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate
law and other factors that the Board may deem relevant.
CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of common shares. As of the date of this AIF, there are
332,979,577 common shares issued and outstanding. The holders of the common shares are entitled to one vote per
share at all meetings of the shareholders of the Company. The holders of common shares are also entitled to dividends,
if and when declared by the directors of the Company and the distribution of the residual assets of the Company in the
event of a liquidation, dissolution or winding up of the Company.
The stock option plan (the “Option Plan”) of the Company is administered by the Board, which is responsible for
establishing the limitations, restrictions and conditions of option grants, including the vesting and expiry provisions.
Pursuant to the Option Plan, the Company may reserve and set aside for issue up to 10% of the total number of
common shares issued and outstanding at the date of any grant. This is a “rolling” plan ceiling as the number of
options which may be reserved and set aside for issue pursuant to the Option Plan will increase as the number of issued
and outstanding common shares increases. As of the date of this AIF, options to purchase up to an aggregate of
12,853,136 common shares pursuant to the Option Plan are granted and outstanding.
MARKET FOR SECURITIES
The Company’s common shares are listed and traded on the TSX and on the NASDAQ under the trading symbol
“CRON”.
The following table sets forth the reported intraday high and low prices and monthly trading volumes of the common
shares on the TSX for the period from May 23, 2018, the first trading day of the common shares on the TSX, to the
close of trading on March 22, 2019:
76
Period
March 1 to March 22, 2019 ................................
February, 2019 ....................................................
January, 2019 ......................................................
December, 2018 ..................................................
November, 2018 .................................................
October, 2018 .....................................................
September, 2018 .................................................
August, 2018 .......................................................
July, 2018 ...........................................................
June, 2018 ...........................................................
May 23 to May 31, 2018 ....................................
(Source: TMX Datalinx)
High
Trading Price
($)
Low
Trading Price
($)
32.60
32.95
26.74
18.56
13.04
16.84
19.81
16.89
9.45
10.79
8.66
25.81
24.85
13.97
11.22
9.45
8.47
12.05
7.33
7.37
8.05
7.65
Total Volume
for Period
38,461,850
68,367,608
49,437,976
51,768,332
31,064,847
59,680,507
103,679,117
63,587,728
7,513,535
20,160,444
3,395,781
The following table sets forth the reported intraday high and low prices and monthly trading volumes of the common
shares on the TSX-V for the period from January 1, 2018 to May 22, 2018, the last trading day of the common shares
on the TSX-V:
Period
May 1 to May 22, 2018 ......................................
April, 2018 ..........................................................
March, 2018 ........................................................
February, 2018 ....................................................
January, 2018 ......................................................
(Source: TMX Datalinx)
High
Trading Price
($)
Low
Trading Price
($)
8.74
9.94
13.39
11.79
14.83
7.06
6.57
8.20
5.96
8.01
Total Volume
for Period
8,588,409
15,180,117
25,756,350
29,666,046
50,873,693
The following table sets forth the reported intraday high and low prices and monthly trading volumes of the common
shares on the NASDAQ for the period from February 27, 2018, the first trading day of the common shares on the
NASDAQ, to the close of trading on March 22, 2019:
77
Period
March 1 to March 22, 2019 ................................
February, 2019 ....................................................
January, 2019 ......................................................
December, 2018 ..................................................
November, 2018 .................................................
October, 2018 .....................................................
September, 2018 .................................................
August, 2018 .......................................................
July, 2018 ...........................................................
June, 2018 ...........................................................
May, 2018 ...........................................................
April, 2018 ..........................................................
March, 2018 ........................................................
February 27 to February 28, 2018 ......................
(Source: Bloomberg)
High
Trading Price
(US$)
Low
Trading Price
(US$)
Total Volume
for Period
24.37
25.10
20.35
13.95
9.95
13.00
15.30
12.89
7.18
8.15
6.85
7.92
10.38
9.17
19.22
18.72
10.25
8.51
7.23
6.50
9.26
5.61
5.66
6.09
5.50
5.13
6.36
7.17
30,613,802
94,436,672
60,970,883
47,501,780
29,651,373
55,934,041
111,605,230
65,939,495
7,428,955
18,312,567
9,469,318
8,467,268
12,029,187
2,348,425
PRIOR SALES
The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued
by the Company during the period between January 1, 2018 and the date hereof.
Date of Issuance
January 30, 2018 ...........................................
January 31, 2018 ...........................................
May 17, 2018 ................................................
June 28, 2018 ................................................
September 13, 2018 ......................................
October 12, 2018
December 14, 2018
March 8, 2019
Security
Options
Options
Options
Options
Options
Options
Options
Warrant
Issuance/Exercise
Price Per Security
($)
8.40
9.00
7.57
8.22
14.70
11.80
15.29
19.00
Number of
Securities
280,000
150,000
1,195,000
180,000
25,000
30,000
50,000
73,990,693
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
As of the date of this AIF, to the knowledge of the Company, other than certain contractual restrictions on the transfer
of the Company’s warrants and options no securities of the Company are held in escrow or are subject to a contractual
restriction on transfer.
78
Name, Occupation and Security Holding
DIRECTORS AND OFFICERS
Below are the names, province or state and country of residence, principal occupation and periods of service of the
directors and executive officers of the Company.
Number of
Common Shares
Beneficially
Owned,
Controlled or
Directed,
Directly or
Indirectly(3)
1,739,915(4)
(0.52%)
Name and
Municipality
Residence
Principal Occupation
for Last Five Years
Director/Officer
of Cronos
Group Since
Position Held
with Cronos
Group
Michael Gorenstein
May 2016 to Present
November 6,
Chairman, Chief
New York, New
York,
United States
Jason Adler(2)
New York, New
York,
United States
CEO of Cronos Group
2015
Executive Officer,
President
June 2017 to Present
Member of Gotham Green
Partners
June 2015 to June 2017
Partner at Alphabet
Ventures, LLC
January 2015 to June
2015
Principal & General
Counsel at Saiers Capital,
LLC (f/k/a Alphabet
Management, LLC)
October 2011 to
December 2015
Associate at Sullivan &
Cromwell, LLP
June 2017 to Present
Managing Member of
Gotham Green Partners
June 2015 to June 2017
Managing Partner of
Alphabet Ventures, LLC
October 2007 to June
2015
Managing Member / CEO
of Saiers Capital, LLC
July 12, 2016
Director
7,129,557(4)
(2.14%)
79
Name and
Municipality
Residence
Principal Occupation
for Last Five Years
Director/Officer
of Cronos
Group Since
Position Held
with Cronos
Group
Number of
Common Shares
Beneficially
Owned,
Controlled or
Directed,
Directly or
Indirectly(3)
James Rudyk(1)(2)
Toronto, Ontario,
Canada
Kevin C.
Crosthwaite Jr.
