Cronos Group Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of December 31, 2021. Based on that evaluation, management has concluded that, as of December 31, 2021, due to the existence of material weaknesses in the Company’s internal control over financial reporting described below, the disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Management’s Report on Internal Controls Over Financial Reporting The Company’s management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon criteria established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2021 because of the material weaknesses described below. • Control Environment: We did not maintain an effective control environment. Specifically, our control environment (i) did not ensure that senior personnel in our accounting function engaged consistently in appropriate professional conduct and conduct consistent with our Code of Business Conduct and Ethics; and (ii) lacked personnel in our accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting rules. None of the personnel in the accounting function that engaged in misconduct were current or former executive officers of the Company. The control environment material weakness contributed to the goodwill and indefinite-lived intangible asset material weakness described below. • Goodwill and Indefinite-lived Intangible Asset Impairment Testing: We identified the following material weakness with respect to goodwill and indefinite-lived intangible asset impairment testing. We did not design and maintain effective controls to assess goodwill and indefinite-lived intangible assets for potential impairment as changes in the performance of and prospects for our U.S. reporting unit occurred. Specifically, we did not design and maintain effective controls to sufficiently assess the overall financial performance of and expectations for our U.S. reporting unit and certain macroeconomic, industry and market conditions when evaluating goodwill associated with our U.S. reporting unit and our Lord Jones ® brand indefinite-lived intangible asset for potential impairment. The material weakness in the control environment contributed to material misstatements related to the impairment of goodwill and indefinite-lived intangible assets that led to the restatement of the Company’s interim condensed consolidated financial statements for the three and six months ended June 30, 2021. The material weaknesses create a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. The lack of personnel in our accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting principles described above resulted in immaterial misstatements related to the accounting for derivatives, share-based compensation, earnings per share, and long-lived asset impairment. Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. 121 (c) Changes in Internal Controls over Financial Reporting Other than those material weaknesses identified above and measures described above below to remediate the material weaknesses identified in the prior and current year, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), that occurred during the year ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Remediation Plan and Status Related to Material Weakness Identified in the Prior Year As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, we have identified the following material weakness: • Inventory Verification The Company 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 created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. The Company’s management, with oversight from the Audit Committee of the Board of Directors, initiated a plan to remediate the material weakness and the material weakness was remediated as of December 31, 2021. The plan and progress is described below: Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status Inventory Verification • Enhance count procedures to ensure appropriate consideration and coverage of their total inventory balance Completed Tested Remediated • Implement cycle counts as a redundant control to supplement the annual physical count Completed Tested Remediated • Provide training to inventory teams on count procedures and inventory management control expectations Completed Tested Remediated 122 Remediation Plan and Status Related to Material Weaknesses Identified in the Current Year As discussed above, we have identified material weaknesses related to the control environment and goodwill and indefinite-lived intangible asset impairment testing. As of the filing date, the Company has implemented or is in the process of implementing various initiatives intended to address the identified material weaknesses and strengthen our overall control environment. In this regard, some of our key remedial initiatives include: Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status Control Environment • The Company’s Chief Executive Officer and Chief Financial Officer have reinforced and will continue to reinforce on an ongoing basis the importance of adherence to the Company’s policies, procedures and standards of conduct, including identifying misconduct and raising and communicating concerns; In Progress Not Tested Not Remediated • All accounting personnel that engaged in unprofessional conduct have been terminated or resigned from the Company and are in the process of being replaced with qualified personnel; Completed Not Tested Not Remediated • We have enhanced our existing sub-certification process to include additional certifications regarding certain complex accounting topics and to include additional employees to increase accountability amongst Company personnel; Completed Not Tested Not Remediated • We have expanded our compensation claw back provisions to incorporate all personnel who are subject to our enhanced sub-certification process; Completed Not Tested Not Remediated • We have identified and are in the process of implementing organizational enhancements including (i) evaluating the sufficiency, experience and training of personnel within our accounting function and (ii) hiring accounting personnel with appropriate knowledge and experience in U.S. GAAP; In Progress Not Tested Not Remediated • We are in the process of developing and implementing a training program for accounting and finance personnel to enhance their knowledge of U.S. GAAP outlined in our accounting policies, which are used in the preparation of the Company’s consolidated financial statements; and In Progress Not Tested Not Remediated Asset Impairment Testing • We have evaluated and will continue to regularly evaluate our policies and procedures relating to certain complex accounting topics and have begun implementing improvements in those policies and procedures. In Progress Not Tested Not Remediated The Company will continue to review, optimize, and enhance its financial reporting controls and procedures. As the Company continues to evaluate and work to improve its internal control over financial reporting, the Company may implement additional measures to address the material weaknesses or certain of the remediation measures described above may be enhanced or modified. The material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through further testing, that these controls are operating effectively. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 123 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, 2021. 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, 2021. 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, 2021 . 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, 2021. 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, 2021. 124 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 71 Consolidated Balance Sheets as of December 31, 2021 and 2020 75 Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2021, 2020, and 2019 76 Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended December 31, 2021, 2020, and 2019 77 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019 79 Notes to Consolidated Financial Statements 81 (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). 2.2 Options Purchase Agreement, dated June 14, 2021, by and between Cronos USA Holdings Inc. and PharmaCann Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Cronos Group Inc. filed June 15, 2021). 2.3 Option, dated June 14, 2021, issued by PharmaCann Inc. to Cronos USA Holdings Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K of Cronos Group Inc. filed June 15, 2021). 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 Amended and Restated Collaboration and License Agreement, dated as of June 3, 2021, by and between Ginkgo Bioworks, Inc. and Cronos Group Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc. filed June 4, 2021). 10.6† 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). 10.7† Form of Option Certificate to 2015 Amended and Restated Stock Option Plan (incorporated by reference to E xhibit 10.6 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 125 10.8† First Amendment to the Cronos Group Inc. 2015 Amended and Restated Stock Option Plan, dated as of August 7, 2019 (incorporated by reference to E xhibit 10.7 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.9† Cronos Group Inc. Amended and Restated 2018 Stock Option Plan, dated as of November 11, 2019 (incorporated by reference to E xhibit 10.8 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.10† Cronos Group Inc. Deferred Shared Unit Plan for Non-Executive Directors, dated as of August 7, 2019 (incorporated by reference to th e E xhibit 10.9 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.11† Employment Agreement, by and between Cronos Group Inc. (Employment Agreement, by and between Cronos Group Inc. (f/k/a PharmaCann Capital Corporation) and Michael Gorenstein, effective as of August 10, 2016 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.12† Description of Oral Amendment, effective as of June 2019, to Employment Agreement, by and between Cronos Group Inc. (f/k/a PharmaCan n Capital Corporation) and Michael Gorenstein, effective as of August 10, 2016 (incorporated by reference to E xhibit 10.1 1 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.13† 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 E xhibit 10.1 2 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.14† Employment Agreement, by and between Hortican Inc. and Xiuming Shum, effective as of August 21, 2017 (incorporated by reference to E xhibit 10.13 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 Hortican Inc., Xiuming Shum and, solely for the purposes specified therein, Cronos Group Inc., effective as of May 21, 2019 (incorporated by reference to E xhibit 10.14 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.16† Cronos Group Inc. Employment Inducement Award Plan #1 (incorporated by reference to E xhibit 10. 21 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.17† Form of Director and Officer Indemnity Agreement (incorporated by reference to E xhibit 10.24 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.18† 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). 10.19† 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). 10.20† 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). 10.21† 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). 10.22† 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). 10.23† Amended and Restated Executive Employment Agreement, dated as of June 3, 2021, by and among Cronos USA Client Services LLC, Cronos Group Inc. and Todd Abraham (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2021). 10.24† Executive Employment Agreement, dated as of August 6, 2021, between Cronos USA, Cronos Group and Robert Madore (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2021). 10.25† Letter Agreement, dated as of August 6, 2021, between Hortican, Cronos Group and Jerry Barbato (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2021). 10.26† Letter Agreement, dated as of November 26, 2021, between Hortican Inc., Cronos Group Inc. and Xiuming Shum (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-k of Cronos Group Inc., filed November 30, 2021). 10.27†* Executive Employment Agreement, dated as of January 10, 2022, by and among Cronos USA Client Services LLC, Cronos Group Inc., Hortican Inc. and John Griese. 10.28†* Letter Agreement, dated as of February 17, 2022, by and among Cronos USA Client Services LLC, Cronos Group Inc., and Anna Shlimak 14.1* Cronos Group Inc. Code of Business Conduct and Ethics 21.1* List of Subsidiaries of Cronos Group Inc. 126 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. 127 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 Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Kurt Schmidt and Robert Madore, 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) March 1, 2022 Kurt Schmidt /s/ Robert Madore Chief Financial Officer (Principal Financial Officer) March 1, 2022 Robert Madore /s/ Carlos Cortez Vice President, Controller (Principal Accounting Officer) March 1, 2022 Carlos Cortez /s/ Kendrick Ashton, Jr. Director March 1, 2022 Kendrick Ashton, Jr. /s/ Heather Newman Director March 1, 2022 Heather Newman /s/ James Rudyk Director March 1, 2022 James Rudyk /s/ Jody Begley Director March 1, 2022 Jody Begley /s/ Jason Adler Director March 1, 2022 Jason Adler /s/ Michael Gorenstein Director, Executive Chairman March 1, 2022 Michael Gorenstein /s/ Murray Garnick Director March 1, 2022 Murray Garnick 128