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Item 1A. Risk Factors

2024-11-12 compared with 2024-08-08 · 43 added, 15 removed, 17 unchanged (77% of the section changed)

2 unchanged sentences

A detailed discussion of our risk factors appears in Part I, Item 1A.

Risk Factors of the Annual Report.

Any of the matters highlighted in the risk factors described in the Annual Report could adversely affect our business, results of operations and financial condition, causing an investor to lose all, or part of, its, his or her investment.

The risks and uncertainties described in the Annual Report are those we currently believe to be material, but they are not the only ones we face.

If any of the risks described in the Annual Report, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected.

Our new auditor may not be able to complete its review procedures in time for us to obtain a review of our financial statements for the third quarter of 2024.

The Audit Committee of the Board has approved the engagement of Davidson & Company LLP (“D&C”) as our independent auditors and our shareholders approved that appointment at our 2024 Annual Meeting.

D&C have advised us that they intend to complete the work necessary to review our third quarter financial statements.

However, D&C have just commenced their work and there can be no assurance that they will be able to complete the required work on a timely basis to permit the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 within the SEC’s required time-frame.

Risk Factors of the Annual Report, as supplemented in Part II, Item 1A.

Risk Factors of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2024.

Any of the matters highlighted in the risk factors described in these reports and the risk factors below could adversely affect our business, results of operations and financial condition, causing an investor to lose all, or part of, its, his or her investment.

These risks and uncertainties are those we currently believe to be material, but they are not the only ones we face.

If any of these risks and uncertainties or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected.

Wholesale price volatility could have a material adverse effect on our business.

Following the Cronos GrowCo Transaction, the financial results of Cronos GrowCo are incorporated into our results, which are in turn impacted by the market for wholesale cannabis.

Wholesale prices fluctuate due to changes in supply (which itself depends on other factors such as the level of cultivation of cannabis, weather conditions, fuel, equipment and labor costs, shipping costs, and government regulations), demand and other market conditions, which are factors beyond the control of Cronos GrowCo.

The market for wholesale cannabis biomass is particularly volatile compared to other commoditized markets due to the relatively nascent maturity of the industry.

The lack of centralized data and large variations in product quality make it difficult to establish a universal “spot price” for wholesale cannabis biomass.

A decline or general volatility in the wholesale price of cannabis biomass, may negatively impact Cronos GrowCo’s operating income, which may have a material adverse effect on our results of operations.

Under the Supply Agreement, which governs our commercial arrangement with Cronos GrowCo, our option to purchase cannabis biomass from Cronos GrowCo is subject to fixed pricing.

In the event of a decline in the wholesale market price of cannabis biomass, we may choose not to exercise our option to purchase biomass from Cronos GrowCo at the fixed prices set forth in the Supply Agreement.

Instead, we may attempt to purchase such biomass at the prevailing market price from Cronos GrowCo or third parties.

If we decline to exercise our option to purchase biomass from Cronos GrowCo, Cronos GrowCo would be under no obligation to sell to us at such lower market prices.

Additionally, if we attempt to purchase biomass from third parties, there can be no assurance that we will be able to do so on a consistent basis or in the quantities, strains, grades and qualities we require.

We are anticipating shortages in raw materials and may be unable to obtain adequate supplies of raw materials in a timely manner and at commercially reasonable prices.

Our production operations require that we obtain adequate supplies of raw materials, particularly biomass, on a timely basis and at commercially reasonable prices.

Our production operations require that we obtain adequate supplies of raw materials, particularly biomass, on a timely basis, at commercially reasonable prices and in the strains, grades and qualities that we require.

From time to time, including presently, there have been and are now shortages of raw materials.

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Cronos GrowCo’s production facilities are our principal source of raw materials.

Therefore, our production operations are reliant on our ability to acquire such raw materials on a timely and cost-effective basis from Cronos GrowCo.

If Cronos GrowCo is unable to meet our needs for raw materials, we may be required to source additional supply from third parties.

We may not be able to find third-party suppliers capable of supplying raw materials on a timely basis at commercially reasonable prices or in the quantities we require.

Therefore, our production operations are reliant on our ability to acquire such raw materials from Cronos GrowCo on a timely, cost-effective basis and in the strains, grades and qualities we require.

If Cronos GrowCo is unable to meet our needs for raw materials (including by not producing the strains, grades and qualities of biomass that we anticipate in our forecasts, as well as being unable to meet demand in excess of our previous forecasts), we may be required to source additional supply from third parties.

We may not be able to find third-party suppliers capable of supplying raw materials on a timely basis at commercially reasonable prices or in the quantities, strains, grades and qualities we require.

If we are unable to secure the necessary raw materials, we may experience product shortages and delays, we may be unable to launch new products and we may be required to discontinue certain products, which could have a material adverse effect on our business, financial condition and results of operations.

Product shortages, discontinuations or delays could result in customers listing fewer of our products, our failure to maintain or grow our market share and reputational damage, which could materially and adversely affect our results of operations, financial condition, business and prospects.

