EX-99.2 3 cron-ex992_113.htm EX-99.2 cron-ex992_113.htm

Exhibit 99.2

 

 

 

 

 

 

 

 

 

 

 

 

 

CRONOS GROUP INC.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

For the Three and Six Months Ended June 30, 2018

 

(in thousands of Canadian dollars)

 

 

 


GENERAL MATTERS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) of Cronos Group Inc. is current as of August 13, 2018 and provides financial information for the three and six months ended June 30, 2018. This MD&A should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2018 and June 30, 2017, including the related notes thereto (the “Interim Financial Statements”), and the audited consolidated financial statements for the year ended December 31, 2017, including the related notes thereto and the related MD&A.

 

Unless otherwise noted or the context indicates otherwise, the “Company”, “Cronos Group”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect subsidiaries and, if applicable, its joint ventures.

 

Our board of directors, on the recommendation of the audit committee, approved the Interim Financial Statements and this MD&A on August 13, 2018.

 

Basis of Presentation

Our financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Certain totals, subtotals and percentages throughout this MD&A are calculated using the rounded numbers as they appear in the tables. All currency amounts herein are expressed in thousands of Canadian dollars, unless otherwise noted.

 

All references in this MD&A to “Q2 2018” and “Q2 2017” are to the fiscal quarters for the three months ended June 30, 2018 and June 30, 2017, respectively. All references in this MD&A to “YTD 2018” and “YTD 2017” are to the six months ended June 30, 2018 and June 30, 2017, respectively.

 

Definitions

Equivalent grams and kilograms

Equivalent grams or kilograms refers to the equivalent number of dried grams or kilograms of cannabis required to produce extracted cannabis in the form of cannabis oil. The Company estimates and converts its cannabis oil inventory to equivalent grams using a standard conversion ratio of the number of grams of dry flower used to produce the extracted cannabis products. Any reference to “grams” or “kilograms” in this MD&A includes both equivalent grams and dried grams, unless otherwise noted and identified as dried grams or equivalent grams for extracts.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains certain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. All information contained herein that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of historical fact. Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as at and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for any other purpose. Forward-Looking Statements in this MD&A include, but are not limited to, statements with respect to:

the performance of our business and operations;

our expectations regarding revenues, expenses and anticipated cash needs;

our expectations regarding cash flow, liquidity and sources of funding;

the intended expansion of our facilities, the costs and timing associated therewith and the receipt of approval from Health Canada to increase the maximum production limits and sales from the expanded facilities;

the expected growth in our growing and production capacities;

expectations with respect to future production costs;

the expected methods to be used by us to distribute cannabis;

the competitive conditions of the industry;

the legalization of cannabis for recreational use in Canada, including federal and provincial regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such market when it is legalized;

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

laws and regulations and any amendments thereto applicable to the business;

the ability of the Company to execute on its strategy and the anticipated benefits of such strategy;

the competitive advantages and business strategies of the Company;

the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis;

the Company’s future product offerings;

the anticipated future gross margins of the Company’s operations;

expectations regarding the use of proceeds of equity financings;

expectations regarding capital expenditures;

accounting standards and estimates; and

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

 

Certain of the Forward-Looking Statements contained herein concerning the cannabis industry and our general expectations concerning the cannabis industry 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 this industry, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While we are not aware of any misstatement regarding any industry or government data presented herein or information presented herein that is based on such data, the cannabis industry involves risks and uncertainties that are subject to change based on various factors, which factors are described further below.

 

With respect to the Forward-Looking Statements contained in this MD&A, we have made assumptions regarding, among other things: (i) our ability to generate cash flow from operations and obtain necessary financing on acceptable terms; (ii) general economic, financial market, regulatory and political conditions in which we operate; (iii) the output from operations of Peace Naturals Project Inc. (“Peace Naturals”), Original BC Ltd. (“OGBC”) and our joint ventures; (iv) consumer interest in our products; (v) competition; (vi) anticipated and unanticipated costs; (vii) government regulation of our activities and products and in the areas of taxation and environmental protection; (viii) the timely receipt of any required regulatory approvals; (ix) our ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; (x) our ability to conduct operations in a safe, efficient and effective manner; and (xi) our construction plans and timeframe for completion of such plans.

 

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 MD&A. Such factors include, without limitation, those discussed in the “Risk and Uncertainties” section of this MD&A, and those discussed under the heading “Risk Factors” in our latest Annual Information Form (“AIF”).

 

Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements. Forward-Looking Statements are based upon certain material assumptions, including those listed above, that were applied in drawing a conclusion or making a forecast or projection, including management’s perceptions of historical trends, current conditions and expected future developments, as well as other considerations that are believed to be appropriate in the circumstances, including that the factors listed in the foregoing paragraph, collectively, are not expected to have a material impact on the Company. While we consider these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.

 

Forward-Looking Statements contained herein are made as of the date of this MD&A and are based on the beliefs, estimates, expectations and opinions of management on the date such Forward-Looking Statements are made. The Company undertakes no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements, except as required by applicable law. The Forward-Looking Statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement.

 

 


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COMPANY OVERVIEW

General

Cronos Group is a geographically diversified and vertically integrated global cannabis company, with a presence across four continents, whose principal activities are the production and sale of cannabis in federally legal jurisdictions, including Canada and Germany. Currently, Cronos Group sells dried cannabis and cannabis oils through wholesale and direct-to-consumer channels under our medical cannabis brand, PEACE NATURALSTM. We operate two wholly-owned licensed producers of medical cannabis (“Licensed Producers”) pursuant to the provisions of the Controlled Drugs and Substances Act (Canada) (“CDSA”) and its relevant regulation, the Access to Cannabis for Medical Purposes Regulations (Canada) (“ACMPR”). Our Licensed Producers are Peace Naturals, which has production facilities near Stayner, Ontario, and OGBC, which has a production facility in Armstrong, British Columbia.

 

We have also entered into five strategic joint ventures, including in Israel and Australia, and hold minority interests in cannabis-related companies and Licensed Producers.

 

Cronos Group’s common shares are listed on the Nasdaq Global Market (“NASDAQ”) and on the Toronto Stock Exchange (“TSX”) under the symbol “CRON”.

 

Strategy

Cronos Group is committed to being one of the world’s leading global cannabis companies. In pursuing this goal, we seek to create value for shareholders by focusing on four core strategic priorities:

establishing an efficient global production footprint;

developing a diversified global sales and distribution network;

creating and monetizing disruptive intellectual property; and

growing a portfolio of iconic brands that resonate with consumers.

 

Production Facilities

Facility

 

Location

 

Grow Type

 

Square

Footage

 

 

Estimated

Annual

Capacity

(in kg)

 

Existing Capacity (1)

 

 

 

 

 

 

 

 

 

 

 

 

Peace Naturals – Buildings 1, 2, 3

 

Stayner, ON, Canada

 

Indoor

 

 

39,000

 

 

 

5,000

 

Peace Naturals – Greenhouse

 

Stayner, ON, Canada

 

Greenhouse

 

 

28,000

 

 

 

1,500

 

OGBC

 

Armstrong, BC, Canada

 

Indoor

 

 

2,500

 

 

 

150

 

Existing Capacity

 

 

 

 

 

 

69,500

 

 

 

6,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capacity in Progress

 

 

 

 

 

 

 

 

 

 

 

 

Peace Naturals – Building 4

 

Stayner, ON, Canada

 

Indoor

 

 

286,000

 

 

 

33,500

 

Cronos Israel – Phase I (2)

 

Hadera, Israel

 

Greenhouse

 

 

45,000

 

 

 

5,000

 

Cronos Australia – Phase I (3)

 

Melbourne, VIC, Australia

 

Indoor

 

 

20,000

 

 

 

2,000

 

Cronos GrowCo (4)

 

Kingsville, ON, Canada

 

Greenhouse

 

 

850,000

 

 

 

70,000

 

Capacity in Progress

 

 

 

 

 

 

1,201,000

 

 

 

110,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma Capacity

 

 

 

 

 

 

1,270,500

 

 

 

117,150

 

 

(1)

Existing capacity is defined as facilities where construction is substantially complete, regulatory approvals required to commence operations have been received and cannabis cultivation has commenced.

(2)

Cronos Group will hold a 70% equity interest in the nursery and cultivation operations of Cronos Israel (as defined herein) and a 90% equity interest in the manufacturing and distribution operations of Cronos Israel.

(3)

Cronos Group owns a 50% equity interest in Cronos Australia (as defined herein).

(4)

Cronos Group owns a 50% equity interest in Cronos GrowCo (as defined herein).

 

Peace Naturals

Situated on approximately 90 acres of land zoned and licensed for cannabis production, Peace Naturals operates four completed production buildings (Building 1, Building 2, Building 3 and the Peace Naturals greenhouse) and is constructing additional capacity via a 286,000 sq. ft. production facility (“Building 4”). Peace Naturals’ production processes are Good Manufacturing Practices (“GMP”) certified under relevant European Economic Area GMP directives by the national competent authority of Germany.

 

On October 31, 2013, Health Canada issued a license to Peace Naturals for activities related to the production and sale of dried cannabis flower under the ACMPR, which license has since been amended and supplemented. Peace Naturals’ current license has an effective

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term from November 1, 2016 to November 1, 2019, and grants Peace Naturals the right to engage in, among other things, the production and sale of dried cannabis flower, cannabis resin, cannabis seeds, cannabis plants and cannabis oil.

 

On January 22, 2018, Peace Naturals received a dealer’s license (the “Peace Naturals Dealer’s License”) pursuant to the Narcotic Control Regulations (“NCR”) and CDSA from Health Canada for the possession, sale, transportation and delivery of controlled substances under the CDSA, including cannabis, tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”). The Peace Naturals Dealer’s License allows Peace Naturals to export medical cannabis extracts, including concentrated oil and resin products, internationally, in accordance with an export permit issued under section 103 of the ACMPR or section 10 of the NCR. The Peace Naturals Dealer’s License has an effective term from January 29, 2018 to December 31, 2018.

 

OGBC

Situated on 30 acres of land, 13 acres of which are zoned and licensed for cannabis production, OGBC’s facility primarily engages in cultivation and processing operations. OGBC currently engages in inter-company bulk transfers of dried cannabis flower to Peace Naturals, which are sold under the PEACE NATURALSTM brand.

 

On February 26, 2014, Health Canada issued a cultivation license to OGBC under the ACMPR, which license has since been amended and supplemented. OGBC’s current license has an effective term from February 28, 2017 to February 28, 2020 and grants OGBC the right to engage in the production and sale of dried cannabis flower.

 

Transition of Licenses under the Cannabis Act

As of October 17, 2018, we expect our Licensed Producers to be primarily regulated under the new Cannabis Act (Canada) and its relevant regulations (collectively, the “Cannabis Act”). While the exact transition requirements have not yet been announced by the Canadian federal government, the Cannabis Act does contain general transition provisions for licenses issued under the CDSA and its relevant regulations (including the ACMPR).

 

The Cannabis Act generally provides that licenses issued under the ACMPR that are in force immediately before the commencement date of the Cannabis Act will be deemed to be licenses issued under the corresponding provisions of the Cannabis Act and any such licenses will continue in force until it is revoked or expires. In particular, a license for production and sale of dried cannabis flower, cannabis resin, cannabis seeds, cannabis plants and cannabis oil under the ACMPR will be deemed to be licenses for cultivation, processing and sale for medical purposes under the Cannabis Act, provided that the license holder meets certain requirements. We expect the licenses under the ACMPR held by our Licensed Producers to be subject to these transition provisions.

 

Similarly, the Cannabis Act generally provides that licenses issued under the NCR that are in force immediately before the commencement date of the Cannabis Act will be deemed to be licenses issued under the corresponding provisions of the Cannabis Act and any such licenses will continue in force until it is revoked or expires. In particular, a license for possession, sale, transportation and delivery of cannabis, THC and CBD under the NCR will be deemed to be a license for processing under the Cannabis Act. We expect the Peace Naturals Dealer’s License to be subject to these transition provisions.

 

The Cannabis Act also contains transition provisions that generally provide that an export permit issued under section 103 of the ACMPR or section 10 of the NCR relating to cannabis that is in force immediately before the commencement date of the Cannabis Act will be deemed to be a permit issued under the corresponding provision of the Cannabis Act and any such license will continue in force until it is revoked or expires. Under the Cannabis Act, licenses and permits authorizing the importation or exportation of cannabis may be issued only in respect of cannabis for medical or scientific purposes or in respect of industrial hemp.

 

Joint Ventures

We have entered into five strategic joint ventures to produce and sell cannabis:

Cronos GrowCo Joint Venture. In July 2018, the Company announced a strategic joint venture with a group of investors led by Bert Mucci (the “Greenhouse Partners”), a leading Canadian large-scale greenhouse operator. The Company and the Greenhouse Partners each owns a 50% equity interest in the joint venture, Cronos Growing Company Inc. (“Cronos GrowCo”), and have equal representation on the board of directors of Cronos GrowCo. Cronos GrowCo is planning to construct an 850,000 sq. ft. purpose-built, GMP certified greenhouse for cannabis production on approximately 100 acres of land owned by Cronos GrowCo in Kingsville, Ontario. Once fully operational, the greenhouse is expected to produce up to 70,000 kilograms of cannabis annually.

MedMen Canada Joint Venture. In March 2018, the Company entered into a strategic joint venture with MedMen Enterprises USA, LLC (“MedMen”). The Company and MedMen each owns a 50% equity interest in the joint venture, MedMen Canada Inc. (“MedMen Canada”), and have equal representation on the board of directors of MedMen Canada. MedMen Canada holds the exclusive license of the MedMen brand in Canada for a minimum term of 20 years. MedMen Canada is currently in the process of obtaining the necessary licenses, permits and retail locations to create a premium MedMen branded retail chain, modelled after its

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iconic retail concept in Los Angeles, Las Vegas and Manhattan, in provinces where private retail is allowed including British Columbia and Alberta.

Australia Joint Venture. In February 2018, the Company entered into a strategic joint venture in Australia with NewSouthern Capital Pty Ltd. (“NewSouthern”) for the research, production, manufacture and distribution of medical cannabis. The Company and NewSouthern each owns a 50% equity interest in the joint venture, Cronos Australia Pty Ltd. (“Cronos Australia”) and have equal representation on the board of directors of Cronos Australia. The Company believes that Cronos Australia will serve as its hub for Australia, New Zealand and Southeast Asia, bolstering the Company’s supply capabilities and distribution network. In the initial phase of construction, Cronos Australia is planning to construct a 20,000 sq. ft. purpose-built indoor facility that is expected to produce up to 2,000 kilograms of cannabis annually. Cronos Australia has also been granted a medicinal cannabis cultivation license, a research license and a manufacturing license by the Therapeutic Goods Administration and the Office of Drug Control (the “ODC”). Cronos Australia has also applied for an import license to import PEACE NATURALSTM branded medical products for sale in the Australian market while the initial phase of construction of Cronos Australia is being completed. Cronos Australia is awaiting the approval of the ODC for the import license.

Israel Joint Venture. In September 2017, the Company entered into a strategic joint venture (“Cronos Israel”) in Israel with the Israeli agricultural collective settlement Kibbutz Gan Shmuel (“Gan Shmuel”) for the production, manufacture and distribution of medical cannabis. Following transfer of the Israeli licenses from Gan Shmuel to Cronos Israel and receipt of approval from the Israeli Ministry of Health, the Company will hold a 70% interest in each of the nursery and cultivation operations and a 90% interest in each of the manufacturing and distribution operations. The Israeli licenses were successfully transferred to Cronos Israel on May 10, 2018 and the equity interests are expected to be issued to Cronos Group shortly after the Israeli Ministry of Health approves the issuance of the equity interests. Cronos Group will have three board member nominees on the board of directors of each of the cultivation, manufacturing, distribution and pharmacies companies, while Gan Shmuel will have one board member nominee on the board of directors of each such entity. In the initial phase of construction, Cronos Israel is planning to construct a 45,000 sq. ft. greenhouse that is expected to produce up to 5,000 kilograms of cannabis annually and a 17,000 sq. ft. manufacturing facility that will be utilized for analytics, formulation development and research. Until exports are permitted under applicable Israeli law, products from Cronos Israel will be distributed domestically in the local Israeli market.

Indigenous Roots Joint Venture (“Indigenous Roots”). In December 2016, the Company launched a strategic joint venture led by Phil Fontaine, former National Chief of the Assembly of First Nations. Indigenous Roots will work cooperatively with Canadian First Nations towards building and operating licensed facilities and providing medical cannabis to First Nations communities in Canada. We will own a 49.9% stake in Indigenous Roots upon closing of the investment, which is expected to be led by a First Nation. The Company believes that Indigenous Roots will provide Cronos Group with optionality for nontraditional distribution channels, incremental production capacity without dilution and a strong brand for our portfolio. Indigenous Roots has commanded significant interest, having met with over 100 indigenous communities and leaders across Canada. Indigenous Roots is in the process of finalizing its capital raise. Once completed, Indigenous Roots is anticipated to commence construction of a 30,000 sq. ft. production facility at the premises of OGBC. The Company is awaiting definitive regulatory clarity on provincial distribution frameworks prior to finalization of the capital raise.

 

Minority Investments

We hold minority interests in other Licensed Producers. As at June 30, 2018, the Company held a 19.0% equity interest in Whistler Medical Marijuana Corporation (“Whistler”) and minority equity investments in Evergreen Medicinal Supply Inc. (“Evergreen”) and Canopy Growth Corporation (“Canopy”).

 

INDUSTRY AND MARKET TRENDS

Medical Cannabis Regulatory Framework in Canada

On August 24, 2016, the Government of Canada introduced the ACMPR regulations to govern the production, sale and distribution of medical cannabis and related oil extracts. The ACMPR effectively combines the regulations and requirements of the Marihuana for Medical Purposes Regulations, the Marihuana Medical Access Regulations and the section 56 exemptions relating to cannabis oil under the CDSA into one set of regulations. In addition, among other things, the ACMPR sets out the process patients are required to follow to obtain authorization from Health Canada to grow cannabis and to acquire seeds or plants from Licensed Producers to grow their own cannabis. Under the ACMPR, patients have three options for obtaining cannabis:

they can continue to access quality-controlled cannabis by registering with Licensed Producers;

they can register with Health Canada to produce a limited amount of cannabis for their own medical purposes; or

they can designate someone else to produce it for them.

 


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Legalization of Regulated Recreational Cannabis in Canada

On December 13, 2016, the Task Force on Cannabis Legalization and Regulation, which was established by the Canadian federal government to seek input on the design of a new system to legalize, strictly regulate and restrict access to cannabis, published its report outlining its recommendations. On April 13, 2017, the Government of Canada released Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (“Bill C-45”), which proposed the enactment of the Cannabis Act to regulate the production, distribution and sale of cannabis for medical and unqualified adult use. After significant debates at the House of Commons and the Senate, on June 21, 2018, Bill C-45 received Royal Assent. On July 11, 2018, the Government of Canada published the final regulations under the Cannabis Act. These regulations provide more details on the medical and recreational regulatory regimes for cannabis, including regarding licensing, security clearances and physical security requirements, production practices, outdoor growing, security, packaging and labelling, cannabis containing drugs, document retention requirements, reporting and disclosure requirements, the new access to cannabis for medical purposes regime and industrial hemp.

 

The Prime Minister of Canada has communicated that the majority of the Cannabis Act will come into force on October 17, 2018. The delay in the coming into force date is to provide enough time for the implementation of various aspects of the regime, including preparing markets for retail sales.

 

The introduction of a recreational regulatory framework for cannabis production and distribution would be a significant new market for the Company’s product. However, it is still uncertain how these developments may impact the medical cannabis market. The impacts may also be negative for the Company and could result in increased levels of competition in its existing medical market and / or the entry of new competitors in the overall cannabis market in which the Company operates.

 

Provincial Distribution Frameworks for Regulated Recreational Cannabis

While the Cannabis Act provides for the regulation of the commercial production of cannabis for medical and recreational purposes and related matters by the federal government, the provinces and territories of Canada will have authority to regulate other aspects of recreational cannabis (similar to what is currently the case for liquor and tobacco products), such as sale and distribution, minimum age requirements, places where cannabis can be consumed, and a range of other matters. The governments of every Canadian province and territory have announced proposed regulatory regimes for the distribution and sale of cannabis for recreational purposes within those jurisdictions.

 

QUARTERLY BUSINESS HIGHLIGHTS AND RECENT DEVELOPMENTS POST QUARTER-END

Revenue increased 428% in Q2 2018 as compared to Q2 2017

Revenue increased by $2.8 million, or 428%, from $0.6 million in Q2 2017 to $3.4 million in Q2 2018. Additionally, the Company continues to see strong growth in cannabis oil sales largely due to its increased supply of a broader assortment of cannabis oils that have been received favorably by customers. In Q2 2018, cannabis oil sales accounted for 40% of domestic medical sales as compared to 29% in Q1 2018.

 

Establishing an efficient global production footprint

Cronos GrowCo

In July 2018, we announced a strategic joint venture with the Greenhouse Partners, a leading Canadian large-scale greenhouse operator. The Company and the Greenhouse Partners each owns a 50% equity interest in the joint venture, Cronos GrowCo, and have equal representation on the board of directors of Cronos GrowCo. Cronos GrowCo is planning to construct an 850,000 sq. ft. purpose-built, GMP certified greenhouse for cannabis production on approximately 100 acres of land owned by Cronos GrowCo in Kingsville, Ontario. Once fully operational, the greenhouse is expected to produce up to 70,000 kilograms of cannabis annually. Greenhouse construction materials are currently on the production site and construction is expected to commence this summer.

 

Cronos Australia receives manufacture license

Cronos Australia was granted a medicinal cannabis manufacture license by the Australian ODC in June 2018. This license permits manufacturing of cannabinoid based products in Australia and is required for all forms of extraction, refining, concentration and transformation of the cannabis plant. This license rounds out the licenses for domestic production, which includes the medicinal cannabis cultivation license and research license and brings Cronos Group one step closer to full scale operations in Australia.

 

Continued progress on capacity expansion projects

Building 4. Construction of Building 4, a 286,000 sq. ft. custom-built indoor production facility built to GMP standards, remains on schedule and cultivation is expected to commence in the second half of 2018.

Cronos Israel. Construction of the custom-built greenhouse and manufacturing facility, each built to GMP standards, has begun. Given modification to facility designs to provide greater flexibility in the cultivation and manufacture of different end products, the expected completion date of construction has changed from Q1 2019 to the first half of 2019 for the greenhouse and to the second half of 2019 for the manufacturing facility. Cultivation is expected to commence in the first half of 2019.

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Cronos Australia. The Company is currently in the design and construction planning phase for the custom-built production facility built to GMP standards. We expect construction to commence in the summer of 2018 and to be complete in the first half of 2019.

 

Developing a diversified global sales and distribution network

Cura supply agreement

In August 2018, Cronos Group announced a supply agreement with Cura Cannabis Solutions (“Cura”), one of the largest cannabis companies in the world by revenues in the first quarter of 2018. Cura signed a five year take-or-pay supply agreement to purchase a minimum of 20,000 kilograms of cannabis per annum from Cronos GrowCo, starting from the date Cura receives its production and sales licenses from Health Canada. Cura also expects to build its proprietary, state-of-the-art extraction facility on a parcel of land owned by Cronos Group in the heart of Okanagan Valley, British Columbia.

 

Distribution in Poland

In June 2018, we entered into a strategic distribution partnership with Delfarma Sp. Zo.o (“Delfarma”). Delfarma is a pharmaceutical wholesaler with a distribution network of over 5,000 pharmacies and more than 200 hospitals that collectively reaches approximately 40% of the Polish domestic market. Under the five-year exclusive distribution agreement, Cronos Group will supply PEACE NATURALSTM branded cannabis products to Delfarma for distribution within Poland. The Company and Delfarma are currently in the process of obtaining the necessary regulatory approvals to sell cannabis products in Poland.