Richmond, Virginia,
United States
(f/k/a Alphabet
Management, LLC)
January 2016 to Present,
CFO at Roots Corporation
January 31, 2018 Director
Nil
March 8, 2019
Director
Nil
October 2009 to
December 2015
CFO and Executive Vice
President at Shred-it
International Inc.
June 2018 to Present,
Senior Vice President and
Chief Growth Officer at
Altria
April 2017 to June 2018
President & Chief
Executive Officer of
Philip Morris USA Inc.
November 2013 to April
2017
Vice President & General
Manager of Philip Morris
USA Inc.
Bronwen Evans
February 2019 to Present
March 8, 2019
Director
Nil
Toronto, Ontario,
Canada
Principal, Evans
Consulting
September 2012 to
February 2019
Founding Director and
Chief Executive Officer at
True Patriot Love
Foundation
80
Name and
Municipality
Residence
Principal Occupation
for Last Five Years
Director/Officer
of Cronos
Group Since
Position Held
with Cronos
Group
Number of
Common Shares
Beneficially
Owned,
Controlled or
Directed,
Directly or
Indirectly(3)
March 8, 2019
Director
Nil
Murray R. Garnick
Richmond, Virginia,
United States
January 2017 to Present
Executive Vice President
and General Counsel at
Altria
February 2008 to January
2017
Deputy General Counsel
at Altria Client Services,
Inc.
Bruce A. Gates
November 2017 to
March 8, 2019
Director
Nil
Alexandria,
Virginia,
United States
Present
Founding Partner at Three
Oaks Strategies LLC and
Three Oaks Asset
Management LLC
May 2008 to November
2017
Senior Vice President,
External Affairs at Altria
Client Services
William Hilson
October 2015 to October
October 10,
Chief Financial
Toronto, Ontario,
Canada
2016
President at Hillhurst
Management
2016
Officer(5)
960,438
(0.29%)
March 2015 to October
2015
President at Hillhurst
Capital
June 2013 to March 2014
CFO at TravelEdge
June 2003 to June 2013
CFO at EMD Inc.
81
Name and
Municipality
Residence
Principal Occupation
for Last Five Years
Director/Officer
of Cronos
Group Since
Position Held
with Cronos
Group
Number of
Common Shares
Beneficially
Owned,
Controlled or
Directed,
Directly or
Indirectly(3)
June 12, 2018
Chief Operating
Officer
333,318
(0.10%)
David Hsu
Toronto, Ontario,
Canada
June 2018 to Present
Chief Operating Officer
of Cronos Group
September 2016 to June
2018
Head of Operations at
Cronos Group
September 2016
Vice President at
Deloitte/CRG Partners
May 2012 to September
2016 Director at
Deloitte/CRG Partners
Xiuming Shum
Toronto, Ontario,
Canada
October 2017 to Present
General Counsel of
Cronos Group
November 14,
2017
General Counsel
and Corporate
Secretary
Nil
January 2016 to August
2017
Corporate & Institutional
Banking Legal –
European & Regulatory
Advisory at BNP Paribas
May 2013 to December
2015
Vice President at BNP
Paribas
82
Name and
Municipality
Residence
Principal Occupation
for Last Five Years
Director/Officer
of Cronos
Group Since
Position Held
with Cronos
Group
Number of
Common Shares
Beneficially
Owned,
Controlled or
Directed,
Directly or
Indirectly(3)
Jerry Barbato
Richmond, Virginia,
United States
February 2019 to Present
Senior Director, Strategy
and Business
Development at Altria
Ventures Inc.
April 15, 2019(5) Chief Financial
Nil
Officer(5)
June 2018 to February
2019
Senior Director of
Corporate Strategy at
Altria
March 2017 to June 2018
Finance Director – U.S.
Smokeless Tobacco
Company at Altria
April 2016 to March 2017
Senior Finance Manager –
Corporate Planning at
Altria
August 2014 to April
2016
Senior Brand Manager –
Philip Morris USA Inc. at
Altria
July 2012 to August 2014
Assistant General
Manager at Richmark
GmbH
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Percentage ownership based on the issued and outstanding common shares of the Company as of the date of
this AIF.
(4) 450,465 of these common shares are held by Gotham Green Fund 1, LP a corporation affiliated with Jason
Adler and Michael Gorenstein.
(5) Effective April 15, 2019, Jerry Barbato will assume the role of Chief Financial Officer of the Company, and
William Hilson will assume the newly created role of Chief Commercial Officer.
As of the date of this AIF, in aggregate, the directors and officers beneficially own, directly or indirectly, 9,712,763
or 2.92% of the issued and outstanding common shares of the Company.
83
Each director is elected at the annual meeting of shareholders or appointed pursuant to the provisions of the Company’s
by-laws and applicable laws to serve until the next annual meeting or until a successor is elected or appointed, subject
to earlier resignation by the director.
The following is a summary biography of each of the directors and executive officers of the Company:
Michael Gorenstein
Chairman, President and CEO
Mike Gorenstein is the Chairman, President and CEO of Cronos Group. Mr. Gorenstein is also a Co-founder and
Member of Gotham Green Partners. Before joining the Company, Mr. Gorenstein was the VP and General Counsel at
Alphabet Partners, LP, a New York City based multi-strategy investment management firm, focused on identifying
mispriced assets across various industries, asset classes and geographies. Prior to Alphabet Partners, LP, he was a
corporate attorney at Sullivan & Cromwell LLP where he focused on mergers and acquisitions and capital markets
transactions. Mr. Gorenstein graduated from the University of Pennsylvania Law School with a Juris Doctor (JD), the
Wharton School at University of Pennsylvania with a certificate in Business Economics and Public Policy and the
Kelley School of Business at Indiana University with a Bachelor of Science Business in Finance.
Jason Adler
Director
Jason Adler is the Co-founder and Managing Member of Gotham Green Partners, a private equity firm focused
primarily on early-stage investing in companies in the cannabis industry. Prior to co-founding Gotham Green, Mr.
Adler was the co-founder and Chief Executive Officer of Alphabet Partners, LP, a New York City based multi-strategy
investment management firm, focused on identifying mispriced assets across various industries, asset classes and
geographies. Prior to Alphabet Partners, LP, Mr. Adler also founded Geronimo, LLC, a broker dealer and member of
the American Stock Exchange, that made markets in equity options, and he began his career as a Market Maker at
G&D Trading. Mr. Adler graduated with a B.A. from the University of Rhode Island.
James Rudyk
Director
James Rudyk is currently the Chief Financial Officer of Roots Corporation (“Roots”), a position he has held since
January 2016. Mr. Rudyk is a seasoned executive with more than 25 years of financial and operational experience,
and a track record of supporting ambitious growth plans. Prior to joining Roots, Mr. Rudyk served as the Chief
Financial Officer of Shred-It International Inc. from 2009 to 2015, where he was instrumental in helping the company
grow from approximately $200 million to over $700 million in revenue and expand to more than 17 countries around
the world. He also served as Chief Financial Officer and Chief Operating Officer of Canada Cartage Systems Limited
from 2004 to 2009. He received his Bachelor of Arts and Master of Accounting degree from the University of
Waterloo. Mr. Rudyk is also a Chartered Professional Accountant and holds an ICD.D designation from the Institute
of Corporate Directors.