If raw material shortages cause industry-wide prices of raw materials to rise, our costs would increase.

If raw material shortages cause industry-wide prices of raw materials to rise, our costs could increase.

To the extent that we are unable to offset such costs through higher prices of our products or other cost savings, our results of operations, financial condition, business and prospects could be materially and adversely affected.

Cronos GrowCo may not be able to continue cultivating cannabis at its current rates, margins and efficiency and may experience delays and other challenges in connection with increasing its cultivation capacity and production.

Cronos GrowCo’s ability to continue the cultivation of cannabis biomass at its current rate or at all, and its ability to increase its cultivation capacity and production, including in connection with the construction of its Phase 2 expansion area, may be affected by a number of factors, including plant design errors, non-performance by third party contractors, increases in material or labor costs, cost overruns, construction delays and challenges, performance falling below expected levels of output or efficiency, weather conditions, contractor or operator errors or disruption, breakdowns, aging or failure of equipment or processes, labor disputes, as well as factors specifically related to indoor agricultural and processing practices, such as reliance on provision of energy and utilities to the facility.

Such factors may also affect Cronos GrowCo’s cost of cultivation and production.

There is no guarantee that Cronos GrowCo’s expansion strategy (including receiving any required Health Canada or other regulatory approvals, licenses and permits in a timely fashion, if at all) will be completed in the currently proposed form, or at all, or that Cronos GrowCo will be able to maintain its margins and efficiency as it expands.

Our option to purchase a significant portion of Cronos GrowCo’s production could strain Cronos GrowCo’s ability to develop, maintain and grow profitable relationships with third party customers.

Under the Supply Agreement, we have the option to purchase a significant portion of Cronos GrowCo’s production.

There can be no assurance that Cronos GrowCo will be able to sell its remaining production to third parties at commercially viable prices or on commercially viable terms.

Likewise, volatility in the exercise of Cronos’ option could negatively impact Cronos GrowCo’s ability to forecast the portion or quantity of its production available for sale to third parties, which could negatively impact Cronos GrowCo’s ability to develop, maintain and grow profitable relationships with third party customers.

To the extent Cronos GrowCo encounters difficulty in selling its remaining production capacity to third parties, Cronos GrowCo’s results of operations may be significantly and adversely affected, which may have a material adverse effect on our results of operations.

Termination or non-renewal of the Supply Agreement could have a material negative impact on our ability to obtain cannabis biomass at commercially viable prices.

Cronos GrowCo’s production facilities are our principal source of raw materials.

Following an initial four-year term, the Supply Agreement is subject to automatic renewal for successive one-year periods unless either party provides notice of non-renewal, as well as various termination rights.

In the event of non-renewal or termination of the Supply Agreement, we would be required to source cannabis biomass from third parties or negotiate a new supply agreement with Cronos GrowCo, and we may not be able to do so on a timely basis at commercially reasonable prices or in the quantities we require.

We could have difficulty integrating the accounting, financial reporting and other administrative functions of Cronos GrowCo.

Following the Cronos GrowCo Transaction, we consolidated the results of operations of Cronos GrowCo in our consolidated financial statements.

We could face difficulty in integrating the systems and processes of Cronos GrowCo, including accounting systems, internal controls over financial reporting, and other financial and administrative functions.

Likewise, Cronos GrowCo could experience challenges in conforming to our accounting standards, procedures and policies.

Any of these items could adversely affect our business, financial condition and results of operations.

The imposition of an anti-dumping duty on our imports into Israel could have a material adverse effect on our business, financial condition and results of operations.

On January 18, 2024, the Company was notified that the Trade Levies Commissioner of the Israel Ministry of Economy and Industry initiated a public investigation of alleged dumping of medical cannabis imports from Canada into Israel.

On July 9, 2024, the Commissioner announced a preliminary determination proposing to impose an anti-dumping duty on Canadian licensed producers.

On November 10, 2024, the Commissioner announced a final determination proposing to impose an anti-dumping duty on Canadian licensed producers.

The Company would be subject to a proposed duty of 175%.

If the Minister of Economy issues a final decision to impose an anti-dumping duty to which the Company’s imports would be subject, our ability to continue to import raw materials and cannabis products into Israel from Cronos GrowCo, the performance of our business in Israel, and our results of operations, financial condition, business and prospects could be materially and negatively impacted.

The Commissioner’s findings will now be evaluated by an ad hoc advisory committee, which is expected to make recommendations to the Ministers of Economy and Finance and the Finance Committee of the Knesset of whether to impose a duty.

If a final decision is made to impose an anti-dumping duty to which the Company’s imports would be subject, our ability to continue to import raw materials and cannabis products into Israel from Cronos GrowCo, the performance of our business in Israel, and our results of operations, financial condition, business and prospects could be materially and negatively impacted.

Unregistered Sales of Equity Securities and Use of Proceeds.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors