Cronos Group Inc.
Annual Report 2019

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(cid:82)(cid:85)(cid:3)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:82)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:69)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)

(cid:36)(cid:79)(cid:79)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:86)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:15)(cid:3)(cid:88)(cid:81)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:90)(cid:76)(cid:86)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:71)(cid:17)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)
(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:180)(cid:3)(cid:82)(cid:85)(cid:3)(cid:179)(cid:7)(cid:180)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:30)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:38)(cid:7)(cid:180)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:76)(cid:68)(cid:81)(cid:3)(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:30)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:36)(cid:7)(cid:180)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:36)(cid:88)(cid:86)(cid:87)(cid:85)(cid:68)(cid:79)(cid:76)(cid:68)(cid:81)(cid:3)
(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:44)(cid:47)(cid:54)(cid:180)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:49)(cid:72)(cid:90)(cid:3)(cid:44)(cid:86)(cid:85)(cid:68)(cid:72)(cid:79)(cid:76)(cid:3)(cid:54)(cid:75)(cid:72)(cid:78)(cid:72)(cid:79)(cid:86)(cid:17)(cid:3)

(cid:3)

(cid:3)

(cid:3)

(cid:3)

(cid:3)

(cid:3)

(cid:3)

(Exchange rates are shown as C$ per $)

As of December 31,

Average rate

Spot rate

2019

2018

2017

1.3268

1.2990

1.2955

1.3639

1.2969

1.2571

All summaries of agreements described herein are qualified by the full text of such agreements (certain of which are filed as exhibits 
hereto). 

Special Note Regarding Forward-Looking Statements

PART I

This Annual Report, the documents incorporated into this Annual Report by reference, other reports we file with, or furnish to, the U.S. 
Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees 
and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-
looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon 
our current internal expectations, estimates, projections, assumptions and beliefs. All information that is not clearly historical in nature 
may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking 
terminology, such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other 
similar  words,  expressions  and  phrases,  including  negative  and  grammatical  variations  thereof,  or  statements  that  certain  events  or 
conditions “may” or “will” happen, or by discussion of strategy. Forward-Looking Statements include estimates, plans, expectations, 
opinions, forecasts, projections, targets, guidance or other statements that are not statements of historical fact.
Forward-Looking Statements include, but are not limited to, statements with respect to: 

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laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty 
regarding the application of United States (“U.S.”) state and federal law to U.S. hemp (including CBD) products and the 
scope of any regulations by the U.S. Federal Drug Administration (the “FDA”), the U.S. Federal Trade Commission (the 
“FTC”), the U.S. Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S. hemp 
(including CBD) products; 
expectations regarding the regulation of the U.S. hemp industry in the U.S., including the promulgation of regulations for 
the U.S. hemp industry by the U.S. Department of Agriculture (the “USDA”);

the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments 
thereof;

our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated 
costs and timing, and expected impact;
the  ability  to  successfully  create  and  launch  brands  and  further  create,  launch  and  scale  U.S.  hemp-derived  consumer 
products, including through the Redwood Acquisition (as defined herein), and cannabis products in jurisdictions where such 
products are legal and that we currently operate in;
the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids;
the anticipated benefits and impact of the Altria Investment (as defined herein); 
the potential exercise of the Altria Warrant (as defined herein), pre-emptive rights and/or top-up rights in connection with 
the Altria Investment, including proceeds to us that may result therefrom;

expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment;

the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related timing and 
impact thereof and our intentions to participate in such markets, if and when such use is legalized;

expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic 
alliances  and  equity  investments,  including  the  strategic  partnership  (the  “Ginkgo  Strategic  Partnership”)  with  Ginkgo 
Bioworks, Inc. (“Ginkgo”);

our ability to execute on our strategy and the anticipated benefits of such strategy;
the ongoing impact of the legalization of additional cannabis product types and forms for adult-use in Canada, including 
federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our 
intentions to participate in such markets;
the future performance of our business and operations;
our competitive advantages and business strategies;
the competitive conditions of the industry;
the expected growth in the number of customers using our products;
our ability or plans to identify, develop, commercialize or expand our technology and research and development (“R&D”) 
initiatives in cannabinoids, or the success thereof;
expectations regarding acquisitions and the anticipated benefits therefrom, including the Redwood Acquisition and the 
acquisition of certain assets from AFI (as defined herein);
expectations regarding revenues, expenses and anticipated cash needs;

expectations regarding cash flow, liquidity and sources of funding;

expectations regarding capital expenditures;

1

• 

• 
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the expansion of our production and manufacturing, the costs and timing associated therewith and the receipt of applicable 
production and sale licenses;

the expected growth in our growing, production and supply chain capacities;
expectations regarding the resolution of litigation and other legal proceedings;

expectations with respect to future production costs;
expectations with respect to future sales and distribution channels;

the expected methods to be used to distribute and sell our products; 
our future product offerings;

the anticipated future gross margins of our operations;
accounting standards and estimates;

expectations regarding our distribution network; and
expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including 
under our third-party supply and manufacturing agreements. 

Certain of the Forward-Looking Statements contained herein concerning the industries in which we conduct our business are based on 
estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions 
based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative 
market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct 
our business involve risks and uncertainties that are subject to change based on various factors, which are described further below.

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, current conditions and expected future 
developments; (ii) our ability to generate cash flow from operations; (iii) general economic, financial market, regulatory and political 
conditions in which we operate; (iv) the production and manufacturing capabilities and output from our facilities and our joint ventures, 
strategic alliances and equity investments; (v) consumer interest in our products; (vi) competition; (vii) anticipated and unanticipated 
costs; (viii) government regulation of our activities and products including but not limited to the areas of taxation and environmental 
protection; (ix) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (x) our ability 
to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xi) our ability to conduct operations in a safe, 
efficient and effective manner; (xii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our 
recent  acquisitions  into  our  existing  operations;  and  (xiii)  other  considerations  that  management  believes  to  be  appropriate  in  the 
circumstances.  While  our  management  considers  these  assumptions  to  be  reasonable  based  on  information  currently  available  to 
management, there is no assurance that such expectations will prove to be correct.
By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which 
give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions 
may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and 
unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements 
in this Annual Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, 
officers, other employees and other persons authorized to speak on our behalf. Such factors include, without limitation, 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 and U.S. hemp products; our ability to manage disruptions in credit markets or changes to our 
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 our capital resources and liquidity, including but not limited to, availability of sufficient cash flow 
to execute our business plan (either within the expected timeframe or at all); the potential effects of judicial or other proceedings on our 
business, financial condition, results of operations and cash flows; volatility in and/or degradation of general economic, market, industry 
or business conditions; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations 
and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; the anticipated 
effects of actions of third parties such as competitors, activist investors or federal (including U.S. federal), state, provincial, territorial or 
local regulatory authorities, self-regulatory organizations, plaintiffs in litigation or persons threatening litigation; changes in regulatory 
requirements in relation to our business and products; and the factors discussed under the heading “Risk Factors” in this Annual Report. 
Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on 
Forward-Looking Statements.
Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial 
position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations 
and plans relating to the future, and the reader is cautioned that the Forward-Looking Statements may not be appropriate for any other 
purpose. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on 
information currently available to management, there is no assurance that such assumptions and expectations will prove to have been 

2

correct. Forward-Looking Statements are made as of the date they are made and are based on the beliefs, estimates, expectations and 
opinions of management on that date. We undertake no obligation to update or revise any Forward-Looking Statements, whether as a 
result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between 
subsequent actual events and such Forward-Looking Statements. The Forward-Looking Statements contained in this Annual Report and 
other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and 
other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements.

ITEM 1. BUSINESS

General
Cronos Group is a corporation incorporated on August 21, 2012 under the Business Corporations Act (Ontario) with principal executive 
offices at 720 King Street West, Suite 320, Toronto, Ontario M5V 2T3. Our telephone number is +1-416-504-0004, our website is https://
thecronosgroup.com/ and the investor relations section of our website is https://ir.thecronosgroup.com/. All references to our website are 
inactive references, are for informational purposes only and are not intended to incorporate any information from or referenced on our 
website into this Annual Report.

Our common shares are currently listed on the Toronto Stock Exchange (“TSX”) and on the NASDAQ Global Market (“Nasdaq”) under 
the trading symbol “CRON.”
Description of the Business

Overview

We are an innovative global cannabinoid company with international production and distribution across five continents. We are committed 
to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build 
an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS™, a global wellness platform; two adult-use 
brands, COVE™ and Spinach™; and two U.S. hemp-derived consumer products brands, Lord Jones™ and PEACE+™. 

We report through our two primary business segments: “United States” and “Rest of World.”
Strategy

We seek to create value for shareholders by focusing on four core strategic priorities:

• 

• 

• 

• 

growing a portfolio of iconic brands that resonate with consumers;

developing a diversified global sales and distribution network;

establishing an efficient global supply chain; and

creating and monetizing disruptive intellectual property in the industries in which we operate.

United States

Cronos Group operates in the U.S. market for U.S. hemp-derived consumer products through Redwood (as defined herein).

Redwood

On September 5, 2019, we announced the closing of the acquisition (the “Redwood Acquisition”) of four Redwood Holding Group, LLC 
operating subsidiaries (collectively, “Redwood”). Redwood manufactures, markets and distributes U.S. hemp-derived supplements and 
cosmetic products through e-commerce, retail and hospitality partner channels in the U.S. under the brand Lord Jones™. Redwood’s 
products  use  pure  U.S.  hemp  extract  that  contains  natural  phytocannabinoids  and  terpenes  found  in  the  plant. We  plan  to  leverage 
Redwood’s capabilities to capitalize on the significant demand for U.S. hemp-derived products to further create and scale U.S. hemp-
derived consumer products and brands.
No U.S. Schedule I Cannabis-Related Activities 
On December 20, 2018, the 2018 Farm Bill was signed into law in the U.S., removing U.S. hemp from the list of Schedule I controlled 
substances under the U.S. Controlled Substances Act (the “CSA”), and in October 2019 the USDA issued an interim final rule establishing 
a domestic U.S. hemp production regulatory program. Though a number of states in the U.S. have authorized the cultivation, distribution 
or possession of U.S. Schedule I cannabis to various degrees and subject to various requirements or conditions, U.S. Schedule I cannabis 
continues to be categorized in the U.S. as a controlled substance under the CSA. Therefore, the cultivation, distribution and possession 
of U.S. Schedule I cannabis violates federal law in the U.S. unless a U.S. federal agency, such as the U.S. Drug Enforcement Agency 
(the “DEA”), grants licenses for a specific use, such as research, with U.S. Schedule I cannabis.
We do not engage in any activities related to U.S. Schedule I 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,  but  such  activities  are  conducted  in 
compliance with all applicable laws regarding controlled substances. 

Rest of World

In Canada, Cronos Group operates two wholly owned license holders under the Cannabis Act (Canada) (the “Cannabis Act”) (together, 
the “License Holders”), Peace Naturals Project Inc. (“Peace Naturals”), which has production facilities near Stayner, Ontario, and Original 
BC Limited (“OGBC”), which has a production facility in Armstrong, British Columbia. Cronos Group has established four strategic 
joint ventures in Canada, Israel and Colombia. Cronos Group additionally holds approximately 31% of the issued capital of Cronos 
3

Australia Limited (“Cronos Australia”), which is listed on the Australian Securities Exchange under the trading symbol “CAU.”  Cronos 
Group currently exports cannabis products to countries that permit the import of such products, such as Germany and Australia. 

Canadian License Holders 
The production facilities at Peace Naturals (the “Peace Naturals Campus”) are licensed by Health Canada under the Cannabis Act to 
engage in, among other things, the cultivation, processing, distribution and sale of dried cannabis flower, cannabis resin, cannabis seeds, 
cannabis plants, cannabis extracts, cannabis topicals and cannabis edibles, among other prescribed activities. In addition, Peace Naturals 
also holds a cannabis drug license under the Cannabis Act, 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 holds licenses under the Cannabis Act from Health Canada to engage in the cultivation, processing, distribution and sale of dried 
cannabis flower, cannabis seeds, and cannabis plants among other prescribed activities. OGBC currently engages in inter-company bulk 
transfers of dried cannabis flower to Peace Naturals, where it is processed and packaged for sale and sold under the Company’s various 
brands.
Joint Ventures/Strategic Investment
We have established four strategic joint ventures in Canada, Israel and Colombia. We also hold approximately 31% of the issued capital 
of Cronos Australia as a result of the completion of Cronos Australia’s initial public offering in the fourth quarter of 2019, pursuant to 
which Cronos Australia issued 40 million new shares at an offering price of A$0.50 per share. Prior to November 7, 2019, we held a 50% 
ownership interest in Cronos Australia. We account for our investment in Cronos Australia under the equity method of accounting.

Our ownership interest in each of our joint ventures is summarized in the table below. 

Joint Venture

Cronos Israel (ii)
Cronos Growing Company Inc. (“Cronos GrowCo”) (iii)
NatuEra S.à.r.l. (“NatuEra”) (iv)
MedMen Canada Inc. (“MedMen Canada”) (v)

Jurisdiction
Israel

Canada

Colombia

Canada

Ownership Interest(i)
70%/90%

50%

50%

50%

(i) 

(ii) 

(iii) 

(iv) 

(v) 

We define ownership interest as the proportionate share of net income to which we are entitled; equity interest may differ from ownership interest shown above. 
We consolidate the financial results of Cronos Israel and account for our other joint ventures under the equity method of accounting. See Notes 2 and 6 of our 
audited consolidated financial statements included in Item 8 of this Annual Report.

A strategic joint venture with Kibbutz Gan Shmuel (“Gan Shmuel”), an Israeli agricultural collective settlement, for the production, manufacture and global 
distribution of medical cannabis, consisting of a cultivation company (Cronos Israel G.S. Cultivations Ltd.), a manufacturing company (Cronos Israel G.S. 
Manufacturing Ltd.), a distribution company (Cronos Israel G.S. Store Ltd.) and a pharmacies company (Cronos Israel G.S. Pharmacies Ltd., collectively, 
“Cronos Israel”). We hold a 70% equity interest in the cultivation company and a 90% equity interest in each of the manufacturing, distribution and pharmacies 
companies.

A strategic joint venture with a group of investors led by Bert Mucci (the “Greenhouse Partners”), a Canadian large-scale greenhouse operator. Each of Cronos 
Group and the Greenhouse Partners owns a 50% equity interest in the joint venture, Cronos GrowCo, and has equal representation on its board of directors.

A strategic joint venture with an affiliate of Agroidea SAS (“AGI”), a Colombian agricultural services provider. Each of the Company and AGI owns a 50% 
equity interest in the joint venture, NatuEra. Cronos Group has three manager nominees on the board of managers of NatuEra, while AGI has 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.

A strategic joint venture with MedMen Enterprises USA, LLC (“MedMen”) for retail in provinces in Canada that permit private retail. Each of the Company 
and MedMen owns a 50% equity interest in the joint venture, MedMen Canada, and has equal representation on the board of directors of MedMen Canada.

Operations Outside of Canada 
Cronos Group anticipates expanding in the geographic markets outside of Canada and the U.S. that we currently participate in and entering 
new  geographic  markets.  By  leveraging  operational,  manufacturing  and  regulatory  expertise,  quality  standards  and  procedures  and 
intellectual property, we believe that we are well-positioned to effectively access international markets. Subject to applicable regulatory 
approvals, strategic international business opportunities pursued by us could include:

• 

• 

production,  distribution,  sales  and  marketing  outside  of  the  geographic  markets  that  we  currently  participate  in  (in 
jurisdictions which have passed legislation to legalize the production, distribution and possession of cannabis and cannabis 
products at all relevant levels of government); and
the export of cannabis and cannabis products to third parties outside of the geographic markets that we currently participate 
in that permit the import of such products.

We seek to conduct business only in jurisdictions where we believe it is legal to do so and where such operations remain compliant with 
our listing obligations with the TSX and Nasdaq. Determining whether a business activity is legal in a jurisdiction may require judgment 
since laws, rules, regulations and licenses may not be clear and legal interpretation and advice of counsel may vary. If a business activity 
we engage in any jurisdiction is determined to be illegal, we could be subject to fines, penalties, reputational harm, delisting from securities 
exchanges and material civil, criminal and regulatory litigation and proceedings or be enjoined from doing business in the applicable 
jurisdiction. See “Risk Factors - We operate in highly regulated sectors where the regulatory environment is rapidly developing, and we 
may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business.” 

4

Altria Strategic Investment 

In March 2019, Altria Group, Inc. (“Altria”) closed a C$2.4 billion (approximately $1.8 billion) investment in us (the “Altria Investment”). 
We issued to certain wholly owned subsidiaries of Altria 149,831,154 of our common shares and one warrant (the “Altria Warrant”), 
which may be exercised in full or in part at any time on or prior to 5:00 p.m. (Toronto time) on 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 of our common shares (subject to adjustment 
in accordance with the terms and conditions of the warrant certificate representing and evidencing the Altria Warrant (the “Altria Warrant 
Certificate”)), at an initial exercise price of C$19.00 for approximately $1.0 billion. As of the closing date of the Altria Investment, Altria 
beneficially held an approximately 45% ownership interest in us (calculated on a non-diluted basis) and, if exercised in full on such date, 
the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in us of approximately 55% (calculated 
on a non-diluted basis). As a result of Altria’s investment we have additional financial resources. In additional, following its investment, 
Altria has provided us with commercial capabilities in the fields of product development and commercialization to better position us to 
compete in the global cannabis industry. See “- Altria Strategic Investment” for more information on the Altria Investment and related 
agreements.
Brand Portfolio 
We are committed to building a portfolio of iconic brands that responsibly elevate the consumer experience. 
In the U.S., we market and distribute solely U.S. hemp-derived supplements and cosmetics products through e-commerce, retail and 
hospitality channels under the brand Lord Jones™. 
In Canada, we sell a variety of cannabis and cannabis products, including dried cannabis, pre-rolls and cannabis extracts (in the form of 
tinctures and vaporizers) through wholesale and direct-to-client channels under our wellness platform, PEACE NATURALS™, and under 
our two adult-use brands, COVE™ and Spinach™. In addition, PEACE NATURALS™ dried cannabis and cannabis oils are currently 
exported for sale to Germany and Australia, respectively. 

Brand Positioning

Wellness

Premium Adult-
Use, Terpene-Rich

Mainstream Adult-
Use

Luxury Adult
Consumer Goods

Mass Market

Product Offering

Dried Cannabis,
Cannabis Tinctures

Dried Cannabis,
Cannabis
Tinctures, Pre-
Rolls, Vaporizers

Dried Cannabis,
Pre-Rolls,
Vaporizers

U.S. hemp-derived
Supplements,
Cosmetics

In Development
(not yet offered for
sale)

Geographic Availability

Canada, Germany
and Australia

Canada

Canada

U.S.

Anticipated U.S.

Wellness Brands
We currently distribute products under PEACE NATURALS™ for the Canadian and non-U.S. international medical cannabis markets. 
PEACE NATURALS™ is a global wellness platform committed to producing high-quality cannabis and cannabis products. PEACE 
NATURALS™ is focused on building and shaping the global cannabis wellness market and promoting a holistic approach to wellness. 
The brand’s goal is to improve the lives of others, one patient at a time. 
Adult-Use Brands
We have launched two brands for the Canadian adult-use market: 
COVE™ is a premium positioned brand focused on creating crafted experiences. The brand seeks to utilize an uncompromising approach 
to quality by leveraging terpene-rich strains that are grown in small-batch runs. COVE’s™ indoor, strain-specific grow rooms allow for 
one-on-one plant care while seeking to maintain the highest quality standards throughout the entire process. 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™, which is geared towards a wide range of consumers 
who are looking for entertaining, fun ways to enhance activities. A lighthearted and playful brand, Spinach™ is focused on offering Farm-
To-Bowl™ products that bring friends together and make experiences more enjoyable. 

Adult Consumer Product Brands
The Company operates Lord Jones™ for the adult consumer goods market in the U.S. Lord Jones™ is a luxury beauty and lifestyle brand 
focusing on high-quality U.S. hemp-derived personal care products. Lord Jones™ U.S. hemp-derived supplements and cosmetics products 

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are distributed online and to over 900 premium stores and retail channels, including Sephora, Neiman Marcus and SoulCycle. Lord 
Jones™ is a preeminent U.S. hemp-derived CBD brand in the U.S. 

The Company launched PEACE+™, a new U.S. hemp-derived CBD brand in the U.S. PEACE+™ U.S. hemp-derived CBD products 
are currently under development and are not yet offered for sale. PEACE+™ is about more than making a better, high-quality U.S. hemp-
derived CBD product; it stems from the belief that well-being can lead to a better world, full of positivity and possibility. It is a belief 
that extends beyond the products and into everything the brand seeks to do and stand for. The brand intends to distribute its products 
through the convenience store retail channel in the future.
Global Sales and Distribution - Principal Markets 
Cronos Group seeks to develop a diversified global sales and distribution network by leveraging established partners for their scale, 
salesforce and market expertise. We are also building a distribution footprint in Canada through the direct-to-patient medical market and 
the adult-use market, as well as a distribution footprint for U.S. hemp-derived consumer products in the U.S. through e-commerce, retail 
and hospitality channels. We do not exhibit any material seasonality over our fiscal year.
United States Market and Distribution
Through Redwood, the Company manufactures, markets and distributes U.S. hemp-derived supplements and cosmetics products through 
e-commerce, retail and hospitality partner channels in the U.S. under the brand Lord Jones™. Redwood’s products use pure U.S. hemp 
extract that contains natural phytocannabinoids and terpenes found in the plant. We plan to use our resources to capitalize on the demand 
to further create and scale U.S. hemp-derived consumer products and brands. We do not engage in any commercial activities related to 
the cultivation, distribution or possession of U.S. Schedule I cannabis in the U.S.
The Company has also launched its PEACE+™ brand for U.S. hemp-derived CBD products in the U.S. PEACE+™ U.S. hemp-derived 
CBD products are currently under development and are not yet offered for sale. The Company intends to access the U.S. convenience 
store retail channel in the future.

Rest of World 

Canadian Market and Distribution
Direct-to-Patient.  We  currently  sell  dried  cannabis  and  cannabis  extracts  direct  to  patients  through  our  wellness  platform,  PEACE 
NATURALS™. These patients are typically sourced through physician and clinic referrals or word-of-mouth recommendations from 
existing patients. 

Adult-Use. In October 2018, Canada became the first G7 country and the second country in the world to legalize cannabis sales for adult-
use at a federal level. We currently sell dried flower, pre-rolls and cannabis extracts (in the form of tinctures and vaporizers) through our 
adult-use brands, COVE™ and Spinach™, to cannabis control authorities in various provinces, including Ontario, Québec, British Columbia, 
Alberta, Manitoba, Nova Scotia, New Brunswick and Prince Edward Island, as well as to private-sector retailers in Saskatchewan, subject 
to the relevant province’s product or other restrictions and requirements. As of December 31, 2019, these nine provinces together represent 
approximately 98% of the Canadian population. As the Company’s supply chain grows, and as a result of the effectiveness of Further 
Regulations (as defined herein), which permitted the sale of cannabis extracts, edibles and topicals in December 2019, the Company 
intends to increase penetration within existing markets in Canada. The rate of the Company’s expansion of distribution remains subject 
to  factors  that  are  beyond  the  Company’s  control,  including  evolving  regulations,  the  development  of  sufficient  supply  chain  and 
manufacturing infrastructure and development of distribution and retail channels across Canada. 

Markets and Distribution Outside of Canada 
Europe. We have distributed and anticipate continuing to distribute PEACE NATURALS™ branded cannabis products in Germany through 
an  exclusive  distribution  relationship  with  G.  Pohl-Boskamp  GmbH  &  Co.  KG  (“Pohl-Boskamp”),  an  international  pharmaceutical 
manufacturer and distributor with a distribution network of pharmacies. See “- Regulatory Framework in Germany for Imports.” We 
have also entered into a strategic distribution partnership with Delfarma Sp. Zo.o (“Delfarma”), a pharmaceutical wholesaler in Poland. 
We and Delfarma are currently in the process of obtaining the necessary regulatory approvals to sell cannabis products in Poland. See “ 
- Regulatory Framework in Poland for Imports.”
Israel. We intend to distribute to the Israeli medical cannabis market through the operations of Cronos Israel, once Cronos Israel is fully 
licensed and operational. See “- Licenses and Regulatory Framework in Israel.”

Latin America. We intend to distribute cannabis and cannabis products to the Latin American and other cannabis markets through the 
operations of NatuEra, once NatuEra is fully licensed and operational. See “- Licenses and Regulatory Framework in Colombia.”

Australia and Asia-Pacific. Cronos Australia has received an import license from the Australian Office of Drug Control (the “ODC”), 
together with all necessary permits, to import PEACE NATURALS™ branded products for sale in the Australian medical market under 
the terms of the relevant permits. In the fourth quarter of 2019, Cronos Group completed its first export of PEACE NATURALS™ branded 
cannabis products to Cronos Australia. Cronos Australia facilitates distribution of the Company’s products in Australia, New Zealand 
and  South  East Asia,  bolstering  the  Company’s  distribution  network  in  the Australia  and Asia-Pacific  region.  See  “-  Licenses  and 
Regulatory Framework in Australia.”
We continue to seek new international distribution channels in jurisdictions that have legalized the production, distribution and possession 
of cannabis and cannabis products at all relevant levels of government.

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Global Supply Chain 

Cronos Group is focused on establishing an efficient global supply chain by seeking to develop industry-leading methodologies and best 
practices at the Peace Naturals Campus and leveraging this expertise to create beneficial production partnerships. We plan to continue 
to develop a global supply chain, which will employ a combination of wholly owned production facilities, third-party suppliers and global 
production partnerships, all of which will support the manufacturing of cannabinoid-based consumer goods. 
United States Supply Chain
In the ordinary course of our business, we enter into contract manufacturing agreements with suppliers of our cosmetic products. We 
supply these third-party manufacturers with U.S. hemp extract, fragrances and packaging that we source from other third-party suppliers. 
The contract manufacturers supply any other necessary ingredients to execute our proprietary formulas and fill and package our products. 
Our contract manufacturing and supply agreements generally do not require us to purchase minimum quantities of materials or products.

In producing our supplement products, we source our ingredients from our suppliers on an ongoing as-needed basis. We have not entered 
into any contracts that obligate us to purchase a minimum quantity or exclusively from any food service distributor. Our supplements are 
manufactured at our facilities in Los Angeles, California according to Good Manufacturing Practices (“GMP”). 
We are obligated to purchase our supply of U.S. hemp extract from one supplier unless that supplier cannot provide the agreed-upon 
quantities in relation to certain brands in the U.S.
Rest of World 
Canadian Supply Chain
Production Facilities at License Holders. The Peace Naturals Campus is licensed for cannabis production and the manufacturing of certain 
cannabis products. The production processes at the Peace Naturals Campus are GMP-certified under relevant European Economic Area 
GMP directives by the national competent authority of Germany. The Peace Naturals Campus is engaged in cultivation, processing, 
finishing, packaging and shipping activities, as well as tissue culture and micro propagation, providing a year-round supply of cannabis.  
The Peace Naturals Campus also engages in R&D to pilot various production technologies, with any tests yielding favorable operational 
improvements evaluated for dissemination to the Company’s other partnership facilities. In addition, the Peace Naturals Campus engages 
in R&D on cannabinoid formulations, delivery systems and product development.

OGBC 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 and sold under the Company’s brands.
Cronos GrowCo. Cronos GrowCo completed construction of the structure of its greenhouse in Kingsville, Ontario in 2019. Full completion 
of construction of the facility, including all fixtures within the greenhouse and all post-harvest activity areas, is expected to be completed 
in 2020. The Company expects the facility to become operational in phases in the second half of 2020. Completion of construction and 
commencement of operations at Cronos GrowCo will be subject to obtaining the appropriate licenses and other customary approvals 
under applicable law.
Third-Party Supply and Manufacturing Agreements. In the ordinary course of our business, we enter into spot market purchase agreements 
and supply agreements with suppliers of dried cannabis and other cannabis products. Our supply agreements for the most part, other than 
the agreement with MediPharm Labs Corp. (“MediPharm”) for cannabis resin described below, generally do not obligate us to purchase 
minimum quantities of products and generally contain provisions permitting cancellation of orders or termination on notice. We also 
enter into contract manufacturing agreements with other license holders, pursuant to which such license holders provide cannabis extract 
and services related to the filling and packaging of vaporizer devices for the Canadian cannabis adult-use and wellness markets.

In May 2019, the Company entered into a take-or-pay supply agreement with MediPharm for cannabis resin. MediPharm will supply the 
Company with approximately C$30.0 million of cannabis resin over 18 months from the date of the agreement, and, subject to certain 
renewal and purchase options, potentially up to C$60.0 million over 24 months from the date of the agreement. 
Supply Chain Outside of Canada 

Cronos Israel. The initial phase of construction of Cronos Israel involves the construction of a greenhouse and a manufacturing facility 
that will be utilized for analytics, formulation and R&D. The construction of the greenhouse was completed in the first half of 2019, and 
construction of a manufacturing facility was completed in the third quarter of 2019. Commencement of operations in Israel is subject to 
receiving the appropriate final cannabis cultivation and production licenses from the Israeli Ministry of Health and the cultivation and 
manufacturing facilities are expected to become operational in phases during 2020. 
NatuEra. NatuEra plans to develop its initial cultivation and manufacturing operations with a purpose-built, GMP-standard facility located 
in Cundinamarca, Colombia. Construction of the GMP-standard facility has commenced, and construction is anticipated to be completed 
in 2020, subject to obtaining the relevant permits and other customary approvals. See “- NatuEra Licenses” for further information on 
the licensing status of NatuEra. 
Major Customers

Two major customers (sales to each of which equaled or exceeded 10% of the Company’s consolidated net revenues for the year ended 
December 31, 2019), Ontario Cannabis Store (the cannabis control authority and sole wholesaler and distributor of cannabis in Ontario) 
and Radient Technologies Inc., accounted for approximately 14% and 18%, respectively, of our consolidated net revenues for the year 
ended December 31, 2019. We mitigate credit risk through verification of the customers’ liquidity prior to the authorization of material 
transactions.

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Government Contracts

In Canada, we sell cannabis and cannabis products to cannabis control authorities in various provinces, including, Ontario, Québec, 
British Columbia, Alberta, Manitoba, Nova Scotia, New Brunswick and Prince Edward Island, where each such cannabis control authority 
is the sole wholesale distributor and in certain provinces, the sole retailer, of cannabis and cannabis products in the relevant province. 
We  sell  these  products  to  the  various  cannabis  control  authorities  under  supply  agreements  that  are  subject  to  terms  that  allow  for 
renegotiation of sale prices and termination at the election of the applicable cannabis control authority. In particular, the cannabis control 
authorities have in the past and may in the future choose to stop purchasing our products, may change the prices at which they purchase 
our products, may return our products to us and, in certain circumstances, may cancel purchase orders at any time including after products 
have been shipped. For the year ended December 31, 2019 we had approximately $8.5 million in sales to cannabis control authorities.
Research and Development Activities and Intellectual Property

Cronos Device Labs
In April  2019,  Cronos  Group  established  Cronos  Device  Labs  Ltd.  (“Cronos  Device  Labs”),  our  Israel-based  global  research  and 
development center for innovation. The state-of-the-art facility is equipped with advanced vaporizer technology and analytical testing 
infrastructure and is home to an experienced team of product development talent. The Cronos Device Labs team, with over 80 years of 
combined experience in vaporizer development, is comprised of product designers, mechanical, electrical and software engineers, and 
analytical and formulation scientists. This global R&D center is expected to significantly enhance Cronos Group’s innovation capabilities 
and accelerate development of next-generation vaporizer products specifically tailored to cannabinoid use. 

Ginkgo 
In September 2018, we announced an R&D partnership with Ginkgo, pursuant to the collaboration and license agreement dated September 
1, 2018 between Ginkgo and the Company (the “Ginkgo Collaboration Agreement”), that could ultimately enable us to produce certain 
cultured cannabinoids at commercial scale at a fraction of the cost compared to traditional cultivation practices. These cultured cannabinoid 
molecules are identical to those produced by plants grown using traditional cultivation but are created by leveraging the power of biological 
manufacturing  via  fermentation.  In  addition  to  tetrahydrocannabinol  (“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.

The Ginkgo Strategic Partnership contemplates the performance of licensed R&D activities in the U.S. in order to produce cultured 
cannabinoids, but such activities are to be conducted in compliance with all applicable laws regarding controlled substances. We intend 
to produce and distribute the target cannabinoids globally, where legally permissible, and have received confirmation from Health Canada 
that this method of production is permitted under the Cannabis Act. 

Cronos Fermentation 

In July 2019, we closed the acquisition (the “Cronos Fermentation Acquisition”) of certain assets from Apotex Fermentation Inc. (“AFI”), 
including a GMP-compliant fermentation and manufacturing facility in Winnipeg, Manitoba. The state-of-the-art facility, which will 
operate as “Cronos Fermentation,” includes fully equipped laboratories covering microbiology, organic and analytical chemistry, quality 
control and method development as well as two large-scale microbial fermentation production areas with a combined production capacity 
of 102,000 liters, three downstream processing plants, and bulk product and packaging capabilities. The acquisition is expected to provide 
the fermentation and manufacturing capabilities we need in order to capitalize on the progress underway with Ginkgo, by enabling us to 
produce the target cannabinoids contemplated under the Ginkgo Collaboration Agreement at commercial scale with high quality and high 
purity. To support this work, a team of engineers, scientists, production and quality assurance personnel previously employed by AFI 
joined us as employees in November 2019.
We have begun to work on developing scale-up and downstream processes at Cronos Fermentation, while in parallel Ginkgo develops 
microorganisms for producing cultured compounds. As we develop the processes and parameters, these learnings will be used for the 
strains that will be used for commercial production of cultured cannabinoids. Commercial production at the facility is subject to completion 
of the equipment alignment for cannabinoid-based production, the receipt of the appropriate licenses from Health Canada for the production 
of cultured cannabinoids under the Cannabis Act and the achievement of the relevant milestones under the Ginkgo Strategic Partnership.
Ginkgo has filed certain patent applications pertaining to biosynthesis of cannabinoids to protect the intellectual property developed as 
part of the research progressing under the Ginkgo Strategic Partnership. Under the partnership, Cronos Group is the exclusive licensee 
of the intellectual property covered by the patent applications for the target cannabinoids. 
Technion Skin Health Research Partnership

In October 2018, we announced we had entered into a sponsored research agreement (the “Technion Research Agreement”) with the 
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.
Research is 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 

8

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 is being 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.

Competitive Conditions 
Competitive Conditions in the United States

We face competition in all aspects of our business in the U.S. hemp market. The 2018 Farm Bill created a proliferation of U.S. hemp 
companies and brands. In addition to numerous small companies and brands, we compete with larger, national companies that may have 
larger distribution capabilities with more developed and efficient supply chain operations. The principal factors on which we compete 
with other U.S. hemp brands are the quality and variety of products, the speed with which such products are brought to market, brand 
recognition and intellectual property. We do not engage in any U.S. Schedule I cannabis activities. However, market participants that 
currently engage in such activities in violation of U.S. federal law in light of state level legalization and the current uncertainty around 
federal enforcement in relation to such activities may further entrench their market positions, increase their operations, sales and distribution 
networks and make it more difficult for us to enter the market if and when U.S. Schedule I cannabis becomes legal under U.S. federal 
law. We believe the Company’s strong capitalization resulting from the Altria Investment, along with the Lord Jones™ existing brand 
equity, recognition and differentiation in the U.S. hemp luxury retail channel, will enable us to provide better quality consumer products, 
grow our U.S. hemp business and strengthen our market position in the U.S. However, rapidly evolving and developing federal and state 
regulatory frameworks affect all areas of our business and could result in our inability to compete successfully against our current and 
future competitors. See “ -U.S. Hemp Regulatory Framework” for further information on regulatory framework on U.S. hemp.

Rest of World

Competitive Conditions in Canada

We face competition in all aspects of our business in the Canadian medical and adult-use markets. As the demand for cannabis increases 
as a result of the legalization of adult-use cannabis in Canada under the Cannabis Act, we believe that new competitors will continue to 
enter the market. 
The principal factors on which we compete with other Canadian license holders are the quality and variety of cannabis products, the 
speed with which such products are brought to market, brand recognition and intellectual property. We believe the Company’s strong 
capitalization resulting from the Altria Investment will enable us to provide better quality consumer products, grow our Canadian business 
and strengthen our market position in Canada. However, a rapidly evolving and stringent federal regulatory framework affects all areas 
of our business. For example, the Cannabis Act places strict limits on the promotion, packaging and labeling of cannabis products, which 
may make it difficult for us to differentiate our products from products of our competitors, thereby impacting our ability to create brand 
recognition and related goodwill.

We also face competition from illegal dispensaries and the illegal market that are unlicensed and unregulated, and that are selling cannabis 
and cannabis products, including products with higher concentrations of active ingredients, using flavors or other additives or engaging 
in advertising and promotional activities that we may not engage in. As these illegal market participants do not comply with the regulations 
governing the cannabis industry, their operations may also have significantly lower costs. Any inability or unwillingness of the Canadian 
federal or provincial 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 illegal market for cannabis.

Competitive Conditions in Europe and Israel 

We face competition when entering new markets in Europe. The quality and variety of products, the speed with which products are 
brought to market, brand recognition, physician familiarity and intellectual property are the main factors that affect product competition. 
We believe we are positioned to enter certain markets in Europe and Israel in a meaningful way while continuing to operate and penetrate 
the markets we currently serve, such as in Israel and Germany, due to our strong capitalization resulting from the Altria Investment, 
extensive experience and expertise in the nascent cannabis industry in Canada, which can be leveraged when entering new markets or 
growing existing operations, and strong partnerships with local pharmaceutical distributors. We believe these factors will enable us to 
develop greater market penetration, provide a greater variety of quality consumer products and enter into new markets and strengthen 
our existing market position in Europe and Israel. However, a patchwork of regulatory frameworks and federal regulations in these various 
regions also affect our ability to compete in emerging markets as evolving regulations and federal frameworks have the potential to affect 
all areas of our business.
Altria Strategic Investment 
Altria Investment and Investor Rights Agreement

Pursuant to the subscription agreement dated December 7, 2018 (the “Subscription Agreement”), on March 8, 2019, in exchange for 
approximately C$2.4 billion (approximately $1.8 billion), we issued to certain wholly owned subsidiaries of Altria, 149,831,154 of our 
common shares and the Altria Warrant, which may be exercised in full or in part at any time on or prior to 5:00 p.m. (Toronto time) on 
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 of 
our common shares (subject to adjustment in accordance with the terms and conditions of the Altria Warrant Certificate) at an initial 
exercise price of C$19.00 for approximately $1.0 billion. As of the closing date of the Altria Investment, Altria beneficially held an 
approximately 45% ownership interest in us (calculated on a non-diluted basis) and, if exercised in full on such date, the exercise of the 
9

Altria Warrant would have resulted in Altria holding a total ownership interest in us of approximately 55% (calculated on a non-diluted 
basis). Since the closing of the Altria Investment, Altria has exercised its top-up rights, as discussed further under “-Pre-Emptive Rights 
and Top-Up Rights” below, each time that top-up rights have been available for exercise, other than in connection with its top-up rights 
for the fiscal quarter ended December 31, 2019. As of December 31, 2019, Altria beneficially held 156,573,537 of our common shares 
and has not exercised the Altria Warrant. If fully exercised, the Altria Warrant would provide us with approximately C$1.5 billion ($1.1 
billion) of additional proceeds.

Investor Rights Agreement
On March 8, 2019, in connection with the closing of the Altria Investment, we entered into the investor rights agreement (the “Investor 
Rights Agreement”) with Altria pursuant to which Altria received certain governance rights which are summarized below.

Board Representation
The Investor Rights Agreement provides that, for so long as Altria and certain of its affiliates (the “Altria Group”) continue to beneficially 
own at least 40% of our issued and outstanding common shares and the size of our board of directors (the “Board”) is seven directors, 
we agree to nominate for election as directors to the Board four individuals designated by Altria (the “Altria Nominees”). In addition, 
for so long as the Altria Group continues to beneficially own greater than 10% but less than 40% of our issued and outstanding common 
shares, 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 our issued and outstanding common shares 
beneficially owned by the Altria Group at the relevant time. At least one Altria Nominee must be independent as long as Atria has the 
right to designate at least three Altria Nominees and the Altria Group’s beneficial ownership of our issued and outstanding common shares 
does not exceed 50%.

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, we agree to 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 (rounded up to the next whole number) based 
on the percentage of our issued and outstanding common shares beneficially owned by the Altria Group at the relevant time. 

Approval Rights
The Investor Rights Agreement also grants Altria, until the Altria Group beneficially owns less than 10% of our issued and outstanding 
common shares, approval rights over certain transactions that may be taken by us. We have agreed that we will not (and will use our 
commercially reasonable efforts to cause our affiliates not to), without the prior written consent of Altria:

• 
• 

• 

• 

• 

• 

• 

• 

consolidate or merge into or with another person or enter into any similar business combination;
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 C$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 our significant subsidiaries, or any reorganization or recapitalization of the Company or any of our 
significant subsidiaries, or commence any claim seeking relief under any applicable laws relating to bankruptcy, insolvency, 
conservatorship or relief of debtors;

sell, transfer, cause to be transferred, exclusively license, lease, pledge or otherwise dispose of any of our or any of our 
significant subsidiaries’ assets, business or operations in the aggregate with a value of more than C$60,000,000;

except as required by applicable law, make any changes to our policy with respect to the declaration and payment of any 
dividends on our 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 us or any of our 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 “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 us or any of our 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  U.S.,  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 our issued and outstanding

common shares; and
the six-month anniversary of the termination of the Investor Rights Agreement,

(ii) 

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Altria has agreed to make us 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:
• 

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 relate to cannabis (such products and 
services, collectively, “Related Products and Services”) anywhere in the world, other than (A) pursuant to any Commercial 
Arrangement  (as  defined  under  “-  Commercial  Arrangements”  below),  or  (B)  pursuant  to  a  contract  approved  by  an 
independent committee of our 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, us and/or one or more of our 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”);

• 

• 

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 us and/or any of our 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 us and/or any of our subsidiaries, so long as any such use of trade 
names, trademarks, trade secrets or other intellectual property rights with us and/or any of our subsidiaries is pursuant to 
an Approved Company Agreement; or

• 

contract with or arrange for any third-party (other than us or any of our 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 
our issued and outstanding common shares, will have a right to purchase, directly or indirectly by another member of the Altria Group, 
upon the occurrence of certain issuances of common shares by us (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 our common shares issuable in connection with the Triggering Event which will, when added to our 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 our issued and outstanding common shares 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 these 
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 if the consideration paid in connection with any such issuance is non-cash, the price per 
common share that would have been received had such common shares been issued for cash consideration will be determined by an 
independent committee (acting reasonably and in good faith); provided further that the price per common share to be paid by Altria 
pursuant to the exercise of its pre-emptive rights in connection with a Ginkgo Issuance will be C$16.25 per common share.

In addition to (and without duplication of) the aforementioned pre-emptive rights, 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 the Altria Group 
beneficially owns at least 20% of our issued and outstanding common shares, Altria shall have the right to subscribe for such number of 
common shares in connection with any Top-Up Securities (as defined below) that we may, from time to 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 our issued and outstanding common shares that the Altria Group 
beneficially owned immediately prior to such issuance. “Top-Up Securities” means any of our common shares issued:

• 

• 

• 

• 

on the exercise, conversion or exchange of our convertible securities issued prior to the date of the Investor Rights Agreement 
or on the exercise, conversion or exchange of our convertible securities issued after the date of the Investor Rights Agreement 
in compliance with the terms of the Investor Rights Agreement, in each case, excluding any of our convertible securities 
owned by any member of the Altria Group;
pursuant to any share incentive plan of the Company;

on the exercise of any right granted by us 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 our lenders, 
in each case, with an equity component; or

11

• 

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 us, 

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 volume-weighted average price of our common shares on the TSX for the 10 full days preceding such exercise by Altria; 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 C
$16.25 per common share without any setoff, counterclaim, deduction or withholding.

Standstill Covenant
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 
our common shares (other than upon settlement of any of our 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 our common shares are then listed; (B) through private agreement 
transactions with existing holders of our 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 our 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.

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 us to use reasonable commercial efforts to file a prospectus under applicable securities laws and/or a registration statement, 
qualifying our common shares held by Altria for distribution in Canada and/or the U.S. In addition, the Investor Rights Agreement provides 
Altria with the right to require us to include our common shares held by Altria in any proposed distribution of common shares in Canada 
and/or the U.S. by us for our own account.

Commercial Arrangements
In  connection  with  the  Altria  Investment,  we  and  Altria  have  entered  into  certain  commercial  arrangements  (the  “Commercial 
Arrangements”), pursuant to which Altria provides us with consulting services on matters which may include R&D, 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 us that is 
equal to Altria’s reasonably allocated costs plus 5%.

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 
trademarks, patents, 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  inventions, 
germplasm, trade secrets, technical know-how and proprietary information and entering into agreements with parties that have access to 
our inventions, germplasm, 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, 
germplasm, 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 jurisdictions, including Canada, Australia, the U.S., China, Israel and Europe. 
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. For example, in the U.S., registered federal trademark protection is only available for 
goods and services that can be lawfully used in interstate commerce; the PTO is not currently approving any trademark applications for 
U.S. Schedule I cannabis, or certain goods containing U.S. hemp-derived CBD (such as dietary supplements and food) until the FDA 
provides clearer guidance on the regulation of such products. In Europe, 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 and enforce intellectual 
property rights against third-party uses of similar trademarks may be limited in certain jurisdictions. 
Employees

As of December 31, 2019, Cronos Group employed 631 employees and two full-time contractors. 
Minority Investments

Prior to the acquisition of OGBC in November of 2014, we exclusively invested in companies either licensed, or actively seeking a 
license, to produce legal cannabis. As of the date of this Annual Report, we have divested our previously held minority interests in most 
investees with active licenses under the Cannabis Act in Canada.

12

See Notes 6 and 9 of our audited consolidated financial statements included in Item 8 of this Annual Report for additional information.
Regulatory Framework in the U.S.

U.S. Hemp Regulatory Framework 
After the closing of the Redwood Acquisition, we derive a portion of our revenues from the manufacture, marketing and distribution of 
U.S. hemp-derived supplement and cosmetic consumer products, through e-commerce, retail and hospitality channels in certain states 
in the U.S. All U.S. hemp-derived products produced and sold by us constitute “hemp” (i) under the 2018 Farm Bill or (ii) the applicable 
state-law equivalent in all states in which we produce and sell such U.S. hemp-derived products. The 2018 Farm Bill was enacted in the 
U.S. on December 20, 2018. Prior to this enactment, cannabis was scheduled as a controlled substance (marijuana) under the CSA with 
limited exemptions based on the portion of the cannabis plant. The 2018 Farm Bill, among other things, removed U.S. hemp (which is 
defined in the 2018 Farm Bill as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, 
extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration 
of not more than 0.3 percent on a dry weight basis”) and its derivatives, extracts and cannabinoids, including CBD, derived from hemp, 
from the definition of “marijuana” in the CSA, thereby removing U.S. hemp and its derivatives as controlled substances. The 2018 Farm 
Bill also amended the Agricultural Marketing Act of 1946 to allow for production and sale of U.S. hemp and its derivatives in the U.S.

The 2018 Farm Bill tasks the USDA with promulgating regulations in relation to the cultivation and production of U.S. hemp. The 2018 
Farm Bill also directs the USDA to promulgate federal regulations that would apply to the production of U.S. hemp in every state which 
does  not  put  forth  a  state  U.S.  hemp  plan  for  approval  by  the  USDA.  There  is  uncertainty  concerning  the  timing  and  manner  of 
implementation of the 2018 Farm Bill. 
In October 2019, the USDA issued an interim final rule establishing a domestic U.S. hemp production regulatory program and has released 
guidelines  for  sampling  and  testing  procedures.  Under  the  interim  final  rule,  state  departments  of  agriculture  may  submit  plans  for 
monitoring and regulating the domestic production of U.S. hemp to the USDA for approval. The interim final rule also establishes a 
federal licensing plan for regulating U.S. hemp producers in states that do not have their own USDA-approved plans. In absence of a 
state plan, U.S. hemp producers will be subject to regulation directly by the USDA unless the state prohibits U.S. hemp production. 
Additionally, the interim final rule includes requirements for maintaining information on the land where U.S. hemp is produced, testing 
U.S. hemp for THC levels, disposing of plants with more than 0.3 percent THC on a dry-weight basis and licensing for U.S. hemp 
producers. The USDA regulations are in effect to accommodate the 2020 planting season. The USDA has committed to draft and publish 
a final set of rules within two years; however, the timing and content of the USDA’s regulations cannot be assured. On February 27, 2020, 
the USDA announced the delay of enforcement of certain requirements under its interim final rule. Under the new guidance, the USDA 
will delay enforcement of the requirement for labs to be registered by the DEA and the requirement that producers use a DEA-registered 
reverse distributor or law enforcement to dispose of non-compliant plants under certain circumstances. Enforcement will be delayed 
starting this crop year and until October 31, 2021, or the final rule is published, whichever comes first.
States may adopt regulatory schemes that impose different levels of regulation and costs on the production of U.S. hemp. Moreover, the 
2018 Farm Bill provides that its provisions do not pre-empt or limit state laws that regulate the production of U.S. hemp. Accordingly, 
some states may choose to restrict or prohibit some or all U.S. hemp production or sales within the state and variances in states’ laws and 
regulations on U.S. hemp are likely to persist.
Further, each state has discretion to develop and implement its own laws and regulations governing the manufacturing, marketing, labeling 
and sale of U.S. hemp products, which is anticipated to create a patchwork of different regulatory schemes applicable to such products.

Under the 2018 Farm Bill, the FDA has retained authority over the Federal Food, Drug, and Cosmetic Act-regulated products (e.g., drugs, 
food, dietary supplements and cosmetics) containing U.S. hemp and U.S. hemp-derived ingredients, including CBD. Moreover, states 
have retained regulatory authority through their own analogues to the Federal Food, Drug and Cosmetic Act, and the states may diverge 
from the federal treatment of the use of U.S. hemp as, or in, food, dietary supplements or cosmetic products.
The FDA has consistently taken the position that CBD, whether derived from U.S. hemp or U.S. Schedule I cannabis, is prohibited from 
use as an ingredient in food and dietary supplements. This stems from its interpretation of the exclusionary clauses in the Federal Food 
Drug & Cosmetic Act because CBD has been approved as a prescription drug and is the subject of substantial clinical investigations as 
a drug, which have been made public. The exclusionary clauses under the Federal Food Drug & Cosmetic Act provide that a substance 
that has been approved and/or has been subject to substantial clinical investigations as a drug may not be used in a food or dietary 
supplement,  unless  the  substance  was  first  marketed  in  a  food  or  dietary  supplement  prior  to  the  initiation  of  substantial  clinical 
investigations of the substance as a drug.
The FDA has not issued regulations that elaborate on the exclusionary clauses and the FDA has not taken any enforcement action in the 
courts asserting a violation of the exclusionary clauses. To date, the FDA has issued a number of warning letters to companies unlawfully 
marketing CBD products. In many of these cases, the manufacturer made unsubstantiated claims about the product being able to treat 
medical conditions (e.g., cancer, Alzheimer’s disease, opioid withdrawal and anxiety) and had not obtained drug approvals. Others were 
issued to companies marketing CBD products as dietary supplements despite those products which contain CBD not meeting the definition 
of a dietary supplement, adding CBD to human and animal foods and marketing CBD products for infants and children and other vulnerable 
populations. Some of these letters were co-signed with the FTC and cited the companies for making claims about the efficacy of CBD 
which were not substantiated by competent and reliable scientific evidence. Recently, the FDA has issued warning letters against dietary 
supplement manufacturers for manufacturing CBD supplements in licensed facilities in addition to various other violations. Importantly, 

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these recent warning letters did not object to the CBD dietary supplements on the basis of any claims made - instead, the FDA cited the 
manufacturer on the basis that CBD was not a permissible dietary supplement ingredient.

In November 2019, the FDA published a revised “Consumer Update” on CBD. The update noted that, as at the time of the Consumer 
Update, the FDA has approved only one CBD product, a prescription drug product to treat two rare, severe forms of epilepsy. The update 
also stated that it is illegal to market CBD by adding it to a food or labeling it as a dietary supplement, that the FDA has seen only limited 
data about CBD safety and these data point to real risks that need to be considered before taking CBD for any reason and that some CBD 
products are being marketed with unproven medical claims and are of unknown quality. Lastly, the FDA stated that it continues to evaluate 
the regulatory frameworks that apply to certain cannabis-derived products that are intended for non-drug uses, including whether and/or 
how they might consider updating their regulations, as well as whether potential legislation might be appropriate.
The FDA has stated that it recognizes the potential opportunities and significant interest in drug and other consumer products containing 
CBD, is committed to evaluating the agency’s regulatory policies related to CBD and has established a dedicated internal working group 
to explore potential pathways for various types of CBD products to be lawfully marketed. The FDA held a public hearing in May 2019 
to  obtain  scientific  data  and  information  about  the  safety,  manufacturing,  product  quality,  marketing,  labeling  and  sale  of  products 
containing cannabis or cannabis-derived compounds. The rules and regulations and enforcement in this area continue to evolve and 
develop.

For more information regarding certain risks facing our business in connection with the U.S. hemp regulatory framework in the U.S., 
see the section below entitled “Risk Factors - Risks Relating to Regulation and Compliance - Risks Related to U.S. Regulations and 
Compliance.” 
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 licenses granted under legislation previously in force prior 
to the Cannabis Act. Due to the repeal of the Access to Cannabis for Medical Purposes Regulations and the amendment of the Controlled 
Drug and Substances Act and Narcotic Control Regulations, 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 Health 
Canada’s Cannabis Tracking and Licensing System to various licenses under the Cannabis Act.

Federal Regime

The Cannabis Act provides a licensing and permitting scheme for, among other things, the cultivation, processing, testing, packaging, 
labeling, distribution, sale, possession and disposal of adult-use cannabis, implemented by regulations promulgated under the Cannabis 
Act. The Cannabis Act and Cannabis Regulations include, among other things, strict specifications for the plain packaging and labeling 
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.

On October 17, 2019, the Regulations Amending the Cannabis Regulations (the “Further Regulations”) came into effect. The Further 
Regulations amend the Cannabis Act and Cannabis Regulations to, among other things, permit the production and sale of cannabis extracts 
(including concentrates), cannabis topicals and cannabis edibles, in addition to dried cannabis, cannabis oil, fresh cannabis, cannabis 
plants and cannabis seeds for parties holding the appropriate licenses. The new product forms authorized under the Further Regulations 
started to become available in December 2019. The Cannabis Regulations set out certain requirements for the sale of cannabis products, 
including limiting the THC content and serving size of certain product forms.
Health Canada permits license holders to export cannabis and cannabis products. Export permits issued by Health Canada are specific 
to each shipment and may only be obtained for medical or 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. 
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 each Canadian province and territory have implemented their regulatory regimes for the distribution and sale of 
cannabis for adult-use purposes which continue to evolve over time. 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. There 
is no guarantee that the provincial and territorial frameworks supporting the legalization of cannabis for adult-use in Canada will continue 
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on the terms outlined below or at all or will not be amended or supplemented by additional legislation. In addition, provinces and territories 
may impose restrictions on sales and distribution which are more stringent than those at the federal level. For example, in November 
2019, the Société Québécoise du Cannabis (the “SQDC”), the exclusive distributor of cannabis in the province and the sole retail and 
online vendor in Québec, announced that it would not initially allow cannabis vaporizers to be sold through its channels. The SQDC has 
also placed significant restrictions on the types of edibles that may be sold through its channels, prohibiting edibles that are sweet, 
confectionary, dessert, chocolate or any other product attractive to persons under 21 years of age. In January 2020, the Prince Edward 
Island Cannabis Management Corporation and the province of Newfoundland and Labrador announced that they would not initially allow 
cannabis vaporizers to be sold through their channels.

Licenses and Regulatory Framework in Israel 
In Israel, cannabis is a controlled substance as defined in the Israeli Dangerous Drugs Ordinance New Version, 5733 - 1973, and its use 
is prohibited unless applicable licenses have been obtained. Licenses to cultivate, possess and use cannabis for medical research in Israel 
are granted by the Israel Medical Cannabis Agency within the Israeli Ministry of Health (the “Yakar”). Patients also must obtain licenses 
either directly from physicians who have been authorized to grant patient licenses or from the Yakar following a request from the patient’s 
physician in order to purchase and consume medical cannabis. For purposes of this section “Licenses and Regulatory Framework in 
Israel”, the term “cannabis” has the meaning given to such term under applicable law.

In 2017, the Yakar promulgated regulations with respect to cannabis (the “New Regulations”). The New Regulations provide that licenses 
from  the Yakar  are  required  for  certain  activities  related  to  the  cannabis  plant  (including  the  cultivation,  manufacture,  distribution, 
possession, transport, or research). Once license applicants have completed construction of their production facilities and meet certain 
applicable agricultural and security requirements, the Yakar may grant final approval to commence and conduct cannabis operations in 
Israel. In August 2019, the Yakar ordered (the “August 2019 Order”) that all cannabis growers and manufacturers (including those that 
held a license prior to the promulgation of the New Regulations) must meet the New Regulations by no later than September 1, 2019 and 
December 31, 2019, respectively. Following such dates, the distribution, prescription or provision of cannabis products that do not comply 
with the New Regulations will be prohibited subject to certain extensions for certain patients. 

In January 2019, the Israeli government approved, in principle, the export from Israel of medical cannabis products that meet applicable 
quality standards under the strict supervision of the Israeli authorities. Only products that can be directly marketed to patients (including 
smoking products, oils, and vaporizer products) may be exported, and only to those countries that have signed the United Nations Single 
Convention on Narcotic Drugs and that have explicitly approved the import of cannabis. The export of plant substances, including seeds 
and tissue cultures, is not permitted. Exports of medical cannabis will be subject to the approval of additional procedures and regulations 
by the Yakar and other related authorities, which are not yet in place. 

Cronos Israel Licenses 

During the third quarter of 2019, the Yakar granted Cronos Israel: (1) a Good Security Practices certification; (2) a Good Agricultural 
Practices (“GAP”) phase I (infrastructure) certification, followed by a permit to grow limited quantities (three small cycles of cultivation 
and  propagation);  and  (3)  a  GMP  infrastructure  permit  to  start  product  validation  batches.  During  December  2019,  Cronos  Israel 
successfully passed full GAP audits for propagation and cultivation, as well as GMP and Good Distribution Practices inspections for the 
manufacturing and distribution facilities. Commencement of operations at the Cronos Israel facility will be subject to obtaining the 
remaining necessary authorizations under applicable law. 

Licenses and Regulatory Framework in Colombia

In 2016, Colombia’s Congress adopted Law 1787, which created a regulatory framework for access to cannabis and its derivatives for 
medical and scientific use within the Colombian territory. Law 1787 regulates the activities of cultivation, processing, manufacturing, 
acquisition, import, export, transport and commercialization of cannabis and its derivatives. The Colombian government issued Decree 
613 of 2017 (“Decree 613”), defining four types of licenses covering permissible activities related thereto and quota requirements related 
to the production of psychoactive cannabis plants and derivatives. Decree 613 also delegated the regulation, oversight and enforcement 
of  such  license  and  quota  requirements  to  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. 
For  purposes  of  this  section  “Licenses  and  Regulatory  Framework  in  Colombia”,  the  term  “cannabis,”  “psychoactive”  and  “non-
psychoactive” have the meanings given to such terms under applicable law.
Under Resolution 2892 of 2017, the Colombia Ministry of Health established the technical regulations for granting and maintaining 
licenses for the production of cannabis derivatives. Likewise, under Resolution 577 of 2017, the Colombia Ministry of Justice established 
the technical regulations for licenses for (i) the use of seeds for planting, (ii) cultivation of psychoactive cannabis, and (iii) cultivation 
of non-psychoactive cannabis. In addition, the Colombian Agricultural Institute (“ICA”) regulates the registration, protection and use of 
cannabis seeds, the National Narcotics Fund regulates the disposal, import and export of controlled substances, and the National Institute 
for Medicines and Food Overseeing oversees the production of food, dietary supplements and medicines for human consumption.
In September 2019, a bill was introduced by an opposition coalition in Colombia’s Congress proposing a regulatory framework to regulate 
the consumption, production, distribution, commercialization and retail sale of adult-use cannabis within Colombia. As of the date of 
this Annual Report, the bill has not yet been voted on.

15

NatuEra Licenses

The Colombian Ministry of Justice has granted a wholly owned subsidiary of NatuEra (i) a license to cultivate non-psychoactive cannabis, 
(ii) a license to cultivate psychoactive cannabis, and (iii) a quota to cultivate psychoactive cannabis mother plants, while the Colombian 
Ministry of Health has granted it a license to manufacture cannabis derivative products for domestic use and export, as well as to conduct 
R&D. In addition, the Colombian Agricultural Institute has registered such wholly owned subsidiary of NatuEra as a certified psychoactive 
and non-psychoactive seed producer and the National Narcotics Fund has registered it as a manufacturer of cannabis derivatives products 
for national use and export. Commencement of operations at the facility in Cundinamarca is subject to completion of the construction of 
NatuEra’s cultivation and extraction facilities and complying with regulatory requirements under applicable law.
Licenses and Regulatory Framework in Australia

Access to medical cannabis in Australia is highly regulated at both the federal and state/territory levels. The principal federal governmental 
agencies responsible for regulation are the Therapeutic Goods Administration (the “TGA”) and the Office of Drug Control (the “ODC”). 
For purposes of this section “Licenses and Regulatory Framework in Australia”, the term “cannabis” has the meaning given to such term 
under applicable law.
Australian patients can access medical cannabis products through the Authorized Prescriber (“AP”) Scheme, Special Access Scheme 
(“SAS”) and clinical trials, all of which are regulated by the TGA.

The ODC issues three types of licenses relating to the supply of medical cannabis products: (i) medical cannabis license authorizing 
cultivation or production or both; (ii) cannabis research license authorizing similar process for research purposes; and (iii) manufacturing 
license authorizing the manufacture of a drug or product. All applicants for licenses are subject to regulations including satisfying the 
“fit and proper person” test, which involves consideration of the applicant’s criminal history, financial viability, business history and 
capacity to comply with licensing requirements. Before any activity under a license can commence, the licensee is required to obtain a 
permit, which will set out the types and amount of cannabis that can be grown and/or produced and the types and quantities of medical 
cannabis products that can be manufactured under the license.

Imports of medical cannabis products from Canada to Australia requires approval in both countries. In Australia, the ODC issues import 
licenses to an applicant 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. Imports may be either as a “per patient import” (i.e., importation for a particular 
patient following a SAS or AP request) or a “sponsored importation of medical cannabis products” (i.e., importation before a SAS or AP 
request).

Cronos Australia Licenses 

Cronos Australia holds a number of licenses that are significant to the operation of its business.  At a federal level, the Office of Drug 
Control (the “ODC”) has issued Cronos Australia manufacturing, cultivation, research and import/export licenses. The import license 
held by Cronos Australia, together with applicable import permits (applied for and issued by the ODC on a case-by-case basis), authorize 
the import of finished PEACE NATURALS™ branded products.  At a state level, the Department of Health and Human Services Victoria 
has issued to Cronos Australia a Schedule 4 and Schedule 8 Wholesale License.  These licenses allow for the sale of medical cannabis 
products (including PEACE NATURALS™ branded products) in Victoria.  

Regulatory Framework in Germany for Imports

Both the use and import of cannabis and cannabis products (including flowers, extracts and oil) for medical purposes are permitted in 
Germany under the Federal Narcotics Act (Betäubungsmittelgesetz, “BtMG”) under certain conditions. Germany also has a licensing 
system that permits and regulates the domestic cultivation of medical cannabis. Such domestic medical cannabis can only be sold to the 
Cannabis Agency, which acts as a state monopoly for the sale of medical cannabis cultivated in Germany. Cannabis in finished and 
packaged form can only be placed on the market as finished drug product if licensed under a valid marketing authorization. For purposes 
of this section “Regulatory Framework in Germany for Imports”, the term “cannabis” has the meaning given to such term under applicable 
law.
To import medical cannabis into Germany, the cannabis must be cultivated in a country that complies with the 1961 Single Convention 
on Narcotic Drugs, meaning that the country must regulate and control the cultivation of cannabis and the cannabis must be cultivated 
for medical purposes. The importer must hold a narcotic drugs license issued by the Federal Institute for Drugs and Medical Devices (the 
“BfArM”) and must also apply to the BfArM for authorization for each specific import shipment. Other activities, including the distribution 
and supply of medical cannabis, also require a narcotic drugs license from the BfArM (subject to limited exceptions). Once imported, 
medical cannabis can be supplied to patients by pharmacists pursuant to an individual narcotics-specific prescription issued by a physician. 
Regulatory Framework in Poland for Imports
The  import  of  medical  cannabis  (covering  non-fibrous  cannabis  herbs,  extracts,  pharmaceutical  tinctures  and  resin  constituting 
pharmaceutical raw materials for the preparation of magistral medical products) is permitted in Poland under the Act on prevention of 
drug abuse (Ustawa o przeciwdzia³aniu narkomaniu, “NarkU”). For purposes of this section “Regulatory Framework in Poland for 
Imports”, the term “cannabis” has the meaning given to such term under applicable law.
In order to import and market medical cannabis in Poland, the following administrative approvals are required: (i) a national Marketing 
Authorization (MA) issued by the President of the Office for Registration of Medical Products, Medical Devices and Biocides (Urz¹d 
Rejestracji Produktów Leczniczych, Wyrobów Medycznych i Produktów Biobójczych); (ii) an import or manufacturing license issued 

16

by the Chief Pharmaceutical Inspector (G³ówny Inspektor Farmaceutyczny, “GIF”); and (iii) a permit for each shipment to Poland issued 
by the GIF to an entity authorized to import and distribute intoxicants and psychoactive substances, together with a permit for export of 
each shipment issued by relevant authorities of a country of export. Import licenses for an individual medical product/pharmaceutical 
raw material are typically issued within 90 days of application for an indefinite period of time on condition that the entity applying for 
the license fulfils the requirements of GMP and employs a qualified person for the duration of all importation activities. The granting of 
the import license results in entry to the Register of Manufacturers and Importers of Medical Products kept by the GIF. 

Once imported, medical cannabis can be supplied to patients by pharmacists pursuant to an individual prescription issued by a physician. 
Medical products based on cannabis are classified as “Rpw” - dispensed on individual physician’s prescription containing narcotic agents. 
This special category allows for stricter control of the trade of medical products containing all narcotic agents and psychotropic substances, 
including cannabis.
Available Information

this  Annual  Report  may  be  obtained  on 

We are subject to the informational requirements of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”) 
and, in accordance with the Exchange Act, we also file reports with and furnish other information to the SEC. The public may obtain any 
document  that  we  file  with  or  furnish  to  the  SEC  from  the  SEC’s  Electronic  Document  Gathering, Analysis,  and  Retrieval  system 
(“EDGAR”), which can be accessed at www.sec.gov, or via the System for Electronic Document Analysis and Retrieval (“SEDAR”), 
which can be accessed at www.sedar.com, as well as from commercial document retrieval services. 
Copies  of 
from  our  Corporate  Secretary, 
corporate.secretary@thecronosgroup.com, telephone: +1-416-504-0004. We also provide access without charge to all of our SEC filings, 
including copies of this Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports 
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after filing or furnishing, on 
our website located at https://thecronosgroup.com.
From time to time, we use our website as an additional means of disclosing public information to investors, the media and others interested 
in the Company. It is possible that certain information we post on our website could be deemed to be material information, and we 
encourage investors, the media and others interested in the Company to review the business and financial information we or our officers 
post on our website. The information on our website is not incorporated by reference into this Form 10-K/A. 

request  without  charge 

17

ITEM 1A. RISK FACTORS

An investment in us involves a number of risks. In addition to the other information contained in this Annual Report and in other filings 
we make, investors should give careful consideration to the following risk factors. Any of the matters highlighted in these risk factors 
could adversely affect our business, results of operations and financial condition, causing an investor to lose all, or part of, its, his or 
her investment. The risks and uncertainties described 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.

Risks Relating to Regulation and Compliance

We operate in highly regulated sectors where the regulatory environment is rapidly developing and we 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 and analogous provincial and local 
regulatory agencies and, in the U.S., the FDA, DEA and FTC and analogous state agencies) relating to the manufacture, marketing, 
management, transportation, storage, sale, pricing and disposal of cannabis and U.S. hemp, and also including laws, regulations and 
guidelines relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment (including 
relating to emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and 
wastes). Our operations may also be affected in varying degrees by government regulations with respect to, but not limited to, price 
controls, export controls, controls on currency remittance, increased income taxes, restrictions on foreign investment and government 
policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular 
jurisdiction.  Laws,  regulations  and  guidelines,  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 cannabis and U.S. hemp industries are still new industries and, in Canada, in particular the 
Cannabis Act, is a new regime that has no close precedent in Canadian law. Similarly, outside of the U.S. and Canada, the regulatory 
environments in jurisdictions legalizing the import, cultivation, production and sale of cannabis and cannabis products are new and are 
still  being  developed  without  close  precedent  in  such  jurisdictions. 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.

The regulatory environment for our products is rapidly developing, and the need to build and maintain robust systems to comply with 
different  and  changing  regulations  in  multiple  jurisdictions  increases  the  possibility  that  we  may  violate  one  or  more  applicable 
requirements. While we endeavor to comply with all relevant laws, regulations and guidelines, any failure to comply with the regulatory 
requirements applicable to our operations could subject us to negative consequences, including, civil and criminal penalties, damages, 
fines, the curtailment or restructuring of our operations, asset seizures, revocation or imposition of additional conditions on licenses to 
operate our business, the denial of regulatory applications (including, in the U.S., by other regulatory regimes that rely on the positions 
of the DEA and FDA in the application of their respective regimes), the suspension or expulsion from a particular market or jurisdiction 
or of our key personnel, or the imposition of additional or more stringent inspection, testing and reporting requirements, any of which 
could materially adversely affect our business and financial results. In the U.S., failure to comply with FDA requirements (and analogous 
state  agencies)  may  result  in,  among  other  things,  injunctions,  product  withdrawals,  recalls,  product  seizures,  fines  and  criminal 
prosecutions. 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, negatively impact 
our future growth plans and opportunities or have a material adverse impact on our business, financial condition and results of operations. 

If the Company’s U.S. hemp business activities are found to be in violation of any of U.S. federal, state or local laws or any other 
governmental regulations, in addition to the items described above: 

• 

the  Company  may  be  subject  to  “Warning  Letters,”  fines,  penalties,  administrative  sanctions,  settlements,  injunctions, 
product recalls and/or other enforcement actions arising from civil, administrative or other proceedings initiated that could 
adversely  affect  the  Company’s  business,  financial  condition,  operating  results,  liquidity,  cash  flow  and  operational 
performance; 

18

• 

• 

the profits or revenues derived therefrom could be subject to money laundering statutes, including the Money Laundering 
Control Act, which could result in significant disruption to our U.S. hemp business operations and involve significant costs, 
expenses or other penalties; and 

the Company’s suppliers, service providers and distributors may elect, at any time, to breach or otherwise cease to participate 
in supply, service or distribution agreements, or other relationships, on which the Company’s operations rely.

As it relates to U.S. Schedule I cannabis, in the U.S., despite U.S. Schedule I 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, U.S. Schedule I cannabis continues to be categorized 
as a Schedule I controlled substance under the CSA and subject to the Controlled Substances Import and Export Act (“CSIEA”). Although 
we do not engage in any activities related to U.S. Schedule I cannabis in the U.S., violations of any U.S. federal laws and regulations, 
including the CSA and the CSIEA, whether intentional or inadvertent, 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. Additionally, 
U.S. border officials could deny entry into the U.S. to those employed at or investing in legal and licensed non-U.S. cannabis companies 
and  such  persons  could  face  detention,  denial  of  entry  or  lifetime  bans  from  the  U.S.  for  their  business  associations  with  cannabis 
businesses.

We and our joint ventures and strategic investments are reliant on required licenses, authorizations, approvals and permits for our 
ability to grow, process, store and sell cannabis which are subject to ongoing compliance, reporting and renewal requirements and 
we may also be required to obtain additional licenses, authorizations, approvals and permits in connection with our business.

Our ability to grow, process, store and sell cannabis in Canada is dependent on our licenses from Health Canada, and in particular the 
licenses currently held by Peace Naturals and OGBC. 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, 
should Health Canada not extend or renew the licenses, should we renew the licenses on different terms (including not allowing for 
anticipated capacity increases) or should the licenses be revoked, our business, financial condition and results of the operations will be 
materially adversely affected.

Our ability to grow, process, store and sell cannabis in Israel is dependent on being granted cannabis cultivation and production licenses 
and our ability to export products from Cronos Israel is also dependent on obtaining the relevant export permits. Our ability to grow, 
process, store and sell cannabis at our Cronos GrowCo cannabis facility in Kingsville, Ontario depends on being granted the appropriate 
licenses from Health Canada. Our ability to grow, process, store and sell cannabis in Colombia is dependent on being granted the appropriate 
licenses from the Ministry of Health and Social Security and our ability to export products from NatuEra is dependent on our ability to 
obtain the relevant export permits. However, there is no assurance that we or our joint ventures will be able to obtain such permits or 
licenses on commercially reasonable terms, if at all. 

In addition, Ginkgo’s ability to conduct certain R&D activities in the U.S. 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. There 
are no assurances that Ginkgo will be able to maintain required 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. 

We may also be required to obtain and maintain certain permits, licenses and approvals in the jurisdictions where we source, process, or 
sell products derived from U.S. hemp. We may be unable to obtain or maintain any necessary licenses, permits or approvals. 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 other Rest of World 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.

Changes in the laws, regulations and guidelines governing cannabis and U.S. hemp may adversely impact our business. 

Our current operations are subject to various laws, regulations and guidelines by governmental authorities (including, in Canada, Health 
Canada  and,  in  the  U.S.,  the  FDA,  DEA,  FTC  and  PTO)  relating  to  the  marketing,  acquisition,  manufacture,  packaging/labeling, 
management, transportation, storage, sale and disposal of cannabis or U.S. hemp but also including laws and regulations relating to health 
and safety, the conduct of operations and the protection of the environment. Additionally, our growth strategy continues to evolve as 
regulations governing the cannabis industry in the jurisdictions other than Canada and the U.S. in which we operate become more fully 
developed. Interpretation of these laws, rules and regulations and their application to our operations is ongoing. 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 amended, 
repealed or interpreted or applied in a manner which could require extensive changes to our operations, increase compliance costs, give 
rise to material liabilities or a revocation of our licenses and other permits, restrict the growth opportunities that we currently anticipate 
or otherwise limit or curtail our operations. 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, 

19

including changes in political regimes or political instability, currency controls, fluctuations in currency exchange rates and rates of 
inflation, labor 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 operations, 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 federal government, the distribution of adult-use 
cannabis in Canada is the responsibility of the provincial and territorial governments. The impact of the legislation regulating adult-use 
cannabis passed in the provinces and territories, on the cannabis industry and our business plans and operations is uncertain. Provinces 
and territories have announced certain restrictions that are more stringent than the federal rules or regulations such as bans on cannabis 
edibles, raising minimum age of purchase and flavor restrictions. For example, Quebec, Newfoundland and Labrador and Prince Edward 
Island do not currently permit sales of cannabis vaporizers. In addition, the distribution and retail channels and applicable rules and 
regulations  in  the  provinces  continue  to  evolve  and  our  ability  to  distribute  and  retail  cannabis  and  cannabis  products  in  Canada  is 
dependent on the ability of the provinces and territories of Canada to establish licensed retail networks and outlets. 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.

Furthermore, additional countries continue to pass laws that allow for the production and distribution of cannabis in some form or another. 
We have some subsidiaries and strategic alliances in place outside of the U.S. and Canada, 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 jurisdiction outside of the U.S. and Canada where we have subsidiaries 
and strategic alliances with local 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.

We are subject to certain restrictions of the TSX and Nasdaq which may constrain our ability to expand our business 
internationally.

Our common shares are listed on the TSX and Nasdaq. We must comply with the TSX and Nasdaq requirements or guidelines when 
conducting business.

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 U.S. Schedule I 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. Although we do not conduct any operations in the 
U.S. with respect to U.S. Schedule I cannabis, failure to comply with the Requirements could have a material adverse effect on our 
business, financial condition and results of operations. 

While Nasdaq has not issued official rules specific to the cannabis or U.S. hemp industry, stock exchanges in the U.S., including Nasdaq, 
have historically refused to list certain U.S. Schedule I cannabis related businesses, including U.S. Schedule I cannabis retailers, that 
operate primarily in the U.S. Failure to comply with any requirements imposed by Nasdaq could result in the delisting of our common 
shares from Nasdaq or denial of any application to have additional securities listed on Nasdaq which could have a material adverse effect 
on the trading price of our common shares.

We are constrained by law in our ability to market and advertise our products.

Our marketing and advertising are subject to regulation by various regulatory bodies in the jurisdictions we operate. In Canada, the 
development of our business and related 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 in Canada, 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 “Business –Regulatory Framework in Canada.”

In the U.S., our advertising is subject to regulation by the FTC under the Federal Trade Commission Act as well as the FDA under the 
Federal Food, Drug, and Cosmetic Act, including as amended by the Dietary Supplement Health and Education Act of 1994, and by state 
agencies under analogous and similar state and local laws. In recent years, the FTC, the FDA and state agencies have initiated numerous 
investigations of food and dietary supplement products both because of their CBD content and based on allegedly deceptive or misleading 
marketing claims and have, on occasion, issued “Warning Letters” due to such claims. Some U.S. states also permit content, advertising 
and labeling laws to be enforced by state attorneys general, who may seek civil and criminal penalties, relief for consumers, class action 
certifications, class wide damages and recalls of products sold by us. There has also been a recent increase in private litigation that seeks, 
among other things, relief for consumers, class action certifications, class wide damages and recalls of products. We could become a 
target of such private class action litigation. Any actions against us by governmental authorities or private litigants could have a material 
and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

20

Risks Related to U.S. Regulation and Compliance 

We are subject to uncertainty regarding the legal and regulatory status of U.S. hemp, including with respect to U.S. federal and state 
implementation of the 2018 Farm Bill and related laws, including the Federal Food, Drug, and Cosmetic Act, and the interpretation 
or application of, or changes to, such laws and regulations may have material and adverse effects on our business, financial condition, 
operating results, liquidity, cash flow and operational performance.

In 2014, U.S. Congress passed the 2014 Farm Bill, which permitted the domestic cultivation of “industrial hemp” (defined as the plant 
Cannabis sativa L. and any part of such plant, whether growing or not, with no more than 0.3% THC on a dry weight basis) as part of 
agricultural pilot programs adopted by individual states for the purposes of research by state departments of agriculture and institutions 
of higher education. There is significant uncertainty concerning the permissible scope of commercial activity under the 2014 Farm Bill. 
The 2014 Farm Bill only authorized institutions of higher education and state agricultural departments to cultivate industrial hemp, and 
only to do so for research purposes. However, it also gave significant discretion to states to regulate industrial hemp pilot programs. Many 
states that have adopted pilot programs have licensed private companies to cultivate and process industrial hemp. Additionally, many 
states  have  interpreted  the  2014  Farm  Bill  to  permit  research  concerning  industrial  hemp  through,  among  other  things,  commercial 
marketing and sale of industrial hemp and industrial hemp products. In contrast, the DEA, FDA and the USDA have taken the position 
that, under the 2014 Farm Bill, industrial hemp products may not be sold for the purpose of general commercial activity or in states 
without agricultural pilot programs that permit their sale for research marketing purposes; these agencies have also taken the position 
that, under the 2014 Farm Bill, industrial hemp plants and seeds may not be transported across state lines.

On December 20, 2018, the 2018 Farm Bill was signed into law. The 2018 Farm Bill, among other things, removes “hemp” (which we 
refer to as “U.S. hemp” in this Annual Report, defined as the plant Cannabis sativa L. and any part of that plant, including the seeds 
thereof  and  all  derivatives,  extracts,  cannabinoids,  isomers,  acids,  salts,  and  salts  of  isomers,  whether  growing  or  not,  with a THC 
concentration of not more than 0.3% on a dry weight basis and its derivatives) from the Controlled Substances Act and amends the 
Agricultural Marketing Act of 1946 to permit the production and sale of U.S. hemp in the U.S. The 2018 Farm Bill tasks the USDA with 
promulgating  regulations  in  relation  to  the  cultivation  and  production  of  U.S.  hemp. The  2018  Farm  Bill  also  directs  the  USDA  to 
promulgate federal regulations that would apply to the production of U.S. hemp in every state which does not put forth a state U.S. hemp 
plan for approval by the USDA. The USDA issued an interim final rule in October of 2019, which rule will be effective through November 
1, 2021. Various states are in the process of applying to the USDA for approval of their U.S. hemp production regulations which impose 
different levels of regulation and costs on the production of U.S. hemp and certain state plans have been approved by the USDA. On 
February 27, 2020, the USDA announced the delay of enforcement of certain requirements under its interim final rule. Under the new 
guidance, USDA will delay enforcement of the requirement for labs to be registered by the DEA and the requirement that producers use 
a DEA-registered reverse distributor or law enforcement to dispose of non-compliant plants under certain circumstances. Enforcement 
will be delayed starting this crop year and until October 31, 2021, or the final rule is published, whichever comes first. Moreover, the 
2018 Farm Bill provides that its provisions do not preempt or limit state laws that regulate the production of U.S. hemp. Accordingly, 
some states may choose to restrict or prohibit some or all U.S. hemp production or sales within the state and variances in states’ laws and 
regulations on U.S. hemp are likely to persist. Further, each state has discretion to develop and implement its own laws and regulations 
governing the manufacturing, marketing, labeling, and sale of U.S. hemp products, which is anticipated to create a patchwork of different 
regulatory schemes applicable to such products.

The FDA or particular states may ultimately prohibit the sale of some or all dietary supplements or conventional foods containing 
U.S. hemp and U.S. hemp-derived ingredients, including CBD and we may be required to submit a New Dietary Ingredient notification 
to the FDA, which may not be accepted without objection.

Under the 2018 Farm Bill, the FDA has retained authority over the Federal Food, Drug, and Cosmetic Act-regulated products (e.g., drugs 
(human  and  animal),  food  (human  and  animal),  dietary  supplements  and  cosmetics)  containing  U.S.  hemp  and  U.S.  hemp-derived 
ingredients, including CBD. The FDA has consistently taken the position that CBD, whether derived from U.S. hemp or U.S. Schedule 1 
cannabis, is prohibited from use as an ingredient in food and dietary supplements. This stems from its interpretation of the exclusionary 
clauses in the Federal Food Drug & Cosmetic Act because CBD is the active ingredient in a drug that has been approved as a prescription 
drug and is the subject of substantial clinical investigations as a drug, which have been made public. The exclusionary clauses under the 
Federal  Food  Drug  &  Cosmetic Act  provide  that  a  substance  that  has  been  approved  and/or  has  been  subject  to  substantial  clinical 
investigations as a drug may not be used in a food or dietary supplement, unless the substance was first marketed in a food or dietary 
supplement prior to the initiation of substantial clinical investigations of the substance as a drug.

The FDA has not issued regulations that elaborate on the exclusionary clauses, and the FDA has not taken any enforcement action in the 
courts asserting a violation of the exclusionary clauses due to the marketing of U.S. hemp, U.S. hemp extracts, or CBD. To date, the FDA 
has issued several “Warning Letters” to companies unlawfully marketing CBD products. In many of these cases, the manufacturer made 
unsubstantiated claims about the product being able to treat medical conditions (e.g., cancer, Alzheimer’s disease, opioid withdrawal and 
anxiety) and had not obtained drug approvals. Some of these letters were co-signed with the FTC and cited the companies for making 
claims about the efficacy of CBD which were not substantiated by competent and reliable scientific evidence. Recently, the FDA issued 
a “Warning Letter” to a dietary supplement manufacturer for a number of violations observed during an inspection, including manufacturing 
CBD supplements in a licensed facility.

21

Until the FDA formally adopts regulations with respect to CBD products or announces an official position with respect to CBD products, 
there is a risk that the FDA could take enforcement action (e.g., “Warning Letter,” seizure, injunction) against the Company’s U.S. hemp-
derived CBD products sold in the U.S.

Moreover, states have retained regulatory authority through their own analogues to the Federal Food, Drug and Cosmetic Act, and the 
states may diverge from the federal treatment of the use of U.S. hemp as, or in, food, dietary supplements or cosmetic products. The FDA 
or applicable states (under their CSA and Federal Food, Drug, and Cosmetic Act analogues) may ultimately not permit the sale of non-
pharmaceutical products containing hemp-derived ingredients, including CBD, which would have a material adverse impact on our 
business, financial condition and results of operations.

Even if the exclusionary clause issue discussed above is resolved in a manner favorable to us, we could be required to submit a New 
Dietary Ingredient Notification (“NDIN”) to the FDA with respect to U.S. hemp-derived ingredients, including CBD, used in dietary 
supplement products. This could depend on whether we can establish that a particular ingredient was marketed as a dietary ingredient in 
a dietary supplement prior to October 15, 1994 or is otherwise currently in the food supply in the same chemical form as used in our 
dietary supplement products. If the FDA objects to our NDIN notification, this could prevent us from producing, marketing and selling 
ingestible U.S. hemp products which would have a material adverse impact on our business, financial condition and results of operations. 

The FDA or particular U.S. states may seek to regulate our cosmetic products containing U.S. hemp-derived ingredients, including 
CBD, as drugs, medical devices, or drug-device combination products.

The FDA may seek to regulate our cosmetic products containing U.S. hemp-derived ingredients, including CBD, under its authorities 
for medical products (i.e., drugs, medical devices, or drug-device combination products). Specifically, the agency could assert that our 
lotions, oils, balms and creams are intended for use in diagnosing, treating, mitigating or preventing disease or for use in affecting the 
structure or any function of the body. In making classification decisions, the agency considers a wide variety of factors to determine a 
product’s intended use; indeed, the FDA has sometimes asserted that a product qualifies as a drug based solely on the presence of an 
ingredient widely understood to have drug effects, even in the absence of express claims about them. Though we do not market our 
lotions, oils, balms and creams as drugs for use in the treatment of diseases or their symptoms, the FDA could still assert that the products 
are intended for use as drugs, including based on the understood or presumed physical effects of topically administered cannabinoids. 
Thus,  we  may  not  have  the  ability  to  successfully  respond  to  such  allegations  simply  by  modifying  labeling  or  advertising  claims. 
Ultimately, if the FDA asserts one of its medical product authorities over our lotion, oil, balm and cream products, and we cannot or elect 
not to comply with the onerous regulatory requirements applicable to the asserted medical product category (e.g., drug), we could be 
prevented from producing, marketing and selling cosmetic products containing U.S. hemp-derived ingredients, including CBD. In addition, 
states may similarly seek to regulate our cosmetic products containing U.S. hemp-derived ingredients, including CBD, as medical products 
(i.e., drugs, medical devices, or drug-device combination products) under state analogues to the Federal Food, Drug, and Cosmetic Act 
or otherwise. States have also considered and established additional restrictions on, or requirements for, the marketing of cosmetic products 
containing U.S. hemp-derived ingredients. If states assert their medical product authorities over our cosmetic products containing U.S. 
hemp-derived ingredients, including CBD, in a manner that we cannot address simply by modifying labelling or advertising claims, and 
we cannot or elect not to comply with the onerous regulatory requirements applicable to the asserted medical product category (e.g., 
drug),  we  could  be  prevented  from  producing,  marketing  and  selling  cosmetic  products  containing  U.S.  hemp-derived  ingredients, 
including CBD. Likewise, if states enforce or adopt regulatory interpretations or restrictions that limit our ability to market our cosmetic 
products containing U.S. hemp-derived ingredients, including CBD, in such states, it could materially and adversely affect our business, 
financial condition, operating results, liquidity, cash flow and operational performance.

The DEA could take enforcement action against us or other participants in the U.S. hemp industry.

There is substantial uncertainty concerning the legal status of U.S. hemp and U.S. hemp products containing U.S. hemp-derived ingredients, 
including CBD. The status of products derived from the cannabis or hemp plant, under both federal and state law can depend on the THC 
content of the plant or derivative (including whether the plant meets the statutory definition of “industrial hemp” or “hemp”), the part of 
the  plant  from  which  an  individual  or  entity  produces  the  derivative  (including  whether  the  plant  meets  the  statutory  definition  of 
“marihuana”  under  the  Controlled  Substances Act),  whether  the  cultivator,  processor,  manufacturer  or  product  marketer  engages  in 
cannabis-related activities for research versus purely commercial purposes, as well as the form and intended use of the product. The mere 
presence of a cannabinoid (such as CBD) is not dispositive as to whether the product is legal or illegal. Under U.S. federal law, products 
containing CBD may be unlawful if derived from U.S. Schedule I cannabis (including hemp with a concentration greater than 0.3% on 
a dry weight basis), or if derived from U.S. hemp grown outside the parameters of an approved U.S. hemp pilot program or U.S. hemp 
cultivated in violation of the 2018 Farm Bill. Even after enactment of the 2018 Farm Bill, the DEA may not treat all products containing 
U.S. hemp-derived ingredients, including CBD, as exempt from the Controlled Substances Act. If the DEA takes action against us or 
other participants in the U.S. hemp industry, this could have a material and adverse effect on our business, financial condition, operating 
results, liquidity, cash flow and operational performance.

22

Risks Relating to Our Products

There is limited long-term data with respect to the efficacy and side effects of our products and future clinical research studies on 
the effects of cannabis, hemp and cannabinoids may lead to conclusions that dispute or conflict with our understanding and belief 
regarding their benefits, viability, safety, efficacy, dosing and social acceptance.

Research in Canada, the U.S. and internationally regarding the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, 
U.S. hemp or isolated cannabinoids (such as CBD and THC) in dietary supplements, food, or cosmetic products remains in early stages. 
There have been relatively few clinical trials on the benefits of cannabis, U.S. hemp or isolated cannabinoids and there is limited long-
term data with respect to efficacy, side effects and/or interaction of these substances with human or animal biochemistry. As a result, our 
products could have unexpected side effects or safety concerns, the discovery of which could lead to civil litigation, regulatory actions 
and even possibly criminal enforcement actions. In addition, if the products we sell do not or are not perceived to have the effects intended 
by the end user, this could have a material adverse effect on our business, financial condition and results of operations. See also “- We 
may be subject to, or prosecute, litigation in the ordinary course of business.”, “- We may be subject to product liability claims.” and “- 
Our products have in the past and may in the future be subject to recalls.”

The statements made by the Company, including in this Annual Report, concerning the potential benefits of cannabis, U.S. hemp and 
isolated cannabinoids are based on published articles and reports and therefore are subject to the experimental parameters, qualifications 
and limitations in such studies that have been completed. Although we believe that the existing public scientific literature generally 
supports our beliefs regarding the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, U.S. hemp and cannabinoids, 
future research and clinical trials may cast doubt or disprove such beliefs, or could raise or heighten concerns regarding, and perceptions 
relating to, cannabis, U.S. hemp and cannabinoids, 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. Given these risks, uncertainties 
and assumptions, undue reliance should not be placed on such literature. In particular, the FDA has raised several questions regarding 
the safety of CBD and gaps in the public scientific literature supporting the use of CBD by the general population.

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:

• 

• 

• 

• 

• 

• 

• 

• 

• 

• 

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 declining to participate in our clinical studies, not performing the clinical studies on the 
anticipated schedule, or acting in ways inconsistent with the established investigator agreement, clinical study protocol or 
good clinical practices.

Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

The current controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer 
products and expose us to litigation and additional regulation.

There have been a number of highly publicized cases involving lung and other illnesses and deaths that appear to be related to vaporizer 
devices and/or products used in such devices (such as vaporizer liquids). The focus is currently on the vaporizer devices, the manner in 
which the devices were used and the related vaporizer device products - THC, nicotine, other substances in vaporizer liquids, possibly 
adulterated products and other illegal unlicensed cannabis vaporizer products. Some states, provinces, territories and cities in the U.S. 

23

and Canada have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products 
or impose restrictions on flavors or use of such vaporizers. This trend may continue, accelerate and expand.

Cannabis vaporizers in Canada are regulated under the Cannabis Act and Cannabis Regulations. Although this legislation sets rules and 
standards for the manufacture, composition, packaging, and marketing of cannabis vaporizer products, these rules and standards predate 
the spate of vaporizer-related health issues that have recently arisen in the U.S. These issues and accompanying negative public sentiment 
may prompt Health Canada or individual provinces/territories to decide to further limit or defer industry’s ability to sell cannabis vaporizer 
products, and may also diminish consumer demand for such products. There can be no assurance that we will be able to meet any additional 
compliance requirements or regulatory restrictions, or remain competitive in face of unexpected changes in market conditions. 

This controversy could well extend to non-nicotine vaporizer devices and other product formats. Any such extension could materially 
and adversely affect our business, financial condition, operating results, liquidity, cash flow and operational performance. Litigation 
pertaining to vaporizer products is accelerating and that litigation could potentially expand to include our products, which would materially 
and adversely affect our business, financial condition, operating results, liquidity, cash flow and operational performance.

Future research may lead to findings that vaporizers, electronic cigarettes and related products are not safe for their intended use.

Vaporizers, electronic cigarettes and related products were recently developed and therefore the scientific or medical communities have 
had a limited period of time to study the long-term health effects of their use. Currently, there is limited scientific or medical data on the 
safety of such products for their intended use and the medical community is still studying the health effects of the use of such products, 
including the long-term health effects. If the scientific or medical community were to determine conclusively that use of any or all of 
these products pose long-term health risks, market demand for these products and their use could materially decline. Such a determination 
could also lead to litigation, reputational harm and significant regulation. Loss of demand for our product, product liability claims and 
increased regulation stemming from unfavorable scientific studies on cannabis vaporizer products could have a material adverse effect 
on our business, results of operations and financial condition.

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 
our 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 our articles and by-laws 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 us. Further, 
as of the date hereof, four of the seven directors on the Board are Altria Nominees. For more information see “Business -Altria Strategic 
Investment - Investor Rights Agreement.”

Upon exercise of the Altria Warrant in full, assuming no other securities of ours 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.

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.

We have cash on hand of approximately $1.2 billion as of December 31, 2019. 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. There can be no assurance that we will 
earn any material revenue from such invested cash.

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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 could extend across the globe as new 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 position. The failure to successfully implement 
or reap the anticipated benefits of Altria’s resources and expertise to realize growth and expansion opportunities could have a material 
adverse effect on our business and results of operations.

Altria may stop providing certain services to us, which could have an adverse effect on our business and results of operations as we 
seek alternative providers for those services. 

We believe that Altria provides high-quality services, and we believe that we achieve efficiency by using Altria as a service provider to 
provide multiple different services.  If Altria terminates or reduces the services it provides to us, we would be required to find other 
service providers, and those services may increase our costs, delay certain initiatives, or otherwise involve compromises as compared 
with the services Altria provides to us.

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 us an aggregate of 77,514,993 of our common shares 
(subject to adjustment in accordance with the terms of the Altria Warrant Certificate), which represents 10% of the issued and outstanding 
common shares as of December 31, 2019 (on a non-diluted basis). Any issuance of common shares pursuant to the exercise of the Altria 
Warrant would dilute all of our other shareholders.

Altria’s significant interest in us 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.

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 
or triggering certain termination rights for our counterparties 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 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 our 
common shares 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 laws, market conditions and our 
financial performance.

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, and have relationships with or are employed by Altria. One of our directors, 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, and Michael Gorenstein, our Chairman, President and Chief Executive Officer is a co-founder and non-managing 
Member of Gotham Green Partners. Two of our directors, Jody Begley and Murray Garnick, are employed by Altria as Senior Vice 

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President, Tobacco Products, and Executive Vice President and General Counsel, respectively. As a result of these relationships, conflicts 
of interests may arise between us and them, as described below.

We may also become involved in other transactions which are inconsistent or conflict with the interests of our directors and officers, and/
or our directors and officers may have interests in persons, firms, institutions, corporations or transactions that are inconsistent or in 
conflict with our interests and those of our shareholders. In addition, from time to time, Gotham Green Partners or Altria 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 the transaction and may recuse himself or herself from any related discussion 
or deliberation. In accordance with applicable laws, our directors are required to act honestly, in good faith and in our best interests.

Risks Relating to Entry into New Markets

Controlled substance and other legislation and treaties may restrict or limit our ability to research, manufacture and develop a 
commercial market for our products outside of the jurisdictions in which we currently operate and our expansion into such 
jurisdictions is subject to risks.

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 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 a Schedule 
I (“substances with addictive properties, presenting a serious risk of abuse”) and as a 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 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 legal obstacles to our 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 and achieving such amendments to the laws and regulations may take a 
prolonged period of time. There can be no assurance that any market for our products will develop in any jurisdiction in which we do 
not currently have operations. 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.

Investments and joint ventures outside of Canada and the U.S. are subject to the risks normally associated with any conduct of 
business in foreign countries, including varying degrees of political, legal and economic risk.

Much  of  our  exposure  to  markets  in  jurisdictions  outside  of  Canada  and  the  U.S.  is  through  investments  and  joint  ventures. These 
investments and joint ventures 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.

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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.

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; (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; and (ix) our joint venture partners may exercise termination 
rights under the relevant agreements. 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 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.

In the case of the Ginkgo Strategic Partnership, we 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. 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.

In addition, pursuant to the Ginkgo Collaboration Agreement, if we undergo a change of control that is approved by the Board, Ginkgo 
may elect to receive cash payments, totaling up to $100 million, in lieu of the common shares that would otherwise become issuable in 
connection with any Equity Milestone Events (as defined in the Ginkgo Collaboration Agreement) achieved following such election (the 
“Milestone Cash Election”). If we undergo 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 us 
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 us; (iii) the then-outstanding and unpaid portion of all cash payments from us 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 us. 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 an event, we would need to finance such payment 
through 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 

27

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 - Research and Development Activities and Intellectual Property.”

With respect to the Technion Research Agreement, we 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 - Research and Development Activities and Intellectual Property - Technion Skin 
Health and Research Partnership.”

Risks Relating to Competition, Performance and Operations

We may not be able to supply the provincial purchasers in various provinces and territories of Canada with our products in the 
quantities or prices anticipated, or at all.

We have entered into various supply arrangements for cannabis products with various provincial purchasers and have secured listings 
with various private retailers in those provinces. We have entered into such supply arrangements with approximately eight provinces in 
Canada (where the relevant provincial body is the sole wholesale distributor and retailer of cannabis and cannabis products in the province) 
and with private retailers in Saskatchewan. Our supply arrangements with provincial purchasers, each of which we understand to be 
substantially similar in all material respects with the supply arrangements entered into with the other license holders in the Canadian 
cannabis industry, do not contain any binding minimum purchase obligations on the part of the relevant provincial purchaser. 

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. Provincial purchasers may change the terms of the supply agreements at any time during the 
supply relationship including on pricing, have broad rights of return of products and are under no obligation to purchase products. As a 
result, provincial purchasers have a significant amount of control over the terms of the supply arrangements.

The effect of the legalization of adult-use cannabis in Canada on the medical cannabis industry in Canada 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 which may increase the age of purchase in the province or territory. 
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 the distribution and sale 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 uncertain, and while we cannot predict 
its impact on our sales and revenue prospects, it may be adverse. 

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 have and may continue to 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. As a result, the available supply of cannabis could exceed demand, which could result in a significant 
decline in the market price for cannabis, which could have a material adverse effect on our business, financial condition and results of 
operations.

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 products do not achieve an adequate 

28

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 adult-use business may be negatively impacted.

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 licenses issued by the Canada Revenue Agency (“CRA”) required to comply with this excise framework. 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.

The industries and markets in which we operate are relatively new, and these industries and markets may not continue to exist or 
grow as anticipated or we may ultimately be unable to succeed in these industries and markets.

The  cannabis  and  U.S.  hemp  industries  and  markets  in  which  we  operate  are  relatively  new,  can  be  highly  speculative,  are  rapidly 
expanding and may ultimately not be successful. 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 these industries and markets 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 in these new industries and markets are relatively unknown and may have unique circumstances that differ from existing industries 
and markets. We are subject to all of the business risks associated with a new business in a niche market, including risks of unforeseen 
capital requirements, failure of widespread market acceptance of our products, failure to establish business relationships and competitive 
disadvantages against larger and more established competitors. 

Accordingly, there are no assurances that these industries and markets 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, and a failure to do so could have a 
material adverse effect on our business, financial condition and results of operations.

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 revenue in 2017 (inter-company bulk transfer); Redwood began operations in 2017. In addition, many 
of 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, limitations with respect to personnel, financial, and other 
resources and lack of revenues. 

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 U.S. hemp and cannabis products, competition from other license holders, the size of the illegal market and 
the adult-use market in Canada, and our ability to produce sufficient volumes of our cannabis-based pharmaceutical products to meet 
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.

Failure to establish and maintain effective internal control over financial reporting may result in our 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 U.S. generally accepted accounting principles (“GAAP”). Because we are implementing new financial 
control and management systems, internal control over financial reporting may not prevent or detect misstatements. Also, projections of 

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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. 

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 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) applicable laws and regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse of 
federal, state and provincial 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 the Company or asserting our rights, those actions 
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.

Our cannabis cultivation and U.S. hemp operations are subject to risks inherent in an agricultural business.

Our business involves the growing of cannabis, an agricultural product, in certain jurisdictions where that activity is permitted. 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 business also involves products containing U.S. hemp. U.S. hemp is typically harvested in or around the month of October. U.S. 
hemp plants can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. Such instances 
often lead to reduced crop quality, stunted growth and/or death of the plant. Moreover, U.S. hemp is “phytoremediative” (meaning that 
it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted). Various regulatory agencies 
have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. If 
U.S. hemp used in our products is found to have levels of pathogens, toxins, chemicals or other undesirable compounds that exceed 
permitted limits, it may have to be destroyed. Should the U.S. hemp used in our products be lost due to pathogens, toxins, chemicals or 
other undesirable compounds, or if we or our suppliers are otherwise unable to obtain U.S. hemp for use in our products on an ongoing 
basis, it may have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational 
performance.

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 on our business, financial condition and results of operations.

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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, or the cannabis and U.S. hemp industries more generally, may receive unfavorable publicity or become subject to negative 
consumer perception.

We believe the cannabis and U.S. hemp industries are highly dependent upon broad social acceptance and consumer perception regarding 
the safety, efficacy and quality of the cannabis and U.S. hemp products, as well as consumer views concerning regulatory compliance. 
Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, 
media attention, market rumors or speculation and other publicity regarding the consumption of cannabis and U.S. hemp 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 or U.S. hemp markets 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 question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and 
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 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 U.S. hemp or cannabis in 
general, or our products specifically, or associating the consumption or use of U.S. hemp or 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.

Additionally, the U.S. hemp industry may be impacted by perceived similarities or differences between U.S. hemp and U.S. Schedule I 
cannabis. Consumers, vendors, landlords/lessors, industry partners or third-party service providers may incorrectly perceive U.S. hemp 
products as U.S. Schedule I cannabis, thereby confusing them for having the THC content of U.S. Schedule I cannabis or for being illegal 
under U.S. federal law which potentially impacts our ability to sell our products or obtain the necessary services or supplies to manufacture, 
store or transport our products.

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 U.S. hemp and cannabis industries 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 U.S. hemp or cannabis industries are 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 U.S. hemp or cannabis industries. 
Lobbying by such groups, and any resulting inroads they might make in halting or rolling back the U.S. hemp and cannabis movements, 
could affect how the U.S. hemp or cannabis industries are 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.

Additionally, the parties with which we do business, may perceive that they are exposed to reputational risk as a result of our cannabis 
or U.S. hemp 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.

Although we take care in protecting our image and reputation, we do not ultimately have control over how we or the U.S. hemp or cannabis 
industries are 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 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. Commencement 
of operations at the production facilities of Cronos Israel and NatuEra will be subject to obtaining the appropriate licenses from the 

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relevant regulatory agencies in those jurisdictions. The completion of construction of Cronos GrowCo’s production facilities are 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, we may 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  markets  that  we  operate  in  are  increasingly  competitive  and  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.

The markets for cannabis and U.S. hemp are competitive and evolving and we face strong competition from both existing and emerging 
companies that offer similar products. Some of our current and potential competitors may have longer operating histories, greater financial, 
marketing and other resources and larger customer bases than us. In addition, there is potential that the cannabis and U.S. hemp industries 
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.

Given the rapid changes affecting global, national and regional economies generally, and the U.S. hemp industry in particular, we may 
not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to respond to, 
among other things, changes in the economy, regulatory conditions, market conditions and competitive pressures. Any failure by us to 
anticipate or respond adequately to such changes could have a material and adverse effect on our business, financial condition, operating 
results, liquidity, cash flow and operational performance.

In Canada, 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. If the number of users of cannabis 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. 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  Canadian  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.

In the U.S., the number of competitors in the U.S. hemp industry is expected to increase, which could negatively impact our market share 
and demand for our products. Additionally, if the U.S. takes steps to legalize U.S. Schedule I cannabis, the impact of such a development 
could result in new entrants into the market and increased levels of competition.

Some jurisdictions may never develop markets for cannabis and U.S. hemp.

Many  jurisdictions  place  restrictions  on  or  prohibit  commercial  activities  involving  cannabis  and  U.S.  hemp.  Such  restrictions  or 
prohibitions may make it impossible or impractical for us to operate in such jurisdictions unless there is a change in law or regulation. 
For example, U.S. Schedule I cannabis remains illegal under U.S. federal law and may never become legal under U.S. federal law. Such 
restrictions and prohibitions restrict our ability to enter or expand our operations in the applicable jurisdictions. 

We face competition from the illegal cannabis market.

We face competition from illegal dispensaries and the illegal market that are unlicensed and unregulated, and that are selling cannabis 
and cannabis products, including products with higher concentrations of active ingredients, using flavors or other additives or engaging 
in advertising and promotion activities that we are not permitted to. As these illegal market participants do not comply with the regulations 
governing the cannabis industry, their operations may also have significantly lower costs. The perpetuation of the illegal market for 
cannabis may have a material adverse effect on our business, results of operations, as well as the perception of cannabis use. 

We may not be able to successfully develop new products or find a market for their sale.

The legal cannabis and U.S. hemp industries are in their 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. In addition, we 

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may be required to obtain additional regulatory approvals from Health Canada, the FDA 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.

We are subject to risks related to the protection and enforcement of our intellectual property rights, and we may be unable to 
protect or enforce our intellectual property rights.

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, proprietary information and certain patent filings 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, technical know-how and proprietary information by maintaining physical security of our premises and physical and electronic 
security of our information technology systems, and we seek to protect our trademarks and the goodwill associated therewith by monitoring 
and enforcing against unauthorized use of our trademarks.

It is possible that we will inadvertently disclose or otherwise fail to protect our inventions, trade secrets, technical know-how or proprietary 
information, or will fail to identify our inventions or trademarks as patentable or registrable intellectual property, or fail to obtain patent 
or registered trademark protection therefor. 

We may be unable to protect our inventions, trade secrets, and other intellectual property from discovery or unauthorized use.

In relation to our agreements with parties that have access to our intellectual property, any of these parties may breach their obligations 
to us, and we may not have adequate remedies for such breach. In relation to our security measures, such security measures may be 
breached and we may not have adequate remedies for such breach. In addition, our intellectual property that 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.

We cannot provide any assurances that our inventions, trade secrets, 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  in  a  manner  that  adversely  impacts  our  intellectual  property  rights. 
Unauthorized parties may attempt to replicate or otherwise obtain and use our inventions, trade secrets, 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 trade secrets are inadequate, we may be unable to enforce our rights in them against third parties.

Our intellectual property rights may be invalid or unenforceable under applicable laws, and we may be unable to have issued or 
registered, and unable to enforce, our intellectual property rights.

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 will permit the filing, prosecution, 
issuance, registration and enforcement of intellectual property rights relating to cannabis and cannabis-related products.

Specifically, we have sought trademark protection in many countries, including Canada, the U.S. and others. Our ability to obtain registered 
trademark protection for cannabis and cannabis-related goods and services (including hemp and hemp-related goods and services), 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 U.S. Schedule I cannabis products or certain goods containing U.S. hemp-derived CBD (such as 
dietary supplements and foods) until the FDA provides clearer guidance on the regulation of such products; and including Europe, 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 

33

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 rights, provide exclusivity for our products 
or processes or prevent others from designing around any issued patent claims. Any of these outcomes could impair our ability to prevent 
competition from third parties, which could materially and adversely affect our business, financial condition and results of operations.

We may be subject to allegations that we are in violation of third-party intellectual property rights, and we may be found to infringe 
third-party intellectual property rights, possibly without the ability to obtain licenses necessary to use such third-party intellectual 
property rights.

Other parties may claim that our products infringe on their intellectual property rights, including with respect to patents, and our operation 
of  our  business,  including  our  development,  manufacture  and  sale  of  our  goods  and  services,  may  be  found  to  infringe  third-party 
intellectual property 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. 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, other equitable relief, and/or require the payment of damages, any or all of 
which may have an adverse impact on our business. In addition, we may need to obtain licenses from third parties who allege that we 
have infringed on their lawful rights. Such licenses may not be available on terms acceptable to us, and we may be unable to obtain any 
licenses or other necessary or useful rights under third-party intellectual property.

Our germplasm relies heavily on intellectual property, and we may be unable to protect, register or enforce our intellectual property 
rights in germplasm, and may infringe third-party intellectual property rights with respect to germplasm, possibly without the ability 
to obtain licenses necessary to use such third-party intellectual property rights. 

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. Although we believe that the parental germplasm is proprietary to us, we may need to obtain 
licenses from third parties who may allege that we have appropriated their germplasm or their rights to such germplasm. Such licenses 
may not be available on terms acceptable to us, and we may be unable to obtain any licenses or other necessary or useful rights under 
third-party intellectual property. 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, 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 several 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 insufficient or breached, and we may not have 
adequate remedies in the case of any such breach.

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We receive licenses to use some third-party intellectual property rights; the failure of the owner of such intellectual property to properly 
maintain or enforce the intellectual property underlying such licenses, or our inability to maintain such licenses, could have a material 
adverse effect on our business, financial condition and performance.

We are party to licenses granted by third parties, 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 applicable licensor to maintain and enforce its licensed intellectual property against other third parties, particularly 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, any of 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 agreements with those licensors, whether with or without merit, and 
accordingly seek to terminate our applicable licenses. If successful, this could result in our loss of the right to use applicable 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.

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.

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. 
If our revenue declines or fails to grow at a rate faster than our operating expenses, and we are unable to secure funding under terms that 
are favorable or acceptable to us, or at all, we will not be able to achieve and maintain profitability in future periods. As a result, we may 
continue to generate losses. We may not achieve profitability in the future and, even if we do become profitable, we might not be able to 
sustain that profitability.

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 in our inability 
to continue to operate our 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 equity of other companies. 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, 2019, 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.

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We must rely largely on our own market research to forecast sales and market demand and market prices which differ from our 
forecasts.

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 or U.S. hemp industries. Our market research and sales forecasts, together with factors such as our 
expectations regarding market conditions, including prices, influence capital expenditure levels, inventory levels, production and supply 
chain capacity and operating expenses and if such forecasts and expectations prove to be inaccurate, this could have a material adverse 
effect on our business, financial condition and results of operations. For example, in the fourth quarter of 2019 we had a $29.4 million
inventory write-down due, in part, to errors in forecasting the decline in market prices.

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 U.S. dollar against certain other currencies, particularly the Canadian dollar, because we publish 
our financial statements in U.S. dollars, while a significant portion of our assets, liabilities, revenues and costs are or will be denominated 
in other currencies. Exchange rates for currencies of the countries in which we operate may fluctuate in relation to the U.S. dollar, and 
such fluctuations may have a material adverse effect on our earnings or assets when translating foreign currency into U.S. dollars.

We could have difficulty transitioning the operations of businesses that we have acquired and will acquire. 

The success of our acquisitions, including the Redwood Acquisition and the Cronos Fermentation Acquisition, depends upon our ability 
to transition any businesses that we acquire. The transitioning of acquired business operations could disrupt our business by causing 
unforeseen  operating  difficulties,  diverting  management’s  attention  from day-to-day operations  and  requiring  significant  financial 
resources that would otherwise be used for the ongoing development of our business. The difficulties of transitions could be increased 
by the necessity of coordinating geographically dispersed organizations, coordinating personnel with disparate business backgrounds 
and managing different corporate cultures, or discovering previously unknown liabilities. In addition, we could be unable to retain key 
employees or customers of the acquired businesses. We could face transition issues including those related to operations, internal controls, 
information systems and operational functions of the acquired companies and we also could fail to realize cost efficiencies or synergies that 
we anticipated when selecting our acquisition candidates or these acquisitions could fail to complete successfully. Any of these items 
could adversely affect our results of operations.

Our production facilities 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 various production and manufacturing facilities including in the U.S. (for U.S. hemp products), 
Canada and Israel. Some licenses are specific to those facilities. Adverse changes or developments affecting our facilities, 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 regulatory agencies, 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 bear the responsibility for all of the costs of maintenance and upkeep at our facilities and our operations and financial performance 
may be adversely affected if our facilities are unable to keep up with maintenance requirements.

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 certain legalized or regulated retail or distribution channels, 
as  well  as  the  concentration  of  inventory  in  our  facilities,  despite  meeting  or  exceeding  the  applicable  security  requirements under 
applicable law, there remains a risk of 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 

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potentially result in additional costs to us 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, state 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 and apply to our operations globally. If we were to be found to be in violation of the privacy or security rules under 
PIPEDA or other applicable laws protecting the confidentiality of patient health information in jurisdictions we operate in, we could be 
subject to sanctions and civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse 
effect on our business, results of operations and financial condition. Additional jurisdictions in which we operate or which we may enter 
also  have  data  privacy  and  security  laws  and  regulations  that  govern  the  collection,  use,  disclosure,  transfer,  storage,  disposal,  and 
protection of sensitive personal information. The interpretation and enforcement of such laws and regulations are uncertain and subject 
to change, and may require substantial costs to monitor and implement compliance with any additional requirements. Failure to comply 
with data protection laws and regulations could result in government enforcement actions (which could include substantial civil and/or 
criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business.

We may be subject to, or prosecute, litigation in the ordinary course of our marketing, distribution and sale of our products. 

We are subject to litigation, claims and other legal and regulatory proceedings from time to time in the ordinary course of our marketing, 
distribution and sale of our products, some of which may adversely affect our business, financial condition and results of operations. 
Several companies in the U.S. hemp-derived CBD industry have recently become party to an increasing number of purported class actions 
lawsuits relating to their food and dietary supplement products containing U.S. hemp-derived CBD. Should we face similar class actions 
filed against us, plaintiffs in such class action lawsuits, as well as in 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, adversely affect the 
market price for the common shares and 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 brands, which could have an adverse effect on 
our business, financial condition and results of operations. See Item 3 of this Annual Report for more details on our legal proceedings.

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 and U.S. hemp 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 or U.S. hemp products 
alone or in combination with other medications or substances could occur as described under “- There is limited long-term data with 
respect to the efficacy and side effects of our products and future clinical research studies on the effects of cannabis, hemp and cannabinoids 
may lead to conclusions that dispute or conflict with our understanding and belief regarding their benefits, viability, safety, efficacy, 
dosing and social acceptance.” We may be subject to various product liability claims, including, among others, that our products 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.

Our products have in the past and may in the future 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 labelling disclosure. For example, on May 5, 2017, Peace Naturals announced a voluntary recall with the support 
of Health Canada for products sold between November 26, 2015 and 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 

37

result of cross-contamination. The source of the PBO was a Pest Management Regulatory Agency approved product that was used to 
sanitize empty rooms between harvests and which is no longer used. 

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, the FDA, the DEA or other regulatory agencies, requiring further management attention and potential legal 
fees and other expenses. Furthermore, any product recall affecting the cannabis or U.S. hemp industries more broadly could lead consumers 
to lose confidence in the safety and security of the products sold by participants in these industries generally, which could have a material 
adverse effect on our business, financial condition and results of operations.

The presence of trace amounts of THC in our U.S. hemp products not intended to contain THC may cause adverse consequences to 
users of such products that will expose us to the risk of liability and other consequences.

Some of our products that are intended to primarily contain U.S. hemp-derived CBD, or other products, may contain trace amounts of 
THC. THC is an illegal or controlled substance in many jurisdictions, including under the federal laws of the U.S. Whether or not ingestion 
of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to consumers of our U.S. 
hemp products who test positive for any amounts of THC, even trace amounts, because of the presence of unintentional amounts of THC 
in our U.S. hemp products. In addition, certain metabolic processes in the body may negatively affect the results of drug tests. As a result, 
we may have to recall our products from the market. Positive tests for THC may adversely affect our reputation, our ability to obtain or 
retain customers and individuals’ participation in certain athletic or other activities. A claim or regulatory action against us based on such 
positive test results could materially and adversely affect our business, financial condition, operating results, liquidity, cash flow and 
operational performance.

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 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 in our Canadian operations 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 may 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.

The inability of our customers to meet their financial or contractual obligations to us may result in disruption to our supply chain, 
operations and could result in financial losses.

We have exposure to several customers who are license holders and, at least some of these customers are experiencing financial difficulties. 
In addition, we also face exposure to our third-party cannabis suppliers who may face financial difficulties and which would impact our 

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supply of cannabis material. We have in the past, and may in the future, have disruptions in our supply chain and need to take allowances 
against and need to write off receivables due to the creditworthiness of these customers. 

Further, the inability of these customers to purchase our products could materially adversely affect our results of operations. 

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 or terminate or suspend 
their contractual arrangements with us, 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 are vulnerable to third-party transportation risks.

We depend on fast and efficient courier services to distribute our products to our customers. 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 particularly important. 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  applicable 
recommendations or requirements, could also have an impact on our ability to continue operating under our licenses or the prospect of 
renewing our licenses.

We rely on third-party testing and analytical methods which are validated but still being standardized.

We  are  required  to  test  our  cannabis  and  U.S.  hemp  products  in  various  jurisdictions  such  as  Canada,  the  U.S.  and  Germany  with 
independent third-party testing laboratories for, among other things, cannabinoid levels. However, testing methods and analytical assays 
for cannabinoid levels of detection vary among different testing laboratories. There is currently no industry consensus on standards for 
testing methods or compendium of analytical assays or standard levels of detection.  The detected and reported cannabinoid content in 
our cannabis and U.S. hemp products therefore can differ depending on the laboratory and testing methods (analytical assays) used. 
Variations in reported cannabinoid content will likely continue until the relevant regulatory agencies and independent certification bodies 
(e.g., ISO, USP) collaborate to develop, publish and implement standardized testing approaches for cannabis (including U.S. hemp), 
cannabinoids and their derivative products. Such differences could cause confusion with our consumers which could lead to a negative 
perception of us and our products, increase the risk of litigation regarding cannabinoid content and regulatory enforcement action and 
could make it more difficult for us to comply with regulatory requirements regarding contents of ingredients and packaging and labeling.  

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 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. For example, certain wholesalers, distributors, retailers and other service 
providers may require suppliers of U.S. hemp products to provide an indemnification from liability in connection with such products, 
which may not be covered by insurance. 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.

Tax and accounting requirements may change or be interpreted 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  many  countries,  including  the  U.S.,  we  are  subject  to transfer 
pricing and  other  tax  regulations  designed  to  ensure  that  appropriate  levels  of  income  are  reported  as  earned  and  are  taxed 
accordingly. Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to 
the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. 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 additional jurisdictions. Requirements as to taxation vary substantially among jurisdictions. Complying with the tax laws of these 

39

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.

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, such as the Covid-19 virus, influenza and other highly communicable diseases or viruses, 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. Such events could 
also negatively impact consumer sentiment, reduce demand for consumer products like ours and cause general economic slowdown. We 
currently import our batteries and cartridges from China. As a result of the Covid-19 virus outbreak in China and other countries, we face 
delays of deliveries of batteries for our cannabis vaporizers from manufacturers in China. While we currently have sufficient supply to 
meet our current commitments to our customers and forecasted demand for the next thirty days, if the outbreak persists, we will need to 
find an alternative supplier of batteries and may only be able to do so at a higher cost or with delays. 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 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;

additions or departures of our executive officers and other key personnel;

transfer restrictions on outstanding common shares;

sales of additional common shares or the perception in the market that such sales might occur;

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 or enforcement actions 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;

reports by industry analysts, investor perceptions, and market rumors or speculation; and

negative announcements by our customers, competitors or suppliers regarding their own performance.

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  our  industries 
experience declines in their stock price, the share price of our common shares may decline as well. Moreover, if the market price of our 
common shares drops significantly, shareholders may institute securities class action lawsuits against us. 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 our 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. In addition, 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 our common shares by those institutions, which could adversely affect the trading price of our common shares. There can be no 

40

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.

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.

We are a large accelerated filer and are no longer a foreign private issuer or an emerging growth company, 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 our issued and outstanding common 
shares (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  us  of  approximately  55%  of  our  issued  and  outstanding  common  shares  (calculated  on  a non-
diluted basis). As a result of the Altria Investment, we have determined that we no longer qualified as a foreign private issuer (within the 
meaning of Rule 3b-4 under the Exchange Act) as of June 28, 2019. While we were able to report on foreign private issuer forms until 
December 31, 2019, we are now required to report on U.S. domestic issuer forms as of January 1, 2020, and to comply with related 
requirements from which we had previously been exempt, such as the proxy statement requirements of Regulation 14A under the Exchange 
Act and the insider reporting and short-swing profit requirements of Section 16 of the Exchange Act.

The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be greater than the costs incurred as 
a Canadian foreign private issuer. We are now required to prepare our financial statements in compliance with U.S. GAAP rather than 
International Financial Reporting Standards, are not eligible to use foreign private issuer forms and are required to file periodic and 
current reports and registration statements with the SEC on U.S. domestic issuer forms, which are generally more detailed and extensive 
than the forms available to foreign private issuers. In addition, we may no longer rely upon exemptions from certain corporate governance 
requirements on Nasdaq that are available to foreign private issuers.

Additionally, based on the market value of our equity securities held by non-affiliates as of June 28, 2019, we became a large accelerated 
filer, and are no longer an emerging growth company, as of December 31, 2019. As of such date, we are no longer permitted to rely on 
exemptions from certain disclosure requirements that are applicable to other public companies that are emerging growth companies. 
These exemptions include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404(b), 
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the 
requirements  of  holding  a  nonbinding  advisory  vote  on  executive  compensation  and  stockholder  approval  of  any  golden  parachute 
payments not previously approved. As a result, we may incur significant additional expenses that we did not previously incur. Moreover, 
once we are no longer an “emerging growth company,” the cost of compliance with Section 404 will require us to incur substantial 
accounting  expense  and  expend  significant  management  time  on  compliance-related  issues  as  we  implement  additional  corporate 
governance practices and comply with reporting requirements. If we or our independent registered public accounting firm identifies 
deficiencies in our internal control over financial reporting as material weaknesses, we may be required to make prospective or retroactive 
changes to our financial statements, consider other areas for further attention or improvement, or be unable to obtain the required attestation 
in a timely manner, if at all. 

We may require additional capital in the future or be required to issue common shares pursuant to certain of our agreements which 
may dilute holders of our securities. 

We may need to raise additional funds through public or private debt or equity financings as discussed under “- We may not be able to 
secure adequate or reliable sources of funding required to operate our business.” above.

Additionally,  we  may  be  required  to  issue  additional  common  shares  pursuant  to  the Altria Warrant  and  the  Ginkgo  Collaboration 
Agreement. See “- Any common shares issued pursuant to the exercise of the Altria Warrant will dilute shareholders.” 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, we 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.

Holders of common shares will have no pre-emptive rights in connection with such further issuances. Our 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 of 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 

41

(calculated on a non-diluted basis). As such, our management, directors and employees, as a group, and Altria 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 and 
expansion. Any decision to declare and pay dividends in the future will be made at the discretion of the Board and will depend on, among 
other things, financial results, cash requirements, contractual restrictions and other factors that the Board may deem relevant. As a result, 
investors may not receive any return on an investment in our 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 Annual Report 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. In addition, while 
statutory provisions exist in Ontario for derivative actions to be brought in certain circumstances, the circumstances in which a derivative 
action may be brought, and the procedures and defenses that may be available in respect of any such action, may be different than those 
of shareholders of a company incorporated in the U.S.

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, we do not expect to be a passive foreign investment company (“PFIC”) for 
the current taxable year ending December 31, 2020 and do 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 shares 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. We will be classified as a PFIC 
for any taxable year for U.S. federal income tax purposes if for a taxable year, (i) 75% or more of our gross income is passive income or 
(ii) 50% or more of the value of our 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 our common shares, 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 our common shares, 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 we are a PFIC, U.S. Holders will generally be deemed to own their proportionate share of our 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 our common shares 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 U.S. 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 our common shares would likely decline. In addition, if our results of operations fail to 
meet the forecast of analysts, the trading price of our common shares would likely decline. If one or more of these analysts cease coverage 

42

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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Our executive offices are located in Toronto, Ontario in Canada, where we lease office space. As of December 31, 2019, our Rest of 
World segment owned various manufacturing facilities in the Canadian provinces of Manitoba, Ontario and British Columbia and in 
Hadera, Israel, as well as a R&D facility in Beit Shemesh, Israel. As of December 31, 2019, our United States segment leased office 
space and a manufacturing facility in Los Angeles, California. Management believes that our existing facilities are adequate to meet our 
current requirements and, to the extent that our facilities are leased, comparable space is readily available. 

ITEM 3. LEGAL PROCEEDINGS.

The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution 
and sale of its products.  These legal proceedings are in the early stages of litigation and seek damages that may be unspecified or not 
quantified.  The Company does not believe that these legal proceedings, individually or in the aggregate, will have a material adverse 
effect on its financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results 
for that quarter. 

U.S. Hemp Business  

A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business 
alleging, among other things, violations of state consumer protection, health and advertising laws.  Cronos and Redwood have received 
written threats of litigation with respect to Redwood’s marketing and sale of U.S. hemp products.  While as of February 28, 2020 no 
formal actions have been filed against the Company or Redwood, the Company anticipates that one or more actions may be filed against 
the Company and Redwood with respect to Redwood’s marketing and sale of U.S. hemp products, and the Company expects litigation 
and regulatory proceedings in this area to increase.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

43

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER 
PURCHASES OF EQUITY SECURITIES.
Our common shares are traded on Nasdaq and the TSX under the symbol “CRON.”

Holders

As of February 25, 2020, there were approximately 77 holders of record of our common shares. This number of holders of record does 
not represent the actual number of beneficial owners of our common shares because shares are frequently held in “street name” by 
securities dealers and others for the benefit of individual owners who have the right to vote their shares. 

Dividends

As of the date of this Annual Report, we have not declared any dividends or made any distributions on our common shares. Furthermore, 
we have no current intention to declare dividends on our common shares in the foreseeable future. Any decision to pay dividends on our 
common shares in the future will be at the discretion of the Board and will depend on, among other things, our results of operations, 
current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement 
covenants, our ability to meet solvency tests imposed by corporate law and other factors that the Board may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

Information concerning securities authorized for issuance under equity compensation plans will be set forth in the 2020 Proxy Statement, 
which will be filed within 120 days of our fiscal year end.

Purchases of Equity Securities by the Issuer and Affiliated Persons

None.

Recent Sales of Unregistered Securities

In March 2019, we closed the Altria Investment for gross proceeds of approximately C$2.4 billion (approximately $1.8 billion). The 
Altria Investment consisted of 149,831,154 of our common shares and the Altria Warrant, issued to wholly owned subsidiaries of Altria 
at an exercise price of C$19.00. Pursuant to the investor rights agreement between us and Altria, entered into in connection with the 
closing of the Altria Investment, we granted Altria top-up rights. Since the closing of the Altria Investment, Altria has exercised its top-
up rights each time that top-up rights have been available for exercise, other than in connection with its top-up rights for the fiscal quarter 
ended December 31, 2019. During the year ended December 31, 2019, we issued 6,742,383 common shares upon Altria’s exercise of 
top-up rights for gross cash proceeds of $67.1 million, in addition to the $16.0 million partial extinguishment of derivative liability. The 
Altria Investment and exercise of top-up rights thereunder was a private placement exempt from registration pursuant to Section 4(a)(2) 
of the Securities Act. See the section titled “Altria Strategic Investment” in Item 1 of this Annual Report.

On September 5, 2019, as part of the consideration for our acquisition of Redwood, we issued 5,086,586 of our common shares to a 
number  of  accredited  investors  (each,  an  “accredited  investor”),  as  defined  in  Rule  501  under  the  Securities Act,  and  sophisticated 
investors, as contemplated by Section 4(a)(2) of the Securities Act. Such common shares were issued in private placements in reliance 
on Section 4(a)(2) of the Securities Act.

On December 23, 2019, we issued 856,017 of our common shares to an accredited investor in a private placement in reliance on Section 
4(a)(2) of the Securities Act in connection with the use of certain publicity rights in brand development. One-third of such common shares 
vested on January 31, 2020 with the remaining shares vesting in two equal instalments on (a) June 23, 2021, and (b) December 23, 2022. 
The total consideration paid for the issuance of such common shares was approximately $6 million.

Performance Graph

The following performance graph compares the cumulative total shareholder return of our common shares as listed on Nasdaq with the 
cumulative total return of the S&P 500 Index and a market-weighted index of publicly traded peers over the 22 month period beginning 
on February 27, 2018 and ending on December 31, 2019. The graph assumes that $100 is invested in each of our common shares, the 
S&P 500 Index, and the index of publicly traded peers on February 27, 2018 and that all dividends, if applicable, were reinvested. The 
publicly traded companies in the peer group are Aphria Inc., Aurora Cannabis Inc., CannTrust Holdings Inc., Canopy Growth Corporation, 
Green Thumb Industries Inc., GW Pharmaceuticals plc, HEXO Corporation, iAnthus Capital Holdings Inc., Organigram Holdings Inc. 
and Tilray Inc. (the “Peer Group”). Past performance may not be indicative of future performance. 

44

COMPARISON OF 22 MONTH CUMULATIVE TOTAL RETURN*
Among Cronos Group Inc., the S&P 500 Index,
and a Peer Group

$300

$250

$200

$150

$100

$50

$0
2/27/18

3/18

6/18

9/18

12/18

3/19

6/19

9/19

12/19

Cronos Group Inc.

S&P 500

Peer Group

Date
February 27, 2018
March 2018

June 2018

September 2018

December 2018

March 2019
June 2019

September 2019

December 2019

Cronos Group Inc.

S&P 500

Peer Group

$

$
$

$

$

$

$

$
$

100.00 $
88.32 $
85.56 $
145.93 $
136.35 $
241.86 $
209.71 $
118.77 $
100.66 $

100.00 $
97.46 $

100.81 $

108.58 $

93.90 $

106.71 $
111.31 $

113.20 $

123.46 $

100.00
105.23

116.32

171.53

88.95

137.15
119.16

70.01

56.05

*$100 invested on 2/27/18 in stock or 2/28/18 in index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.

Because Cronos Group’s common shares are also traded on the TSX, we are providing additional information in order to 
enhance the reader’s understanding of our trading history.  The following performance graph compares the cumulative 
total shareholder return of our common shares as listed on the TSX with the cumulative total return of the S&P 500 Index 
and a market-weighted index of the Peer Group over the five-year period beginning on December 16, 2014 and ending on 
December 31, 2019. The graph assumes that $100 is invested in each of our common shares, the S&P 500 Index, and the 
index of the Peer Group and that all dividends, if applicable, were reinvested. Past performance may not be indicative of 
future performance.

45

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cronos Group Inc., the S&P 500 Index,
and a Peer Group

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

Cronos Group Inc.

S&P 500

Peer Group

Date
December 16, 2014

December 2014

December 2015
December 2016

December 2017
December 2018

December 2019

Cronos Group Inc.

S&P 500

Peer Group

$
$

$

$

$

$

$

100.00 $
100.00 $
39.38 $
185.00 $
1,217.50 $
1,797.50 $
1,246.25 $

100.00 $

99.75 $

101.13 $
113.22 $

137.94 $
131.89 $

173.42 $

100.00

100.05

107.88
214.34

502.14
390.70

246.19

*$100 invested on 12/16/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright© 2020 Standard & Poor's, a division of S&P Global. All rights reserved.

46

Share Information

Issued and outstanding shares

Common shares

Potentially issuable shares

Stock options
Warrants
Restricted stock units
Altria Warrant
Exercisable Top-up Rights
Total potentially issuable shares

Total outstanding and potentially issuable shares

As of February 27, 2020

348,817,472

14,149,502
18,066,662
732,972
77,514,993
716,956
111,181,085

459,998,557

47

 ITEM 6. Selected Financial Data.

The following table sets forth the selected financial data of Cronos Group and our consolidated subsidiaries over the five-year period 
ended December 31, 2019, which has been derived from our consolidated financial statements. The selected financial data presented for 
the years ended December 31, 2019, 2018 and 2017 have been presented in accordance with US GAAP while December 31, 2016 and 
2015 are presented under IFRS. All figures are presented in U.S. dollars. The financial information below should be read in conjunction 
with Item 7 and Item 8 of this Annual Report. 

(In thousands of $, except per share amounts)

Year ended December 31,

2019 (i)

2018

2017

2016

2015

Income Statement Data

Net revenue
Net income (loss)
Comprehensive income (loss)

Basic earnings per share
Diluted earnings per share

Balance Sheet Data
Current assets

Cash and cash equivalents
Short-term investments
Other current assets

Total current assets

Non-current assets
Total assets

Current liabilities

Derivative liabilities
Other current liabilities

Total current liabilities
Non-current liabilities
Long-term debt
Other non-current liabilities

Total non-current liabilities

Total liabilities
Shareholders’ equity

$

$

23,750
1,165,574
1,203,261

3.76
3.33

$ 1,199,693
306,347
63,972
1,570,012
520,430
2,090,442

297,160
35,728
332,888

—
8,524
8,524
341,412
$ 1,749,030

$

$

$

$

12,121
(21,817)
(34,151)

(0.13)
(0.13)

23,927
—
16,017
39,944
143,527
183,471

—
33,269
33,269

—
1,653
1,653
34,922
148,549

$

$

$

$

3,147
(1,483)
1,376

(0.01)
(0.01)

7,315
—
8,057
15,372
58,887
74,259

—
6,266
6,266

4,269
—
4,269
10,535
63,724

$

$

$

$

419
(899)
298

(0.02)
(0.02)

2,578
—
3,439
6,017
25,905
31,922

—
5,779
5,779

—
1,084
1,084
6,863
25,059

$

$

$

$

—
303
303

0.01
0.01

814
—
71
885
9,756
10,641

—
1,682
1,682

361
141
502
2,184
8,457

(i) 
“Redwood” in Item 1, Business of this Form 10-K/A. 

Certain 2019 amounts include the impact of the Altria Investment and Redwood Acquisition. See “Altria Strategic Investment” and 

48

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with our consolidated financial statements and the related notes to those 
statements, which are included in Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks 
and uncertainties. As a result of many factors, such as those set forth in Item 1A “Risk Factors,” of this Form 10-K/A and elsewhere in 
this report, our actual results may differ materially from those anticipated in these forward-looking statements.

Business Overview
We are an innovative global cannabinoid company with international production and distribution across five continents. We are committed 
to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build 
an iconic brand portfolio. Cronos Group Inc.’s (the

 “Company” or “Cronos Group”) brand portfolio includes PEACE NATURALS™, a global wellness platform; two adult-use brands, 
COVE™ and Spinach™; and two U.S. hemp-derived consumer products brands, Lord Jones™ and PEACE+™.
Strategy

We seek to create value for shareholders by focusing on four core strategic priorities:

• 

• 
• 

• 

growing a portfolio of iconic brands that resonate with consumers;

developing a diversified global sales and distribution network;
establishing an efficient global supply chain; and

creating and monetizing disruptive intellectual property in the industries in which we operate.

Business Segments

Our activities are carried out through two business segments: Rest of World, and United States as discussed below. On September 5, 
2019, as a result of the Redwood Acquisition, described below, a manufacturer and distributor of U.S. hemp-derived products in the 
United States (“U.S.”) under the brand Lord Jones™ the Company established the United States business segment, which includes only 
the results of Redwood since the date of acquisition.  

Recent Developments

In December 2019, an outbreak of a novel strain of coronavirus, Covid-19, was identified in Wuhan, China. Since then, Covid-19 has 
spread across the globe, including the U.S., Canada and other countries in which we or our affiliates operate (including Australia, Colombia, 
and Israel) and has subsequently been recognized as a pandemic by the World Health Organization. Much of the global efforts to contain 
or slow the spread of Covid-19, including in the U.S. and Canada, have been unsuccessful to date. The Covid-19 outbreak has severely 
restricted the level of economic activity around the world. In response to the Covid-19 outbreak the governments of many countries, 
states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and 
business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of 
businesses  have  been  ordered  and  numerous  other  businesses  have  temporarily  closed  voluntarily.  These  impacts  have  expanded 
significantly in the last two weeks and are expected to continue to grow. The global pandemic of Covid-19 continues to rapidly evolve 
and the ultimate impact of the Covid-19 outbreak is highly uncertain and subject to change.

The effect of this outbreak could include closures of our facilities or the facilities of our customers, suppliers or other vendors in our 
supply chain. For example, as discussed under Item 1A “Risk Factors,” this outbreak has already resulted in delays of deliveries of 
batteries for our cannabis vaporizers from manufacturers in China and we expect similar delays from other items in our supply chain in 
impacted countries which impacts our product allocation among our sales channels. Further, although cannabis dispensaries that hold a 
medical cannabis state retail license in certain U.S. states, for example, California, have been designated as “essential, retailers of our 
products in the U.S. and Canada still may be deemed non-essential and be required to close or choose to suspend or significantly curtail 
their operations due to health and safety concerns for their employees.  Even if our production facilities remain open, mandatory or 
voluntary self-quarantines and travel restrictions may limit our employees’ ability to get to our facilities, and this, together with impacts 
on our supply chain and the uncertainty produced by the rapidly evolving nature of the Covid-19 outbreak, may result in a suspension 
of production or, at least, lower production. Those type of restrictions could also impact the abilities of customers in the U.S. or certain 
Canadian provinces to continue to have access to our products.   Quarantines, shelter-in-place and similar government orders, or the 
perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur could impact personnel at 
third-party manufacturing facilities in the U.S. and Canada and other countries, or the availability or cost of materials, which would 
disrupt our supply chain, in particular in relation to our supply of masks, gowns and other protective equipment used at our GMP facilities 
due to the global shortage of such protective equipment and materials. Additionally, delays in shipping as a result of Covid-19 may impact 
our ability to obtain materials and deliver our products in a timely manner. As a result of Covid-19, we have implemented work-from-
home policies for certain employees and the effects of our work-from-home policies may negatively impact productivity, disrupt access 
to books and records and disrupt our business. In addition, our facilities may experience temporary closures quarantines, shelter-in-place 
and similar government orders are put into place and as the exemptions for “essential” or “critical” businesses and workforces evolve 
and change. Collectively, we expect effects of the Covid-19 outbreak will adversely affect our first quarter results of operations and, if 
the effects continue unabated, our results so long as these measures to combat the Covid-19 outbreak stay in effect. 

Our businesses could also be negatively impacted should the effects of Covid-19 lead to changes in consumer behavior, including as a 
result of a decline in the level of vaping or in discretionary spending. In addition, a recession or market correction resulting from the 
49

spread of Covid-19 would likely materially affect our business and the value of our common shares. At this time, neither the duration 
nor scope of the disruption can be predicted, therefore, the ultimate impact to our business cannot be reasonably estimated but such impact 
could materially adversely affect our business and financial results.

2019 Business Highlights
Altria Strategic Investment

In March 2019, Altria Group, Inc. (“Altria”) closed an approximately $2.4 billion Canadian dollars (“C$”) (approximately $1.8 billion) 
investment in us (the “Altria Investment”). We issued to certain wholly owned subsidiaries of Altria 149,831,154 of our common shares 
and one warrant (the “Altria Warrant”), which may be exercised in full or in part at any time on or prior to 5:00 p.m. (Toronto time) on 
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 of 
our  common  shares  (subject  to  adjustment  in  accordance  with  the  terms  and  conditions  of  the  warrant  certificate  representing  and 
evidencing the Altria Warrant (the “Altria Warrant Certificate”)), at an exercise price of C$19.00. As of the closing date of the Altria 
Investment, Altria beneficially held a 45% ownership interest in us (calculated on a non-diluted basis) and, if exercised in full on such 
date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in us of approximately 55% 
(calculated on a non-diluted basis). As a result of Altria’s investment we have additional financial resources. In addition, following its 
investment, Altria have provided us with commercial capabilities in the fields of product development and commercialization to better 
position us to compete in the global cannabis industry. See “- Altria Strategic Investment” in Item 1, Business, of this Form 10-K/A for 
more information on the Altria Investment and related agreements.

Cronos Device Labs
In April  2019,  Cronos  Group  established  Cronos  Device  Labs  Ltd.  (“Cronos  Device  Labs”),  our  Israel-based  global  research  and 
development (“R&D”) center for innovation. The state-of-the-art facility is equipped with advanced vaporizer technology and analytical 
testing infrastructure and is home to an experienced team of product development talent. The Cronos Device Labs’ team, with over 80 
years of combined experience in vaporizer development, is comprised of product designers, mechanical, electrical and software engineers, 
and  analytical  and  formulation  scientists.  This  global  R&D  center  is  expected  to  significantly  enhance  Cronos  Group’s  innovation 
capabilities and accelerate development of next-generation vaporizer products specifically tailored to cannabinoid use.

Cronos Fermentation Acquisition

In July 2019, we closed the acquisition (the “Cronos Fermentation Acquisition”) of certain assets from Apotex Fermentation Inc. (“AFI”), 
including a Good Manufacturing Practice compliant fermentation and manufacturing facility in Winnipeg, Manitoba. The state-of-the-
art  facility,  which  will  operate  as  “Cronos  Fermentation,”  includes  fully  equipped  laboratories  covering  microbiology,  organic  and 
analytical chemistry, quality control and method development as well as two large-scale microbial fermentation production areas with a 
combined production capacity of 102,000 liters, three downstream processing plants, and bulk product and packaging capabilities. The 
acquisition is expected to provide the fermentation and manufacturing capabilities we need in order to capitalize on the progress underway 
in our R&D partnership with Ginkgo Bioworks, Inc. (“Ginkgo”), by enabling us to produce the target cannabinoids contemplated under 
the  collaboration  and  license  agreement  dated  September  1,  2018  between  Ginkgo  and  the  Company  (the  “Ginkgo  Collaboration 
Agreement”) at commercial scale with high quality and high purity.

We  are  in  the  process  of  aligning  specifications  for  the  equipment  and  manufacturing  required  for  the  production  and  downstream 
processing of cannabinoids. To support this work, a team of engineers, scientists, production and quality assurance personnel that previously 
worked at the facility joined us in November 2019. Commercial production at the facility is subject to completion of the equipment 
alignment for cannabinoid-based production, the receipt of the appropriate licenses from Health Canada for the production of cultured 
cannabinoids under the Cannabis Act and the achievement of milestones under the Ginkgo Strategic Partnership.

Ginkgo has filed certain patent applications pertaining to biosynthesis of cannabinoids to protect intellectual property developed as part 
of the research progressing under the partnership with Cronos Group. Under the partnership, Cronos Group is the exclusive licensee of 
the intellectual property covered by the patent applications for the target cannabinoids. 
Redwood Acquisition
On September 5, 2019, we announced the closing of the acquisition (the “Redwood Acquisition”) of four Redwood Holding Group, LLC 
operating subsidiaries (collectively, “Redwood”). The total fair value of the consideration paid for this acquisition, net of cash and debt 
and subject to customary working capital adjustment, was approximately $283 million, of which approximately $227 million was paid 
in cash and $56 million was paid in common shares of the Company. Redwood manufactures, markets and distributes U.S. hemp-derived 
supplements and cosmetics products through e-commerce, retail and hospitality partner channels in the U.S. under the brand Lord Jones™. 
Redwood’s products use pure U.S. hemp extract that contains natural phytocannabinoids and terpenes found in the plant. We plan to 
leverage Redwood’s capabilities to capitalize on the significant demand to further create and scale U.S. hemp-derived consumer products 
and brands. 

50

Recent Developments

Initial Public Offering of Cronos Australia
On October 25, 2019, Cronos Australia Limited (“Cronos Australia”) announced the closing of a A$20.0 million (approximately $13.8 
million) initial public offering. In the offering, Cronos Australia issued 40 million new shares at an offering price of A$0.50 per share 
(the “Cronos Australia IPO”). Cronos Australia began trading on the Australian Securities Exchange on a deferred settlement basis on 
November 7, 2019. Upon completion of the Cronos Australia IPO, Cronos Group held approximately 31% of the issued capital of Cronos 
Australia on a non-diluted basis.

Peace Naturals Campus Repurposing
On November 12, 2019, we commenced certain repurposing initiatives to better align our evolving business with our four core strategic 
priorities. Certain facilities at the Peace Naturals Campus are in the process of being repurposed from cultivation activities to provide 
for additional R&D activities focused on new technologies for value-added product manufacturing, production and manufacturing of 
derivative products and increased vault and warehousing capabilities. 

In the fourth quarter of 2019, we recorded pre-tax charges of $1.9 million and $5.3 million within the inventory write-down and operating 
expenses respectively, for a total of $7.2 million related to the repurposing efforts at the Peace Naturals Campus. 
Launch of Vaporizers in Canada

In December 2019, we launched packaged cannabis vaporizer devices for the Canadian adult-use market. Distributed under the COVE™ 
and Spinach™ brands, our vaporizer products are currently available in Ontario, British Columbia, Manitoba, Nova Scotia and New 
Brunswick, as well as private-sector retailers in Saskatchewan. In the first quarter of 2020, the Company intends to launch PEACE 
NATURALSTM branded vaporizers through the direct-to-patient channel.
Write-down of inventory

In 2019, we recorded an inventory write-down primarily related to downward pressure on the price of cannabis oils and specific cannabis 
strains previously in production. The inventory write-down in 2019 also included inventory write-down charges driven by the repurposing 
of certain facilities at the Peace Naturals Campus. The Company anticipates inventory write-downs in the short-term due to pricing 
pressures in the marketplace and while the Company executes its operational repurposing of the Peace Naturals Campus.

Consolidated Results of Operations: FY 2019 compared with FY 2018

Summary of financial results - consolidated

(In thousands of U.S. dollars)

Year ended December 31,

Change

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

Net revenue

Gross profit (loss)
Gross margin

Reported operating loss
Adjusted operating loss (i)
(i) 

Net revenue - consolidated

(In thousands of U.S. dollars)

Net revenue, before excise taxes (i)
Excise taxes

Net revenue
(i) 

2018

$

$

12,121

$

11,629

2019
23,750

(17,864)

(75)%

$

$

6,213

51%

(24,077)
—

(100,143)
(92,875)

(121,484)
(114,216)

$

(21,341)
(21,341)

%

96 %

(388)%
(126)pp

469 %
435 %

Year ended December 31,

2019

2018

$

$

25,639
(1,889)
23,750

13,234
(1,113)
12,121

Change

$

%

12,405
(776)
11,629

94%
70%
96%

$

$

Net revenue, before excise taxes, is calculated net of sales returns and discounts.

For the fiscal year 2019 (“FY 2019”), we reported net revenue of $23.8 million, representing an increase of 96% from the fiscal year 
2018 (“FY 2018“). This change was primarily due to:
•  A higher volume of wholesale sales in FY 2019 from FY 2018, which were sold at a lower price relative to other channels. 

•  An increase in the volume of products sold in the Rest of World segment from FY 2018, primarily driven by increased production, 

as well as the launch and continued growth of the adult-use market in Canada.

•  The Redwood Acquisition on September 5, 2019, resulted in an increase in net revenue of $3.4 million in FY 2019, driven by expanded 

distribution of Lord JonesTM branded products through online sales and an increased retail channel footprint. 

•  The launch, in December 2019, of packaged cannabis vaporizer devices for the Canadian adult-use-markets, resulting in net revenue 

within the cannabis extracts and other categories, which was not present within the product mix in FY 2018. 

51

•  A partially offsetting decrease in the price of products sold in the Rest of World segment from FY 2018, primarily driven by downward 
pressure in Canadian market prices of cannabis flower and cannabis extracts during the year due to broader trends of oversupply in 
the industry, which we expect to continue in 2020.

Cost of sales and gross profit (loss) - consolidated

(In thousands of U.S. dollars)

Year ended December 31,

Change

Cost of sales
Inventory write-down

Gross profit (loss)
Gross margin

$

2019
12,174
29,440

2018

$

5,908
—

$

(17,864)

(75)%

6,213

51%

$

6,266
29,440

(24,077)
—

%

106 %
N/A

(388 )%
(126)pp

For FY 2019, we reported gross profit (loss) of $(17.9) million, representing a decrease of 388% from gross profit (loss) in FY 2018. 
Gross margin decreased by 126 percentage points from FY 2018 to FY 2019. These changes were primarily due to:
•  An inventory write-down of $29.4 million on cannabis oil and dried cannabis, which includes $1.9 million relating to dried cannabis 

• 

written down as part of the repurposing of certain facilities at the Peace Naturals Campus. 
If we were to adjust for the effects of the inventory write down of $29.4 million, gross profit for FY 2019 would have been $11.6 
million, representing gross margins of 49%.

•  An increase in cost of sales of 106% from FY 2018, primarily driven by increased production in the Rest of World segment. 

•  The Redwood Acquisition on September 5, 2019, resulted in an increase in cost of sales by $1.5 million and an increase in gross 

profit by $1.9 million, driven by strong sales prices and brand equity.