 

Growing a portfolio of iconic brands that resonate with consumers

First recreational brand COVETM

Cronos Group previewed its premium recreational brand COVE™ at the May 2018 LIFT Conference. The newly launched brand, COVE™ was born in the Okanagan Valley in British Columbia, which is known for producing some of the world’s finest cannabis. COVE™ products are non-irradiated and hand-trimmed using only the best result of each harvest. By avoiding shortcuts like harsh refining processes, COVE™ is able to maintain the natural balance of the plant across all of the brand’s terpene rich cannabis extracts and brings the highest in quality products to its consumers.

 

Uplisting to the Toronto Stock Exchange

On May 23, 2018, the trading of the Company’s common shares in Canada were uplisted from the TSX Venture Exchange to the TSX. Cronos Group’s common shares are listed under the symbol “CRON” on both NASDAQ and TSX.

 

Appointment of KPMG LLP as auditor

In May 2018, the board of directors approved the appointment of KPMG LLP as auditor of the Company, which was subsequently approved by a majority of votes cast by shareholders at the Company’s Annual and Special Meeting of Shareholders on June 28, 2018.

 

Enhanced board of directors with the election of Michael Coates

Michael Coates was elected to the board of directors by a majority of votes cast by shareholders at the Company’s Annual and Special Meeting of Shareholders held on June 28, 2018. Michael Coates was President and Chief Executive Officer, Americas Region of Hill+Knowlton Strategies (“H+K”), a global public relations and integrated communications agency, from 2014 to 2016 and retired as Global Vice Chairman of H+K in 2017. Prior to this, Mr. Coates held a variety of roles at H+K and has had a more than thirty-year career advising Fortune 500 clients on strategies to manage political risk. In June 2018, Michael served as a member of the Premier of Ontario’s transition team. Mr. Coates received an MPA from Queen’s University and holds an ICD.D designation from the Institute of Corporate Directors.

 

Strengthened liquidity with a $100.0 million equity offering in April 2018

The Company closed a bought deal offering of common shares in April 2018 (the “April 2018 Bought Deal”) that provided aggregate gross proceeds of $100.0 million (not taking into account any commissions, fees or expenses). As of June 30, 2018, total liquidity amounted to $118.3 million, comprised of $89.6 million in cash and $28.7 million of additional borrowings available under the Construction Loan (as defined herein).

 


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RESULTS OF OPERATIONS

Selected Financial Results

The following table summarizes the selected financial results for the periods indicated.

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Revenue

 

$

3,394

 

 

$

643

 

 

$

2,751

 

 

 

428

%

 

$

6,339

 

 

$

1,157

 

 

$

5,182

 

 

 

448

%

Cost of Sales

 

 

(2,952

)

 

 

(478

)

 

 

(2,474

)

 

 

518

%

 

 

(1,935

)

 

 

(1,000

)

 

 

(935

)

 

 

94

%

Gross Profit

 

 

6,346

 

 

 

1,121

 

 

 

5,225

 

 

 

466

%

 

 

8,274

 

 

 

2,157

 

 

 

6,117

 

 

 

284

%

Operating Expenses

 

 

5,856

 

 

 

2,626

 

 

 

3,230

 

 

 

123

%

 

 

9,962

 

 

 

4,399

 

 

 

5,563

 

 

 

126

%

Operating Income (Loss)

 

 

490

 

 

 

(1,505

)

 

 

1,995

 

 

 

(133

%)

 

 

(1,688

)

 

 

(2,242

)

 

 

554

 

 

 

(25

%)

Other Income (Expense)

 

 

(34

)

 

 

1,656

 

 

 

(1,690

)

 

 

(102

%)

 

 

206

 

 

 

1,550

 

 

 

(1,344

)

 

 

(87

%)

Income (Loss) before Income Taxes

 

 

456

 

 

 

151

 

 

 

305

 

 

 

202

%

 

 

(1,482

)

 

 

(692

)

 

 

(790

)

 

 

114

%

Income Tax Recovery

 

 

(267

)

 

 

(23

)

 

 

(244

)

 

 

1061

%

 

 

(1,155

)

 

 

(22

)

 

 

(1,133

)

 

 

5150

%

Net Income (Loss)

 

 

723

 

 

 

174

 

 

 

549

 

 

 

316

%

 

 

(327

)

 

 

(670

)

 

 

343

 

 

 

(51

%)

Other Comprehensive Income

 

 

39

 

 

 

11

 

 

 

28

 

 

 

255

%

 

 

4

 

 

 

694

 

 

 

(690

)

 

 

(99

%)

Comprehensive Income (Loss)

 

 

762

 

 

 

185

 

 

 

577

 

 

 

312

%

 

 

(323

)

 

 

24

 

 

 

(347

)

 

 

(1446

%)

 

Revenue

The following table sets forth revenue, kilograms sold and average sales price per gram by product type for the periods indicated.

 

($ in 000s)

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

 

Revenue

 

 

Kilograms Sold

 

 

Avg. Sales Price / Gram

 

 

Revenue

 

 

Kilograms Sold

 

 

Avg. Sales Price / Gram

 

Dry Cannabis

 

$

2,715

 

 

 

416

 

 

$

6.53

 

 

$

5,335

 

 

 

894

 

 

$

5.97

 

Cannabis Oil

 

 

636

 

 

 

61

 

 

 

10.43

 

 

 

891

 

 

 

84

 

 

 

10.61

 

Other

 

 

43

 

 

 

 

 

 

 

 

 

113

 

 

 

 

 

 

 

Total

 

 

3,394

 

 

 

477

 

 

 

7.12

 

 

 

6,339

 

 

 

978

 

 

 

6.48

 

 

Results for Q2 2018 compared to Q2 2017

For Q2 2018, the Company reported revenue of $3.4 million as compared to $0.6 million for Q2 2017, representing an increase of $2.8 million, or 428%. This change was primarily due to:

continued expansion in our patient onboarding as domestic medical patient sales grew 234% year-over-year;

expanded production with an increase of 489% in the number of grams of cannabis sold year-over-year; and

continued strong growth in our cannabis oil sales that represent 40% of domestic medical revenue in the current quarter.

 

During Q2 2018, 477 kilograms of cannabis products were sold at an average selling price of $7.12 per gram. This represents an increase in volume of 396 kilograms sold compared to the Q2 2017 at an average selling price of $7.99 per gram.

 

Results for YTD 2018 compared to YTD 2017

For YTD 2018, the Company reported revenue of $6.3 million as compared to $1.2 million for YTD 2017, representing an increase of $5.2 million, or 448%. This change was primarily due to:

expansion in our patient onboarding;

launch and strong growth in our cannabis oils sales; and

increased production capacity and yield developments.

 

During YTD 2018, 978 kilograms of cannabis products were sold at an average selling price of $6.48 per gram. This represents an increase in volume of 832 kilograms sold compared to YTD 2017 at an average selling price of $7.93 per gram.

 

8


Cost of Sales and Gross Profit

Cost of sales and gross profit for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory Expensed to Cost of Sales before Fair Value Adjustments

 

$

1,254

 

 

$

215

 

 

$

1,039

 

 

 

483

%

 

$

2,821

 

 

$

413

 

 

$

2,408

 

 

 

583

%

Gross Profit before Fair Value Adjustments

 

 

2,140

 

 

 

428

 

 

 

1,712

 

 

 

400

%

 

 

3,518

 

 

 

744

 

 

 

2,774

 

 

 

373

%

Fair Value Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Change in Fair Value of Biological Assets

 

 

(6,831

)

 

 

(1,122

)

 

 

(5,709

)

 

 

509

%

 

 

(9,575

)

 

 

(2,701

)

 

 

(6,874

)

 

 

254

%

Realized Fair Value Adjustments on Inventory Sold

 

 

2,625

 

 

 

429

 

 

 

2,196

 

 

 

512

%

 

 

4,819

 

 

 

1,288

 

 

 

3,531

 

 

 

274

%

Total Fair Value Adjustments

 

 

(4,206

)

 

 

(693

)

 

 

(3,513

)

 

 

507

%

 

 

(4,756

)

 

 

(1,413

)

 

 

(3,343

)

 

 

237

%

Gross Profit

 

 

6,346

 

 

 

1,121

 

 

 

5,225

 

 

 

466

%

 

 

8,274

 

 

 

2,157

 

 

 

6,117

 

 

 

284

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin Before Fair Value Adjustments

 

 

63

%

 

 

67

%

 

 

 

 

 

 

 

 

 

 

55

%

 

 

64

%

 

 

 

 

 

 

 

 

Gross Margin

 

 

187

%

 

 

174

%

 

 

 

 

 

 

 

 

 

 

131

%

 

 

186

%

 

 

 

 

 

 

 

 

 

Results for Q2 2018 compared to Q2 2017

Total cost of sales was a recovery of $3.0 million in Q2 2018 as compared to a recovery of $0.5 million in Q2 2017, representing a decrease in expenses of $2.5 million. This change is largely driven by:

an increase in the number of kilograms sold during the period;

an increase in growing costs relating to addition of new production facilities, such as the Peace Naturals Greenhouse; and

offset by overall lower growing costs on a per gram basis.

 

Inventory expensed to cost of sales before fair value adjustments represents the actual growing and processing costs associated with cannabis sold during the period, including labor, material, consumables, supplies, utilities, overhead allocation, and amortization of production equipment and facilities.

 

During Q2 2018, the Company made a voluntary change in accounting policy to capitalize the direct and indirect costs attributable to the biological asset transformation. The previous accounting policy was to expense these costs as period costs identified as Production Costs. The new accounting policy provides more reliable and relevant information to users as the gross profit before fair value adjustments only considers the costs incurred on inventory sold during the period, and excludes costs incurred on the biological transformation until the related harvest is sold. This accounting policy change does not impact gross profit, net income (loss), basic or diluted earnings per share, the statement of financial position, or the statement of changes in equity on the current or prior periods.

 

In Q2 2018, inventory expensed to costs of sales before fair value adjustments of $1.2 million on sales of $3.4 million, results in a gross profit before fair value adjustments of $2.1 million, or 63% gross margin on 477 kilograms sold, as compared to inventory expensed to costs of sales before fair value adjustments of $0.2 million on sales of $0.6 million, results in a gross profit before fair value adjustments of $0.4 million, or 67% gross margin on 80 kilograms sold during Q2 2017. Management anticipates the cost to produce dry cannabis will continue to decrease as production output increases now that Buildings 1, 2, 3 and the Peace Naturals greenhouse are fully operational. Operational costs in Q2 2018 included expenditures related to the Peace Naturals greenhouse, however no product was harvested from the greenhouse during this period.

 

Fair value adjustments of a recovery of $4.2 million in Q2 2018, as compared to a recovery of $0.7 million in Q2 2017 representing an increase of $3.5 million. The fair value adjustments consist of: i) unrealized change in fair value of biological assets of $6.8 million recovery in Q2 2018, compared to $1.1 million recovery in Q2 2017, and ii) realized fair value adjustments on inventory sold in the period of $2.6 million cost, compared to $0.4 million cost in Q2 2017. The change in fair value adjustments is largely driven by:

larger number of plants under cultivation; and

partially offset by an increase in growing costs associated with more cultivation rooms including growing costs relating to the Peace Naturals greenhouse which recently came on line but had no harvested product during the period.

 

The cost to produce dry cannabis per gram is used by management to measure the estimated amount of growing costs (including all direct and indirect growing costs, overhead allocation, and amortization associated with the cultivation of cannabis) on a per gram basis, that are required to produce dry cannabis during the reporting period. Management uses this measure to track growing cost trends by using the total estimated growing costs (excluding all post-harvest production costs), and dividing such amount by the approximate

9


number of grams of cannabis grown during the period. Post-harvest production costs include drying and curing direct expenses, quality control and testing expenses, shipping and packaging expenses, and other order fulfillment costs.

 

In Q2 2018, total growing costs were $1.8 million, including $0.1 million of amortization associated with the growing equipment and facilities, and 1,145 kilograms were grown during the quarter, resulting in an all-in cost to produce dry cannabis of $1.64 per gram, and $1.52 per gram on a cash basis after backing out amortization. In Q1 2018, the all-in cost to produce dry cannabis was $2.18 per gram.

 

Gross profit including fair value adjustments for Q2 2018 of $6.3 million or 187% of sales, as compared to $1.1 million or 174% of sales for Q2 2017, represents an increase of $5.2 million. Gross profit increased during the quarter primarily due to the increase in sales and an increase in fair value gains driven by increased production capacity, yield improvements, and increased portion of cannabis oil sales.

 

Results for YTD 2018 compared to YTD 2017

Total cost of sales was a recovery of $1.9 million in YTD 2018 as compared to a recovery of $1.0 million in YTD 2017, representing a decrease in expenses of $0.9 million. This change is largely driven by:

an increase in the number of kilograms sold during the period;

an increase in growing costs relating to addition of new production facilities, such as the Peace Naturals Greenhouse; and

offset by overall lower growing costs on a per gram basis.

 

Inventory expensed to cost of sales before fair value adjustments represents the actual growing and processing costs associated with cannabis sold during the period, including labor, material, consumables, supplies, utilities, overhead allocation, and amortization of production equipment and facilities.

 

In YTD 2018, inventory expensed to costs of sales before fair value adjustments of $2.8 million on sales of $6.3 million, results in a gross profit before fair value adjustments of $3.5 million, or 55% gross margin on 978 kilograms sold, as compared to inventory expensed to costs of sales before fair value adjustments of $0.4 million on sales of $1.2 million, results in a gross profit before fair value adjustments of $0.7 million, or 64% gross margin on 146 kilograms sold during YTD 2017.

 

Fair value adjustments of a recovery of $4.7 million in YTD 2018, as compared to a recovery of $1.4 million in YTD 2017 representing an increase of $3.3 million. The fair value adjustments consist of: i) unrealized change in fair value of biological assets of $9.6 million recovery in YTD 2018, compared to $2.7 million recovery in YTD 2017 and ii) realized fair value adjustments on inventory sold in the period of $4.8 million cost, compared to $1.3 million cost in YTD 2017. The change in fair value adjustments is largely driven by:

larger number of plants under cultivation; and

partially offset by an increase in growing costs associated with more cultivation rooms including growing costs relating to the Peace Naturals greenhouse which recently came on line but had no harvested product during the period.

 

In YTD 2018, total growing costs were $3.5 million, including $0.3 million of amortization associated with the growing equipment and facilities, and 1,861 kilograms were grown during the period, resulting in an all-in cost to produce dry cannabis of $1.88 per gram, and $1.72 per gram on a cash basis after backing out amortization.

 

Gross profit including fair value adjustments for YTD 2018 of $8.3 million or 131% of sales, as compared to $2.2 million or 186% of sales for YTD 2017, represents an increase of $6.1 million. Gross profit increased during the period primarily due to the increase in sales and an increase in fair value gains driven by increased production capacity, yield improvements, and increased portion of cannabis oil sales.

 

10


Operating Expenses

Operating expenses for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and Marketing

 

$

364

 

 

$

87

 

 

$

277

 

 

 

318

%

 

$

950

 

 

$

131

 

 

$

819

 

 

 

625

%

General and Administrative

 

 

4,219

 

 

 

1,872

 

 

 

2,347

 

 

 

125

%

 

 

6,680

 

 

 

3,208

 

 

 

3,472

 

 

 

108

%

Share-Based Payments

 

 

950

 

 

 

439

 

 

 

511

 

 

 

116

%

 

 

1,724

 

 

 

631

 

 

 

1,093

 

 

 

173

%

Depreciation and Amortization

 

 

323

 

 

 

228

 

 

 

95

 

 

 

42

%

 

 

608

 

 

 

429

 

 

 

179

 

 

 

42

%

Total Operating Expenses

 

 

5,856

 

 

 

2,626

 

 

 

3,230

 

 

 

123

%

 

 

9,962

 

 

 

4,399

 

 

 

5,563

 

 

 

126

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a Percentage of Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and Marketing

 

 

11

%

 

 

14

%

 

 

 

 

 

 

 

 

 

 

15

%

 

 

11

%

 

 

 

 

 

 

 

 

General and Administrative

 

 

124

%

 

 

291

%

 

 

 

 

 

 

 

 

 

 

105

%

 

 

277

%

 

 

 

 

 

 

 

 

Share-Based Payments

 

 

28

%

 

 

68

%

 

 

 

 

 

 

 

 

 

 

27

%

 

 

55

%

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

10

%

 

 

35

%

 

 

 

 

 

 

 

 

 

 

10

%

 

 

37

%

 

 

 

 

 

 

 

 

Total Operating Expenses

 

 

173

%

 

 

408

%

 

 

 

 

 

 

 

 

 

 

157

%

 

 

380

%

 

 

 

 

 

 

 

 

 

Results for Q2 2018 compared to Q2 2017

For Q2 2018, the Company reported total operating expenses of $5.9 million as compared to $2.6 million for Q2 2017, representing an increase of $3.2 million, or 123%. This change was primarily due to:

an increase in professional and consulting fees for services rendered in connection with various strategic initiatives and strengthening the company’s governance and internal controls associated with the Company’s NASDAQ listing;

hiring of new employees and bringing on new dedicated functions such as procurement, information technology and investor relations;

increase in stock-based compensation associated with stock options issued to employees, directors and service providers; and

increase in depreciation expense allocated to operating expenses, the remainder of which is allocated to growing costs and capitalized to inventory.

 

Results for YTD 2018 compared to YTD 2017

For YTD 2018, the Company reported total operating expenses of $10.0 million as compared to $4.4 million for YTD 2017, representing an increase of $5.6 million, or 126%. This change was primarily due to:

an increase in professional and consulting fees for services rendered in connection with various strategic initiatives, expenditures associated with the Company’s NASDAQ listing, and strengthening the company’s governance and internal controls environment;

an increase in payroll associated with building out existing and new functions; and

increased amortization and stock-based compensation.

 

Other Income (Expense)

Other income (expense) for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income (Expense)

 

$

(37

)

 

$

13

 

 

$

(50

)

 

 

(385

%)

 

$

(59

)

 

$

(137

)

 

$

78

 

 

 

(57

%)

Share of Income from Whistler Investment

 

 

3

 

 

 

313

 

 

 

(310

)

 

 

(99

%)

 

 

44

 

 

 

416

 

 

 

(372

)

 

 

(89

%)

Gain on Other Investments

 

 

 

 

 

1,330

 

 

 

(1,330

)

 

 

(100

%)

 

 

221

 

 

 

1,271

 

 

 

(1,050

)

 

 

(83

%)

Total Other Income (Expense)

 

 

(34

)

 

 

1,656

 

 

 

(1,690

)

 

 

(102

%)

 

 

206

 

 

 

1,550

 

 

 

(1,344

)

 

 

(87

%)

 

Results for Q2 2018 compared to Q2 2017

For Q2 2018, the Company reported total other expense of $0.03 million as compared to total other income of $1.7 million for Q2 2017, representing a decrease in income of $1.7 million, or 102%. This change was primarily due to an increase in the gain on other investments in the prior year quarter, as no investments were disposed during this quarter. Total other expense for Q2 2018 was attributable to interest expense during the quarter.

11


 

Results for YTD 2018 compared to YTD 2017

For YTD 2018, the Company reported total other income of $0.2 million as compared to total other income of $1.6 million for YTD 2017, representing a decrease in income of $1.3 million, or 87%. This change was primarily due to a decrease in the gain on other investments, as investments were disposed during the previous year’s quarter. This resulted in the gain on disposal and the previously recorded revaluation gains in other comprehensive income being recycled through net income.

 

Income Tax Recovery

Results for Q2 2018 compared to Q2 2017

The Company recorded an income tax recovery of $0.3 million in Q2 2018 as compared to an income tax recovery of $0.02 million in Q2 2017. The effective tax rate for Q2 2018 was (59%) as compared to (15%) in Q2 2017. The change in effective tax rate in Q2 2018 is mainly attributable to an increase in deductible temporary differences not recognized, specifically for property, plant, and equipment, share and debt issuance costs, and losses carried forward.

 

Results for YTD 2018 compared to YTD 2017

The Company recorded an income tax recovery of $1.2 million in YTD 2018 as compared to an income tax recovery of $0.02 million in YTD 2017. The effective tax rate for YTD 2018 was 78% as compared to 3% in YTD 2017. The change in effective tax rate in YTD 2018 is mainly attributable to an increase in deductible temporary differences not recognized, specifically for property, plant, and equipment, share and debt issuance costs, and losses carried forward.

 

Other Comprehensive Income

Other comprehensive income for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Other Comprehensive Income

 

$

39

 

 

$

11

 

 

$

28

 

 

 

255

%

 

$

4

 

 

$

694

 

 

$

(690

)

 

 

(99

%)

 

Results for Q2 2018 compared to Q2 2017

For Q2 2018, the Company reported no material change in other comprehensive income as compared to Q2 2017.

 

Results for YTD 2018 compared to YTD 2017

For YTD 2018, the Company reported other comprehensive income of $0.004 million as compared to $0.7 million for YTD 2017, representing a decrease of $0.7 million, or 99%. This change was primarily due to the disposition of investments classified as fair value through other comprehensive income. The gain on revaluation of other investments represents only the revaluation of investments held by the Company as at June 30, 2018, which only includes the shares held in Canopy. The remainder of the investments were sold prior to YTD 2018, and thus, there would be no amount in this component of other comprehensive income related to those investments.

 

Comprehensive Income (Loss)

Comprehensive income (loss) for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

Change

 

 

Six Months Ended

June 30,

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Comprehensive Income (Loss)

 

$

762

 

 

$

185

 

 

$

577

 

 

 

312

%

 

$

(323

)

 

$

24

 

 

$

(347

)

 

 

(1446

%)

 

Results for Q2 2018 compared to Q2 2017

For Q2 2018, the Company reported comprehensive income of $0.8 million as compared to income of $0.2 million for Q2 2017, representing an increase of $0.6 million. The change in total comprehensive income results from the factors described in the immediately preceding section above.

 

Results for YTD 2018 compared to YTD 2017

For YTD 2018, the Company reported comprehensive loss of $0.3 million as compared to income of $0.02 million for YTD 2017, representing a decrease of $0.3 million. The change in total comprehensive income results from the factors described in the immediately preceding section above.

 


12


SELECTED QUARTERLY FINANCIAL INFORMATION

The following table summarizes selected quarterly financial information for the last eight quarters.

 

($ in 000s, except per share data)

 

FY 2018

 

 

FY 2017

 

 

FY 2016

 

 

 

Q2

 

 

Q1

 

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

 

Q3

 

Sales

 

$

3,394

 

 

$

2,945

 

 

$

1,610

 

 

$

1,314

 

 

$

644

 

 

$

514

 

 

$

431

 

 

$

124

 

Net Income (Loss)

 

 

723

 

 

 

(1,050

)

 

 

2,063

 

 

 

1,097

 

 

 

175

 

 

 

(844

)

 

 

1,370

 

 

 

(228

)

Total Comprehensive Income (Loss)

 

 

762

 

 

 

(1,085

)

 

 

2,025

 

 

 

1,095

 

 

 

187

 

 

 

(161

)

 

 

2,737

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

 

 

$

(0.01

)

 

$

0.01

 

 

$

0.01

 

 

$

 

 

$

(0.01

)

 

$

0.01

 

 

$

 

Diluted Earnings Per Share

 

 

 

 

 

(0.01

)

 

 

0.01

 

 

 

0.01

 

 

 

 

 

 

(0.01

)

 

 

0.01

 

 

 

 

 

The Company does not exhibit any material seasonality over its fiscal year. For further information on changes in income statement data, please see “Results of Operations” in this MD&A.

 

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash, availability under the Construction Loan (as defined herein) and proceeds from capital financings. As of June 30, 2018, total liquidity amounted to $118.3 million, comprised of $89.6 million in cash and $28.7 million of additional borrowings available under the Construction Loan (as defined herein).

 

Summary of Cash Flows

Our cash flows for the periods indicated are as follows:

 

($ in 000s)

 

Three Months Ended

June 30,

 

 

 

 

 

 

Six Months Ended

June 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

 

2018

 

 

2017

 

 

$ Change

 

Cash used in Operating Activities

 

$

(6,866

)

 

$

(3,328

)

 

$

(3,538

)

 

$

(20,629

)

 

$

(5,254

)

 

$

(15,375

)

Cash used in Investing Activities

 

 

(30,161

)

 

 

(3,903

)