Kevin C. Crosthwaite Jr.
Director
Kevin “K.C.” Crosthwaite, Jr. serves as Senior Vice President and Chief Strategy and Growth Officer at Altria. In this
role, Mr. Crosthwaite identifies and pursues Altria’s strategic and innovative product growth priorities. Since joining
Philip Morris USA in 1997, Mr. Crosthwaite has held several leadership positions across Altria’s family of companies,
84
including President and Chief Executive Officer for Philip Morris USA, where he oversaw operations for Philip Morris
USA and John Middleton, as well as Vice President, Strategy and Business Development, and Vice President &
General Manager at Marlboro. Mr. Crosthwaite also led Altria Ventures’ international efforts with innovative tobacco
products. Mr. Crosthwaite currently serves on the Board of Directors for United Negro College Fund and the
Richmond Forum. Mr. Crosthwaite received his Bachelor of Arts from Marquette University and his Master of
Business Administration (MBA) from Providence College.
Bronwen Evans
Director
Bronwen Evans is an independent consultant drawing on 20 years of experience in the charitable, corporate and
government sectors to provide clients with business development and brand strategies for transformational growth.
Ms. Evans was a Founding Director of the True Patriot Love Foundation, where she served as its first CEO from 2012
to 2019 and raised record funds to support 25,000 Canadian military and veteran families. Before that, Ms. Evans was
the Vice President of Marketing and Corporate Affairs at Medcan Health Management, and became the company’s
first Chief Privacy Officer. She is a recipient of The Queen’s Diamond Jubilee Medal (2012) and currently serves as
Director, Secretary and Chair of the Governance Committee of Kingsway College School. Ms. Evans holds a Bachelor
of Arts in Philosophy with Honors from McGill University, and a Master of Arts in Philosophy with a concentration
in Biomedical Ethics from Carleton University.
Murray R. Garnick
Director
Murray Garnick serves as Executive Vice President and General Counsel of Altria. In his role since 2017, he leads the
company’s Law Department, Regulatory Affairs and Regulatory Sciences. Mr. Garnick previously served as Deputy
General Counsel for Altria Client Services, a subsidiary of Altria, which provides professional services and support
to Altria and its operating companies. At Altria, Mr. Garnick has led the legal support for sales, marketing, regulation,
and product development and intellectual property matters. He has also supervised the management of tobacco, health
and all other litigations brought against Altria and its operating companies. Prior to joining Altria in 2008 as Senior
Vice President, Litigation and Associate General Counsel, Mr. Garnick served for more than two decades as a senior
litigation partner at the law firm of Arnold & Porter in Washington, D.C. and currently serves on the Board of Trustees
of Newseum in Washington, D.C. Mr. Garnick received his Bachelor of Arts from the University of Georgia and his
Juris Doctor (JD) from the University of Georgia School of Law.
Bruce A. Gates
Director
Bruce Gates is a Founding Partner of Three Oaks Strategies LLC, a management, policy and communications
consulting firm based in Alexandria, Virginia. He is also the founding partner of Three Oaks Asset Management LLC,
a family office/venture capital firm. Prior to his retirement from Altria in November 2017, Mr. Gates served as a
Senior Vice President of External Affairs for Altria Client Services. In his role, he led the Government Affairs and
Corporate Affairs departments and directed the company’s strategies involving governments, corporate
communications, philanthropic programs and corporate social responsibility. Before assuming that role in 2011, Mr.
Gates was Altria’s Senior Vice President of Government Affairs. He currently serves on the board of a private
company, Aliro, and also on a number of non-profit boards, including The Boulder Crest Retreat for Wounded
85
Warriors and Veteran Wellness, D.C. Sail, and the Congressional Institute. Recently, he joined the Board of Trustees
for the Ford’s Theatre. Mr. Gates received his Bachelor of Arts from the University of Georgia.
William Hilson
Chief Financial Officer
William Hilson oversees accounting, financial reporting, payroll, procurement, tax, and treasury among other
functions. Prior to joining Cronos Group, William was the President of Hillhurst Management Inc. and CFO for EMD
Inc. and Serono Canada Inc. and Director of Finance for Hemosol Inc. William’s specialty is in pharmaceuticals with
a proven track record of driving business objectives and growth, increasing efficiencies, mitigating risk, and increasing
profit. William graduated from the University of Western Ontario with an Honors Bachelor of Science in Genetics,
from the University of Toronto with a Master of Science Clinical Biochemistry. His academic work has been published
internationally. William is a member of the Board of Directors of EMD Inc., Canada; and EMD Crop Bioscience and
he is also a member of Chartered Professional Accountants of Canada. Effective April 15, 2019, William will serve
as Chief Commercial Officer of Cronos Group, a newly created role. As Chief Commercial Officer, William will
report to the Chief Executive Officer and be responsible for further enhancing the commercial strategy as well as the
product and research development priorities of the Company.
David Hsu
Chief Operating Officer
David oversees all of Cronos Group’s operations including construction, cultivation and manufacturing as Chief
Operating Officer. David is focused on continuous improvement by testing and integrating new technologies and
automation to establish best practices in the cannabis industry. Prior to joining Cronos Group, David spent over ten
years consulting with Deloitte and CRG Partners, a premier turnaround consulting firm, where he operated and
managed distressed companies with revenues more than $500M. His expertise includes financial and operational
restructuring, growth creation, and lean manufacturing gleaned from experience working in various sectors including
consumer packaged goods, manufacturing, distribution, media, and transportation. David graduated from Babson
College with a Bachelor of Science in Business Management and is a certified Lean Six Sigma Black Belt.
Xiuming Shum
General Counsel
Xiuming manages all legal and regulatory functions at Cronos Group, which informs the company’s strategy and
execution. Xiuming has a decade of transactional and in-house experience in mergers and acquisitions and regulatory
change management. Prior to joining Cronos Group, Xiuming served as in-house counsel at BNP Paribas’ Corporate
and Institutional Banking division in New York and London, where she provided advice to senior management on
disruptive and transformative legislative changes, such as the BASEL banking reforms, Brexit, and the Dodd-Frank
Act. Previously, she was a corporate attorney at Sullivan & Cromwell LLP in New York, where she focused on M&A
in large, complex cross-border transactions in diverse industries, including alcohol and spirits, insurance, banking,
private equity, and hedge funds. Xiuming is a New York-qualified attorney, holding a Juris Doctor (JD) from
Columbia Law School where she was a Harlan Fiske Stone Scholar and a first-class Bachelor of Laws degree from
University College London in the U.K.
86
Jerry Barbato
Chief Financial Officer (effective April 15, 2019)
Jerry Barbato will assume the role of Chief Financial Officer of Cronos Group effective April 15, 2019. Jerry joins
Cronos Group with 20 years of experience in strategic planning, corporate financial analysis and services, and brand
management. Prior to joining Cronos Group, he held various roles within the Altria family of companies. Jerry joined
Altria in 2003 and served in leadership roles within the Finance, Strategy & Business Development and Marketing
functions, and most recently held the role of Senior Director of Corporate Strategy. He has broad experience in both
finance and operating roles, as well as managing operations in regulated international markets. Jerry supported the
Marlboro brand and provided analysis that shaped brand strategies for Altria’s smokeable segment. He also served as
Assistant General Manager for a joint venture, Richmark GmbH, in Zurich, Switzerland. Jerry holds a BS in
Accounting from Marquette University and an MBA from the University of Maryland, University College.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Except as disclosed below, to the knowledge of the directors and officers of the Company, no director or officer of
the Company, or a shareholder holding a sufficient number of securities of the Company to affect materially the control
of the Company is, as at the date of this AIF or has been, within the 10 years before the date of the AIF, a director or
executive officer of any company that, while that person was acting in that capacity:
(a)
(b)
(c)
(d)
was the subject of a cease trade or similar order or an order that denied the relevant companies access
to any exemption under securities legislation, for a period of more than 30 consecutive days;
was subject to an event that resulted, after the director or executive officer ceased to be a director or
executive officer, in the company being the subject of a cease trade or similar order or an order that
denied the relevant company access to any exemption under securities legislation, for a period of more
than 30 consecutive days;
within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to
hold its assets; or
has, within the 10 years before the date of the AIF, become bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings,
arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to
hold its assets.
No director or executive officer of the Company, (i) has been subject to any penalties or sanctions imposed by a court
relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a
settlement agreement with a Canadian securities regulatory authority, or (ii) has been subject to any other penalties or
sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in
making an investment decision.
No director or executive officer of the Company or, to the knowledge of the Company, shareholder holding a sufficient
number of securities of the Company to affect materially the control of the Company, has been subject to: (a) any
penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has
entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions
87
imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making
an investment decision.
Conflicts of Interest
The Company may from time to time become involved in transactions which conflict with the interests of our directors
and officers. The interests of these persons could conflict with those of the Company. Conflicts of interest, if any,
will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a
conflict of interest arises at a meeting of our directors, a director who has such a conflict will abstain from voting for
or against the approval of such participation or such terms. In accordance with applicable laws, the directors of the
Company are required to act honestly, in good faith and in the best interests of the Company.
PROMOTERS
Alan Friedman, a former director of the Company, may have been considered a “promoter” of the Company under
applicable Canadian securities laws within the Company’s two most recently completed financial years because he
was a director at the time of the Qualifying Transaction. As of the date of this AIF, Mr. Friedman beneficially owns,
controls, or directs, directly or indirectly, 122,602 common shares, comprising 0.04% of the issued and outstanding
common shares. Mr. Friedman served as a director of the Company from August 21, 2012 to March 8, 2019, when
he resigned as part of the reconstitution of the Board following the closing of the Altria Investment.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than those disclosed below, we are not aware of: (a) any legal proceedings to which we are a party, or by which
any of our property is subject, which would be material to us and are not aware of any such proceedings being
contemplated, (b) any penalties or sanctions imposed by a court relating to securities legislation, or other penalties or
sanctions imposed by a court or regulatory body against us that would likely be considered important to a reasonable
investor making an investment decision and (c) any settlement agreements that we have entered into before a court
relating to securities legislation or with a securities regulatory authority.
The following is a brief summary of certain ongoing litigation matters of which the Company is aware:
MedCann Access Acquisition Litigation
On July 31, 2015, 8437718 Canada Inc., 8437726 Canada Inc., Michael Blaine Dowdle, Rade Kovacevic, Kevin Furet
and 9388036 Canada Inc. (“938”) (collectively, the “Plaintiffs”) commenced a claim against Peace Naturals and a
number of other parties, for $15 million in damages as a result of an alleged breach of obligations to them by
terminating a share purchase transaction for the acquisition of the Plaintiffs’ company, MedCann Access. The
Company believes that the allegations contained in the statement of claim are without merit and plans to vigorously
defend itself. On February 21, 2018, the parties began the discovery phase of proceedings which is ongoing.
Wrongful Termination Claims
On October 31, 2017, a former Peace Naturals employee (Ms. Jennifer Caldwell) commenced a wrongful termination
claim against Peace Naturals, Cronos Group and certain directors before the Ontario Superior Court of Justice, for
$580,000 and 30,000 options in Cronos Group. On January 17, 2018, Peace Naturals and Cronos Group filed a
counterclaim against Jennifer Caldwell and Mark Gobuty, the former CEO of Peace Naturals, for damages for
conspiracy, fraud, conversion, breach of trust and/or fiduciary duty. On July 18, 2018, Jennifer Caldwell filed an
amended statement of claim in which, among other things, the plaintiff discontinued the action against the directors.
88
It is the opinion of the Company that the claim is without merit and the Company intends to vigorously defend this
claim.
On December 12, 2017, Mark Gobuty, the former CEO of Peace Naturals, commenced a claim against Peace Naturals,
Cronos Group and certain directors before the Ontario Superior Court of Justice, for $12,681,686.38 and a 10% equity
interest in Peace Naturals in damages in relation to Mark Gobuty’s departure from the Company. On April 30, 2018,
the plaintiff filed an amended statement of claim which, among other things, discontinued the action against the
directors. On January 30, 2019, the parties and Mandelbaum Spergel Inc., in its capacity as bankruptcy trustee of Mark
Gobuty, agreed to settle the claims for a total of $643,732.30, net of applicable statutory deductions and withholdings,
which Peace Naturals paid out of the amount held in escrow in connection with the purchase of Peace Naturals
pursuant to the Share Purchase Agreement, dated July 14, 2016 between Cronos Group, Hortican Inc., the Barnes
Family Trust, Anna Barnes and Peace Naturals and pursuant to the separation agreement which set out the terms and
conditions of Mark Gobuty’s resignation from Peace Naturals and which terms he has resiled. Mark Gobuty has filed
a notice of discontinuance to discontinue the proceedings.
Evergreen Equity Litigation
On April 21, 2017, Cronos Group filed a claim in the Supreme Court of British Columbia against Evergreen and its
directors, seeking, among other things, declarations that the Company holds equity of Evergreen and that the
agreement between the parties in respect of its equity is a valid and binding contract. The Company continues to
actively pursue this claim.
On March 9, 2018, Philip Illingworth filed a claim in the Supreme Court of British Columbia against Evergreen, its
directors, Welton Construction Limited, 0611389 B.C. Ltd. and Hortican, claiming among other things, declarations
and an order for specific performance that the plaintiff is the owner of 50% of the shares of Evergreen. On June 20,
2018, the plaintiff filed a notice of discontinuance in the Supreme Court of British Columbia to discontinue the
proceeding against Hortican.
US Securities Class Action Claims
In September 2018, shortly following the publication by a firm identifying itself as a short-seller of a document
alleging that our disclosure regarding our provincial supply agreements and our sales to our German distributor is
misleading, two purported shareholders of Cronos Group each filed a putative class action in the United States District
Court for the Southern District of New York against the Company and its CEO alleging that Cronos Group’s
continuous disclosure omitted material information with respect to the matters raised in the short-seller’s publication,
thus rendering our disclosure false and misleading in violation of Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 thereunder. The complaints purport to seek, among other things, compensatory damages and a reasonable
allowance for plaintiff attorneys’ and experts’ fees. On January 28, 2019, the lead plaintiff filed a notice of voluntary
dismissal to discontinue the actions against the Company and its CEO.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
The Company considers its related parties to consist of: (i) key members or former members of its Board and senior
officers, including their close family members; (ii) persons or companies that beneficially own, control or direct,
directly or indirectly, more than 10 percent of any class or series of outstanding voting securities of the Company; and
(iii) any associate or affiliate of any of the persons or companies referred to in (i) or (ii) (each, a “Related Party”).
Other than as disclosed below, no Related Parties have had a material interest in any transaction within the three most
89
recently completed financial years of the Company or during the current financial year of the Company that has had
a material effect on the Company or is reasonably expected to materially affect the Company.
Pursuant to the Subscription Agreement dated December 7, 2018, upon closing of the Altria Investment on March 8,
2019, the Company issued to certain wholly-owned subsidiaries of Altria 149,831,154 common shares of the Company
and the Altria Warrant. As a result of the Altria Investment, as of the closing date of the Altria Investment, Altria
beneficially held an approximately 45% ownership interest in the Company (calculated on a non-diluted basis) and, if
exercised in full on such date, the exercise of the Altria Warrant would result in Altria holding a total ownership
interest in the Company of approximately 55% (calculated on a non-diluted basis). See “General Development of the
Business – Three Year History – Altria Investment”.
In addition, pursuant to the Investor Rights Agreement entered into in connection with the Altria Investment, four of
the seven directors currently on the Board, namely Kevin C. Crosthwaite, Bronwen Evans, Murray R. Garnick and
Mr. Bruce A. Gates, were nominated for election to the Board by Altria.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company’s common shares is TSX Trust Company at 100 Adelaide Street
West, Suite 301, Toronto, Ontario M5H 4H1.
MATERIAL CONTRACTS
The Company has entered into the following material contracts, the particulars of which may also be described
elsewhere in this AIF:
(a) Investor Rights Agreement dated March 8, 2019 between the Company and Altria pursuant to which
Altria has certain governance rights, so long as Altria and its affiliates collectively meet certain
specified beneficial ownership thresholds of the then issued and outstanding common shares of the
Company, including the right to nominate a specified number of directors to the Board, approval
rights over certain Company actions and pre-emptive and top-up rights entitling Altria to maintain
its pro rata beneficial ownership in the Company. See “Description of the Business – Arrangements
with Altria – Investor Rights Agreement”.
(b) Subscription Agreement dated December 7, 2018, by and between the Company, Altria Summit
LLC, a wholly owned subsidiary of Altria, and, solely for certain limited purposes set forth therein,
Altria, pursuant to which Altria made an approximately $2.4 billion equity investment in the
Company on a private placement basis in exchange for common shares in the capital of the Company
and the Altria Warrant. See “Description of the Business – Arrangements with Altria – Altria
Investment”.
(c) Ginkgo Collaboration Agreement dated September 1, 2018, by and between the Company and
Ginkgo pursuant to which Ginkgo will work with the Company on the R&D of microorganisms
capable of producing certain target cannabinoids in a scalable and highly efficient manner. Under
the Ginkgo Collaboration Agreement, the Company agreed to issue a specified number of common
shares in tranches subject to Ginkgo’s achievement of certain production milestones. See
“Description of the Business – Research and Development Activities – Ginkgo Collaboration
Agreement”.
90
Copies of these material contracts are available under our profile on the SEDAR website at www.sedar.com. The
above summaries are qualified in their entirety by reference to the terms of the material contract.
AUDIT COMMITTEE INFORMATION
The Company’s Audit Committee Charter is attached hereto as Schedule “A” to this AIF.
As of date of this AIF, the Audit Committee of the Company was composed of three members. The members of the
Audit Committee are James Rudyk, Jason Adler and Bronwen Evans. The Board believes that each of the members
of the Audit Committee is financially literate and has the requisite expertise. Currently, the three members have been
determined by the Board to be “independent” and “financially literate” as such terms are defined under National
Instrument 52-110 – Audit Committees (“NI 52-110”). The Board has made these determinations based on the
education as well as breadth and depth of experience of each member of the Committee. The following is a brief
summary of the education and experience of each member of the Committee that is relevant to the performance of his
or her responsibilities as an Audit Committee member:
James Rudyk is currently the Chief Financial Officer of Roots, a position he has held since January 2016. Mr. Rudyk
is a seasoned executive with more than 25 years of financial and operational experience, and a track record of
supporting ambitious growth plans. Prior to joining Roots, Mr. Rudyk served as the Chief Financial Officer of Shred-
It International Inc. from 2009 to 2015, where he was instrumental in helping the company grow from approximately
$200 million to over $700 million in revenue and expand to more than 17 countries around the world. He also served
as Chief Financial Officer and Chief Operating Officer of Canada Cartage Systems Limited from 2004 to 2009. He
received his Bachelor of Arts and Master of Accounting degree from the University of Waterloo. Mr. Rudyk is also a
Chartered Professional Accountant and holds an ICD.D designation from the Institute of Corporate Directors.
Jason Adler is the Co-founder and Managing Member of Gotham Green Partners, LLC a private equity firm focused
primarily on early-stage investing in companies in the cannabis industry. Prior to co-founding Gotham Green, Mr.
Adler was the co-founder and Chief Executive Officer of Alphabet Partners, LP, a New York City based multi-strategy
investment management firm, focused on identifying mispriced assets across various industries, asset classes and
geographies. Prior to Alphabet Partners, LP, Mr. Adler also founded Geronimo, LLC, a broker dealer and member of
the American Stock Exchange, that made markets in equity options, and he began his career as a Market Maker at
G&D Trading. Mr. Adler graduated with a B.A. from the University of Rhode Island.
Bronwen Evans is an independent consultant drawing on 20 years of experience in the charitable, corporate and
government sectors to provide clients with business development and brand strategies for transformational growth.
Ms. Evans was a Founding Director of the True Patriot Love Foundation, where she served as its first CEO from 2012
to 2019 and raised record funds to support 25,000 Canadian military and veteran families. Before that, Ms. Evans was
the Vice President of Marketing and Corporate Affairs at Medcan Health Management, and became the company’s
first Chief Privacy Officer. She is a recipient of The Queen’s Diamond Jubilee Medal (2012) and currently serves as
Director, Secretary and Chair of the Governance Committee of Kingsway College School. Ms. Evans holds a Bachelor
of Arts in Philosophy with Honors from McGill University, and a Master of Arts in Philosophy with a concentration
in Biomedical Ethics from Carleton University.
Subject to the requirements of NI 52-110 and section 10A(i) of the Exchange Act, the provision of non-audit services
by the independent auditor requires pre-approval of the Audit Committee and the Company has adopted policies and
procedures to this effect.
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The following table provides detail in respect of audit, audit related, tax and other fees billed to the Company by the
external auditors for professional services provided to the Company and its subsidiaries:
Audit Fees
Tax Fees(1)
Audit-Related Fees(2)
Other Fees
Total
Notes:
2018
($)
130,000
25,000
154,000
Nil
309,000
2017
($)
130,000
20,000
63,800
Nil
213,800
2017 and 2018 tax fees were related to Scientific Research and Development Credits input tax credit work.
(1)
(2) Audit-related fees in 2018 increased predominantly due to listing on NASDAQ, review of prospectuses in relation to the Company’s common
share offerings, and quarterly reviews of financial statements. Audit-related fees in 2017 included review of prospectuses in relation to the
Company’s common share offerings, quarterly review of financial statements and review of the Company’s registration statement on Form
F-10 filed with the SEC in connection with its April 2018 Bought Deal.
INTERESTS OF EXPERTS
MNP LLP was the independent auditor of the Company for the fiscal years ended December 31, 2017 and 2016 and
was independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants
of Ontario and within the meaning of the Exchange Act and the applicable rules and regulations adopted by the SEC
and the Public Company Accounting Oversight Board (U.S.).
In May 2018, the Board appointed KPMG LLP as auditor of the Company. KPMG LLP is independent within the
meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario and within the
meaning of the Exchange Act and the applicable rules and regulations adopted by the SEC and the Public Company
Accounting Oversight Board (U.S.).
Additional information regarding the Company can be found on SEDAR at www.sedar.com.
ADDITIONAL INFORMATION
Additional financial information is provided in our comparative financial statements and management’s discussion
and analysis for the most recent completed financial year.
The foregoing documents may be obtained by contacting our Corporate Secretary at our head office located at 720
King Street West, Suite 320, Toronto, Ontario M5V 2T3.
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SCHEDULE “A”
AUDIT COMMITTEE CHARTER
[see attached]
93
AUDIT COMMITTEE CHARTER
OF
CRONOS GROUP INC.
(the “Corporation”)
As approved by the Board of Directors on March 25, 2018
ARTICLE 1
PURPOSE AND SCOPE
1.1
Functions of the Audit Committee
The primary functions of the Audit Committee (the “Committee”) of the Board of Directors of the
Corporation (the “Board”) are to exercise the responsibilities and duties set forth below, including but not limited to:
(a)
assist the Board in fulfilling its responsibilities by reviewing:
(i)
(ii)
the financial reports prepared by management of the Corporation for filing with the
Canadian and U.S. securities regulatory authorities, including the Ontario Securities
Commission and the U.S. Securities and Exchange Commission, any stock exchange and
any other governmental or regulatory authority exercising authority over the Corporation
(each a “Regulatory Authority”);
the Corporation’s financial statements, management’s discussion and analysis of the
Corporation’s financial condition and results of operations (the “MD&A”), and annual and
interim profit or loss press releases before the Corporation discloses the information to the
Corporation’s shareholders and to the general public; and
(iii)
the Corporation’s internal financial and accounting controls established by management of
the Corporation;
(b)
recommend to the Board the external auditor to be nominated for appointment by the shareholders
of the Corporation for the purpose of preparing or issuing an auditor’s report;
(c)
the issuer;
recommend to the Board the external auditor performing other audit, review or attest services for
(d)
recommend to the Board the compensation of the external auditor to be fixed by the Board as
authorized by the Shareholders of the Corporation;
(e)
oversee the work performed by any independent external audit firm, including their conduct of the
annual audit and engagement for any other services, and review their qualifications and independence,
(f)
oversee the accounting and financial reporting processes of the Corporation as established by the
Corporation’s management and the audits of the financial statements of the Corporation conducted by the
Corporation’s independent audit firm,
(g)
recommend, establish and monitor procedures, including without limitation those relating to
financial reporting risk management and those designed to improve the quality and reliability of the disclosure of the
Corporation’s financial condition and results of operations,
(h)
establish and monitor procedures designed to facilitate:
(i)
the receipt, retention and treatment of complaints relating to accounting, internal
accounting controls or auditing matters, and
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(ii)
the receipt of confidential or anonymous submissions by employees of concerns regarding
questionable accounting or auditing matters,
(i)
(j)
engage advisors as necessary, and
determine the relevant funding required by the Corporation for the payment of the independent audit
firm, any advisors engaged by the Committee and ordinary administrative expenses of the Committee.
ARTICLE 2
COMPOSITION AND MEETINGS
2.1
Composition
(a)
The Committee shall be comprised of a minimum of three directors of the Board as appointed by
the Board, each of whom:
(i) meets the applicable independence and/or audit committee composition requirements set
forth in:
(A)
(B)
(C)
National Instrument 52-110 – Audit Committees of the Canadian Securities
Administrators;
Section 10A-3 of, and Rule 10A-3(b)(1) under, the Securities Exchange Act of
1934, as amended (the “U.S. Exchange Act”),
the NASDAQ Listing Standards, the TSX-V or TSX Company Manual, as
applicable, or the rules of any other applicable stock exchange;
(D)
the Business Corporations Act (Ontario); and
(E)
any other applicable rule, policy or law of any Regulatory Authority,
as in effect from time to time (collectively, the “Applicable Requirements”); and
(ii)
has not participated in the preparation of financial statements of the Corporation or any
current subsidiary of the Corporation at any time during the past three years.
(b)
All members of the Committee shall be “financially literate”, which is defined as having a basic
understanding of finance and accounting and having the ability to read and understand fundamental financial
statements, including a balance sheet, cash flow statement and income statement, that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can
reasonably be expected to be raised by the Corporation’s financial statements.
(c)
At least one member of the Committee shall have employment experience in finance or accounting,
requisite professional certification in accounting, or other comparable experience or background which results in the
individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer
or other senior officer with financial oversight responsibilities. Further, at least one member of the Committee shall
qualify as an “audit committee financial expert” (as such term is defined in paragraph 8(b) of General Instruction B
of Form 40-F under the U.S. Exchange Act).
(d)
The Committee shall ensure that all necessary and proper disclosures shall be made in all applicable
filings with the Regulatory Authorities as to composition of the Committee.
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(e)
Committee members may enhance their familiarity with finance and accounting by participating in
education programs conducted by the Corporation or an outside consultant at the Corporation’s expense.
(f)
Independence and financial literacy are to be determined by the Board of Directors in accordance
with applicable laws, rules and regulations of the Regulatory Authorities.
2.2
Appointment
(a)
The members of the Committee shall be appointed by the Board at the meeting of the Board
following each annual meeting of shareholders and shall serve until their successors shall be duly elected and qualified
or until their earlier death, resignation or removal.
(b)
The Board may fill a vacancy in the membership of the Committee and remove a member of the
Committee at any time for any reason.
(c)
Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair
by majority vote of the full Committee membership. In the absence of the Chair at a duly convened meeting, the
Committee shall select a temporary substitute from among its members.
2.3
Meetings
(a)
The Committee shall meet on a regularly-scheduled basis at least four times per year or more
frequently as circumstances dictate.
(b)
At the invitation of the Committee, members of the Corporation’s management, senior personnel of
the Corporation’s internal audit function and others may attend Committee meetings as the Committee considers
necessary or desirable.
(c)
Representatives of the Corporation’s independent external audit firm are entitled to attend and be
heard at each Committee meeting.
(d)
The Committee shall hold executive sessions without management present at each Committee
meeting.
(e)
All independent directors may attend Committee meetings, provided that directors who are not
members of the Committee shall not be entitled to vote, nor shall their attendance be counted as part of the quorum of
the Committee.
(f)
The Chair of the Committee or any member of the Committee may call a meeting by notifying the
members of the Committee. Ordinarily, meetings of the Committee should be convened with no less than 48 hours'
notice having been given. The requirement for notice to a Committee member can be waived in writing by that
Committee member or with the consent of no less than the number of Committee members that constitutes a quorum
of the Committee, whether before or after such notice is required. Attendance by a Committee member constitutes
waiver of notice to such Committee member of such meeting.
(g)
The Committee shall report its actions to the members of the Board and the Corporate Secretary of
the Corporation and keep written minutes of its meetings which shall be recorded and filed with the books and records
of the Corporation. Minutes of each meeting will be made available to the members of the Board and the Secretary
of the Corporation.
2.4
Quorum
A majority of the members of the Committee shall constitute a quorum at any meeting of the
Committee, but in no case shall a quorum be comprised of less than two members of the Committee, and the action
of a majority of those present, after determining a quorum, shall be the act of the Committee.
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ARTICLE 3
RESPONSIBILITIES AND DUTIES
3.1
Document Review
(a)
The Committee shall review and assess the adequacy of this Charter periodically as conditions
dictate, but at least annually (and recommend changes to the Board for its approval, if and when appropriate).
(b)
The Committee shall review the Corporation’s audited annual financial statements, the auditors’
report thereon and the related financial disclosures, including the MD&A, prior to their filing with any Regulatory
Authority, including:
(i)
the audit reports of the Corporation’s financial statements and management’s assessment
of internal control over financial reporting, any memorandum prepared by the
Corporation’s independent external audit firm with respect to assessment of internal control
over financial reporting, any other pertinent reports and management’s responses
concerning such memorandum;
(ii)
the qualitative judgments of the independent external audit firm about the appropriateness
of accounting principles and financial disclosure practices used or proposed to be adopted
by the Corporation;
(iii)
the selection and application of the Corporation’s critical accounting policies;
(iv)
the methods used to account for significant unusual transactions;
(v)
the effect of significant accounting policies in controversial or emerging areas for which
there is a lack of authoritative guidance or consensus;
(vi) management’s process for formulating sensitive accounting estimates and
the
reasonableness of these estimates;
(vii)
significant recorded and unrecorded audit adjustments;
(viii)
any material accounting issues among management and the independent external audit
firm; and
(ix)
other matters required to be communicated to the Committee under applicable auditing
standards by independent auditors.
After such review, the Committee shall recommend to the Board whether such audited annual financial statements
and related MD&A should be filed with the applicable Regulatory Authorities.
(c)
The Committee shall review the Corporation’s quarterly financial statements and the related
MD&A. After such review, the Committee shall recommend to the Board whether such financial statements and
related MD&A should be filed with the applicable Regulatory Authorities. If any Regulatory Authority requires that
the independent external audit firm review the Corporation’s interim financial statements prior to their filing with the
Regulatory Authority, the Committee shall take steps designed to ensure that such review has been completed.
(d)
The Committee shall review any other financial reports and filings as may be deemed appropriate
by the Committee or required by any other Regulatory Authority (including financial disclosure in a registration
statement, prospectus or other securities offering document of the Corporation, press releases disclosing, or based
upon, financial results of the Corporation including earnings releases and any other material financial disclosure,
including financial guidance provided to analysts, rating agencies or otherwise publicly disseminated) and shall
recommend to the Board whether such other financial reports or filings should be included in any external filing.
4
(e)
The Committee shall review any forward-looking financial information prepared by management
of the Corporation that is proposed to be publicly disseminated.
3.2
Independent Audit Firm
(a)
Subject to the approval of the Board and the shareholders of the Corporation as may be required
under the Business Corporations Act (Ontario), the Committee shall have the sole authority and direct responsibility
for the appointment, compensation and oversight of any independent external audit firm engaged for the purpose of
preparing or issuing an external audit report or performing other audit, review or attest services for the Corporation,
and each such independent audit firm must report directly to the Committee. The authority of the Committee shall
include ultimate authority to approve all audit engagement fees and terms.
(b)
The Committee shall approve in advance any and all audit services and permissible non-audit
services to be performed by the independent external audit firm in accordance with Applicable Requirements (as
defined below) and adopt and implement policies for such pre-approval.
(c)
The Committee shall determine funding necessary for compensation of any independent external
audit firm and notify the Corporation of anticipated funding needs of the Committee.
(d)
The Committee shall resolve any disagreements between management and the independent external
audit firm as to financial reporting matters.
(e)
The Committee shall instruct the independent external audit firm that it should report directly to the
Committee on matters pertaining to the work performed during its engagement and on matters required by the
Applicable Requirements.
(f)
On at least an annual basis, the Committee shall receive from the independent external audit firm a
formal written statement identifying all relationships between the independent external audit firm and the Corporation
consistent with the applicable requirements of the Public Corporation Accounting Oversight Board (the “PCAOB”),
the Canadian Auditing and Assurance Standards Board and/or the applicable Rules of Professional Conduct/Code of
Ethics adopted by the order of chartered accountants to which it belongs and the Applicable Requirements. The
Committee shall actively engage in a dialogue with the independent external audit firm as to any disclosed
relationships or services that may impact its objectivity and independence and take any other action considered
appropriate to satisfy the Committee of the independence of the independent external audit firm. The Committee shall
establish policies for ensuring receipt from the independent external audit firm of a formal written statement of
independence prior to engagement, and then on at least an annual basis, and take appropriate action to oversee the
independence of the independent external audit firm.
(g)
On an annual basis, the Committee shall discuss with representatives of the independent external
audit firm the matters required to be discussed by PCAOB Auditing Standard No. 16 Communications with Audit
Committee, as it may be modified or supplemented, or any other applicable standards of the PCAOB.
(h)
The Committee shall evaluate the qualifications and performance of the independent external audit
firm and shall, at least annually, review the qualifications and performance of the lead partner(s) of the independent
external audit firm.
(i)
The Committee shall obtain a report from the independent external audit firm annually verifying
that the lead partner has served in that capacity for no more than five fiscal years of the Corporation and that the
engagement team collectively possesses the experience and competence to perform an appropriate audit.
(j)
The Committee shall review and approve policies for the Corporation’s hiring of partners and
employees or former partners and employees of the independent audit firm.
(k)
When a change of independent external audit firm is proposed, the Committee shall review all issues
related to the change, including the information required to be disclosed by any Regulatory Authority.
5
(l)
The Committee shall review all reportable events, including disagreements, unresolved issues and
consultations with the Corporation’s independent external audit firm, whether or not there is to be a change of
independent audit firm, and receive and review all reports prepared by the independent audit firm.
3.3
Financial Reporting Processes
(a)
In consultation with the Corporation’s management and the independent external audit firm, the
Committee shall review annually the adequacy of the Corporation’s internal control over financial reporting and
consider, in particular:
(i)
the effectiveness of, or weakness or deficiencies in: the design or operation of the
Corporation’s internal controls (including computerized information system controls and
security), the overall control environment for managing business risks, and accounting,
financial and disclosure controls (including, without limitation, controls over financial
reporting), non-financial controls, and legal and regulatory controls and the impact of any
identified weaknesses in internal controls on management’s conclusions;
(ii)
any significant changes in internal control over financial reporting that are disclosed, or
considered for disclosure, including those in the Corporation’s periodic regulatory filings;
(iii)
any issues raised by any inquiry or investigation by any Regulatory Authority;
(iv)
(v)
the Corporation’s fraud prevention and detection program, including deficiencies in
internal controls that may impact the integrity of financial information, or may expose the
Corporation to other significant internal or external fraud losses and the extent of those
losses and any disciplinary action in respect of fraud taken against management or other
senior employees who have a significant role in financial reporting; and
any related significant issues and recommendations of the independent external audit firm
together with management’s responses thereto, including the timetable for implementation
of recommendations to correct weaknesses in internal controls over financial reporting and
disclosure controls.
(b)
The Committee shall require the Corporation’s Chief Executive Officer and Chief Financial Officer
to submit a report to the Committee prior to the filing of the Corporation’s annual audited financial statements and
quarterly unaudited interim financial statements, which is based on their evaluation of internal control over financial
reporting, and which discloses:
(i)
any and all significant deficiencies and material weaknesses in the design and operation of
the internal controls over financial reporting which are reasonably likely to adversely affect
the Corporation’s ability to record, process, summarize, and report financial data;
(ii)
any significant changes in internal control over financial reporting; and
(iii)
any fraud, whether or not material, that involves management or other employees who have
a significant role in the Corporation’s internal control over financial reporting,
(c)
The Committee shall direct the actions to be taken and/or make recommendations to the Board of
actions to be taken, to the extent such report indicates the finding of any significant deficiencies in internal control
over financial reporting or fraud.
(d)
The Committee shall:
(i)
regularly review the Corporation’s critical accounting policies and accounting estimates
resulting from the application of these policies;
6
(ii)
(iii)
(iv)
(v)
inquire at least annually of both the Corporation’s management, accounting group and the
independent external audit firm as to whether either has any concerns relative to the quality
or aggressiveness of management’s accounting policies;
review with the independent external audit firm alternative accounting treatments that have
been discussed with management;
review with management any significant changes in IFRS as issued by the IASB, as well
as emerging accounting and auditing issues, and their potential effects; and
review with management matters that may have a material effect on the financial
statements.
3.4
Compliance
(a)
The Committee shall establish procedures in compliance with applicable law for:
(i)
(ii)
the receipt, retention, and treatment of complaints received by the Corporation regarding
accounting, internal accounting controls, or auditing matters; and
the confidential, anonymous submission by employees of the Corporation of concerns
regarding questionable accounting or auditing matters.
(b)
The Committee shall investigate any allegations that any officer or director of the Corporation, or
any other person acting under the direction of any such person, took any action to fraudulently influence, coerce,
manipulate, or mislead any firm (including the Corporation’s independent external audit firm) engaged in the
performance of an audit of the financial statements of the Corporation for the purpose of rendering such financial
statements materially misleading and, if such allegations prove to be correct, take or recommend to the Board of
Directors appropriate disciplinary action.
3.5
Reporting
The Committee shall advise the Corporation’s management of the need to disclose in its filings with
Regulatory Authorities the approval by the Committee of any non-audit services performed by the independent
external audit firm, and review the substance of any such disclosure and the considerations relating to the compatibility
of such services with maintaining the independence of the independent external audit firm.
3.6
Conflicts of Interest
The Committee shall review the Corporation’s policies relating to the avoidance of conflicts of
interest and review and approve all payments to be made pursuant to any related party transactions involving executive
officers and members of the Board, as required by any Regulatory Authority. The Committee shall consider the results
of any review of these policies and procedures by the Corporation’s independent external audit firm.
3.7
Access to Management and Independent Advice
(a)
The Committee shall have unrestricted access to the Corporation’s management and employees and
the books and records of the Corporation and, from time to time may hold unscheduled or regularly scheduled meetings
or portions of meetings in executive session or otherwise with the Corporation’s independent external audit firm, the
Chief Financial Officer, the Chief Executive Officer or the Corporate Secretary.
(b)
The Committee may conduct or authorize investigations into or studies of matters within the
Committee’s scope of responsibilities and duties as described above, and may seek, retain and terminate accounting,
legal, consulting or other expert advice from a source independent of management, at the expense of the Corporation,
with notice to either the Chair of the Board or the Chief Executive Officer of the Corporation, as deemed appropriate
7
by the Committee. In furtherance of the foregoing, the Committee shall have the sole authority to retain and terminate
any such consultant or advisor to be used to assist in the evaluation of such matters and shall have the sole authority
to approve the consultant or advisor’s fees and other retention terms.
3.8
Duty of the Committee
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty
of the Committee to plan or conduct audits, to establish the Corporation’s accounting and financial reporting systems,
or to determine that the Corporation’s financial statements are complete and accurate and are in accordance with
generally accepted accounting principles.
ARTICLE 4
NO RIGHTS CREATED
This Charter is a broad policy statement and is intended to be part of the Board’s flexible governance
framework. While this Charter should comply with all Applicable Requirements and the Corporation’s constating
documents, including articles and by-laws, this Charter does not create any legally binding obligations on the Board,
the Committee or any other committee of the Board or any director or the Corporation.
8