Operating loss - consolidated

(In thousands of U.S. dollars)

Year ended December 31,

Change

Sales and marketing
Research and development
General and administrative
Share-based payments
Depreciation and amortization
Repurposing charges

Operating expenses

Reported operating loss
Adjusted operating loss (i)

$

2019
23,045
12,155
49,372
11,619
2,101
5,328
103,620

2018

$

%

$

$

3,173
1,814
13,447
8,151
969
—
27,554

19,872
10,341
35,925
3,468
1,132
5,328
76,066

(121,484)
(114,216)

(21,341)
(21,341)

(100,143)
(92,875)

626 %
570 %
267 %
43 %
117 %
N/A
276 %

469 %
435 %

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

For FY 2019, we reported an operating loss of $121.5 million, representing an increase of 469% from FY 2018. This change was primarily 
due to:

•  A decrease in gross profit (loss) of 388% from FY 2018, as described above.
•  An increase in general and administrative costs of 267% from FY2018, in order to support our growth strategy through increased 

staffing levels and services rendered in connection with various strategic initiatives.  

•  An increase in sales and marketing costs of 626%, in order to create, build and develop our brands for the first full year of the 

Canadian adult-use market.

•  An increase in R&D costs of 570%, primarily related to the Ginkgo Strategic Partnership and the Technion - Israel Institute of 

Technology (“Technion”) Research Agreement.

•  The Redwood Acquisition on September 5, 2019, resulted in an increase in operating loss of $2.8 million, driven by increased 
investments  in  sales  and  marketing  and  general  and  administrative  expenses  as  the  business  focuses  on  growth  prospects  and 
developing new brands and products.

•  A charge in FY 2019 of $5.3 million within operating expenses, as well as the inventory write-down of $1.9 million within gross 
profit (loss) related to the repurposing of certain facilities at the Peace Naturals Campus, which make up the total adjustment between 
reported and adjusted operating loss. 

52

Results of Operations by Business Segment: FY 2019 compared with FY 2018

Summary of financial results - Rest of World

(In thousands of U.S. dollars)

Year ended December 31,

Change

Net revenue

Gross profit (loss)
Gross margin

Reported operating loss
Adjusted operating loss (i)

$

$

2018

$

%

$

12,121

$

8,265

2019
20,386

(19,737)

(97)%

6,213

51%

(25,950)
—

(85,587)
(78,319)

(106,928)
(99,660)

$

(21,341)
(21,341)

$

68 %

(418 )%
(148)pp

401 %
367 %

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

Net revenue - Rest of World 

(In thousands of U.S. dollars)

Cannabis flower

Cannabis extracts

Other

Net revenue

Year ended December 31,

Change

2019

2018

$

%

$

15,020

$

5,338

28

20,386

$

9,210

2,732

179

12,121

5,810

2,606
(151)
8,265

63 %

95 %
(84)%
68 %

For FY 2019, we reported net revenue of $20.4 million, representing an increase of 68% from FY 2018. This change was primarily due 
to:
•  A higher volume of wholesale sales in FY 2019, which were sold at a lower price relative to other channels.

•  An increase in the volume of products sold from FY 2018, primarily driven by increased production, as well as the launch and 

continued growth of the adult-use market in Canada. 

•  The  launch  in  December  2019  of  packaged  cannabis  vaporizer  devices  for  the  Canadian  adult-use  market  resulting  in net 

revenue within the cannabis extracts and other categories, which was not present within the product mix in FY 2018.

•  A partially offsetting decrease in the price of products sold from FY 2018, primarily driven by downward pressure in Canadian 
market prices of cannabis flower and cannabis extracts during the year due to broader trends of oversupply in the market, which we 
expect to continue in 2020.

Cost of sales and gross profit (loss) - Rest of World

(In thousands of U.S. dollars)

Cost of sales
Inventory write-down

Gross profit (loss)
Gross margin

$

Year ended December 31,
2019
2018
10,683
29,440

$

5,908
—

(19,737)

(97)%

6,213

51%

$

Change

$

4,775
29,440

(25,950)
—

%

81 %
N/A

(418)%
(148)pp

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

For FY 2019, we reported gross profit (loss) of $(19.7) million, representing a decrease of 418% from FY 2018. Gross margin decreased 
by 148 percentage points from FY 2018 to FY 2019. This change was primarily due to:
•  An inventory write-down of $29.4 million on cannabis oil and dried cannabis, which includes $1.9 million relating to dried cannabis 

• 

at the Peace Naturals Campus as a part of the repurposing efforts. 
If we were to adjust for the effects of the inventory write downs, gross profit for FY 2019 would have been $9.7 million, representing 
gross margins of 48%.

•  An increase in cost of sales of 81% from FY2018, primarily driven by increased production.  

53

Operating loss - Rest of World

(In thousands of U.S. dollars)

Year ended December 31,

Change

Reported operating loss
Adjusted operating loss (i)

2019
(106,928)
(99,660)

$
$

$
$

2018

(21,341)
(21,341)

$
$

$
(85,587)
(78,319)

%

401%
367%

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

(i) 
For FY 2019, we reported an operating loss of $106.9 million, representing an increase of 401% from FY 2018. This change was primarily 
due to:
•  A decrease in gross profit (loss) of 418% from FY 2018, as described above.

•  An increase in general and administration costs in order to support our growth strategy through increased staffing levels and for 

services rendered in connection with various strategic initiatives. 

•  An increase in sales and marketing costs in order to create, build and develop our brands for the first full year of the Canadian adult-

use market.

•  An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and Technion Research Agreement.
•  A charge in FY 2019 of $5.3 million within operating expenses, as well as the $1.9 million within gross profit (loss) related to the 
repurposing of certain facilities at the Peace Naturals Campus, which make up the total adjustment between reported and adjusted 
operating loss. 

Summary of financial results - United States

(In thousands of U.S. dollars)

Year ended December 31,

Change

2019

2018

$

%

Net revenue

Gross profit
Gross margin

$

3,364

1,873

56%

Reported and adjusted operating loss (i)

$

(2,777)

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

—

—
—

—

N/A

N/A
N/A

N/A

N/A

N/A
N/A

N/A

Net revenue - United States

(In thousands of U.S. dollars)

Net revenue

Year ended December 31,

Change

2019

2018

$

%

$

3,364

—

N/A

N/A

The US segment reported net revenue of $3.4 million. This activity was primarily due to:
•  The Redwood Acquisition on September 5, 2019, resulted in an increase in net revenue of $3.4 million in FY 2019, driven by expanded 

distribution of Lord JonesTM branded products through e-commerce sales and an increased retail channel footprint. 

Cost of sales and gross profit - United States

(In thousands of U.S. dollars)

Year ended December 31,

Change

Cost of sales

Gross profit
Gross margin

$

$

2019

1,491

1,873

56%

2018

$

%

—

—
—

N/A

N/A
N/A

N/A

N/A
N/A

The US segment reported gross profit of $1.9 million, and gross profit margin of 56%. These results were primarily due to:
•  The net revenue, as described above.

•  The Redwood Acquisition on September 5, 2019, resulted in an increase in cost of sales by $1.5 million and an increase in gross 

profit by $1.9 million, driven by strong sales prices and brand equity.

54

Operating loss - United States

(In thousands of U.S. dollars)

Year ended December 31,

Change

2019

2018

$

%

Reported and adjusted operating loss (i)

$

(2,777)

—

N/A

N/A

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

The US segment reported operating loss of $2.8 million. These results were primarily due to:

•  The Redwood Acquisition on September 5, 2019, resulting in an operating loss of $2.8 million.

• 

• 

Sales and marketing costs incurred were in relation to the preparation for the launch of the PEACE+™ U.S hemp-derived CBD 
brand, as well as the introduction of several new U.S. hemp-derived CBD products under the Lord Jones™ brand, including Lord 
Jones™ CBD Formula Heavy Duty Chill Balm, Lord Jones™ High CBD Formula, Bath Salts and Lord Jones + Tamara Mellon 
CBD Formula Stiletto Cream. 
Salaries and wages costs of $1.4 million, incurred in order to support our growth strategy through increased staffing levels across a 
variety of functions.

Consolidated Results of Operations: FY 2018 compared with FY 2017

All of our activities throughout FY 2018 and the fiscal year 2017 (“FY 2017”) were attributable to the Rest of World segment. 

Selected financial results - consolidated

(In thousands of U.S. dollars)

Net revenue

Gross profit

Gross margin

Year ended December 31,

Change

2018

2017

$

%

$

12,121

$

3,147

$

8,974

6,213

51%

1,574

50%

4,639

—

Reported and adjusted operating loss (i)

$

(21,341)

$

(6,121)

$

(15,220)

(i) 

See “Non-GAAP Measures” for information related to Non-GAAP Measures.

Net revenue - consolidated

(In thousands of U.S. dollars)

Net revenue, before excise taxes (i)
Excise taxes

Net revenue

Year ended December 31,

Change

2018

2017

$

%

$

$

13,234
(1,113)
12,121

$

$

3,147

—

3,147

$

$

10,087
(1,113)
8,974

285 %

295 %
1pp

249 %

321%

N/A

285%

(1)  Net revenue, before excise taxes is calculated net of sales returns and discounts.

For FY 2018, we reported net revenue of $12.1 million, representing an increase of 285% from FY 2017. This change was primarily due 
to:
•  An increase in the volume of products sold from FY 2017, primarily driven by the commencement of shipments into the adult-use 

market in Canada, as well as growth of our medical client base, growth in cannabis oil revenue, and increased production.

•  Offset by a decrease in the price of products sold from FY 2017, primarily driven by lower margins available in the adult-use market 

in Canada.

55

Cost of sales and gross profit - consolidated

(In thousands of U.S. dollars)

Year ended December 31,

Change

Cost of sales

Gross profit
Gross margin

$

$

2018

5,908

6,213

51%

$

$

2017

1,573

1,574

50%

$

$

$

%

4,335

4,639
—

276 %

295 %
1pp

For FY 2018, we reported gross profit of $5.9 million, representing an increase of 276% from FY 2017. Gross margin increased by 1
percentage point from FY 2017 to FY 2018. This change was primarily due to:
•  An increase in the volume of products sold from FY 2017, resulting in an increase in gross profit.

•  An increase in cost of sales of 276% from FY 2017, primarily driven by increased production. 

Operating loss - consolidated

(In thousands of U.S. dollars)

Sales and marketing

Research and development

General and administrative

Share-based payments

Depreciation and amortization

Operating expenses

Year ended December 31,

Change

2018

2017

$

%

$

$

3,173

1,814

13,447

8,151

969
27,554

$

443

—

4,904

1,931

417
7,695

2,730

1,814

8,543

6,220

552
19,859

Reported and adjusted operating loss

$

(21,341)

$

(6,121)

$

(15,220)

616%

N/A

174%

322%

132%
258%

249%

(i) 

See”Non-GAAP Measures” for information related to Non-GAAP Measures.

For FY 2018, we reported an operating loss of $21.3 million, representing an increase of 249% from FY 2017. This change was primarily 
due to:

•  An increase in gross profit of 295% from FY 2017, as described above.

•  An increase in sales and marketing costs of 616% from FY 2017, in order to build and develop our brands.

•  An increase in R&D costs of $1.8 million, primarily related to the Ginkgo Strategic Partnership and the Technion Research Agreement, 

which both began in FY 2018.

•  An increase in general and administrative costs of 174% from FY 2017, primarily related to an increase in salaries and wages related 

to growing the business.

56

Non-GAAP Measures 

Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”). 
This Annual Report refers to measures not recognized under US GAAP (“non-GAAP measures”). These non-GAAP measures do not 
have a standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other 
companies. Rather, these non-GAAP measures are provided as a supplement to corresponding GAAP measures to provide additional 
information  regarding  our  results  of  operations  from  management’s  perspective. Accordingly,  non-GAAP  measures  should  not  be 
considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. All non-GAAP 
measures presented in this Annual Report are reconciled to their closest reported GAAP measure. Reconciliations of historical adjusted 
financial measures to corresponding GAAP measures are provided below.
Adjusted operating loss

Management reviews operating loss on an adjusted basis, which excludes certain income and expense items that management believes 
are not part of underlying operations. These items may include repurposing charges. Management does not view any of these items to 
be part of underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying 
business trends and results.
Management believes that adjusted operating loss provides useful insight into underlying business trends and results and provides a more 
meaningful comparison of year-over-year results. Management uses adjusted operating loss for planning, forecasting and evaluating 
business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

(In thousands of U.S. dollars)

Reported operating loss

Adjustments

Repurposing charges

Adjusted operating loss

Year ended December 31,

2019

2018

(121,484)

$

(21,341)

7,268
(114,216)

$

—
(21,341)

$

$

Adjusted operating loss by business segment
Management reviews operating loss by business segment, which excludes corporate expenses, and adjusted operating loss by business 
segment, which further excludes certain income and expense items that management believes are not part of the underlying segment’s 
operations. Corporate expenses are expenses that relate to the consolidated business and not to an individual operating segment while 
the income and expenses items may include repurposing charges. Management does not view the income and expense items above to be 
part of underlying results of the segment as they may be highly variable, may be unusual or infrequent, are difficult to predict and can 
distort underlying business trends and results.
Management believes that adjusted operating loss by business segment provides useful insight into underlying segment trends and results 
and will provide a more meaningful comparison of year-over-year results, going forward. Management uses adjusted operating loss by 
business segment for planning, forecasting and evaluating segment performance, including allocating resources and evaluating results 
relative to employee compensation targets.

(In thousands of U.S. dollars)

Reported operating loss

Adjustments

Repurposing charges

Adjusted operating loss

Year ended December 31, 2019

US
(2,777)

RoW
$ (106,928)

$

Total
Segments
$ (109,705)

Corporate
Expenses

$

(11,779)

Total
$ (121,484)

—
(2,777)

7,268
(99,660)

7,268
(102,437)

—
(11,779)

7,268
(114,216)

57

Foreign currency exchange rates

All  currency  amounts  in  this Annual  Report  are  stated  in  U.S.  dollars,  which  is  our  reporting  currency,  unless  otherwise  noted. All 
references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of the Company's foreign operations are translated into dollars 
at the exchange rate in effect as of December 31, 2019 and 2018. Transactions affecting the stockholders' equity (deficit) are translated 
at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated 
statements of cash flows of the Company's foreign operations are translated into dollars by applying the average foreign exchange rate 
in effect for the reporting period. 
The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below:

(Exchange rates are shown as C$ per $)

Average rate
Spot rate

Year ended December 31,

2019

2018

2017

1.3268
1.2990

1.2955
1.3639

1.2969
1.2571

Liquidity and capital resources
As of December 31, 2019, we had $1,199.7 million in cash and cash equivalents and $306.3 million in short term investments. Subsequent 
to December 31, 2019, Cronos Group’s cash position $1,444.3 million due primarily to the maturity of our short-term investments. We 
believe that our existing cash and cash equivalents, short-term investments and cash generated by operations will be sufficient to fund 
our business operations and capital expenditures over the next twelve months.
Summary of cash flows

(In thousands of U.S. dollars)

Cash provided (used) in operating activities

$

Cash used in investing activities

Cash provided by financing activities

Effect of foreign currency translation on cash and cash equivalents

Net change in cash

FY 2019 cash flows vs FY 2018 cash flows

Year ended December 31,

2019

2018

2017

$

(130,007)
(603,539)
1,856,941

52,371

1,175,766

$

(7,517)
(93,908)
122,112
(4,085)
16,602

(4,278)

(29,897)

39,074

(152)

4,747

Operating activities. During FY 2019, we used $130.0 million of cash in operating activities as compared to $7.5 million in FY 2018, 
representing an increase of $122.5 million in cash used. This change is primarily driven by a $57.9 million decrease in the net change in 
non-cash working capital from FY 2018 and a $64.6 million decrease in net income adjusted for non-cash items from FY 2018. 

Investing activities. During FY 2019, we used $603.5 million of cash in investing activities, as compared to $93.9 million of cash used 
in investing activities in FY 2018, representing an increase of $509.6 million in cash used. This change is primarily driven by the short-
term investment of $299.9 million and the Redwood Acquisition resulting in in the payment of cash consideration of $224.3 million, as 
well as advances to joint ventures and loan receivable of $58.5 million (FY 2018 – $5.4 million), and $39.0 million (FY 2018 – $88.6 
million) in capital expenditures. 

Financing activities. During FY 2019, cash provided by financing activities was $1,856.9 million, as compared to $122.1 million of cash 
provided by financing activities in FY 2018, representing an increase of $1,734.8 million in cash provided. This change is primarily 
driven by proceeds from the strategic investment from Altria of $1,809.6 million, as well as proceeds from exercise of warrants and 
options as well as the Top-up Rights of $68.5 million, which were partially offset by withholding taxes paid on share appreciation rights 
of $0.9 million, and further offset by repayment of the $16.0 million construction loan payable. 
FY 2018 cash flows vs FY 2017 cash flows
Operating activities. During FY 2018, the Company used $7.5 million of cash in operating activities as compared to $4.3 million in FY 
2017, representing an increase of $3.2 million in cash used. This change is primarily driven by a decrease in net income, a net loss of 
$21.8 million and an increase in the net change in non-cash working capital.
Investing activities. During FY 2018, the Company used $93.9 million of cash in investing activities, as compared to $29.9 million in 
FY 2017, primarily due to advances to our Cronos Australia, Cronos Growing Company Inc. (“Cronos GrowCo”) and MedMen Canada 
Inc. (“MedMen Canada”) joint ventures, and capital expenditures to fund expansion efforts at Cronos Israel G.S. Cultivations Ltd., Cronos 
Israel G.S. Manufacturing Ltd., Cronos Israel G.S. Store Ltd., Cronos Israel G.S. Pharmacies Ltd (collectively “Cronos Israel”) and Peace 
Naturals.

Financing activities. During FY 2018, cash provided by financing activities was $122.1 million, as compared to $39.1 million in FY 
2017, primarily due to debt advances and net proceeds from a January 2018 common shares offering in which we sold a total of 5,257,143 
common shares at a price of $8.75 per common share for aggregate gross proceeds of approximately $35.5 million (C$46.0 million) and 

58

an April 2018 common shares bought deal offering in which we sold a total of 10,420,000 common shares at a price of $9.60 per common 
share for aggregate gross proceeds of approximately $77.2 million (C$100.0 million).

Debt
In August 2017, we entered into a senior secured loan, to be funded by way of multiple advances, for up to C$40.0 million ($31.9 million) 
in committed capital (the “Romspen Construction Loan”) with Romspen Investment Corporation (“Romspen”). In January 2019, the 
Romspen Construction Loan was fully repaid.
In January 2019, we 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 C$65.0 million ($48.7 million) secured non-revolving term loan credit facility (the “Credit 
Facility”). In connection with closing the Credit Facility, we used funds available under the Credit Facility to fully repay the Romspen 
Construction Loan. In March 2019, the Credit Facility was repaid in full by us with a portion of the proceeds from the Altria Investment.
Contractual obligations
As of December 31, 2019, we had the following contractual obligations:

(In thousands of U.S. dollars)

Long-term debt obligations
Capital (finance) lease obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities

Payments Due by Period

Total

Less Than 1
Year

1-3 Years

4-5 Years

$

— $
101
7,966
16,814
10,593

— $
41
1,240
13,051
4,533

— $
60
2,453
3,015
6,060

— $
—
2,103
748
—

After 5 Years
—
—
2,170
—
—

Total contractual obligations

35,474

18,865

11,588

2,851

2,170

Finance lease obligations relate to equipment leases maturing in June 2022. Operating lease obligations relate to office equipment and 
vehicle leases, as well as our lease for our headquarters, which terminates in November 2026. Other long-term liabilities relate to R&D 
commitments associated with the Ginkgo Strategic Partnership and the Technion Strategic Partnership. Other purchase obligations include 
commitments for capital expenditures, information technology and professional services.

Equity

During FY 2019, we raised $1.9 billion in gross proceeds (not taking into account any commissions, fees or expenses) and issued 170.1 
million shares for various strategic initiatives as outlined below:

•  The closing of the Altria Investment, wherein we issued 149,831,154 common shares to Altria at a price of C$16.25 per common 
share and the Altria Warrant for aggregate gross proceeds of approximately C$2.4 billion (approximately $1.8 billion), before taking 
into account any commissions, fees or expenses.

• 

Pursuant to the Altria Investment, we incurred transaction costs of $26.1 million, of which $3.7 million was allocated to share capital 
and $22.4 million to the derivative liabilities based on the relative values assigned to the respective components. During the year 
ended December 31, 2019, we issued 6,742,383 common shares upon Altria’s exercise of Top-up Rights for gross cash proceeds of 
$67.1 million, in addition to the $16.0 million partial extinguishment of derivative liability.

•  The issuance on September 5, 2019, in connection with the acquisition of Redwood of 5,086,586 common shares as part of the 

purchase consideration paid.

•  The issuance, on December 23, 2019, of 856,017 of our common shares in connection with the use of certain publicity rights in brand 

development. 

Liquidity
Our primary need for liquidity is to fund operations and capital expenditures. Our ability to fund operations and capital expenditures 
depends on, among other things, future operating performance and cash flows that are subject to general economic conditions and financial 
and other factors, including factors beyond our control.
Historically, we have primarily funded our operations through debt and equity financings. In March 2019, Altria closed a C$2.4 billion 
(approximately $1.8 billion) investment in us, pursuant to which we issued to certain wholly owned subsidiaries of Altria 149,831,154 
of our common shares and one warrant, as further discussed under “ - 2019 Business Highlights - Altria Strategic Investment” herein. As 
of March 25, 2020 we had a cash balance of $1.3 billion to fund operations and capital expenditures.
Off-balance sheet arrangements

As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements, as defined in the rules and regulations 
of the U.S. Securities and Exchange Commission (“SEC”).
Financial instruments
As of the date of this Annual Report, we have the following financial instruments: cash, accounts receivable, other receivables, loan 
receivable, advances to joint ventures, other investments, accounts payable and other liabilities, holdbacks payable, derivative liabilities 

59

and  due  to  non-controlling  interests.  These  financial  instruments  were  not  used  in  any  hedging  activities.  See  note  26  “Financial 
Instruments” to the Annual Financial Statements for the assessment of related risks.

Changes in accounting estimate and policy including adoption of new pronouncements
Estimates and critical judgments by management 

The  preparation  of  the  consolidated  financial  statements  in  conformity  with  GAAP  requires  management  to  make  estimates  and 
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the 
consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are 
reviewed periodically and adjustments are made as appropriate in the year they become known. Items for which actual results may differ 
materially from these estimates are described in the following section.
Business combinations

In  determining  the  appropriate  basis  of  accounting  for  an  acquisition,  judgment  is  used  to  determine  if  an  acquisition  is  a  business 
combination or an asset acquisition.
Control, joint control, or level of influence

In determining the appropriate basis of accounting for our interests in investees, judgment is applied regarding the degree to which we 
have the ability to exert influence directly or indirectly over the investees’ financial and operating activities.
Warrants and stock options

Warrants and stock options are initially valued at fair value, based on the application of the Black-Scholes option pricing model. This 
pricing  model  requires  management  to  make  various  assumptions  and  estimates  which  are  susceptible  to  uncertainty,  including  the 
volatility of the share price, expected dividend yield, expected term of the warrant or stock option and expected risk-free interest rate.
Useful lives and impairment of long-lived assets

Long-lived assets are defined as property, plant and equipment and intangible assets with finite lives. Depreciation and amortization are 
dependent upon estimates of useful lives and impairment is dependent upon estimates of recoverable amounts. These are determined 
through the exercise of judgment, and are dependent upon estimates that take into account factors such as economic and market conditions, 
frequency of use, anticipated changes in laws, and technological improvements.

Impairment of cash-generating units and goodwill

The impairment test for cash generating units (“CGUs”) to which goodwill is allocated is based on the value in use of the CGU, determined 
in accordance with the expected cash flow approach. The calculation is based on assumptions used to estimate future cash flows, the cash 
flow growth rate and the discount rate.

Income taxes

Income taxes and tax exposures recognized in the consolidated financial statements reflect management’s best estimate based on facts 
known at the reporting date. When we anticipate a future income tax payment based on our estimates, it recognizes a liability. The 
difference between the expected amount and the final tax outcome has an impact on current and deferred taxes when we become aware 
of this difference.

In addition, when we incur losses for income tax purposes, it assesses the probability of taxable income being available in the future 
based on our budgeted forecasts. These forecasts are adjusted to take into account certain non-taxable income and expenses and specific 
rules on the use of unused credits and tax losses. When the forecasts indicate that sufficient future taxable income will be available to 
deduct the temporary differences, a deferred tax asset is recognized for all deductible temporary differences.

Variable consideration in revenue from contracts with customers
Determining the amount of variable consideration to recognize, and whether the amount of variable consideration should be constrained, 
is dependent on management’s estimate of the most likely amount to which we will be entitled and the probability of a significant reversal 
in that amount. These determinations require management to make estimates based on historical amounts received, current economic 
conditions, and current industry conditions, in the geographies we operate in and abroad, adjusted for forward looking information.
Returns from customers
Revenue is measured net of returns. As a result, we are required to estimate the amount of returns based on the historical data by customer 
and product type, adjusted for forward-looking information.

60

 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest rate risk

Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest 
rates may impact the level of income and expense recorded on our cash equivalents and short-term investments, and the market value of 
all interest-earning assets, other than those which possess a short term to maturity. A 10% change in the interest rate in effect on December 
31, 2018 and December 31, 2019, would not have a material effect on (i) fair value of our cash equivalents and short-term investments 
as the majority of the portfolio have a maturity date of three-months or less, or (ii) interest income as interest income is not a significant 
component of our earnings and cash flow. Management continues to monitor external interest rates and revise the Company’s investment 
strategy as a result.
Foreign currency risk

Our Annual Financial Statements are expressed in U.S. dollars, but we have net assets, liabilities and revenues denominated in other 
foreign currencies, including Canadian dollars and Israeli shekels. As a result, we are exposed to foreign currency translation gains and 
losses.  Revenue  and  expenses  of  all  foreign  operations  are  translated  into  U.S.  dollars  at  the  foreign  currency  exchange  rates  that 
approximate the rates in effect at the dates when such items are recognized. Appreciating foreign currencies relative to the U.S. dollar 
will adversely impact operating income and net earnings, while depreciating foreign currencies relative to the U.S. dollar will have a 
positive impact.
A 10% change in the exchange rates for the Canadian dollar would affect the carrying value of net assets by approximately $175.3 million 
as of December 31, 2019. The same change to exchange rates for the Canadian dollar as of December 31, 2018 would affect the carrying 
value of net assets by approximately $14.9 million. The corresponding impact would be recorded in accumulated other comprehensive 
income. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to 
mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon changes 
in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of operations.

61

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Cronos Group Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cronos Group Inc. (the Company) as of December 31, 2019 and 2018, 
the related consolidated statements of net income (loss) and comprehensive income (loss), changes in shareholders’ equity (deficit), and 
cash flows for each of the years in the three year period ended December 31, 2019, and the related notes (collectively, the consolidated 
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position 
of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the 
three year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), 
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - 
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated 
March 30, 2020, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion 
on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are 
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and 
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error 
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, 
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, 
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting 
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 
statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements 
that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are 
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The 
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, 
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the 
accounts or disclosures to which they relate.

Evaluation of revenue recognition through the wholesale sales channel

As discussed in Notes 2(e), 4 and 30 to the consolidated financial statements, the Company contracts with customers for the sale of dried 
cannabis flower, which represents 63% of revenue or $15,020 thousand in the year ended December 31, 2019. Revenue is recognized at 
the point in time when control is transferred to the customer, which is on shipment or delivery, depending on the contract. Also, as 
discussed in Note 29 to the consolidated financial statements, the Company enters into non-monetary transactions for the simultaneous 
sale of dried cannabis flower and purchase of cannabis resin. 

We identified the evaluation of revenue recognition through the wholesale sales channel as a critical audit matter. The evaluation of bulk 
sales of dried cannabis flower, where the Company also purchases cannabis resin from the customer, required a higher degree of auditor 
judgment. Judgement was required to assess whether such transactions were linked and in the scope of Accounting Standards Codification 
(ASC)  606  Revenue  from  Contracts  with  Customers  or ASC  845  Nonmonetary  Transactions,  and  to  assess  if  the  transactions  had 
commercial substance and resulted in revenue being recognized.

63

The primary procedures we performed to address this critical audit matter included the following. We involved forensic accounting 
professionals with specialized skills and knowledge who assisted in evaluating the Company’s previously disclosed review, involving 
outside  counsel  and  forensic  accountants,  into  financial  and  non-financial  information  related  to  certain  revenue  transactions.  We 
considered the results of the Company’s previously disclosed review in determining our audit procedures. We compared bulk sales of 
dried cannabis flower transactions in the wholesale sales channel to customer contracts, shipment documentation and third party payment 
support. We obtained supplier lists and compared these to wholesale customer lists to identify suppliers to which sales had also been 
made. In all instances of bulk dried cannabis flower sales made to a supplier of goods, we assessed whether revenue should be recognized 
or the sale was a non-monetary transaction, and whether certain revenue transactions had commercial substance.  

Evaluation of the fair value of the brand name intangible asset acquired in the Redwood Holding Group, LLC acquisition on initial 
recognition
As discussed in Note 20 to the consolidated financial statements, the Company acquired all the issued and outstanding shares of Redwood 
Holding Group, LLC, in a business combination for aggregate consideration of $283,300 thousand. The Company recognized $64,000 
thousand of brand intangible asset as a result of this acquisition. 

We identified the evaluation of the fair value of brand name intangible asset acquired in the Redwood acquisition on initial recognition 
as a critical audit matter. The evaluation of the Company’s key assumptions used in the discounted cash flow valuation model, including 
the growth rates, the discount rate, and forecasted royalty income from the acquired brand intangible asset, required a high degree of 
auditor judgment.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over 
the Company’s purchase price allocation process, including controls related to the analysis of key assumptions used in the discounted 
cash flow valuation model. We evaluated the key assumptions used in the discounted cash flow valuation model, including comparing 
growth rates against external analyst expectations for the industry in the United States. We also performed sensitivity analysis on the 
forecasted growth rates and royalty income to assess the impact on the Company’s fair value estimate of the brand name intangible asset. 
We compared a selection of royalty rates of comparable entities used by the Company to determine the royalty rate used in the discounted 
cash flow valuation model to publicly available information. We involved valuation professionals with specialized skills and knowledge 
who assisted in: 

• 

• 

evaluating the discount rate, by comparing it against the internal rate of return, and weighted average cost of capital, and to a 
range that was independently developed using publicly available market data for comparable entities.

evaluating the royalty rate, which was applied against forecasted revenues to calculate forecasted royalty income, using industry 
knowledge, qualitative factors specific to the brand and through consideration of the comparable entities used by the Company 
to determine the royalty rate.

/s/ KPMG LLP

Chartered Professional Accountants, Licensed Public Accountants

We have served as the Company’s auditor since 2018.

Vaughan, Canada

March 30, 2020

64

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Cronos Group Inc.:

Opinion on Internal Control Over Financial Reporting 
We have audited Cronos Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria 
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway 
Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of 
the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based 
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the 
Treadway Commission. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), 
the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of net income 
(loss) and comprehensive income (loss), changes in shareholders’ equity (deficit), and cash flows for each of the years in the three-year 
period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 
30, 2020 expressed an unqualified opinion on those consolidated financial statements. 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a 
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or 
detected on a timely basis. Material weaknesses related to the following were identified:

•  Risk Assessment:  The Company did not appropriately design controls to monitor and respond to changes in its business in 

relation to our transactions in the wholesale market. 

• 

Segregation  of  Duties:  The  Company  did  not  maintain  adequately  designed  controls  on  segregation  of  purchase  and  sale 
responsibilities to ensure accurate recognition of revenue in accordance with GAAP; and 

•  Non-Routine  Transactions:  The  Company’s  controls  were  not  effective  to  ensure  that  non-routine  transactions,  including 
deviations from contractually established sales terms were authorized, communicated, identified and evaluated for their potential 
effect on revenue recognition. 

The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 
consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

The Company acquired four Redwood Holding Group, LLC operating subsidiaries (Redwood) during 2019, and management excluded 
from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, Redwood’s 
internal control over financial reporting associated with total assets of 16.0% and total revenues of 14.2% of the consolidated financial 
statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the 
Company also excluded an evaluation of the internal control over financial reporting of Redwood.

Basis for Opinion 
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of 
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control 
Over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on the Company’s internal control over financial 
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect 
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange 
Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our 
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing 
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the 
assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe 
that our audit provides a reasonable basis for our opinion.

65

Definition and Limitations of Internal Control Over Financial Reporting 

A company’s internal control over financial reporting 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 generally accepted accounting 
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance 
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide 
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally 
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations 
of  management  and  directors  of  the  company;  and  (3)  provide  reasonable  assurance  regarding  prevention  or  timely  detection  of 
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections 
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in 
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Chartered Professional Accountants, Licensed Public Accountants

Vaughan, Canada

March 30, 2020

66

CRONOS GROUP INC. 
CONSOLIDATED FINANCIAL STATEMENTS 
FOR THE YEAR ENDED DECEMBER 31, 2019 AND 2018

Cronos Group Inc.
Consolidated Balance Sheets
As of December 31, 2019 and 2018
(In thousands of U.S. dollars)

Assets
Current assets

Cash and cash equivalents
Short-term investments
Accounts receivable, net of current expected credit loss ("CECL") of $136 and $37 as of December 31,
2019 and 2018, respectively

$

Other receivables
Current portion of loans receivable
Prepaids and other assets
Inventory

Total current assets

Investments in equity accounted investees
Advances to joint ventures
Other investments
Loan receivable
Property, plant and equipment
Right-of-use assets
Intangible assets
Goodwill

Total assets

Liabilities
Current liabilities

Accounts payable and other liabilities
Current portion of lease obligation
Derivative liabilities (Note 28)

Total current liabilities
Due to non-controlling interests
Lease obligation

Total liabilities

Commitments and contingencies (Note 21 & 22)
Shareholders’ equity

$

$

$

Share capital (authorized: 2019 and 2018 – unlimited; issued: 2019 – 348,817,472; 2018 – 178,720,022) $
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)

Total equity attributable to shareholders of Cronos Group
Non-controlling interests
Total shareholders' equity
Total liabilities and shareholders' equity

See notes to consolidated financial statements.

$

67

As of December 31,

2019

2018

1,199,693
306,347
4,638

7,232
4,664
9,395
38,043
1,570,012
557
19,437
—
44,967
161,809
6,546
72,320
214,794
2,090,442

35,301
427
297,160
332,888
1,844
6,680
341,412

561,165
23,234
1,137,646
27,838
1,749,883
(853)
1,749,030
2,090,442

$

$

$

$

$

$

23,927
—
3,052

2,507
230
2,842
7,386
39,944
2,960
4,689
297
—
125,905
125
8,237
1,314
183,471

33,239
30
—
33,269
1,566
87
34,922

175,001
11,263
(27,945)
(9,870)
148,449
100
148,549
183,471

Cronos Group Inc.
Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)
For the years ended December 31, 2019, 2018, and 2017
(In thousands of U.S dollars, except share and per share amounts)

Net revenue, before excise taxes

Excise taxes

Net revenue

Cost of sales
Inventory write-down

Gross profit (loss)
Operating expenses

Sales and marketing
Research and development
General and administrative
Share-based payments
Depreciation and amortization
Repurposing charges

Total operating expenses

Operating loss
Other income (expense)

Interest income (expense)
Financing and transaction costs
Gain on revaluation of derivative liabilities (Note 28)
Gain on revaluation of financial liabilities
Gain on disposal of Whistler Medical Marijuana Company ("Whistler")
Gain on other investments
Share of income (loss) from investments in equity accounted investees

Total other income (expense)
Income (loss) before income taxes
Income tax recovery
Net income (loss)

Net income (loss) attributable to:

Cronos Group
Non-controlling interests

Other comprehensive income (loss)

Foreign exchange gain (loss) on translation
Gain on revaluation and disposal of other investments, net of tax
Unrealized gains reclassified to net income
Total other comprehensive income (loss)

Comprehensive income (loss)
Comprehensive income (loss) attributable to:

Cronos Group
Non-controlling interests

Net income (loss) per share

Basic
Diluted

Weighted average number of outstanding shares

Basic
Diluted

See notes to consolidated financial statements.

68

Year ended December 31,

2019

2018

2017

$

$

$

$

$

$

$

$

$

25,639
(1,889 )
23,750
12,174
29,440
(17,864 )

23,045
12,155
49,372
11,619
2,101
5,328
103,620
(121,484 )

27,982
(32,208 )
1,276,819
197
15,530
747
(2,009 )
1,287,058
1,165,574
—
1,165,574

1,166,506
(932 )
1,165,574

37,687
—
—
37,687
1,203,261

1,204,214
(953 )
1,203,261

3.76
3.33

$

$

$

$

$

$

$

$

$

13,234
(1,113)
12,121
5,908
—
6,213

3,173
1,814
13,447
8,151
969
—
27,554
(21,341)

83
—
—
—
—
164
(723)
(476)
(21,817)
—
(21,817)

(21,636)
(181)
(21,817)

(12,337)
3
—
(12,334)
(34,151)

(33,964)
(187)
(34,151)

(0.13)
(0.13)

$

$

$

$

$

$

$

$

$

3,147
—
3,147
1,573
—
1,574

443
—
4,904
1,931
417
—
7,695
(6,121)

(97)
—
—
—
—
3,746
127
3,776
(2,345)
(862)
(1,483)

(1,483)
—
(1,483)

2,456
415
(12)
2,859
1,376

1,376
—
1,376

(0.01 )
(0.01 )

310,067,179
342,811,992

172,269,170
172,269,170

134,803,542
176,789,161

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Cronos Group Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2019, 2018, and 2017
(In thousands of U.S dollars)

Operating activities
Net income (loss)
Items not affecting cash:
Inventory write-down
Share-based payments
Depreciation and amortization
Share of loss (income) from investments in equity accounted investees
Non-cash repurposing costs
Gain on disposal of Whistler
Gain on revaluation of derivative liabilities (Note 28)
Gain on revaluation of financial liabilities
Gain on other investments
Income tax expense (recovery)
Foreign exchange gain
Non-cash sales and marketing
Non-cash interest
Net changes in non-cash working capital
Cash flows used in operating activities

Investing activities

Purchase of short-term investments, net
Repayment of purchase price liability
Investments in equity accounted investees
Investment in Vivo Cannabis ("Vivo")
Proceeds from sale of other investments
Payment to exercise Vivo warrants
Advances to joint ventures
Purchase of property, plant and equipment, net of disposals
Payment of accrued interest on construction loan payable
Purchase of intangible assets
Acquisition of Redwood
Advances on loans receivable
Proceeds from repayment of loans receivable

Cash flows used in investing activities

Financing activities

Repayment of lease obligations
Proceeds from Altria Investment
Proceeds from exercise of Top-up Rights
Proceeds from exercise of warrants and options
Withholding taxes paid on share appreciation rights
Proceeds from share issuance
Share issuance costs
Proceeds from construction loan payable
Repayment of construction loan payable
Advance under Credit Facility
Repayment of Credit Facility
Repayment of mortgage payable
Transaction costs paid on construction loan payable

Cash flows provided by financing activities

Effect of foreign currency translation on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period

See notes to consolidated financial statements.

Year ended December 31,

2019

2018

2017

$

1,165,574

$

(21,817)

$

(1,483 )

29,440
11,619
3,913
2,009
4,439
(15,530 )
(1,276,819 )
(197 )
(747 )
—
115
410
(25 )
(54,208)
(130,007 )

(299,923 )
—
(1,658 )
—
19,614
—
(15,135 )
(38,664 )
(89 )
(289 )
(224,295 )
(43,337 )
237
(603,539 )

(919 )
1,809,556
67,051
1,455
(915 )
—
(3,722 )
—
(15,971 )
48,715
(48,309 )
—
—
1,856,941
52,371
1,175,766
23,927
1,199,693

$

—
8,151
1,937
723
—
—
—
—
(164)
—
(9)
—
—
3,662
(7,517)

—
—
(480)
—
747
(88)
(5,358)
(88,308)
(143)
(278)
—
—
—
(93,908)

—
—
—
2,612
(16 )
115,510
(7,577)
11,583
—
—
—
—
—
122,112
(4,085)
16,602
7,325
23,927

$

—
1,931
768
(127 )
—
—
—
—
(3,746 )
(862 )
—
—
—
(759 )
(4,278 )

—
(1,997 )
(830 )
(783 )
8,388
(1,749 )
—
(32,926 )
—
—
—
—
—
(29,897 )

—
—
—
1,697
—
38,542
(2,114 )
5,022
—
—
—
(3,084 )
(989 )
39,074
(152 )
4,747
2,578
7,325

$

70

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

1. Background

Cronos  Group  Inc.  (the  “Cronos  Group”  or  the  “Company”)  is  a  corporation  incorporated  on August  21,  2012  under  the  Business 
Corporations Act (Ontario) with principal executive offices at 720 King Street West, Suite 320, Toronto, Ontario, M5V 2T3. The Company’s 
common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker 
symbol “CRON.”

Cronos Group is an innovative global cannabinoid company, with international production and distribution across five continents. The 
company is committed to building disruptive intellectual property by advancing cannabis research, technology and product development 
and is seeking to build an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS™, a global wellness 
platform; two adult-use brands, COVE™ and Spinach™; and two U.S hemp-derived consumer products brands, Lord Jones™ and PEACE
+™.
Cronos Group has established four strategic joint ventures in Canada, Israel, and Colombia. One of these strategic joint ventures, Cronos 
Israel (as defined herein) is considered a subsidiary for financial reporting purposes. The Company also holds approximately 31% of the 
issued capital of Cronos Australia Limited (“Cronos Australia”) as a result of the completion of Cronos Australia’s initial public offering, 
pursuant to which Cronos Australia issued 40 million new shares at an offering price of $0.50 Australian dollar (“A$”) per share. The 
Company accounts for its investment in Cronos Australia under the equity method of accounting. See Note 6, for additional discussion 
regarding the joint ventures and strategic investment.

2. Summary of Significant Accounting Policies 

Basis of Presentation

(a) 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted 
in the United States of America (“U.S. GAAP”). U.S. GAAP requires management to make estimates and assumptions that affect the 
reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the consolidated financial statements and 
the reported amounts of net revenues and expenses during the reporting periods. The accounting policies adopted in the preparation of 
the consolidated financial statements were effective as of January 1, 2019. The Company has early adopted ASU No. 2016-13, Financial 
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which has been issued, but is not yet 
effective. ASU No. 2016-13 requires the Company to recognize the current estimate of all expected credit losses immediately at the point 
a financial asset is originated or purchased.

(b) 

New Segment Structure

The Company undertook a realignment of its management structure along geographic regions in September 2019. As a result, effective 
September 2019, the Company's results are reported through the following operating segments: United States and Rest of World. Prior 
period amounts contained in these consolidated financial statements have been adjusted to conform to the new segment presentation. 
Refer to Note 30 for additional information. 

Basis of Consolidation

(c) 
The accompanying consolidated financial statements include the accounts of the Company, and all entities in which the Company has a 
controlling voting interest or is the primary beneficiary of a variable interest as of and for the fiscal years ended December 31, 2019, 
December 31, 2018 and December 31, 2017. The Company assesses control under the variable interest entity (“VIE”) model to determine 
whether the Company is the primary beneficiary of that entity's operations. If an entity is not deemed to be a VIE, the Company consolidates 
the entity if the Company has a controlling voting interest. Subsidiaries are fully consolidated from the date on which control is transferred 
to the Company. They are deconsolidated from the date that control ceases. Investments in which the Company has the ability to exercise 
significant influence over the operating and financial policies of the investee, but does not have control, are accounted for under the equity 
method of accounting. The Company consolidates the financial results of the following entities, which the Company controls:

Subsidiaries
Cronos Israel G.S. Cultivations Ltd. (i)
Cronos Israel G.S. Manufacturing Ltd. (i)
Cronos Israel G.S. Store Ltd. (i)
Cronos Israel G.S. Pharmacies Ltd. (i)

Jurisdiction of Incorporation
Israel

Israel
Israel

Israel

Incorporation Date
February 4, 2018

September 4, 2018
June 28, 2018

February 15, 2018

Ownership Interest (ii)
70%

90%
90%

90%

(i) 

(ii)

These Israeli entities are collectively referred to as “Cronos Israel.”

“Ownership interest” is defined as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest as 
described herein. 

71

 
Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

In the consolidated statements of net income (loss) and comprehensive income (loss), the net income (loss) and comprehensive income 
(loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of 
Cronos Israel are presented separately in the stockholder's equity (deficit) section of the consolidated balance sheets and consolidated 
statements of stockholders' equity (deficit). All intercompany transactions and balances are eliminated upon consolidation.

Use of Estimates

(d) 
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments 
and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates 
and assumptions include, among other things, valuation of derivative liabilities, fair value of assets and liabilities assumed in business 
combinations, impairment of goodwill, contingent liabilities, inventory write-downs, valuation allowance on deferred income tax assets 
and uncertain tax liabilities. Actual results could differ from those estimates. 

Revenue Recognition

(e) 
The Company's contracts with customers for the sale of dried cannabis, cannabis oil, cannabinoid-derived products and hemp-derived 
personal care products consist of one performance obligation. The Company has concluded that revenue from the sale of these products 
should be recognized at the point in time when control is transferred to the customer, which is on shipment or delivery, depending on the 
contract. Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled 
in exchange for transferring promised goods to a customer. 

Net revenue before excise taxes from sale of goods, as presented in the consolidated statements of net income (loss) and comprehensive 
income (loss), represents revenue from the sale of goods less expected price discounts, and allowances for customer returns. Net revenue 
before excise taxes excludes excise taxes, which the Company pays as principal and excludes duties and taxes collected on behalf of third 
parties. Excise taxes are a production tax classified as government remittances payable, which when applicable, become payable when 
a product is delivered to the customer and are not directly related to the value of revenue.

The Company treats shipping and handling activities as a fulfillment cost, classified as cost of sales. Accordingly, the Company accrues 
all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. Within the Company's Rest of World 
segment, dried cannabis sales outside of Canada may include profit sharing arrangements with distributors which give rise to variable 
consideration. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which 
it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated as the most likely amount, 
based on the Company's historical information, at contract inception.

The Company's payment terms vary by customer and product type. For individual consumer sales, payment is due prior to the transfer 
of control. 

The Company elected to treat the costs incurred to obtain a contract, primarily related to sales commissions, as an expense in the period 
incurred and not an asset to be capitalized, as the amortization period of the related asset would be less than one year. Accordingly, the 
Company will expense the costs to obtain a contract in the period incurred.

(f) 

Investments 

Variable Interest Entities (“VIE”)
A VIE is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated 
financial support or equity investors at risk that lack the ability to control the entity's activities. Variable interests are investments or other 
interests that will absorb portions of a VIE's expected losses or receive portions of the VIE's expected residual returns. The Company 
evaluates  whether  it  is  the  primary  beneficiary  of  the  each  VIE  it  identifies  on  an  ongoing  basis  and  considers  the  impact  of  any 
reconsideration events. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact 
the VIE and holds a variable interest that could potentially be significant to the VIE. To make this determination the Company considers 
both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company consolidates 
the VIE when it is determined that it is the primary beneficiary of the VIE.
Equity Method Investments
The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a 
controlling financial interest, using the equity method. Under the equity method, the Company records its proportionate share of income 
or losses in the consolidated statements of net income (loss) and comprehensive income (loss). If the current fair value of an investment 
falls below its carrying amount, this may indicate that an impairment loss should be recorded. Any impairment losses recognized cannot 
be reversed in subsequent periods.
(g) 

Inventory

Inventory is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants, by-products to be 
extracted, oils, gel caps, tinctures, and boxes. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and 
irrigation, are capitalized into inventory until the time of harvest.

72

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

Inventory is stated at the lower of cost and net realizable value, determined using weighted average cost. Cost includes expenditures 
directly related to manufacturing and distribution of the products. Primary costs include consumables (insect control, fertilizers, soil), 
packaging, shipping, direct labor, overhead, supplies and small tools, and the depreciation of manufacturing equipment and production 
facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, rent, 
utilities, security, and property taxes.

Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of 
completion,  disposal  and  transportation. At  the  end  of  each  reporting  period,  the  Company  performs  an  assessment  of  inventory 
obsolescence to measure inventory at the lower of cost and net realizable value. Factors considered in the determination of obsolescence 
include slow-moving or non-marketable products.
 Definite Life Intangible Assets
(h) 

Intangible assets are recorded at cost less any accumulated amortization and accumulated impairment losses. Intangible assets acquired 
through a business combination are measured at fair value at the acquisition date.
The Company capitalizes certain costs incurred in connection with its enterprise software, which include external direct costs of materials 
and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly 
associated with and who devote time to the development of the software for the function intended. All other costs are expensed as incurred.

Intangible  assets  with  finite  useful  lives  are  amortized  over  their  estimated  useful  lives  using  the  following  methods  and  rates:

Enterprise software

Health Canada licenses
Israeli codes (i)

Method
Double declining

Straight-line

Straight-line

Rate
50%

Useful life of corresponding facilities

Useful life of corresponding facilities

(i) 

The preliminary licenses granted to Cronos Israel by the Medical Cannabis Unit of the Israeli Ministry of Health in early 2017 (the “Israeli Codes”) were transferred 
by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities specified above. 

Amortization begins when assets become available for use. The estimated useful life, amortization method, and rate are reviewed at the 
end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

(i) 

Property, Plant & Equipment

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is computed 
using the straight-line method over the estimated useful lives of the assets as follows:

Building
Furniture and equipment
Computer equipment
Leasehold improvements
Equipment under finance lease

Rate
15 to 25 years
5 to 7 years
Double declining- 50%
Lesser of term of lease and useful life
Lesser of term of lease and useful life

When assets are disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or 
loss is recognized. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which increase productivity or 
extend the useful life of the asset, are capitalized. 
Interest incurred relating to construction or expansion of buildings is capitalized to the construction in progress. The Company ceases 
the capitalization of interest when construction activities are substantially completed and the facility is available for use. At this point, 
construction in progress is transferred to the appropriate asset class. Available for use is defined as the point at which the related building 
receives the requisite regulatory licenses to (i) possess cannabis, (ii) to obtain dried cannabis, fresh cannabis, cannabis plants or cannabis 
plant seeds by cultivating, propagating and harvesting cannabis, and (iii) to produce cannabis, other than obtaining it by cultivating, 
propagating, or harvesting. Depreciation commences at the point the assets are available for use.
(j) 
The Company enters into leases in the normal course of business, primarily for the land-use rights, office premises, and equipment used 
in the production of its products. At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract 
is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for 
consideration. The Company performs an analysis over the classification of the lease agreement as either an operating lease or finance 
lease. 

Leases

73

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

A right-of-use asset and the related lease obligation associated with the lease are recorded at the inception of the lease. The right-of-use 
asset's recorded amount is based on the present value of future lease payments over the lease term at the commencement date plus any 
initial direct costs incurred. If the rate implicit in the lease is not readily determinable for the Company's operating leases, an incremental 
borrowing rate is generally used based on information available at the lease commencement date to determine the present value of future 
lease payments. Subsequent changes to these lease payments due to rate updates are recorded as lease expense in the period incurred. 
Leases with a term of 12 months or less are not recorded on the balance sheet as a lease. 

The right of use asset is subject to impairment testing whenever events or changes in circumstances indicate the carrying value of the 
asset may not be recoverable. The leased asset is amortized over the shorter of the lease term or its estimated useful life if title does not 
transfer to the Company, while the leased asset is depreciated in accordance with the Company's depreciation policy if the title is to 
eventually transfer to the Company.
The Company's lease agreements generally exclude non-lease components. As a result, non-lease components are accounted for separately 
for all classes of assets and expensed as incurred. In addition, the Company's lease agreements do not contain any material residual value 
guarantees or material restrictive covenants. For finance leases, from the commencement date to the earlier of the end of the useful life 
of the right-of-use asset or the end of the lease term, the right of use asset is amortized on a straight-line basis and the interest expense 
is recognized on the lease liability using the effective interest method. For operating leases, lease expense is recognized on a straight-
line basis over the term of the lease and presented as a single charge in the consolidated statements of net income (loss) and comprehensive 
income (loss).

(k) 

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of 
an asset may not be recoverable. The Company groups assets at the lowest level for which cash flows are separately identifiable, referred 
to as an asset group. The Company prepares projected undiscounted cash flow analyses for each asset or asset group. If the sum of the 
undiscounted cash flow is less than the carrying value of the asset or asset group, an impairment loss is recognized equal to the excess 
of the carrying value over the fair value, if any. Impairment losses on assets held for sale are based on the fair value, less costs to sell.

Goodwill and indefinite life intangible assets are not amortized, but rather the Company performs an annual review of both for potential 
impairment in the fourth quarter of each year, and more frequently in the case an event occurs or circumstances change. The Company 
may opt to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is 
less than its carrying amount. In this case, or if a qualitative assessment is not performed, the Company performs a quantitative impairment 
test. The quantitative impairment test consists of two steps. Step 1 requires the Company to compare the carrying value of a reporting 
unit to its fair value. If the carrying value exceeds the fair value, step 2 of the impairment test is performed. Step 2 requires the Company 
to compare the carrying value to the implied fair value and if the carrying value exceeds the implied fair value, an impairment loss equal 
to the excess is recognized.
(l) 

Contingent Liabilities

A contingent liability is recorded when both information available before the consolidated financial statements are issued indicates that 
it is probable that a liability had been incurred at the date of the consolidated financial statements and the amount of loss can be reasonably 
estimated. It must be probable that one or more future events will occur confirming the fact of the loss.

Repurposing Charges

(m) 
The  Company's  repurposing  charges  primarily  include  employee  termination  benefits  and  refurbishment  costs.  The  recognition  of 
repurposing charges requires the Company make certain judgments and estimates regarding the nature, timing, and amount of costs 
associated with the planned activity. To the extent actual results differ from estimates and assumptions, a revision to the estimated liabilities, 
requiring the recognition of additional repurposing charges or the reduction of liabilities already recognized may be required. At the end 
of each reporting period, the Company evaluates the remaining accrued balances to ensure these balances are properly stated and the 
utilization of the reserves are for their intended purpose in accordance with planned activity.
(n) 
Capital stock is presented at the fair value at the time of issuance of the shares issued. Costs related to the issuance of shares are reported 
in equity, net of tax, as a deduction from the issuance proceeds.

Capital Stock

(o) 

Foreign Currency

The Company's functional currency is the Canadian dollar (“C$”). Prior to the year ended December 31, 2019, the Company reported 
its financial results in C$, however following the change in the Company's status from foreign private issuer to a United States (“U.S.”) 
domestic issuer, the financial results are now reported in the U.S dollars (“dollars” or “$”). Functional currencies for the entities in these 
consolidated financial statements are their respective local currencies, including C$, A$ and Israeli New Shekel (“I$”). The assets and 
liabilities of the Company's foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2019 and 2018. 
Transactions affecting the shareholders' equity (deficit) are translated at historical foreign exchange rates. The consolidated statements 

74

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

of net income (loss) and comprehensive income (loss) and the consolidated statements of cash flows of the Company's foreign operations 
are translated into dollars by applying the average foreign exchange rate in effect for the reporting period. The cumulative translation 
adjustments (“CTA”) resulting from translating the consolidated financial statements into their dollar reporting currency are recorded in 
other comprehensive income (loss). 

Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency by applying the foreign exchange 
rate in effect at the balance sheet date. Revenues and expenses are translated using the average foreign exchange rate for the reporting 
period. Realized and unrealized foreign currency differences are recognized in the consolidated statements of net income (loss) and 
comprehensive income (loss).
Transactions in foreign currencies are translated into the functional currency using the exchange rate prevailing at the date of the transaction 
are recorded in other comprehensive income. Exchange differences arising from operating transactions are recorded in net income for 
the period.

Income Taxes

(p) 
The Company accounts for its income taxes using the asset and liability method. Deferred income tax assets and liabilities are determined 
based on the difference between the financial reporting and the tax basis of the assets and liabilities. Deferred income tax assets and 
liabilities are determined based on enacted tax rates and laws for the years in which the differences are expected to reverse.

The Company recognizes uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon examination 
by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being 
sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to 
unrecognized tax liabilities are presented within income tax expense in the consolidated statements of net income (loss) and comprehensive 
income (loss). Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.

Share-Based Compensation

(q) 
As described in more detail below, the Company has four share-based compensation plans under which awards have been made: the 2018 
Stock Option Plan, the 2015 Stock Option Plan (each, as defined below), the Cronos Group Inc. Employment Inducement Award Plan 
#1 (the “Employment Inducement Award Plan”) and a cash-settled deferred share unit (“DSU”) plan for non-executive directors.

Share-based compensation consists of equity-settled share-based awards such as stock options, restricted share units (“RSUs”), warrants 
and share appreciation rights (“SARs”) that are issued to employees, directors, and non-employees. Share-based compensation also 
consists of cash-settled deferred share units (“DSUs”) that are issued to non-executive directors.

Equity instruments granted are initially measured at fair value on the grant date. The fair value of the stock options and warrants are 
determined using the Black-Scholes option pricing model. The fair value of RSUs, SARs and DSUs are determined using the market 
price. This is recognized on a straight-line basis in the consolidated statements of net income (loss) and comprehensive income (loss) 
over the vesting period for employees, and over the contractual term for non-employees. The fair value of the payout of cash-settled 
DSUs is determined at each reporting date based on the fair value of the Company’s common shares at the reporting date and is recorded 
within other liabilities.
The related costs for all equity-settled share-based awards are reflected in additional paid-in capital until the awards are exercised. Upon 
exercise, shares are issued and the amount previously reflected in the additional paid-in capital is, along with any proceeds paid upon 
exercise, credited to share capital. Forfeitures are estimated at the time of grant, and the Company revises these estimates in subsequent 
periods if there is a difference in actual forfeitures and the estimates.
(r) 
The Company presents basic and diluted net earnings (loss) per share data for its common shares. Basic net earnings (loss) per share is 
calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common 
shares outstanding during the period. Diluted net earnings (loss) per share is determined by adjusting the profit or loss attributable to 
common shareholders and the weighted average number of common shares outstanding for the effects of all potentially dilutive common 
shares which comprise warrants, stock options, RSUs, SARs and the Altria Warrant (as defined below). 
(s) 
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash 
with original maturities of three months or less. Cash and cash equivalents include amounts held in dollars, C$ and I$ and security deposits. 
Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

 Net Earnings (Loss) per Share

Cash and Cash Equivalents

(t) 

Derivative Liabilities

Derivative liabilities consist of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights, see Note 28. Derivative liabilities are 
initially recognized at fair value at the date on which the derivative contract was entered into. Any attributable transaction costs are 

75

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

recognized in net income (loss) as incurred. Subsequent to initial recognition, derivative liabilities are measured at fair value at each 
reporting date until settlement with the re-measurement gain or loss being recognized immediately in comprehensive income.

Fair Value Measurements

(u) 
The carrying value of the Company's cash, accounts receivable, other receivables, loan receivable, account payables and other liabilities 
and holdbacks payable approximate fair value, given their short-term nature. 

Cronos Group uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical 
assets and liabilities, noted as Level 1 measurements, and the lowest priority to unobservable inputs, noted as Level 3 measurements. 
The following are the three levels of inputs used to measure fair value: 

•  Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets and liabilities. 
•  Level 2 – valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or 

liability, either directly or indirectly. 

•  Level 3 – valuation techniques using the inputs for the asset or liability that are not based on observable market data.

The Company's policy for determining when transfers between levels of the fair value hierarchy occur is based on the date of the event 
or changes in circumstances that caused the transfer.

(v) 

Acquisitions 

The accounting basis for each acquisition is dependent on whether the integrated set of assets and activities acquired constitutes a business. 
A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The cost 
of acquisition is allocated to the assets acquired on a relative fair value basis. No goodwill is recognized in an asset acquisition. If it is 
determined that a business is not acquired, the transaction is accounted for as an asset acquisition and the relevant values are finalized 
prior to the next reporting period. On the other hand, when a business is acquired, the acquisition method of accounting in accordance 
with Accounting Standards Codification (“ASC”) 805 is applied, which requires that once control of the business is obtained, the assets 
and liabilities of the acquired business, including amounts attributable to non-controlling interests, be recorded at their respective fair 
values as of the date of acquisition. Any excess of purchase consideration over the net fair value of tangible and identified intangible 
assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions, including fees for accounting, legal, 
professional consulting and valuation specialists, are expensed as incurred. Purchase price allocations may be preliminary and, during 
the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments 
to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

For business combinations achieved in stages, the Company’s previously held interest in the acquiree is remeasured at its subsequent 
acquisition date fair value, with the resulting gain or loss recorded in the consolidated statements of net income (loss) and comprehensive 
income (loss). For a pre-existing relationship between the Company and acquiree that is not extinguished on the business combination, 
such a relationship is considered effectively settled as part of the business combination even if it is not legally cancelled. At the acquisition 
date, it becomes an intercompany relationship and is eliminated upon consolidation. 

Contingent consideration in a business combination is initially measured at fair value. Subsequently all liability classified as contingent 
consideration is remeasured at fair value at each reporting period until the contingency is resolved and any change in the fair value 
following the date of acquisition is recorded in the consolidated statements of net income (loss) and comprehensive income (loss). All 
equity classified as contingent consideration is not remeasured and its subsequent settlement is accounted for within equity.

3. New Accounting Pronouncements

Adoption of new accounting pronouncements

(a) 
Leases:
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and all related ASU 
amendments (collectively “ASU No. 2016-02”), which requires entities to recognize lease assets and lease liabilities on the balance sheet 
and disclose key information about leasing arrangements. The Company applied the guidance retrospectively at the beginning of the 
period of adoption, and the Company recognized the cumulative effect of initially applying ASU No. 2016-02 as an adjustment to the 
accumulated deficit as of January 1, 2019. As a result, comparative periods prior to adoption will continue to be presented in accordance 
with prior lease guidance, including disclosures. The Company has applied the following practical expedients:

(i) 

(ii) 

The  Company  used  hindsight  in  determining  the  lease  terms  and  assessing  impairment  of  right-of-use  assets  when 
transitioning to ASU No. 2016-02 using its actual knowledge and current expectation as of the effective date.
The Company has elected not to assess whether any land easements existing or entered into prior to the adoption of ASU 
No. 2016-02 are, or contain, leases in accordance with ASU No. 2016-02.

76

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

(iii) 

On transition to ASU No. 2016-02, the Company elected to apply the practical expedient to grandfather the assessment 
of which transactions are leases. The Company applied ASU No. 2016-02 only to contracts that were previously identified 
as leases. Contracts that were not identified as leases previously were not reassessed for whether there is a lease. The 
Company applied the definition of a lease under ASU No. 2016-02 to contracts entered into or changed on or after January 
1, 2019.

The impact of the adoption was not material to the Company’s consolidated financial statements. As a result of the adoption, the Company, 
as the lessee, recorded right-of use assets of $1,492 and lease liabilities of $1,198 for its leases at January 1, 2019. The Company’s finance 
leases were not material for any of the periods presented. The Company did not identify an impact from the initial application of ASU 
No. 2016-02 to the accumulated deficit as at January 1, 2019. 
The following table summarizes the impacts of adopting ASU No. 2016-02 on the Company’s consolidated financial statements as of 
the adoption date of January 1, 2019.

As of January 1, 2019
Right-of-use assets
Current lease liabilities
Non-current lease liabilities

$

Financial instrument - credit losses:

As previously reported

Adjustments

$

159
30
87

1,333
222
1,111

As restated under ASU No. 2016-02
1,492
$
252
1,198

On January 1, 2019, the Company early adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of 
Credit Losses on Financial Instruments and all related ASU amendments (collectively “ASU No. 2016-13”). ASU No. 2016-13 requires 
the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions 
and reasonable and supportable forecasts. Adoption of ASU No. 2016-13 requires organizations to use forward-looking information to 
better formulate their credit loss estimates. 

The Company has applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative 
effect of initially applying the impairment standard as an adjustment to opening accumulated deficit in the period of initial application. 
There was no adjustment to the Company’s opening accumulated deficit in the period as there were no incremental impairment losses as 
a result of the early adoption of ASU No. 2016-13 as of the date of initial application.

(b) 

New accounting pronouncements not yet adopted

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint 
Ventures (Topic 323), and Derivatives and Hedging (Topic 815). ASU No. 2020-01 clarifies the interaction of accounting for the transition 
into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward 
contracts to acquire investments. The guidance in ASU No. 2020-01 is effective for annual and interim periods beginning after December 
15, 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact it may have on its 
consolidated financial statements. 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying 
the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application 
of U.S. GAAP-related to changes in enacted tax laws or rates and employee stock option plans. ASU No. 2019-12 is effective for annual 
and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect of 
adopting this ASU on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value 
Measurement (Topic 820) (“ASU No. 2018-13”). ASU No. 2018-13 adds, modifies, and removes certain fair value measurement disclosure 
requirements. ASU No. 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. 
The Company’s adoption of ASU No. 2018-13 is not expected to have a material impact on its consolidated financial statements.
In August  2018,  the  FASB  issued ASU  No.  2018-15,  Intangibles  –  Goodwill  and  Other  Internal-use-software  (Subtopic  350-40): 
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 
2018-15”). ASU No. 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service 
contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. The guidance in ASU 
No. 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company’s 
adoption of ASU No. 2018-15 is not expected to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill 
Impairment (“ASU No. 2017-04”). ASU No. 2017-04 eliminates step 2 from the goodwill impairment test and instead requires an entity 
to measure the impairment of goodwill assigned to a reporting unit if the carrying value of assets and liabilities assigned to the reporting 

77

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

unit, including goodwill, exceeds the reporting unit’s fair value. The guidance in ASU No. 2017-04 is effective for annual and interim 
goodwill tests completed by the Company beginning on January 1, 2020. After the adoption of this standard, which will be applied 
prospectively, the Company will follow a one-step model for goodwill impairment. The Company’s adoption of ASU No. 2017-04 is not 
expected to have a material impact on its consolidated financial statements.

4. Revenues from Contracts with Customers

On January 1, 2018, Cronos Group adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes 
principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s 
contracts with customers. Cronos Group elected to apply the guidance using the modified retrospective transition method. Cronos Group 
disaggregates net revenues based on product type. For further discussion, see Note 30. Receivables were $4,638 at December 31, 2019
(2018 – $3,052). The Company recorded a CECL of $136 as of December 31, 2019 (2018 – $37). 

Cronos Group offers discounts to customers for prompt payment and calculates cash discounts as a percentage of the list price based on 
historical experience and agreed-upon payment terms. Cronos Group records an allowance for cash discounts, which is included as a 
contra-asset against receivables on the Company’s consolidated balance sheets.

Revenue is measured net of returns. As a result, the Company is required to estimate the amount of returns based on the historical data 
by customer and product type, adjusted for forward-looking information. This is included in other liabilities on the Company’s consolidated 
balance sheets. The Company estimates sales returns based principally on historical volume and return rates, as a reduction to revenues. 
The difference between actual sales and estimated sales returns is recorded in the period in which the actual amounts become known. 
These differences, if any, have not had a material impact on the Company’s consolidated financial statements. 

Upon return, products can be extracted from dried cannabis, resold, or destroyed depending on the nature of the product. The Company 
has assessed that the amount recoverable is immaterial. 

5. Inventory

Inventory is comprised of the following items:

Raw materials

Work-in-progress – dry cannabis

Work-in-progress – cannabis extracts
Finished goods – dry cannabis

Finished goods – cannabis extracts

Supplies and consumables

Total

As of December 31,

2019

2018

995

$

11,538

17,975

1,798

2,624

3,113
38,043

$

2,577

1,596

—
1,502

1,123

588

7,386

$

$

Inventory is written down for any obsolescence or when the net realizable value of inventory is less than the carrying value. For the year 
ended December 31, 2019, the Company recorded write-downs related to inventory of $29,440, including $1,940 related to the repurposing 
of the Peace Naturals Campus. Refer to Note 23 for additional information. 
There were no inventory write-downs in 2018 and 2017.

78

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

6. Investments 

(a) 

Variable Interest Entities

The Company holds variable interests in Cronos Growing Company Inc. (“Cronos GrowCo”) and MedMen Canada Inc. (“MedMen 
Canada”). 

Cronos  GrowCo  is  a  joint  venture  incorporated  under  the  Canada  Business  Corporations Act  (“CBCA”)  on  June  14,  2018  with  the 
objective of building a cannabis production greenhouse, applying for cannabis licenses under the Cannabis Act, and growing, cultivating, 
extracting, producing and selling cannabis in accordance with such licenses. Cronos Group holds variable interests in Cronos GrowCo 
through its ownership of 50% of Cronos GrowCo’s common shares and senior secured debt in Cronos GrowCo. The Company has also 
agreed  to  purchase  a  minimum  amount  of  Cronos  GrowCo’s  cannabis  product  annually,  subject  to  Cronos  GrowCo’s  receipt  of  all 
applicable licenses and permits. Cronos GrowCo’s economic performance is driven by the quantity and strains of cannabis grown. The 
joint venture partners mutually determine the quantity and strains of cannabis grown. 

MedMen Canada is a joint venture incorporated under the CBCA on March 13, 2018, with the objective of the retail sale and marketing 
of cannabis products in Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 
20 years. Cronos holds variable interests in MedMen Canada through its ownership of 50% of MedMen Canada’s common shares and 
other subordinated debt in the entity. MedMen Canada’s economic performance is driven by the quantity and strains of cannabis sold. 
Subject to applicable law, the joint venture partners mutually determine the quantity and strains of cannabis to be sold in MedMen Canada’s 
retail stores, if and when stores are opened. 

NatuEra is a joint venture registered in Luxembourg with the objective of cultivating and commercializing medical cannabis to serve the 
export market. Cronos holds variable interests in NatuEra through its ownership of 50% of NatuEra’s common shares and other debt in 
the entity. NatuEra’s economic performance is driven by the quantity and strains of cannabis to be grown. The joint venture partners 
mutually determine the quantity and strains of cannabis grown. 

The Company’s investments in Cronos GrowCo and MedMen Canada are exposed to economic variability from each entity’s performance, 
however the Company does not consolidate the entities as it does not have the power to direct the activities that most significantly impact 
the joint ventures’ economic performance; thus, Cronos Group is not considered the primary beneficiary of the entity. These investments 
are accounted for as equity method investments classified as Investments in Equity Accounted Investees in the consolidated balance 
sheets. 
(b) 

Equity Method Investments 

Cronos Australia

Cronos GrowCo

MedMen Canada

NatuEra

Balance at December 31, 2019

Cronos Australia

Cronos GrowCo
MedMen Canada

Balance at December 31, 2018

Other Net Assets (Liabilities)

Maximum Exposure to Loss

10,900

$

3,091

(199)
(358)
13,434

(737)
(50)
(257)
(1,044)

$

$

$

1,355

20,700

642

4,888
27,585

1,051
3,068
1,450
5,569

$

$

$

$

Refer to Note 7 for advances to the joint ventures included in the investment in equity accounted investees.

79

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

As of January 1, 2018
Capital contributions

Share of net income (loss)
Advances to joint ventures applied
to (recovered from) carrying
amount of investments

Change due to currency translation

As of December 31, 2018

Capital contributions (disposals)

Share of net income (loss)

Advances to joint ventures applied
to (recovered from) carrying
amount of investments

Change due to currency translation

As of December 31, 2019

$

$

$

$

Whistler (i)

MedMen
Canada

Cronos
GrowCo

Cronos 
Australia (ii)

NatuEra

3,028

$

— $

— $

— $

— $

—
178
—

78
(213)
128

77
(100)
21

325
(588)
251

—
—
—

$

$

(246)
2,960

(3,073)
29
—

7
— $

— $
35
(35)

2
— $

$

1,658
(167)
(22)

12
— $

— $

(1,101)
779

—
— $

— $

(805)
224

Total
3,028

480
(723)
400

(225)
2,960

(1,415)
(2,009)
946

84

—

32

— $

— $

1,501

$

(24)
(346)

$

(17)
(598)

$

75

557

(i) 

(ii) 

Whistler was incorporated in British Columbia, Canada and is a license holder under the Cannabis Act (Canada) with production facilities in British Columbia, 
Canada. Although the Company held less than 20% of the ownership interest and voting control of Whistler, the Company had the ability to exercise significant 
influence through its power to elect board members. The Company fully divested its investment in Whistler during the three months ended March 31, 2019. See 
Note 9.

Cronos Australia was a joint venture incorporated under the Corporations Act 2001 (Australia) on December 6, 2016 and was an unconsolidated VIE upon initial 
recognition. On October 25, 2019, Cronos Australia issued 40 million new shares in an initial public offering at an offering price of A$0.50 per share. Cronos’ 
ownership in Cronos Australia decreased from 50% to 31% on November 7, 2019 when Cronos Australia began trading on the Australian Securities Exchange. 
This resulted in a reconsideration event, which required the reassessment of the Company’s VIE conclusion. Upon reconsideration, the Company determined that 
the entity was no longer a VIE as of December 31, 2019 and is now reported under the equity method.

The following is a summary of financial information for the Company’s equity method investments as of and for the year ended December 
31:

2019

2018

Current assets

Non-current assets

Current liabilities

Non-current liabilities

Revenue
Gross profit
Net income (loss)

$

23,200

76,212

52,796

33,189

52
—
(2,048)

7,121

27,129

3,746

13,201

5,344
—
(874)

$

80

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

7. Advance to Joint Ventures 

MedMen 
Canada(i)

Cronos GrowCo

Cronos 
Australia(ii) 

NatuEra

Total

As of January 1, 2018

Advances (repayments)

Advances to joint ventures recovered from
(applied to) carrying amount of investments

Changes due to currency translation

As of December 31, 2018

Advances (repayments)

Advances to joint ventures recovered from
(applied to) carrying amount of investments

Changes due to currency translation

As of December 31, 2019

$

$
$

$

— $

— $

— $

— $

1,309

(128)

63
1,244
(852)

35

44
471

$
$

$

3,127
(21)

(136)

2,970
15,494

$
$

22

480

18,966

$

500
(251)

226

475
274
(779)

$
$

30

— $

—

—

—
— $
219
$
(224)

5
— $

—

4,936

(400)

153
4,689
15,135

(946)

559
19,437

(i) 

(ii) 

Advance is unsecured, non-interest bearing, and there are no terms of repayment. Refer to Note 6 for details regarding the Company’s investments in MedMen.

A$1,500 is governed by an unsecured loan bearing interest at a rate of 12% per annum, calculated and compounded daily, in arrears, on the amounts advanced 
from the date of each advance. The loan is due on January 1, 2022. If the loan is overdue, the outstanding amount bears interest at an additional 2% per annum. 
Refer to Note 6 for details regarding the Company’s investment in Cronos Australia.

81

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

8. Loan Receivable 

Current portion

NatuEra series A loan (i)
Evergreen loan (ii)
Add: Accrued interest

Total current portion of loans receivable

Long term portion

Cronos GrowCo credit facility (iii)
2645485 Ontario Inc. (“Mucci”) promissary note (iv)
Add: Accrued interest

Total long term portion of loans receivable

Total loans receivable

$

$

As of December 31,

2019

2018

4,575

$

—
89

4,664

31,678

12,587
702

44,967

49,631

$

—

194
36

230

—

—
—

—

230

(i)

(ii)

(iii)

(iv)

On September 27, 2019, the Company entered into a master loan agreement (the “Series A Loan”) for $4,575 with NatuEra with effect as of August 29, 2019. The 
total aggregate principal amount of the Series A Loan is $9,150, of which the Company has committed to fund 50% and its joint venture partner has committed to 
fund the remaining 50%. Outstanding principal amounts bear interest at a fixed annual rate of 5.67% with a maturity date of August 29, 2020.

On June 9, 2014, the Company entered into a general service agreement with Evergreen Medicinal Supply Inc. (“Evergreen”) for $194. The loan is due on
demand and accrued interest at a fixed annual rate of 8%, up to March 31, 2017, calculated and payable annually in arrears.  During the twelve months ended
December 31, 2019, the Company received cash repayment of $230 on the outstanding balance from Evergreen, net of $36 of accrued interest.

On August 23, 2019, the Company entered into a credit agreement with Cronos GrowCo in respect of a C$100,000 secured non-revolving term loan credit facility 
(the “GrowCo Credit Facility”). The GrowCo Credit Facility will mature on March 31, 2031 and will bear interest at varying rates based on the Canadian prime rate 
as announced by the Bank of Montreal. Interest began to accrue as of the closing date of the GrowCo Credit Facility and is payable on a quarterly basis until maturity, 
except that any interest accrued prior to March 31, 2021 will be payable not later than December 31, 2021. Repayment of principal will be made on a quarterly basis 
commencing on March 31, 2021. The credit facility is secured by substantially all present and after acquired property of Cronos GrowCo and its subsidiaries. Mucci, 
the other 50% shareholder of Cronos GrowCo, has provided a limited recourse guarantee in favour of Cronos GrowCo, secured by Mucci's shares in Cronos GrowCo. 
As at December 31, 2019, Cronos GrowCo Credit Facility had drawn $31,678 from the credit facility.

On June 28, 2019, the Company entered into a promissory note receivable agreement (the “Mucci Promissory Note”) for C$16,350 with Mucci. The outstanding
principal amount of the Mucci Promissory Note bears interest at 3.95% annually and is due within 90 days of demand. The Company does not intend to demand
the loan within 12 months. Interest accrued under the Mucci Promissory Note until July 1, 2021 is payable by way of capitalization on the principal amount and
interest thereafter must be paid in cash on a quarterly basis. The Mucci Promissary Note is secured by a general security agreement covering all the assets of
Mucci.

82

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

9. Other Investments 

Other investments consist of investments in common shares and warrants of several companies in the cannabis industry. Canopy and 
Vivo Cannabis shares were the only investments quoted in an active market as of the relevant period end date and, as a result, had a 
reliably measurable fair value as of such period end dates. 
The gains (losses) recognized upon the increase (decrease) in the fair value of other investments were as follows:

Gain recognized in other comprehensive income (loss) before taxes

Canopy Growth Corporation (“Canopy”) (i)

The balance of other investments were as follows: 

Fair value through profit or loss investment

Canopy (i)

$

$

$

$

Year ended December 31,

2019

2018

2017

— $
— $

— $
— $

469
469

As of December 31,

2019

2018

2017

— $

— $

297

297

The gains (losses) recognized in net income (loss) related to other investments were as follows: 

Year ended December 31,

2019

2018

Gain recognized in net income (loss)

Canopy (i)
Vivo Cannabis - shares (ii)
Vivo Cannabis - share warrants (ii)

  The Hydropothecary Corporation (“Hydropothecary”) (iii)
  Aurora Cannabis Inc. (“Aurora”) (iv)

$

$

51

—

—

—

696

747

$

$

166
(173)
171

—

—

$

$

$

—

—

2017

27

3,208

4

507

—

164

$

3,746

(i) 

(ii) 

(iii)

(iv) 

During the year ended December 31, 2019, the Company sold all of its shares of Canopy (2018 – 18,436,000 and 2017 – 7,374,000) for proceeds of $355 (2018
– $530; 2017 – $68). Upon adoption of ASU 2016-01 during the year ended December 31, 2018, the gains and losses on the Canopy investment were reclassified 
from fair value through other comprehensive income to fair value through net income.

During the year ended December 31, 2017, ABcann completed a reverse takeover with Panda Capital Inc. As a result of this transaction, ABcann began trading 
on the TSX. The Company subscribed for additional shares of ABcann of $808 and sold 8,770,001 shares of ABcann for proceeds of $7,602 during the year ended 
December 31, 2017. 

AbCann changed its name to Vivo Cannabis (“Vivo”) during 2018. During the year ended December 31, 2018, the Company exercised 182,927 share warrants 
for aggregate consideration of $87 for additional shares of Vivo. During the year ended December 31, 2018, the Company sold all 182,927 shares of Vivo for 
proceeds of $216.

Upon adoption of ASU 2016-01 during the year ended December 31, 2018, the gains and losses on the Vivo Cannabis shares investment were reclassified from 
fair value through other comprehensive income to fair value through net income.

During the year ended December 31, 2017, BFK Capital Corp. acquired all of the outstanding shares of Hydropothecary (currently operating as HEXO Corp. and 
trading as TSX: HEXO). As a result of this transaction, Hydropothecary executed a 6:1 stock split. During the year ended December 31, 2017, the Company sold 
all 550,002 shares of Hydropothecary for proceeds of $719. The cumulative gain previously recognized as other comprehensive income on these shares was 
reclassified to income during 2017. 

In connection with the Company’s investment in Whistler transaction described in Note 6, the Company received 2,524,341 common shares of Aurora. During 
the year ended December 31, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $19,299.

83

 
 
 
Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

10. Accumulated Other Comprehensive Income (Loss) 

The following is a continuity schedule of accumulated other comprehensive income (loss):

Net unrealized gain (loss) on revaluation and disposal of other
investments

Balance at January 1
Cumulative effect from adoption of ASU 2016-01

Net unrealized (loss) gain
Reclassification of net (gain) loss to net income

Balance at December 31

Net foreign exchange gain (loss) on translation of foreign operations

Balance at January 1

Net unrealized (loss) gain

Balance at December 31

Total other comprehensive income (loss)

11. Leases 

2019

2018

2017

$

$

5
—

—
—

5

(9,875)
37,708

27,833

27,838

$

$

446
(444)
3
—

5

2,456
(12,331)
(9,875)
(9,870)

$

$

43
—

415
(12)

446

—

2,456

2,456

2,902

The Company has entered into leases primarily for the land-use rights, office premises and equipment used in the production of cannabis, 
hemp and related products. The Company’s leases have terms which range from three years to nine years, excluding land use rights, 
which generally extend over 15 years. These leases often include options to extend the term of the lease for up to 10 years. When it is 
reasonably certain that the option will be exercised, the impact of the option is included in the lease term for purposes of determining 
total future lease payments. 

Operating leases greater than one year are included in right-of-use assets and operating lease liabilities. Finance leases are included in 
property, plant and equipment on the Company’s consolidated balance sheet. 

The Company’s finance leases were not material for any of the periods presented. 

Lease cost

Operating lease cost

Short-term lease cost

Total lease cost

Weighted-average remaining lease term – operating leases
Weighted-average discount rate – operating leases

Year ending December 31, 2019

$

$

760

373
1,133

5
12%

84

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

12. Loans Payable 

On August 23, 2017, Peace Naturals, as borrower, signed a construction loan agreement with Romspen Investment Corporation as lender, 
to borrow C$40,000 ($31,860), to be funded by way of multiple advances. The aggregate advances were limited to C$35,000 ($27,877) 
until the lender received an appraisal valuing the property in British Columbia at an amount of not less than C$8,000 ($6,372). The loan 
bore interest at a rate of 12% per annum, calculated and compounded monthly, in arrears, on the amounts advanced from the date of each 
advance. The term of the loan was two years, with the borrower’s option to extend for another twelve months. 
As at December 31, 2018, C$20,951 ($15,625) was outstanding relating to the construction loan payable, including accrued interest of 
C$121 ($89) and net of transaction costs of C$481 ($353), in addition to C$7,887 ($5,783) of holdback payable relating to the loan. This 
is included within the balance of Accounts payable and other liabilities.

On January 23, 2019, the Company 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 C$65,000 ($48,715) secured non-revolving term loan credit facility (the 
“Credit Facility”). The loan was guaranteed by the Company’s wholly owned Canadian subsidiaries and secured by substantially all 
present and after-acquired property of the Company and its wholly owned Canadian subsidiaries. The Company used the funds available 
under the Credit Facility to fully repay the construction loan payable, consisting of C$21,311 ($15,971) in loan principal and C$275
($206) in accrued interest and fees, calculated for the period from January 1, 2019 to January 22, 2019. 

On March 8, 2019, the Credit Facility was fully repaid. In connection with the Credit Facility, the Company incurred financing costs of 
C$523 ($395) which were expensed upon repayment of the Credit Facility.

As at December 31, 2019, the balances of construction loan payable and holdback payable are both $nil.

13. Property, Plant and Equipment 

Property, plant and equipment, net consisted of the following

Cost

Land
Building

Furniture and equipment

Computer equipment
Leasehold improvements

Construction in progress
Less: accumulated depreciation and amortization

Balance at December 31

As of December 31,

2019

2018

$

$

$

3,727
150,324

10,156

687
2,789

3,569

(9,443)

161,809

$

2,451
15,875

4,788

340
1,161

103,728

(2,438)

125,905

Depreciation  expense  included  in  costs  of  sales  relating  to  manufacturing  equipment  and  production  facilities  for  the  year  ended 
December 31, 2019 was $1,812 (2018 – $374; 2017 – $351). Depreciation expense included in operating expenses related to general 
office space and equipment for the year ended December 31, 2019 was $1,455 (2018 – $423; 2017 – $417). The remaining depreciation 
is included in inventory. 
For the year ended December 31, 2019 there is $nil (2018 – $89) of capitalized interest included in construction in progress. 

85

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

14. Intangible Assets and Goodwill  

(a) 

Intangible Assets

Intangible assets are comprised of the following items: 

Software
Health Canada licenses
Lord JonesTM brand
Trademarks
Israeli Codes (i)

Weighted Average
Amortization
Period (in years)

N/A $
17

N/A
N/A

25

2019

Accumulated
Amortization
202
$
976

$

—
—

4

Cost

541
8,627

64,000
36

298

As of December 31,

Net

339
7,651

64,000
36

294

$

Cost

264
8,217

—
—

274

2018

Accumulated
Amortization
53
$
465

$

—
—

—

Net

211
7,752

—
—

274

$

73,502

$

1,182

$

72,320

$

8,755

$

518

$

8,237

(i) 

The preliminary licenses granted to Kibbutz Gan Shmuel (the Cronos Israel joint venture partner) by the Medical Cannabis Unit of the Israeli Ministry of Health 
in early 2017 (the “Israeli Codes”) were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities 
specified above.

The aggregate amortization for the period was $646 (2018 – $546; 2017 – $nil). Intangible asset additions in 2019 included the Lord 
JonesTM brand for $64,000. There were no disposals of intangible assets in 2019.

The amortization expense for the next five years on intangible assets in use is estimated to be as follows: 2020 – $531; 2021 – $520; 
2022: $496; 2023 – $480; 2024 – $479. 

Additions

— $
—
213,414
213,414

$

Effect of CTA
15
51
—
66

As of
December 31,
2019

$

$

302
1,078
213,414
214,794

(b) 

Goodwill

OGBC
Peace Naturals
Redwood

As of
January 1,
2018

$

$

312
1,114
—
1,426

$

$

Additions

Effect of CTA
(25 )
(87 )
—
(112)

— $
—
—
— $

As of
December 31,
2018

$

$

287
1,027
—
1,314

$

$

86

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

15. Capital Stock 

The Company is authorized to issue an unlimited number of no par value common shares.
The holders of the common shares are entitled to receive dividends, which may be declared from time to time, and are entitled to one
vote per share at shareholder meetings of the Company. All common shares are ranked equally with regards to the Company’s residual 
net assets.
The following is a summary of common shares issued:

Bought deal offering
Private placement – 2017

Altria investment
Redwood acquisition

Private placement – 2019

2019

2018

2017

—
—

149,831,154
5,086,586

856,017
155,773,757

15,677,143
—

—
—

—
15,677,143

13,181,190
6,671,111

—
—

—
19,852,301

During the year ended December 31, 2019, the Company issued 149,831,154 common shares to Altria for aggregate gross proceeds of 
$1,809,556, net of issuance costs of $3,722. The gross proceeds were first allocated to the derivative liabilities issued in connection with 
the Altria Investment, and the residual of $248,302 was allocated to share capital. Pursuant to the Altria Investment, the Company incurred 
transaction costs of $25,223, of which $3,642 was allocated to share capital and $21,581 to the derivative liabilities based on the relative 
fair values assigned to the respective components. Refer to Note 28 for additional information.

During the year ended December 31, 2019, the Company issued 5,086,586 common shares with a fair value of $56,109 related to the 
acquisition of certain subsidiaries of Redwood Holding Group, LLC (collectively, “Redwood”). Refer to Note 20 for additional information.

During the year ended December 31, 2019, the Company also issued 856,017 common shares to an accredited investor in a private 
placement (“Private Placement - 2019”) in reliance on Section 4(a)(2) of the Securities Act in connection with the use of certain publicity 
rights in brand development. The common shares vest in three equal installments on each of (a) January 31, 2020, (b) June 23, 2021; and 
(c) December 23, 2022. The issuance did not involve a public offering and was made without general solicitation or advertising. The 
total fair value of the consideration paid for the issuance of such common shares was approximately $6,000. The fair value of the shares 
was calculated using the ten-day volume weighted average price per share of the Company’s common shares on Nasdaq. 

During the year ended December 31, 2018, the Company issued 15,677,143 (2017 – 13,181,190) common shares for aggregate gross 
proceeds of $115,510 (2017 – $26,382) through bought deal offerings, net of issuance costs of $7,577 (2017 – $2,091).

During the year ended December 31, 2017, the Company issued 6,671,111 common shares for aggregate gross proceeds of $2,160 through 
private placements, net of issuance costs of $23.
There were no share repurchases during the year ended December 31, 2019, 2018 or 2017.

16. General and Administrative Expenses 

General and administrative expense are comprised of the following items:    

Salaries and wages
Professional and consulting

Office and general
Other

Total

Year ended December 31,

2019

2018

2017

17,829
15,369

13,407
2,767

49,372

$

$

$

4,294
5,242

3,713
198

13,447

$

989
2,197

1,236
482

4,904

$

$

87

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

17. Share-based Payments

(a)  Warrants
The following is a summary of the changes in warrants from January 1, 2017 to December 31, 2019:

Balance at January 1, 2017
Exercise of warrants
Expiry of warrants

Balance at December 31, 2017

Exercise of warrants
Expiry of warrants

Balance at December 31, 2018

Exercise of warrants

Balance at December 31, 2019

Weighted average exercise price (C$)
0.24
0.23
0.70
0.24

$

$

$
$

$

0.14
0.08

0.26
0.26

0.26

$
$

$
$

$

Number of warrants

45,885,172
(7,211,308)
(19,210)
38,654,654

(13,114,336)
(82,695)

25,457,623
(7,390,961)

18,066,662

As of December 31, 2019, the Company had outstanding warrants as follows. Refer to Note 28 on derivative liabilities for disclosure of 
the Altria Warrant. 

Grant Date
October 8 – 28, 2015

Expiry date
October 8 – 28, 2020

May 13 – 27, 2016

May 13 – 27, 2021

Number of warrants

2,976,610

15,090,052

Weighted average exercise price (C$)
0.31

$

18,066,662

$

0.25

0.26

(b) 

Stock options
(i)  Stock option plans

The Company adopted an amended and restated stock option plan dated May 26, 2015 (the “2015 Stock Option Plan”) which was 
approved by shareholders of the Company at the annual general meeting of shareholders held on June 28, 2017. The 2015 Stock Option 
Plan allowed the Board to award options to purchase shares to directors, officers, key employees and service providers of the Company. 
As of December 31, 2019, the 2015 Stock Option Plan has 12,332,215 Company common shares issued under the plan. As of December 31,
2019, the total shared-based compensation expense associated with the 2015 Stock Option Plan was $7,411 (2018 – $8,062; 2017 –
$1,931). As of June 28, 2018, no further awards will be granted under the 2015 Stock Option Plan; however, shares may be purchased 
via option exercise by the holders of any outstanding options previously issued under the 2015 Stock Option Plan. 
On June 28, 2018, the shareholders of the Company approved a new stock option plan (the “2018 Stock Option Plan”). Upon the approval 
of shareholders of the 2018 Stock Option Plan, the Company discontinued grants under the 2015 Stock Option Plan, and options then 
outstanding under the 2015 Stock Option Plan remain outstanding and either may be exercised, expire or otherwise terminated in accordance 
with their terms. As of December 31, 2019, options to purchase 1,817,287 Company common shares were outstanding under the 2018 
Stock Option Plan. On November 12, 2019, the Board approved an amendment to the 2018 Stock Option Plan, effective as of January 
1, 2020, to set the maximum number of the Company’s common shares issuable under the 2018 Stock Option Plan equal to the lesser of 
(i) 34,881,747 and (ii) 10% of the number of issued and outstanding Company common shares on a non-diluted basis at any time (which, 
as of December 31, 2019, was 34,881,747). For the year ended December 31, 2019, the total stock-based compensation expense associated 
with the 2018 Stock Option Plan was $2,850 (2018 – $89).
The  2018  Stock  Option  Plan  authorizes  the  award  of  options  to  directors,  officers,  key  employees  and  service  providers  (including 
consultants) of the Company. Shares subject to awards granted under the 2018 Stock Option Plan that expire or terminate without being 
exercised in full, or that are paid out in cash rather than in shares, do not reduce the number of shares available for issuance under the 
2018 Stock Option Plan. Additionally, shares become available for future grant under the 2018 Stock Option Plan if they were issued 
under the 2018 Stock Option Plan and the Company repurchases them or they are forfeited. This includes shares used to pay the exercise 
price of an award or to satisfy the tax withholding obligations related to an award. 
Options represent the right to purchase Company common shares on the date of exercise at a stated exercise price. The exercise price of 
an option generally must be at least equal to the fair market value of the Company common shares on the date of grant. The Company’s 

88

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

compensation committee may provide for options to be exercised only as they vest or to be immediately exercisable with any shares 
issued on exercise being subject to the Company’s right of repurchase that lapses as the shares vest. The maximum term of options granted 
under the 2018 Stock Option Plan is seven years.

Participants under the 2018 Stock Option Plan are eligible to be granted options to purchase shares at an exercise price established upon 
approval of the grant by the Board. When options are granted, the exercise price is, with respect to a particular date, the closing price as 
reported by the TSX and, if the shares are not traded on the TSX, the Nasdaq or any other stock exchange on which the Company’s 
common shares are traded (as selected by the Board in good faith taking into account applicable legal and tax requirements) on the 
immediately preceding trading day (the “Fair Market Value”). The 2018 Stock Option Plan does not authorize grants of options with an 
exercise price below the Fair Market Value.
Vesting conditions for grants of options are determined by the Board. The typical vesting for employee grants is quarterly vesting over 
five years, and the typical vesting for directors and executive officers is quarterly vesting over three to five years. The term of the options 
is established by the Board, provided that the term of an option may not exceed seven years from the date of the grant. 

The 2018 Stock Option Plan also provides for the issuance of SARs in tandem with options. Each SAR entitles the holder to surrender 
to the Company, unexercised, the right to subscribe for shares pursuant to the related option and to receive from the Company a number 
of shares, rounded down to the next whole share, with a Fair Market Value on the date of exercise of each such SAR that is equal to the 
difference between such Fair Market Value and the exercise price under the related option, multiplied by the number of shares that cease 
to be available under the option as a result of the exercise of the SAR, subject to satisfaction of applicable withholding taxes and other 
source deductions. Each unexercised SAR terminates when the related option is exercised or the option terminates, including upon a 
change in control. Upon each exercise of a SAR, in respect of a share covered by an option, such option is cancelled and is of no further 
force or effect in respect of such share.

(ii)   Summary of changes

The following is a summary of the changes in options from January 1, 2017 to December 31, 2019: 

Balance at January 1, 2017

Issuance of options

Exercise of options

Cancellation of options

Balance at December 31, 2017

Issuance of options

Exercise of options

Cancellation of options

Balance at December 31, 2018

Issuance of options
Exercise of options
Cancellation of options

Balance at December 31, 2019

Weighted average exercise price (C$)
1.10

$

2.82

1.03

1.15
2.05

8.23

1.41

2.43

2.99

20.08
3.48
2.27
4.84

$

$

$

$

$

Number of options

6,177,594

6,402,000

(571,246)

(404,598)
11,603,750

1,910,000

(597,379)

(13,376)

12,902,995

1,534,162
(282,572)
(5,083)
14,149,502

The weighted average share price at the dates the options were exercised during the year ended December 31, 2019 was C$23.88 per 
share (2018 – C$9.37 per share; 2017 – C$3.66 per share). The total fair values of stock options vested in 2019 and 2018 were $10,278
and $8,151, respectively. 

89

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

As of December 31, 2019 the Company had outstanding and exercisable options as follows:   

Grant date
August 5, 2016
October 6, 2016
November 21, 2016

April 12, 2017
August 24, 2017

November 9, 2017
January 30, 2018

January 31, 2018

May 17, 2018
June 28, 2018

Vesting terms
Evenly over 48 months
Evenly over 48 months

Evenly over 48 months
Evenly over 48 months

Expiry date
August 5, 2021
October 6, 2021

November 21, 2021
April 12, 2022

Evenly over 48 months

August 24, 2022

Evenly over 48 months

November 9, 2022

Evenly over 48 months
Evenly over 48 months

Evenly over 48 months
Evenly over 20 quarters

January 30, 2023
January 31, 2023

May 17, 2023
June 28, 2023

September 13, 2018

Evenly over 16 quarters

September 13, 2023

October 12, 2018

Evenly over 16 quarters

October 12, 2023

December 14, 2018

Evenly over 20 quarters

December 14, 2023

March 28, 2019

May 11, 2019

August 12, 2019
September 5, 2019

Evenly over 16 quarters

March 28, 2024

Evenly over 16 quarters

May 11, 2024

Evenly over 16 quarters

Evenly over 16 quarters

August 12, 2024
September 5, 2024

Outstanding at December 31, 2019

Exercisable at December 31, 2019

Weighted average

Number of
options

Exercise
price (C$)

Remaining
contractual
life (in years)

$

1,058,334
3,242,542

182,000
3,255,009

2,853,288
200,000

267,917

109,375
1,163,750

180,000

25,000

28,125

50,000

51,830
1,263,957

31,115

187,260

14,149,502

9,034,714

$

$

0.50
1.23

1.84
3.14

2.42
3.32

8.40

9.00
7.57

8.22

14.70

11.80

15.29

24.75
20.65

17.68

15.34

4.84

2.93

1.60
1.77

1.89
2.28

2.65
2.86

3.08

3.09
3.38

3.49

3.70

3.78

3.96

4.24
4.36

4.62

4.68

2.56

2.27

Outstanding options expire at the earlier of 180 days after the death, disability or incapacity of the holder or specified expiry date and 
can only be settled in common shares.

As of December 31, 2019, the weighted average exercise price of options outstanding was C$4.84 per option (2018 – C$2.99 per option 
and 2017 – C$2.05 per option). The weighted average exercise price of options exercisable was C$2.93 per option (2018 – C$2.28 per 
option and 2017 – C$1.71 per option).

(iii) Fair value of options issued

The fair value of the options issued during the year was determined using the Black-Scholes option pricing model, using the following 
inputs:

Share price at grant date (per share)
Exercise price (per option)

Risk-free interest rate
Expected life of options (in years)
Expected annualized volatility

Expected dividend yield

Weighted average Black-Scholes value at grant date
(per option)

$

Forfeiture rate

2019

2018

C$15.34 – 24.75
C$15.34 – 24.75

1.39% – 1.62%
5
82%

C$7.57 – $15.29
C$7.57 – $15.29

1.93% – 2.45%
5 – 7
55%

—
13.03

—

$

—
4.09

—

$

2017

C$2.42 – $3.27
C$2.42 – $3.32

0.96% – 1.59%
5
55%

—
1.39

—

The expected life of the awards represents the period of time options are expected to be outstanding and is estimated considering vesting 
terms  and  employees  and  ‘non-employees’  historical  exercise  and,  where  relevant,  post-vesting  employment  termination  behavior. 

90

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

Volatility was estimated by using the historical volatility of the Company’s share price, adjusted for the Company’s expectation of volatility 
going forward. The risk-free interest rate was based on the Bank of Canada government bonds with a remaining term equal to the expected 
life of the options at the grant date. 

(c) 

Restricted share units

On  September  5,  2019,  the  Company  issued  an  aggregate  of  732,972  RSUs  to  certain  employees  in  connection  with  the  Redwood 
Acquisition (as defined in Note 20) and pursuant to Employment Inducement Award Plan. Each RSU entitles the holder to receive upon 
vesting one common share of the Company. The fair value of these RSUs has been determined based on the quoted market price on the 
date  of  issuance  of  C$15.34  per  share. The  RSUs  vest  over  a  three-year  period  following  the  grant  date  and  have  no  performance 
requirements. For the year ended December 31, 2019, the Company recorded $889 in share-based compensation expense related to these 
RSUs. No RSUs were granted or outstanding during 2018 or 2017.
The following is a summary of the changes in RSUs from January 1, 2019 to December 31, 2019: 

Balance at January 1, 2019

Issuance of RSUs

Vesting of issued RSUs

Balance at December 31, 2019

(d) 

 Deferred share units

Number of RSUs

Share-based reserve

— $

732,972

—

732,972

$

—

—

889

889

On August 10, 2019, the Company established a cash-settled DSU plan for its non-executive directors. The DSU plan is designed to 
promote a greater alignment of long-term interests between non-executive directors and shareholders. The number of DSUs granted 
(including fractional DSUs) is determined by dividing the amount of remuneration payable by the closing price as reported by the TSX 
on the trading day immediately preceding the day of grant. DSUs are payable at the time a non-executive director ceases to hold the office 
of director for any reason and are settled by a lump-sum cash payment, based on the value of the DSUs at such time. The value of the 
cash payout is determined by multiplying the number of DSUs vested at the payout date by the closing price as reported by the TSX on 
the trading day immediately preceding the payout date. The fair value of the payout is determined at each reporting date based on the 
fair value of the Company’s common shares at the reporting date and is recorded within other liabilities.

The following is a summary of the changes in DSUs from January 1, 2019 to December 31, 2019: 

Balance at January 1, 2019
Granting and vesting of DSUs
Gain on revaluation

Balance at December 31, 2019

No DSUs were granted or outstanding during 2018 or 2017.

Number of DSUs

Financial liability

— $

33,397
—
33,397

$

—
452
(197)
255

91

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

18. Earnings (loss) Per Share

Basic and diluted earnings (loss) per share are calculated using the following numerators and denominators:   

Basic earnings (loss) per share computation

Net income (loss) attributable to common shareholders of Cronos Group
Weighted average number of common shares outstanding

 Basic earnings (loss) per share

Diluted earnings (loss) per share computation

Net income (loss) used in the computation of basic earnings (loss) per
share

Adjustment for gain on revaluation of derivative liabilities

Net income (loss) used in the computation of diluted income (loss) per
share

2019

2018

2017

$

$

$

$

1,166,506

310,067,179
3.76

1,166,506

(24,416)
1,142,090

$

$

$

$

(21,636)
172,269,170
(0.13)

$

$

(1,483)
134,803,542
(0.01)

(21,636 )

$

(1,483 )

—
(21,636 )

$

—
(1,483 )

Weighted average number of common shares outstanding used in the
computation of basic earnings (loss) per share

310,067,179

172,269,170

134,803,542

Dilutive effect of warrants

Dilutive effect of stock options and share appreciation rights
Dilutive effect of restricted share units

Dilutive effect of Altria Warrant

Dilutive effect of Top-up Rights - exercised and exercisable fixed price

Weighted average number of common shares for computation of
diluted income (loss) per share

19,481,352

10,649,487

732,972

—
1,881,002

—

—

—

—
—

38,378,288

3,607,331

—

—
—

342,811,992

172,269,170

176,789,161

Diluted earnings (loss) per share

$

3.33

$

(0.13)

$

(0.01)

The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive 
or because conditions for contingently issuable shares were not satisfied at the end of the reporting periods. 

Ginkgo Equity Milestones

Pre-emptive Rights
Altria Warrant

Top-up Rights - fixed price

Top-up Rights - market price

Stock options

Warrants

Total anti-dilutive securities

2019

14,674,904

12,006,740
77,514,993

25,103,456

1,255,223

1,315,787

—
131,871,103

2018

2017

—

—

—

—

—

12,902,995

25,457,623

38,360,618

—

—

—

—
—

—

—

—

19. Related Party Transactions and Balances 

On March 8, 2019, in connection with the Altria Investment, Altria Group Inc. (“Altria”), through certain of its wholly owned subsidiaries, 
purchased a 45% equity interest in the Company. During the year ended December 31, 2019, the Company incurred $3,479 for consulting 
services from Altria Pinnacle LLC, a subsidiary of Altria (“Altria Pinnacle”). As of December 31, 2019, the accrual for these consulting 
services was $1,152. In addition, the Company purchased machinery and equipment amounting to $1,258 from a subsidiary of Altria, 
which was fully paid for during the year. Refer to Note 21 for additional information. 

Refer to Note 28 for further information on the derivative liabilities related to the Altria investment.
There were no material related party transactions during the years ended December 31, 2018 and 2017, respectively. 

92

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

20. Business Combinations 

On September 5, 2019, the Company closed the acquisition Redwood Acquisition Redwood manufactures, markets and distributes U.S. 
hemp-derived supplements and cosmetics product that are through e-commerce, retail and hospitality channels in the U.S. under the brand 
Lord Jones™. Redwood’s products use pure U.S. hemp extract that contains natural phytocannabinoids and terpenes found in the plant. 
The Company plans to leverage Redwood’s capabilities to capitalize on the significant demand to further create and scale U.S. hemp-
derived consumer products and brands.

The Company acquired all the issued and outstanding shares of each of the four operating subsidiaries for an aggregate consideration of 
$283,300, which included $227,191 in cash and 5,086,586 common shares of the Company with a fair value of $56,109. The fair value 
of the shares issued as part of the consideration paid was based on the volume weighted average trading price of the common shares on 
Nasdaq on each of the ten consecutive trading days prior to the date of the Membership Interest Purchase Agreement dated August 1, 
2019 (the “MIPA”), by and among the Company, Redwood Holding Group, LLC, and certain Key Persons solely for the purposes as 
described in the MIPA, at C$14.74 per share. 
The Redwood acquisition was unanimously approved by the board of directors of Redwood Holdings Group, LLC and by the Board 
following the unanimous recommendation of a special committee of independent directors (“Special Committee”). A Special Committee 
composed entirely of independent directors of the Company was formed to evaluate and make recommendations to the Board since one 
of our directors, Jason Adler, and Michael Gorenstein, our Chairman, President and Chief Executive Officer, each hold an indirect interest 
in Redwood Holding Group, LLC by way of their interest in certain funds affiliated with Gotham Green Partners, which funds were 
equity holders in Redwood Holding Group, LLC.  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, and Michael Gorenstein, is a co-
founder and non-managing Member of Gotham Green Partners. The Special Committee engaged Perella Weinberg Partners LP as financial 
advisor.

The Redwood Acquisition was accounted for as a business combination as defined in ASC 805 Business Combinations. As a result of 
the change in control of Redwood, the assets and liabilities of Redwood are recorded at fair value in the consolidated statements of the 
Company. The following table summarizes the Company’s finalized allocation of the purchase price to assets acquired and liabilities 
assumed at the acquisition date. 

September 5, 2019

Fair value of net assets acquired

Cash
Accounts receivable (i)
Prepaid expenses and other assets
Inventory
Property and equipment
Right-of-use assets
Intangible assets (ii)
Goodwill
Accounts payable and accrued liabilities
Lease obligations

$

$

2,896
647
265
2,806
1,890
3,533
64,037
213,414
(2,688)
(3,500)
283,300

(i) 

(ii) 

The fair value of acquired accounts receivable is $647. No loss allowance has been recognized on acquisition.

Intangible assets include the fair value of brand name of $64,000, the remaining balance relates to software.

For the year ended December 31, 2019, acquisition-related costs of $8,531 were expensed. These costs are included in the consolidated 
statement of net income (loss) in the line item entitled “Financing and transaction costs.”
The goodwill recognized represents the excess over the fair value of the net tangible and intangible assets acquired as a part of the 
Redwood acquisition. This goodwill is attributable to the expertise and reputation of the assembled workforce acquired, the expected 
synergies, and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes. 
The Relief-from-Royalty Method, was used to value the intangible asset relating to the Lord JonesTM brand. Significant inputs include 
discount rate, growth rates, and cash flow projections.

During the period from September 5, 2019 to December 31, 2019, the Company recognized $3,364 in revenues and a net loss of $2,613
from Redwood operations. If the acquisition had occurred on January 1, 2019, the Company estimates that for the year ended December 31, 

93

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

2019, it would have recorded an increase of $12,266 in revenues and a decrease of $1,112 in net income and that for the year ended 
December 31, 2018, it would have recorded an increase of $7,630 in revenues and an increase of $1,533 in net income. 

There were no business combinations during the years ended December 31, 2018 and December 31, 2017.

21. Commitments  

Lease Commitments

(a) 
The following is a summary of the Company’s future minimum lease payments under operating leases for its premises due in future 
fiscal years: 

2020

2021

2022
2023

2024 and thereafter

$

December 31,

2019

2018

$

1,644
1,668

1,666

1,651

4,017

426
430

434

479

2,000

In addition to the minimum lease payments, the Company is required to pay realty taxes and other occupancy costs in accordance with 
the terms of the lease agreements.
(b) 

R&D Commitments

(i)  Ginkgo. On September 4, 2018, the Company announced a R&D partnership with Ginkgo Bioworks Inc. (“Ginkgo”) to develop 
scalable and consistent production of a wide range of cannabinoids, including THC, CBD and a variety of other lesser known 
and rarer cannabinoids. As part of this partnership, Cronos Group has agreed to issue up to 14,674,903 common shares of the 
Company (aggregate value of approximately $100,000 as of July 17, 2018 assuming all milestones are met, collectively the 
“Ginkgo Equity Milestones”) in tranches and $22,000 in cash subject to Ginkgo’s achievement of certain milestones and to 
fund certain R&D expenses, including foundry access fees. 

(ii)  Technion. On October 15, 2018, the Company announced a sponsored research agreement with the Technion Research and 
Development Foundation of the Technion – Israel Institute of Technology (“Technion”). Research will be focused on the use 
of cannabinoids and their role in regulating skin health and skin disorders. The Company has committed to $1,784 of research 
funding over a period of 3 years. An additional $4,900 of cash payments will be paid to Technion upon the achievement of 
certain milestones.

(iii) Altria Services. On February 18, 2019, the Company entered into an agreement with a wholly owned subsidiary of Altria 
(which agreement was subsequently amended and restated to substitute Altria Pinnacle as a party thererto), to receive strategic 
advisory  and  project  management  services  from Altria  Pinnacle  (the  “Services Agreement”).  Pursuant  to  the  Services 
Agreement, the Company will pay Altria Pinnacle a monthly fee equal to the product of one hundred and five percent (105%) 
and the sum of: (i) all costs directly associated with the services incurred during the monthly period, and (ii) a reasonable and 
appropriate allocation of indirect costs incurred during the monthly period. The Company will also pay all third-party direct 
charges incurred during the monthly period in connection with the services, including any reasonable and documented costs, 
fees and expenses associated with obtaining any consent, license or permit. The Services Agreement will remain in effect until 
terminated by either party. See Note 19.

22. Contingencies 

The Company is party to a number of lawsuits (and has been threatened with lawsuits arising) in the ordinary course of business and in 
connection with its marketing, distribution and sale of its products. Although the outcome of these matters cannot be predicted with 
certainty, management does not believe that resolution of these matters will have a material adverse effect on the Company’s consolidated 
financial condition but may be material to the Company’s operating results for any particular reporting period depending, in part, on the 
results from that period.

94

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

23. Repurposing Charges 

The Company has commenced initiatives to better align its evolving business and its strategy. Certain facilities at the Peace Naturals 
campus are intended to be repurposed from cultivation activities to provide for the following activities: additional R&D activities focused 
on new technologies for value-added product manufacturing; production and manufacturing of derivative products; and increased vault 
and warehousing capabilities.

The activities associated with the repurposing are substantially complete at December 31, 2019. The following table presents information 
associated with this plan:

Employee termination benefits

Impairment costs associated with plan

$

$

Year ended December 31, 2019

889
4,439

5,328

Inventory write-down associated with the repurposing cost of $1,940 has been included as part of inventory write-down on the Consolidated 
Statements of Net Income (Loss) and Comprehensive Income (Loss). The Company does not expect to incur any further significant costs 
related to the repurposing activities.
The accrued liability associated with the Company’s repurposing initiative consisted of the following: 

Employee termination benefits

Liability as of
December 31, 2018
$
$

— $
— $

Charges

Payments/
Utilization

Effect of CTA

889

889

$
$

— $
— $

18
18

Liability as of
December 31, 2019
907
$
907
$

All repurposing related charges were incurred within the Rest of World segment.

There were no repurposing charges in 2018 or 2017.

