XML 38 R17.htm IDEA: XBRL DOCUMENT
v3.20.2

Derivative Liabilities | 6 Months Ended
--- | ---
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Liabilities | Derivative Liabilities On March 8, 2019, the Company closed the previously announced investment in the Company (the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. As of the closing date of the Altria Investment, the Altria Investment consisted of 149,831,154 common shares of the Company as of the closing date, issued to a wholly owned subsidiary of Altria and one warrant of the Company (the “Altria Warrant”), refer to Note 15(a), issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximately 45% ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 55% (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note. The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable. a.The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10% of the common shares of Cronos (approximately 77.8 million common shares at June 30, 2020) at a per share exercise price of C$19.00 which expires on March 8, 2023. b.The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the R&D partnership with Ginkgo Bioworks Inc. (“Ginkgo”) (the “Ginkgo Strategic Partnership”), which is discussed in Note 19(a)(i) below, the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance. The price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Strategic Partnership will be C$16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%. c.In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10-day volume-weighted average price of the common shares of the Company on the TSX for the ten full days preceding such exercise by Altria, provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%. The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities; related transaction costs of $22,355 were expensed as financing costs during the year ended December 31, 2019. A reconciliation of the carrying amounts of the derivative liability is presented below:
| April 1, 2020 |  | (Gain) / Loss on revaluation |  | Exercise of Rights |  | Effect from foreign exchange |  | As of June 30, 2020
(a) Altria Warrant | $ | 132,366 |  |  | $ | 30,052 |  |  | $ | — |  |  | $ | 3,540 |  |  | $ | 165,958 |
(b) Pre-emptive Rights | 13,070 |  |  | 2,610 |  |  | — |  |  | 500 |  |  | 16,180 |
(c) Top-up Rights | 20,740 |  |  | 3,218 |  |  | (727) |  |  | 1,072 |  |  | 23,576 |
| $ | 166,176 |  |  | $ | 35,880 |  |  | $ | (727) |  |  | $ | 5,112 |  |  | $ | 205,714 |
| January 1, 2020 |  | (Gain) / Loss on revaluation |  | Exercise of Rights |  | Effect from foreign exchange |  | As of June 30, 2020
(a) Altria Warrant | $ | 234,428 |  |  | $ | (58,052) |  |  | $ | — |  |  | $ | (10,418) |  |  | $ | 165,958 |
(b) Pre-emptive Rights | 12,787 |  |  | 3,925 |  |  | — |  |  | (532) |  |  | 16,180 |
(c) Top-up Rights | 49,945 |  |  | (23,361) |  |  | (727) |  |  | (2,281) |  |  | 23,576 |
| $ | 297,160 |  |  | $ | (77,488) |  |  | $ | (727) |  |  | $ | (13,231) |  |  | $ | 205,714 |
Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments. During the six months ended June 30, 2020, the Company’s share price decreased from December 31, 2019 resulting in a gain on revaluation of $77,488. The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of June 30, 2020 and December 31, 2019 applying the following inputs:
| As of June 30, 2020 |  |  |  |  |  | As of December 31, 2019 |  |  |  |
| Altria Warrant |  | Pre-emptive Rights |  | Top-up Rights |  | Altria Warrant |  | Pre-emptive Rights |  | Top-up Rights
Share price at valuation date (per share in C$) | $8.18 |  | $8.18 |  | $8.18 |  | $9.97 |  | $9.97 |  | $9.97
Subscription price (per share in C$) | $19.00 |  | $16.25 |  | $16.25 |  | $19.00 |  | $16.25 |  | $16.25
Weighted average risk-free interest rate (i) | 0.30% |  | 0.29% |  | 0.26% |  | 1.69% |  | 1.73% |  | 1.71%
Weighted average expected life (in years) (ii) | 2.68 |  | 2.00 |  | 1.11 |  | 3.18 |  | 1.25 |  | 1.66
Expected annualized volatility (iii) | 91% |  | 91% |  | 91% |  | 82% |  | 82% |  | 82%
Expected dividend yield | —% |  | —% |  | —% |  | —% |  | —% |  | —%
(i) The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. The risk-free interest rate uses a range of approximate ly 0.21% to 0.61% as of June 30, 2020 (December 31, 2019 – 1.66% to 1.73%) for the Pre-emptive rights and Top-up rights. (ii) The expected life in years represents the period of time that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. The expected life uses a range of approximately 0.25 year to 5.5 year s as of June 30, 2020 (December 31, 2019 – 0.25 year to 6 years). (iii) Volatility was based on an equally weighted blended historical volatility level of the underlying equity securities of the Company and peer companies. The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. A decrease in the inputs noted below would cause a decrease in derivative liability and as of June 30, 2020, there would be an equal but opposite impact on net income (loss).
| Decrease as of June 30, 2020 |  |  |  |  |  |  | Decrease as of December 31, 2019 |  |  |  |
|  | Altria Warrant |  | Pre-emptive Rights |  | Top-up Rights |  | Altria Warrant |  | Pre-emptive Rights |  | Top-up Rights
Share price |  | $ | 26,300 |  |  | $ | 2,779 |  |  | $ | 4,939 |  |  | $ | 36,436 |  |  | $ | 2,743 |  |  | $ | 9,577 |
Weighted average expected life |  | 14,249 |  |  | 1,744 |  |  | 1,272 |  |  | 17,471 |  |  | 2,366 |  |  | 2,178 |
Expected annualized volatility |  | 27,711 |  |  | 2,652 |  |  | 4,769 |  |  | 33,343 |  |  | 2,180 |  |  | 7,714 |
These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several factors outside of the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration