Cronos Group Inc. 10-K

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 our disclosure controls and procedures were not effective as of December 31, 2020 due to the material weakness described below. (b)(i) 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, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP, due to the material weakness 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. 2020 Material Weakness – Inventory Verification Management failed to properly design and execute sufficient procedures to verify inventory quantities. Specifically, while inventory counts were performed in the fourth quarter, (i) the aggregate value of items excluded from the count exceeded the Company’s materiality threshold, and (ii) human error in count execution, data transposition and reconciliation analysis resulted in inaccurate adjustments. This deficiency did not result in errors that were quantitatively material. Nevertheless, the deficiency creates a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis. 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, 2020 as stated in their report which is included in the financial statements in Part II, Item 8 of this 10-K. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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. (b)(ii) Remediation of 2020 Material Weakness Contributing factors included restrictions in the ability to perform physical inventory counts at third party logistics and subcontract manufacturing locations, resource turnover and the organization’s experience in processing count results within their new ERP system implemented at the beginning of the third quarter of 2020. Management will (i) enhance their count procedures to ensure appropriate consideration and coverage of their total inventory balance, (ii) implement cycle counts as a redundant control to supplement the annual physical count, and (iii) provide training to inventory teams on count procedures and inventory management control expectations. (c) Changes in internal control over financial reporting. During the year, the Company implemented a new ERP system across the Canadian business. The new ERP system is a meaningful component of our internal control over financial reporting and is expected to enable us to realize efficiencies throughout our finance, supply chain and operations processes. In connection with the ERP implementation, we updated the processes and controls that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our accounting procedures and business processes. 118 T able of Contents The Company has implemented its processes and internal controls over financial reporting in the U.S. segment for the year ended December 31, 2020. Closure of 2019 Material Weakness As disclosed in Part II Item 9A, Controls and Procedures, in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2019 (the “2019 Annual Report”), during the fourth quarter of 2019 we identified material weaknesses in internal controls related to risk assessment, segregation of duties, and non-routine transactions. During 2020, management implemented our previously disclosed remediation plan that included: (i) enhancement of our quarterly review of the risk assessment model and its risk control matrices, (ii) establishing a risk committee, which reviews the risk assessment for changes in the business on a quarterly basis, (iii) enhancement of our delegation of authority matrix, to further limit groups that may authorize sales or purchases of inventory, (iv) the establishment of a review process and internal database to identify entities that are both vendors and customers of the Company, in order to identify potential related transactions, (v) the implementation of revenue recognition training, (vi) the creation and implementation of a non-routine transaction policy, (vii) implementation of procedures for the preparation of business cases for all non-routine business-to-business unbranded sales and purchases, and (viii) expansion of the sub-certification processes to additional members of management to ensure that non routine transactions are identified. During the fourth quarter of 2020, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded the material weaknesses reported in the 2019 Annual Report have been remediated as of December 31, 2020. The completed remediation to date is described below: Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status Risk Assessment • Enhance quarterly review of risk assessment model and risk control matrices Implemented Tested Remediated • Establish a risk committee which reviews the risk assessment for changes in the business on a quarterly basis Implemented Tested Remediated Segregation of Duties • Enhance Delegation of Authority matrix to further limit groups that may authorize sales or purchases of inventory Implemented Tested Remediated • Establish review process and internal database to identify entities that are both vendors and customers of the Company Implemented Tested Remediated • Create and implement revenue recognition training Implemented Tested Remediated Non-Routine Transactions • Create and implement a Non-Routine Transactions Policy to include: Implemented Tested Remediated ◦ Definition of Non-Routine Transactions ◦ Accounting memorandum completion ◦ CEO/CFO approval • Formalization of business cases for all non-routine business to business unbranded sales and purchases to be reviewed on a quarterly basis to ensure alignment with the objectives of the business Implemented Tested Remediated • Expand the sub-certification process to additional members of management to ensure that non routine transactions are identified Implemented Tested Remediated In the fourth quarter of 2020, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), other than noted above. ITEM 9B. OTHER INFORMATION. None. 119 T able of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2020. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2020. 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 or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2020 . 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 or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2020. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2020. 120 T able of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. The following documents are filed as part of this Annual Report on Form 10-K, 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 on the pages indicated. CRONOS GROUP INC. AND SUBSIDIARIES Page No. Reports of Independent Registered Public Accounting Firm 67 Consolidated Balance Sheets as of December 31, 2020 and 2019 71 Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019, and 2018 72 Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended December 31, 2020, 2019, and 2018 74 Consolidated Statements of Cash Flows for the years ended December 2020, 2019, and 2018 76 Notes to Consolidated Financial Statements 77 (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, or are incorporated by reference herein. Exhibit Number Exhibit Description 2.1 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). 3.1 Certificate of Continuance, Notice of Articles and Articles of Cronos Group Inc. (incorporated by reference to Exhibit 4 .1 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 4.1 Form of Cronos Group Inc. Common Share certificate ( incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020 ) . 4.2* Description of Capital Stock of Cronos Group Inc. 10.1 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). 10.2 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). 10.3 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). 10.4 First Amendment to Collaboration and License Agreement, dated as of May 9, 2019 (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.5† 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). 10.6† Form of Option Certificate to 2015 Amended and Restated Stock Option Plan (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.7† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.8† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.9† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 121 T able of Contents 10.10† Employment Agreement, by and between Cronos Group Inc. ( 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020) . 10.11† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.12† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.13† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.14† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.15† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.16† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.17† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.18† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.19† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.20† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.21† Cronos Group Inc. Employment Inducement Award Plan #1 (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.22† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.23† 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 Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.24† Form of Director and Officer Indemnity Agreement (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.25† Separation Agreement, dated as of July 20, 2020, by and among Robert Rosenheck, Redwood Wellness, LLC and Cronos Group Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc., filed July 20, 2020). 10.26† Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.27† Form of Restricted Share Unit Award Agreement to Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.28† Form of Restricted Share Unit Award Agreement (Israel) to Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.29† Executive Employment Agreement, dated as of September 9, 2020, by and among Cronos USA Client Services LLC, Cronos Group Inc. and Kurt Schmidt (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc., filed September 9, 2020). 122 T able of Contents 10.30† Amended and Restated Employment Agreement, dated as of September 9, 2020, by and among Cronos USA Client Services LLC, Cronos Group Inc., and Michael Gorenstein (incorporated by reference to Exhibit 10. 2 to the Current Report on Form 8-K of Cronos Group Inc., filed September 9, 2020). 14.1* Cronos Group Inc. Code of Business Conduct and Ethics 21.1* List of Subsidiaries of Cronos Group Inc. 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm. 24.1* Power of Attorney (included on signature page hereto). 31.1* 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. 31.2* 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. 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. 123 T able of Contents SIGNATURES 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. CRONOS GROUP INC. By: /s/ Kurt Schmidt Kurt Schmidt President and Chief Executive Officer Date: February 26, 2021 Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Kurt Schmidt and Jerry Barbato, severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Name Title Date /s/ Kurt Schmidt President and Chief Executive Officer (Principal Executive Officer) February 26, 2021 Kurt Schmidt /s/ Jerry Barbato Chief Financial Officer (Principal Financial Officer) February 26, 2021 Jerry Barbato /s/ Puneet Mathur Vice President, Controller (Principal Accounting Officer) February 26, 2021 Puneet Mathur /s/ Bronwen Evans Director February 26, 2021 Bronwen Evans /s/ Heather Newman Director February 26, 2021 Heather Newman /s/ James Rudyk Director February 26, 2021 James Rudyk /s/ Jody Begley Director February 26, 2021 Jody Begley /s/ Jason Adler Director February 26, 2021 Jason Adler /s/ Michael Gorenstein Director, Executive Chairman February 26, 2021 Michael Gorenstein /s/ Murray Garnick Director February 26, 2021 Murray Garnick 124