95

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

24. Income Taxes 

For financial reporting purposes, income (loss) before income taxes includes the following components:   

Rest of World

United States

Total

The expense (recovery) for income taxes consists of: 

Current:

Rest of World

United States

Total
Deferred:

Rest of world

United States

Total

Year ended December 31,

2019
1,168,644
(3,070)
1,165,574

$

$

2018

2017

(21,817)
—
(21,817)

$

$

(2,345)
—

(2,345)

Year ended December 31,

2019

2018

2017

— $

—

— $

— $

—

— $

— $
—
— $

— $

—

— $

(862)
—

(862)

—

—

—

$

$

$

$

$

$

Reconciliation of the expected income tax of the combined Canadian federal and provincial statutory income tax rate of 26.5% (2018 
– 26.5%; 2017 – 26.5%) to the effective tax rate is as follows:

Income (loss) before income taxes

Expected income tax expense (recovery)

Non-taxable income

Non-deductible expenses
Effect of provincial tax rate difference

Non-deductible transaction costs
Fair value gain on financial liabilities
Changes in unrecognized deferred tax assets
Other

Income tax expense (recovery), net

2019
1,165,574

$

$

308,877
(2,156)
3,603
26

1,523
(338,409)
25,904
632

Year ended,

2018

(21,817)
(5,782)
14

2,466
(64)
—
—
3,674
(308)

2017

$

(2,345)

(621)
(588)
538
4

—
—

(429)
234
(862)

$

— $

— $

96

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

The following table summarizes the components of deferred tax: 

Deferred assets:

Tax loss carryforwards – Canada
Deferred financing costs
Share issuance cost

Finance lease obligation
Plant and equipment

Investment
Intangible
Reserve

Other

Total deferred tax assets

Less valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Inventory

Plant and equipment

Intangible assets

Investment
License

Right-of-use assets

Total deferred tax liabilities

Net deferred tax liability

As of

2019

2018

$

$

30,908
5,690
2,217

1,491
871

395
—
—

482

42,054
(36,948)
5,106

(1,227)
—
(2,126)
—
(293)
(1,460)
(5,106)

$

— $

8,842
233
1,841

37
—

60
1
36

40

11,090

(7,931)

3,159

(340)

(729)

—

(30)
(2,060)

—

(3,159)

—

The realization of deferred tax assets is dependent on the Company’s generating sufficient taxable income in the years that the temporary 
differences become deductible. A valuation allowance has been provided for the portion of the deferred tax assets that the Company 
determined is more likely than not to remain unrealized based on estimated future taxable income.

A deferred tax liability of $nil has been recognized in accumulated other comprehensive income as at December 31, 2019 (2018 – $nil; 
2017 – $nil) with an associated tax recovery of $nil (2018 – $nil; 2017 – $(862)).

97

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

As of December 31, 2019 and 2018, the Company had accumulated tax losses available to offset future years’ federal and provincial 
taxable income in Canada and foreign jurisdictions of approximately $115,910 and $33,341, respectively. The non-capital loss carry 
forwards expire as noted in the table below.

2030

2031
2032

2033
2034

2035
2036
2037
2038

2039

As of December 31,

2019

2018

$

— $

—
22

265
2,572

4,061
3,365
2,557
17,769

85,299

$

115,910

$

23

16
250

1,887
1,307

3,997
3,390
3,301
19,170

—

33,341

The Company files federal income tax returns in Canada, Israel and the U.S. The Company has open tax years with the taxation jurisdictions. 
These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations and tax 
treaties, as they relate to the amount, timing, or inclusion of revenue and expense.

Jurisdiction
Canada
United States

Israel

Open Years
2015 – 2019
2017 – 2019

2018 – 2019

The following table outlines the movements in the valuation allowance:

Year ended December 31, 2019

$

Year ended December 31, 2018

$

(7,931)
(2,926)

$

(998)
507

(28,019)
(5,512)

Balance at beginning
of year

Change due to
expense and foreign
exchange

Deductions

Balance at end of year
(36,948)
$

(7,931)

The valuation allowance increased by $28,019 in 2019 and increased by $5,512 in 2018, which was mostly related to the changes in the 
Company’s deferred tax asset balances. The 2019 increase in the valuation allowance was due to $29,017 related to the current year loss, 
tax credits, foreign exchange and other activity, offset by $859 decrease for release of prior year valuation allowance in Cronos Group 
Inc.

98

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

25. Supplementary Cash Flow Information 

The net changes in non-cash working capital items are as follow:

Accounts receivable
Prepaids and other receivables

Current portion of loans receivable

Inventory
Accounts payable and other liabilities

Lease obligation

Total

26. Financial Instruments 

Year ended December 31,

2019

2018

2017

$

$

(702)
(10,509)
(4,585)
(51,888)
13,317

159
(54,208)

$

$

(2,569)
(2,382)
—
(4,092)
12,705

—
3,662

$

$

(3,198)
(221)

—
(2,504)

5,164
—
(759)

Credit Risk

(a) 
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual 
obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and 
its investing activities, including cash held with banks and financial institutions, loan receivable, and advances to joint ventures. The 
Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $1,586,978 as 
of December 31, 2019 (2018 – $34,405).

(i)  Accounts receivable

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision 
rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the 
probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date 
about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no 
reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of 
a debtor to engage in a repayment plan, and a failure to make contractual payments for a period of greater than 120 days past due. For 
the year ended December 31, 2019, the Company recognized an approximate CECL of $136 (2018 – $37).

Provided below is the information about the credit risk exposure on the Company’s accounts receivable using a provision matrix of 
expected credit loss rates against an analysis of the age of accounts receivable:

Less than 30 days past billing date
31 to 60 days past billing date
61 to 90 days past billing date
91 to 120 days past billing date
Over 120 days past billing date

Expected credit loss
rates
<3%
<5%
<8%
<12%
<18%

$

$

As of December 31,

2019

2018

$

4,401
130

49
42

16

2,917
100

—
14

21

4,638

$

3,052

The Company has assessed that there is a concentration of credit risk, as 56% of the Company’s accounts receivable were due from two 
customers as of December 31, 2019 (2018 – 88% due from five customers) with an established credit history with the Company.

99

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

(ii)    Cash and cash equivalents, short-term investments, and other receivables

The Company held cash and cash equivalents of $1,199,693 at December 31, 2019 (2018 – $23,927). The short-term investments and 
related interest receivable of $306,347 (December 31, 2018 – $nil) represents short-term investments with a maturity of less than a year 
and accrued interest as at December 31, 2019. The cash and cash equivalents and short-term investments, including guaranteed investment 
certificates and bankers’ acceptances, are held with central banks and financial institution counter-parties that are highly rated. In addition 
to interest receivable, other receivables includes sales taxes receivable from the government. As such, the Company has assessed an 
insignificant loss allowance on these financial instruments. 

(iii) Advances to joint ventures

The Company has assessed that there has been no significant increase in credit risk of these advances from initial recognition based on 
the financial position of the borrowers, and the regulatory and economic environment of the borrowers. Based on historical information, 
and adjusted for forward-looking expectations, the Company has assessed the loss allowance on these advances as of December 31, 2019 
to be $nil.

Liquidity risk

(b) 
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and arises principally 
from the Company’s accounts payable and other liabilities, holdbacks payable, government remittances payable and construction loan 
payable. The Company’s policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations 
as they become due. Further, the Company’s management is responsible for ensuring funds exist and are readily accessible to support 
business opportunities as they arise. The Company’s funding is primarily provided in the form of capital raised through the issuance of 
common shares and warrants. As of December 31, 2019, 42% of the Company’s payables were due to three vendors (2018 – 35% due 
to one vendor).

The following represents an analysis of the age of accounts payable:

Less than 30 days past billing date
31 to 60 days past billing date
61 to 90 days past billing date

Over 90 days past billing date

(c) 

Market risk

As of

2019

2018

4,551
2,162
417

2,064

9,194

$

$

881
268
21

—

1,170

$

$

Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate 
due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, market and economic 
conditions, and equity and commodity prices. The Company is exposed to market risk in divesting its investments, such that, unfavorable 
market conditions could result in dispositions of investments at less than their carrying values. Further, the revaluation of securities 
classified as fair value through net income, could result in significant write-downs of the Company’s investments, which would have an 
adverse impact on the Company’s financial position.
The Company previously managed market risk by having a portfolio of securities from multiple issuers, such that the Company was not 
materially exposed to any one issuer. During the year ended December 31, 2018, the Company sold a significant portion of its investments 
subject to price risk, and subsequent to December 31, 2018, these investments were fully divested. 
(d) 
Currency rate risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly 
fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on advances to joint ventures denominated in  
A$ and U.S dollars, refer to Note 7. The Company is further exposed to this risk through subsidiaries operating in Israel and the U.S. 
refer to Note 2(c). The Company does not currently use foreign exchange contracts to hedge its exposure to currency rate risk as management 
has determined that this risk is not significant at this point in time. As such, the Company’s financial position and financial results may 
be adversely affected by the unfavorable fluctuations in currency exchange rates. As of December 31, 2019, the Company had foreign 
currency gain (loss) on translation of $37,687 (2018 – $(12,337), 2017 – $2,456). A 10% change in the exchange rates for the foreign 
currencies would affect the carrying value of net assets by approximately $174,902 as of December 31, 2019 (2018 – $14,855).

Currency rate risk 

100

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

27. Fair Value Measurement 

The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and 
reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at 
least annually. The following represents information about the Company’s assets that are measured at fair value on a recurring basis as 
of December 31, 2019 and 2018, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine 
such fair value. 

Level 1 – Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. 
In these consolidated financial statements, other investments (Canopy, Aurora and Vivo shares) are included in this category.
Level 2 – Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield 
curves. In these consolidated financial statements, Vivo share purchase warrants are included in this category.
Level 3 – Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where 
there is little, if any, market activity for the asset or liability. In these consolidated financial statements, Hydropothecary and the Altria 
derivative liabilities are included in this category.

There were no transfers between categories during the periods presented.

Balance  sheet  items  which  are  dependent  upon  Level  3  fair  value  measurement  include  the  Hydropothecary  investment,  as  well  as 
derivative liabilities. 

28. Derivative Liabilities 

On March 8, 2019, the Company closed the previously announced investment in the Company (the “Altria Investment”) by Altria, pursuant 
to a subscription agreement dated December 7, 2018. As of the closing date of the Altria Investment, the Altria Investment consisted of 
149,831,154 common shares of the Company as of the closing date, refer to Note 15, issued to a wholly owned subsidiary of Altria and 
one warrant of the Company (the “Altria Warrant”), refer to Note 17(a), issued to a wholly owned subsidiary of Altria. As of the closing 
date of the Altria Investment, Altria beneficially held an approximate 45% ownership interest in the Company (calculated on a non-diluted 
basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria 
holding a total ownership interest in the Company of approximately 55% (calculated on a non-diluted basis). Pursuant to the investor 
rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor 
Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note.

The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria 
Warrant, as applicable. 

a.  The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an 
additional 10% of the common shares of Cronos (77,514,993 common shares at December 31, 2019) at a per share exercise 
price of C$19.00, which expires at 5:00 p.m. (Toronto time) on March 8, 2023. The number of common shares of the Company 
to which the holder is entitled, and the corresponding exercise price, is subject to adjustment in the event of a share dividend, 
share issuance, distribution, or share subdivision, split or other division, share consolidation, reverse-split or other aggregation, 
share reclassification, a capital reorganization, consolidation, amalgamation, arrangement, binding share exchange, merger or 
other combination, certain securities issuances, repurchases, redemptions or certain other actions that would result in a reduction 
in the number of common shares of the Company outstanding, in each case, executed by the Company. If and whenever there 
is  a  reclassification  of  the  common  shares  or  a  capital  reorganization  of  the  Company,  or  a  consolidation,  amalgamation, 
arrangement, binding share exchange or merger of the Company, in each case executed by the Company and pursuant to which 
(i) in the event the consideration received by the Company’s shareholders is exclusively cash, the Company or the successor 
entity (as applicable) is required to purchase the Altria Warrant in cash equal to the amount by which the purchase price per 
share paid for the common shares acquired exceeds the exercise price of the Altria Warrant multiplied by the number of common 
shares that would have been issuable upon exercise of the Altria Warrant immediately prior to any such transaction, and (ii) in 
the event the consideration received by the Company’s shareholders is not exclusively cash, the Altria Warrant will remain 
outstanding in accordance with its terms until any subsequent exercise of the Altria Warrant, at which time the holder thereof 
will receive in lieu of each share that would have been issuable upon the exercise of the Altria Warrant immediately prior to any 
such transaction, the kind and amount of cash, the number of shares or other securities or property resulting from any such 
transaction, that such holder would have been entitled to receive had such holder been the registered holder of such shares that 
would have been issuable upon the exercise of the Altria Warrant on the record date or effective date of the transaction (as 
applicable).

101

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

b.  The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of 
common shares of the Company executed by the Company (including issuances pursuant to the R&D partnership with Ginkgo 
(the “Ginkgo Agreement”), refer to Note 21(b)), the right to purchase up to such number of common shares of the Company in 
order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding 
any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which 
the common shares are sold in the relevant issuance; provided that if the consideration paid in connection with any such issuance 
is non-cash, the price per common share of the Company that would have been received had such common shares been issued 
for cash consideration will be determined by an independent committee (acting reasonably and in good faith); provided further 
that the price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related 
to the Ginkgo Agreement will be C$16.25 per common share. These rights may not be exercised if Altria’s ownership percentage 
of the issued and outstanding shares of the Company falls below 20%. 
In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications 
and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion 
or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible 
securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of 
any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or 
securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate 
an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers 
or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership 
percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up 
Rights”). 

c. 

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 for the ten full days preceding such exercise 
by Altria; provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in 
connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that are outstanding as 
of March 8, 2019 will be C$16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not 
be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%.

The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities; related transaction 
costs of $22,355 have been expensed as financing costs. A reconciliation of the carrying amounts of the derivative liability from the date 
of initial recognition, March 8, 2019, to December 31, 2019 is presented below:

(a) Altria Warrant
(b) Pre-emptive Rights
(c) Top-up Rights

As of March 8, 2019
1,086,920
$
92,548
386,152
1,565,620

$

Gain on revaluation
$

(869,630)
(81,070)
(326,119)
(1,276,819)

$

Exercise of Rights

Effect of CTA

As of  December 31,
2019

$

$

— $
—
(15,478 )
(15,478 )

$

17,138
1,309
5,390
23,837

$

$

234,428
12,787
49,945
297,160

Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. 
During the period ended December 31, 2019, the Company’s share price decreased significantly from initial valuations made at the time 
of closing of the Altria Investment. As the share price decreases for each of the related derivative instruments, the value to the holder of 
the instrument generally increases. Share price is one of the significant observable inputs used in the fair value measurement of each of 
the Company’s derivative instruments.

102

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of March 8, 2019 and December 31,
2019, applying the following inputs:

Share price at grant date (per share in C$)

Subscription price (per share in C$)
Weighted average risk-free interest rate (i)
Weight average expected life (in years) (ii)
Expected annualized volatility (iii)
Expected dividend yield

As of March 8, 2019

As of  December 31, 2019

Altria
Warrant
$29.15

$19.00

1.65%
4.00

80%
0%

Pre-emptive
Rights
$29.15

$16.25

1.64%
2.00

80%
0%

Top-up
Rights
$29.15

$16.25

1.64%
2.68

80%
0%

Altria
Warrant
$9.97

$19.00

1.69%
3.18

82%
0%

Pre-emptive
Rights
$9.97

$16.25

1.73%
1.25

82%
0%

Top-up
Rights
$9.97

$16.25

1.71%
1.66

82%
0%

(i) 

(ii) 

(iii) 

The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative 
liabilities.

The expected life in years represents the period of time that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights 
and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights 
are linked. 

Volatility was based on the blended historical volatility levels of the Company and peer companies. 

The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the 
reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease 
in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. As of March 8, 2019, 
there would be an equal but opposite impact on share capital, refer to Note 15, and as of December 31, 2019, there would be an equal 
but opposite impact on net income (loss).

Share price at issuance date

Weighted average expected life

Expected annualized volatility

Decrease (Increase) as of March 8, 2019

Decrease (Increase) as of December 31, 2019

Altria
Warrant
$ 138,098

31,021

56,958

Pre-emptive
Rights

Top-up
Rights

Altria
Warrant

Pre-emptive
Rights

Top-up
Rights

$

13,183

$

52,113

$

36,436

$

2,591

3,743

9,687

16,493

17,471

33,343

$

2,743

2,366

2,180

9,577

2,178

7,714

These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several uncontrollable factors, which 
could significantly affect the fair value of these derivative liabilities in future periods. 

29. Non-monetary Transactions 

In March 2019, the Company entered into two transactions to simultaneously purchase and sell inventory to a third party. The 
Company purchased cannabis resin from the third party and in turn sold cannabis dry flower to the third party. The transactions 
involved the exchange of work in progress inventory, and were accounted for in accordance with ASC 845 Non-monetary transactions 
at the carrying value of inventory transferred by the Company, which equaled the value of the cannabis resin received. No revenue was 
recognized as a result of this transaction and no gain or loss was recognized in the Consolidated Statements of Operations and 
Comprehensive Income (Loss).

In September 2019, the Company entered into three transactions to simultaneously purchase and sell inventory to a third party. The 
Company purchased cannabis resin and cannabis tincture oil and in turn sold cannabis dry flower to the third party. The transactions 
involved the exchange of work in progress inventory and were accounted for in accordance with ASC 845 Non-monetary transactions 
at the carrying value of inventory transferred by the Company. $2.3 million was recognized in revenue as a result of this transaction 
and no gain or loss was recognized in the Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss).

103

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

30. Segment Information 

Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manages the 
business, makes operating decisions and assesses the Company’s performance. For the year ended December 31, 2019, the Company 
determined that it has the following two reportable segments: United States and Rest of World. The United States operating segment 
consists of the manufacture and distribution of hemp-derived CBD infused products. The Rest of World operating segment is involved 
in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. These 
two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic 
region.  The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions 
regarding the allocation of resources. The CODMs reviews operating income (loss) as the measure of segment profit or loss to evaluate 
performance of and allocate resources for its reportable segments. Operating income (loss) is defined as net revenue less cost of sales 
and operating expenses.

Reporting by operating segments follows the same accounting policies as those used to prepare the consolidated financial statements. 
The operating segments are presented in accordance with the same criteria used for internal reporting prepared for the CODMs. Inter-
segment transactions are recorded at the stated values as agreed to by the segments.
Segment data was as follows for the year ended December 31, 2019:

Consolidated statements of net income
(loss) and comprehensive income (loss)

United States

Rest of World

Corporate

Total

— $

15,020

$

— $

$

$

$

$

$

Net revenue

Cannabis flower

Cannabis extracts

Other

Net revenue

Equity income (loss)

Interest revenue

Interest expense

Net interest income (expense)

Depreciation and amortization

Income tax (benefit) expense
Net income (loss)

Consolidated balance sheets

Total assets
Investments in equity accounted investees
Goodwill
Purchase of property, plant and equipment

—

—

— $

15,020

5,338

3,392

23,750

— $

(2,009)

— $

—

— $

—

—
(11,597)

1,486,603
—
—
—

29,226

1,244

27,982

2,101

—

1,165,574

2,090,442
557
214,794
38,664

—

3,364

3,364

$

5,338

28

20,386

— $

(2,009)

$

$

6

—

6

46

—

29,220

1,244

27,976

2,055

—

(3,070)

1,180,241

$

$

$

$

293,985
—
213,414
259

309,854
557
1,380
38,405

104

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

Segment data was as follows for the year ended December 31, 2018:

$

$

$

$

$

Consolidated statements of net income
(loss) and comprehensive income (loss)
Net revenue

Cannabis flower
Cannabis extracts

Other

Net revenue

Equity income (loss)

Interest revenue

Interest expense

Net interest income (expense)

Depreciation and amortization

Income tax (benefit) expense

Net income (loss)

Consolidated balance sheets

Total assets
Investments in equity accounted investees

Goodwill

Purchase of property, plant and equipment

United States

Rest of World

Corporate

Total

$

$

$

$

$

— $

—
—

— $

9,210

2,732
179

12,121

— $

(723)

— $

—

— $

—

—

—

—
—

—

—

222

139

83

969

—

(21,817)

183,471
2,960

1,314

88,308

— $

—
—

— $

9,210

2,732
179

12,121

— $

(723)

— $

—

— $

—

—

—

—
—

—

—

222

139

83

969

—

(21,817)

183,471
2,960

1,314

88,308

105

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

Segment data was as follows for the year ended December 31, 2017:

United States

Rest of World

Corporate

Total

Consolidated statements of net income
(loss) and comprehensive income (loss)
Net revenue

Cannabis flower
Cannabis extracts

Other

Net revenue

Equity income (loss)

Interest revenue

Interest expense

Net interest income (expense)

Depreciation and amortization

Income tax (benefit) expense

Net income (loss)

Consolidated balance sheets

Purchase of property, plant and equipment

$

$

$

$

$

— $

2,884

$

— $

—
—

— $

— $

— $

—

— $

—

—

—

—

$

$

$

$

113
150

3,147

127

4

101
(97)

417

(862)
(1,483)

32,926

—
—

— $

— $

— $

—

— $

—

—

—

—

Net revenue attributed to a geographic region based on the location of the customer were as follows:

Canada

United States

Other countries

Total

Year ended December 31,

2019

2018

2017

20,202

$

11,195

$

3,364

184

—

926

23,750

$

12,121

$

$

$

2,884

113
150

3,147

127

4

101

(97)

417

(862)

(1,483)

—

32,926

2,686

—

461

3,147

As at December 31, 2018, substantially all of the Company’s property, plant and equipment were physically located in Canada. Following 
the Company’s acquisition of Redwood during the year ended December 31, 2019, the property, plant and equipment assets were physically 
located in the following geographic regions: 

Canada
United States

Other countries

Total

As of December 31, 2019

141,021
2,103

18,685

161,809

$

$

106

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

The Company sells products through a limited number of major customers. Major customers are defined as customers that each individually 
accounted for greater than 10% of the Company’s annual revenues and greater than 10% of accounts receivable.

United States
During the year ended December 31, 2019, the Company had no major customers. 

As of December 31, 2019, $12 in expected credit losses has been recognized on receivables from contract with customers. Refer to Note 
26(a).
Rest of World

During the year ended December 31, 2019, the Company earned a total net revenue before excise taxes of $7,597 from two major customers 
(2018 – $2,186; 2017 – $601 from one and two major customers, respectively), accounting for 32% of the Company’s revenues (2018 – 
17%; 2017 – 19%).
As of December 31, 2019, $124 (2018 – $37) in expected credit losses has been recognized on receivables from contract with customers. 
Refer to Note 26(a).

31. Quarterly Financial Data (unaudited) 

The following table contains selected quarterly data for 2019 and 2018. The information should be read in conjunction with the Company’s 
consolidated financial statements and related notes included elsewhere in this report. The Company believes that, after the restatement 
of the first and third quarters of 2019, the following information reflects all normal recurring adjustments necessary for a fair presentation 
of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future 
period.

Net revenue

Gross profit (loss)
Net income (loss)

Total comprehensive income (loss)

Basic earnings per share

Diluted earnings per share

Net revenue
Gross profit
Net income (loss)
Total comprehensive income (loss)

Basic earnings per share
Diluted earnings per share

$

$

Q4

Q3

Q2

Q1

Fiscal Year 2019

$

7,308
(20,375)
61,569

89,833

0.18

0.16

5,785
(3,137)
604,128

591,706

1.78

0.42

$

7,653

$

4,093
185,888

203,835

0.56

0.16

3,004

1,555
313,989

317,887

1.43

0.33

Q4

Q3

Q2

Q1

Fiscal Year 2018

$

4,285
1,880
(9,692)
(18,200)

(0.05)
(0.05)

$

2,877
1,585
(4,785)
(1,967)

(0.03)
(0.03)

$

2,630
1,658
(4,116)
(7,672)

(0.02)
(0.02)

2,329
1,090
(3,224)
(6,312)

(0.02)
(0.02)

107

Cronos Group Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2019
(In thousands of U.S. dollars, except for gram and share amounts)

32. Subsequent Events 

(a) 
On March 4, 2020, in respect to a milestone achieved related to the Whistler transaction described in Note 9, the Company 
received 578,101 shares of Aurora. The Company subsequently sold all of the Aurora shares on March 6, 2020 for gross proceeds of 
$786 (C$1,055). 

On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in 
(b) 
the U.S. District Court for the Eastern District of New York against the Company and its Chief Executive Officer and Chief Financial 
Officer alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, and 
Section 20(a) of the Exchange Act against the individual defendants.  The complaints generally allege that certain of the Company’s 
prior public statements about revenues and internal controls were incorrect based on the Company’s March 2, 2020, disclosure that the 
Audit Committee of its Board of Directors was conducting a review of the appropriateness of revenue recognized in connection with 
certain bulk resin purchases and sales of products through the wholesale channel.  The complaints do not quantify a damage request.  
Defendants have not yet responded to the complaints.  

108

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 
DISCLOSURE. 

None.

ITEM 9A. CONTROLS AND PROCEDURES.

(a) 

Evaluation of disclosure controls and procedures. 

Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures as defined 
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information 
required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported 
within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed by us in 
reports that we file or submit under the Exchange Act, is accumulated and communicated to our management, including the principal 
executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this 
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, due to the existence 
of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures 
were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit 
under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the rules and forms 
of the SEC, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, 
is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as 
appropriate, to allow timely decisions regarding required disclosure.

(b) 

Management’s Report on Internal Control Over Financial Reporting.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as 
defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s 
internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the 
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, 
management has concluded that its internal control over financial reporting was not effective as of December 31, 2019 to provide 
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with 
GAAP, due to the material weaknesses described below.

A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a 
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a 
timely basis.

We have identified material weaknesses in the following areas:

•  Risk Assessment:  The Company did not appropriately design controls to monitor and respond to changes in our business in 

relation to our transactions in the wholesale market. 

• 

Segregation of Duties: The Company did not maintain adequately designed controls on segregation of purchase and sale 
responsibilities to ensure accurate recognition of revenue in accordance with GAAP. 

•  Non-Routine Transactions: The Company’s controls were not effective to ensure that non-routine transactions, including 

deviations from contractually established sales terms, were authorized, communicated, identified and evaluated for their potential 
effect on revenue recognition. 

Because of these control deficiencies which we have also determined to be material weaknesses, the Company overstated revenue, 
cost of sales and inventory related to non-routine, wholesale sale transactions which have resulted in the restatement of the interim 
financial statements for the three months ended March 31, 2019, six months ended June 30, 2019 and three and nine months ended 
September 30, 2019. 

While the risk assessment deficiency did not directly result in a misstatement to the financial statements, it was a contributing factor in 
the other material weaknesses described above. Because of the segregation of duties and non-routine transaction deficiencies, the 
Company restated one transaction for the three months ended March 31, 2019 and six months ended June 30, 2019, and two 
transactions for the three months ended September 30, 2019 to correct misstatements. These deficiencies create a reasonable 
possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis. 

Management’s assessment of the effectiveness of internal control over financial reporting excluded the entities acquired on September 
5, 2019 in the Redwood Acquisition, whose net assets on a combined basis constitute approximately 16.0% of the total assets as of 
December 31, 2019 and 14.2% and (0.2)% of net revenues and net loss respectively, for the year then ended.

109

The effectiveness of internal control over financial reporting has been audited by KPMG LLP, an independent registered public 
accounting firm, who has issued an adverse opinion on the effectiveness of our internal control over financial reporting as of 
December 31, 2019 as stated in their report which is included in the financial statements in Part II, Item 8 of this 10-K.

Remediation of Material Weaknesses

•  Risk Assessment: The Company will enhance its process to evaluate on a quarterly basis its risk assessment model and risk control 

matrices related to any significant changes in its business environment.

• 

Segregation of Duties: We have identified and will be implementing controls and procedures to ensure segregation of duties over 
sales transactions and purchase transactions to include (i) updating our delegation of authority policy to ensure only individuals in 
our sales department approve sales to customers, only individuals in our procurement and supply chain departments approve 
purchases and prevent all other departments from authorizing these transactions; (ii) building and establishing Know Your 
Customer and Know Your Vendor databases to ensure a higher level of scrutiny for any entity that is both a customer and a 
vendor; and (iii) building and delivering a training and education program of revenue recognition principles inclusive of non-
monetary transactions to all applicable stakeholders.

•  Non-routine Transactions: We have identified and will be implementing controls and procedures to ensure adequate review and 

disclosure of non-routine transactions, specifically targeting wholesale sales and purchases to include (i) requiring the preparation 
of accounting memorandums from the Finance Department on all non-routine transactions which must include all key elements of 
the transaction and review and approval of either the CEO or CFO prior to any non-routine transactions being executed; (ii) 
requiring the preparation of business cases for all wholesale sales and purchases to ensure they have legitimate business purposes; 
and (iii) enhancing our existing sub-certification process, to include all relevant employees to increase vigilance in identifying and 
understanding non-routine transactions and their impact prior to issuing financial statements.

We believe the measures described above will remediate the material weaknesses we have identified and strengthen our internal 
controls over financial reporting. We are committed to continuing to improve our internal control processes and have already 
implemented the separation of the purchase and sale departments through changes in the Company’s organizational structure, and have 
begun to implement the other steps described above. We will also continue to review, optimize, and enhance our financial reporting 
controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take 
additional measures to address control deficiencies or we may modify certain of the remediation measures described above. These 
material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time 
and management has concluded, through testing, that these controls are operating effectively.

(c) 

Changes in internal control over financial reporting. 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred 
during the three months ended December 31, 2019 other than the material weaknesses noted above.

ITEM 9B. OTHER INFORMATION.

None.

110

 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PART III

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with 

the SEC no later than 120 days after the close of our fiscal year ended December 31, 2019.

ITEM 11. EXECUTIVE COMPENSATION

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with 

the SEC no later than 120 days after the close of our fiscal year ended December 31, 2019.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 
STOCKHOLDER MATTERS

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with 

the SEC no later than 120 days after the close of our fiscal year ended December 31, 2019.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with 

the SEC no later than 120 days after the close of our fiscal year ended December 31, 2019.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. 

The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with 

the SEC no later than 120 days after the close of our fiscal year ended December 31, 2019.

111

 
 
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

PART IV

The following documents are filed as part of this Annual Report on Form 10-K/A, or incorporated herein by reference:

(a)(1)  Financial Statements. The following financial statements of Cronos Group Inc. are filed as part of this Annual Report on Form 
10-K/A on the pages indicated.

CRONOS GROUP INC. AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the years ended
December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended December 31,
2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended December 2019, 2018, and 2017
Notes to Consolidated Financial Statements

Page No.
63
67

68

69

70
71

(a)(2)  Financial Statement Schedules. Schedules are omitted because the required information is inapplicable, not material, or the 
information is presented in the consolidated financial statements or related notes.

(a)(3)  Exhibits. The exhibits listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K/A, or 
are incorporated by reference herein.

Exhibit
Number

2.1

3.1

3.2

4.1

4.2

10.1

10.2

10.3

10.4

10.5†

10.6†

10.7†

Exhibit Description

Membership Interest Purchase Agreement, among Cronos Group Inc., Redwood Holdings Group, LLC and certain 
key persons, dated as of August 1, 2019 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report 
of Foreign Private Issuer, filed August 2, 2019).

Certificate of Incorporation and Articles of Amendment of Cronos Group Inc. (incorporated by reference to Exhibit 
4.1 to the Registration Statement on Form S-8 of Cronos Group Inc., filed July 11, 2018).

By-law No. 5 of Cronos Group Inc. (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form 
S-8 of Cronos Group Inc. filed on July 11, 2018).

Form of Cronos Group Inc. Common Share certificate (incorporated by reference to the corresponding exhibit to the 
Original Filing).
Description of Capital Stock of Cronos Group Inc. (incorporated by reference to the corresponding exhibit to the 
Original Filing).
Subscription Agreement, dated as of December 7, 2018, by and among Cronos Group Inc., Altria Summit LLC, and, 
solely for the purposes specified therein, Altria Group, Inc. (incorporated by reference to Exhibit 99.1 to the 
Company’s Current Report of Foreign Private Issuer, filed December 10, 2018).
Investor Rights Agreement, dated as of March 8, 2019, by and between Cronos Group Inc. and Altria Group, Inc. 
(incorporated by reference to Exhibit 99.1 to the Company’s Current Report of Foreign Private Issuer, filed March 
15, 2019).
Collaboration and License Agreement, dated as of September 1, 2018, by and between Cronos Group Inc. and 
Ginkgo Bioworks, Inc. (incorporated by reference to Exhibit 99.3 to the Company’s Current Report of Foreign 
Private Issuer, filed September 4, 2018).
First Amendment to Collaboration and License Agreement, dated as of May 9, 2019 (incorporated by reference to 
the corresponding exhibit to the Original Filing).
Cronos Group Inc. 2015 Amended and Restated Stock Option Plan, dated as of May 26, 2015 (incorporated by 
reference to Exhibit 4.3 to the Registration Statement on Form S-8 of Cronos Group Inc., filed July 11, 2018).

Form of Option Certificate to 2015 Amended and Restated Stock Option Plan (incorporated by reference to the 
corresponding exhibit to the Original Filing).

First Amendment to the Cronos Group Inc. 2015 Amended and Restated Stock Option Plan, dated as of August 7, 
2019 (incorporated by reference to the corresponding exhibit to the Original Filing).

112

10.8†

10.9†

10.10†

10.11†

10.12†

10.13†

10.14†

10.15†

10.16†

10.17†

10.18†

10.19†

10.20†

10.21†

10.22†

10.23†

10.24†

14.1

21.1
23.1*
24.1

31.1*

31.2*

Cronos Group Inc. Amended and Restated 2018 Stock Option Plan, dated as of November 11, 2019 (incorporated 
by reference to the corresponding exhibit to the Original Filing).
Cronos Group Inc. Deferred Shared Unit Plan for Non-Executive Directors, dated as of August 7, 2019 
(incorporated by reference to the corresponding exhibit to the Original Filing).
Employment Agreement, by and between Cronos Group Inc. (f/k/a PharmaCan Capital Corporation) and Michael 
Gorenstein, effective as of August 10, 2016 (incorporated by reference to the corresponding exhibit to the Original 
Filing).

Description of Oral Amendment, effective as of June 2019, to Employment Agreement, by and between Cronos 
Group Inc. (f/k/a PharmaCan Capital Corporation) and Michael Gorenstein, effective as of August 10, 2016 
(incorporated by reference to the corresponding exhibit to the Original Filing).
Executive Employment Agreement, by and among Hortican Inc., Jerry Barbato and, solely for the purposes 
specified therein, Cronos Group Inc., effective as of April 15, 2019. (incorporated by reference to the corresponding 
exhibit to the Original Filing).

Employment Agreement, by and between Hortican Inc. and Xiuming Shum, effective as of August 21, 2017 
(incorporated by reference to the corresponding exhibit to the Original Filing).
Executive Employment Agreement, by and among Hortican Inc., Xiuming Shum and, solely for the purposes 
specified therein, Cronos Group Inc., effective as of May 21, 2019 (incorporated by reference to the corresponding 
exhibit to the Original Filing).

Executive Employment Agreement, by and among Redwood Wellness, LLC, Robert Rosenheck and, solely for the 
purposes specified therein, Cronos Group Inc., dated as of September 5, 2019 (incorporated by reference to the 
corresponding exhibit to the Original Filing).

Restricted Share Unit Agreement, by and between Cronos Group Inc. and Robert Rosenheck, dated as of September 
5, 2019 (incorporated by reference to the corresponding exhibit to the Original Filing).
Executive Employment Agreement, by and between Hortican Inc. and David Hsu, effective as of June 12, 2018 
(incorporated by reference to the corresponding exhibit to the Original Filing).

Executive Employment Agreement, by and among Hortican Inc., David Hsu and, solely for the purposes specified 
therein, Cronos Group Inc., effective as of May 13, 2019 (incorporated by reference to the corresponding exhibit to 
the Original Filing).

Executive Employment Agreement, by and among Hortican Inc., William Lawrence Hilson and, solely for the 
purposes specified therein, Cronos Group Inc., effective as of May 15, 2019 (incorporated by reference to the 
corresponding exhibit to the Original Filing).

Service Agreement, by and between The Peace Naturals Project Inc. and Hillhurst Management Inc., entered into as 
of October 1, 2015 (incorporated by reference to the corresponding exhibit to the Original Filing).

Cronos Group Inc. Employment Inducement Award Plan #1 (incorporated by reference to the corresponding exhibit 
to the Original Filing).

Termination and Release Agreement, by and among Cronos Group Inc. and David Hsu, dated as of November 15, 
2019 (incorporated by reference to the corresponding exhibit to the Original Filing).
Termination and Release Agreement, by and among Cronos Group Inc. and William Lawrence Hilson, dated as of 
November 15, 2019 (incorporated by reference to the corresponding exhibit to the Original Filing).
Form of Director and Officer Indemnity Agreement (incorporated by reference to the corresponding exhibit to the 
Original Filing).
Cronos Group Inc. Code of Business Conduct and Ethics (incorporated by reference to the corresponding exhibit to 
the Original Filing).
List of Subsidiaries of Cronos Group Inc (incorporated by reference to the corresponding exhibit to the Original 
Filing).
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
Power of Attorney (incorporated by reference to the corresponding exhibit to the Original Filing).
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities 
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities 
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 
906 of the Sarbanes-Oxley Act of 2002.

113

32.2**

Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 
906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.

† 

* 

Management contract or compensatory plan or arrangement.

Filed herewith.

** 

Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

114

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Date: March 30, 2020

CRONOS GROUP INC.

By:

/s/ Michael Gorenstein
Michael Gorenstein
President and Chief Executive Officer

115