first quarter 2020 interim report · management’s discussion and analysis may 26, 2020 basis of...

First Quarter 2020 Interim Report

Management’s Discussion and Analysis May 26, 2020

Basis of Presentation

This Management’s Discussion and Analysis of the Financial Position and Results of Operations (“MD&A”) is the responsibility of management and has been reviewed and approved by Crescita’s board of directors (the “Board of Directors”). This MD&A has been prepared in accordance with the requirements of the Canadian Securities Administrators (“CSA”). While the Board of Directors is ultimately responsible for approving the MD&A, it carries out this responsibility mainly through the oversight of its Audit Committee, which has been appointed by the Board of Directors and is composed entirely of independent and financially literate directors.

Throughout this document, Crescita Therapeutics Inc. is referred to as “Crescita”, “we”, “our” or “Company”. This MD&A provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations, cash flows and financial condition of the Company. The following information should be read in conjunction with Crescita’s condensed consolidated interim financial statements and the notes thereto for the three months ended March 31, 2020 and 2019 (the “Q1-20 Interim Financial Statements”) which have been filed on SEDAR. Crescita’s accounting policies are in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Additional information relating to the Company, including its Annual Information Form (“AIF”), can be found on SEDAR at www.sedar.com. All amounts in this MD&A are expressed in thousands of Canadian dollars, unless otherwise noted.

Materiality of Disclosures

This MD&A includes information we believe is material to investors. We consider something to be material if it results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or if it is likely that a reasonable investor would consider the information important in making an investment decision.

Forward-looking Statements

This MD&A contains “forward-looking statements” within the meaning of applicable securities laws. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Forward-looking statements include, but are not limited to, statements concerning the Company’s future objectives, strategies to achieve those objectives, the expected impact of, and responses to be taken with respect to, the outbreak of the coronavirus disease (“COVID-19”) as well as statements with respect to management’s expectations regarding beliefs, plans, estimates, goal, strategies, intentions, future growth, results of operations, performance, business prospects, opportunities and macroeconomic industry trends and similar statements concerning anticipated future events, results, circumstances, performance or expectations. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on the Company’s current beliefs, expectations and assumptions regarding the future of its business, future plans and strategies, projections, industry trends, legislative or regulatory matters, future levels of indebtedness, availability of capital, current economic conditions, the impact of, and response measures to be taken with respect to COVID-19 and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control. Crescita’s actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, readers should not rely on any of these forward-looking statements. Important factors that could cause Crescita’s actual results and financial condition to differ materially from those indicated in the forward-looking statements include general business and economic uncertainties, adverse market conditions, the impact of COVID-19 on the operations, business and financial results of the Company, the Company’s ability to execute

Crescita Therapeutics Inc. ▪ First Quarter 2020 Interim Report 2

http://www.sedar.com/

its growth strategies, the impact of changing conditions in the regulatory environment and product development processes, increasing competition in the industries in which the Company operates, the Company’s ability to meet its debt commitments, the impact of unexpected product liability matters, the impact of litigation involving the Company and/or its products, the impact of changes in relationships with customers and suppliers, the degree of intellectual property protection of the Company’s products, the degree of market acceptance of the Company’s products, developments and changes in applicable laws and regulations, as well as other risk factors as described from time to time in the reports and disclosure documents filed by Crescita with Canadian securities regulatory agencies and commissions, including the Company’s Annual Information Form dated March 24, 2020. These and other factors should be considered carefully, and readers should not place undue reliance on Crescita’s forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements and none of Crescita or any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Any forward-looking statement made by the Company in this MD&A is based only on information currently available to it and speaks only as of the date on which it is made. Except as required by applicable securities laws, Crescita undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Non-IFRS and Key Financial Measures

The Company reports its financial results in accordance with IFRS. However, we use certain non-IFRS financial measures to assess our Company’s performance. We believe these to be useful to management, investors, and other financial stakeholders in assessing Crescita’s performance. The non-IFRS measures used in this MD&A do not have any standardized meaning prescribed by IFRS and are therefore not comparable to similar measures presented by other issuers. These measures should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with IFRS. The following are the non-IFRS and key financial measures used by management to assess the underlying financial performance of the Company alongside their respective definitions:

Profitability • EBITDA (non-IFRS) – is defined as earnings (loss) from continuing operations before interest, income taxes, depreciation, and amortization. A reconciliation of EBITDA to its closest IFRS measure can be found under the EBITDA and Adjusted EBITDA section of this MD&A on page 24.

• Adjusted EBITDA (non-IFRS) – is defined as earnings (loss) from continuing operations before interest, income taxes, depreciation and amortization, gain on settlement, other income or expense, equity-settled stock-based compensation (“SBC”), gain on debt renegotiations, goodwill and intangible asset impairment, termination and other costs and foreign currency gains (losses), as applicable. Management believes that Adjusted EBITDA is an important measure of operating performance and cash flow and provides useful information to investors as it highlights trends in the underlying business that may not otherwise be apparent when relying solely on IFRS measures. A reconciliation of the adjusted EBITDA to its closest IFRS measure can be found under the EBITDA and Adjusted EBITDA section of the present document on page 24.

• Net income (loss) from continuing operations before income taxes – is a measure of income or loss generated by the Company during the period, prior to the impact of any discontinued operations.

Liquidity • Cash provided by (used in) operating activities – is a measure of cash generated from or (used in) managing our day-to-day business operations. We believe that operating cash flow is indicative of financial flexibility, allowing us to execute our Four-Pillar Growth Strategy.


Change in Reporting Segments

IFRS 8 - Operating Segments (“IFRS 8”) requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. As a result of certain realignments in the 2020 strategic planning process, effective January 1, 2020, the Company now has three reportable segments: (i) Commercial Skincare (“Commercial”); (ii) Licensing and Royalties (“Licensing”); and (iii) Manufacturing and Services. Prior to this, the Company operated its business as one segment. The Company has retrospectively revised the segmented information for the comparative period to conform to the new segmented information structure. Please refer to the Revenue by Segment and Cost of Goods Sold and Gross Profit by Segment sections of the present document and to note 14 - Segmented Information of our Q1-20 Interim Financial Statements for additional information on our segments.


MD&A Contents

In this document, we aim to provide a narrative explanation of the condensed consolidated interim financial statements through the eyes of management and provide context within which these financial statements should be analyzed by giving disclosure about the dynamics of the Company’s business.

Section Contents Page

Corporate Overview

• About Crescita

• Vision and Growth Strategy

• Competitive Conditions

• Non-Prescription Skincare Product Portfolio

• Prescription Product Portfolio

• Product Candidates in Co-Development

• Transdermal Delivery Technologies

• Pipeline Products

6

7

7

7

8

9

10

11

Key Business Developments

• Q1-2020 Year-over-Year Financial Highlights

• Selected Quarterly Financial Information

• Impact of COVID-19 Pandemic

• Outlook and Liquidity Update

• Key Business Developments

• Significant Partnerships

• Outstanding Share Data

• Normal Course Issuer Bid

• Fluctuations in Operating Results

• Foreign Exchange Rates

12

12

13

14

14

16

17

17

17

18

Results of Operations

• Revenue by Segment

• Revenue Distribution

• Major Customers

• Cost of Goods Sold and Gross Profit by Segment

• Operating Expenses (excluding COGS)

• Other (Income) Expenses

• Net Income (Loss) and Net (Loss) per Share

• EBITDA and Adjusted EBITDA Reconciliation

18

20

20

20

22

23

23

24

Liquidity and Capital Resources

• Consolidated Statement of Cash Flows

• Commitments

• Financial Instruments and Risk Management

• Off-Balance Sheet Financing

• Guarantees

• Capability to Deliver Results

25

26

26

29

29

29

Eight Quarter Summary

A summary of the past eight quarters’ key performance measures. 30

Critical Accounting Policies and Estimates

A discussion of critical accounting estimates used in the preparation of the Consolidated Audited Financial Statements.

31

Management’s Responsibility of Financial Reporting

A discussion of the existence of appropriate procedures and controls to ensure that information used internally and disclosed externally in complete and reliable.

33

Risk Environment • Risk Factors

• Litigation

34 34


Corporate Overview

About Crescita

Crescita (TSX: CTX and OTC US: CRRTF) is a growth-oriented, innovation-driven Canadian commercial dermatology company with in-house research & development (“R&D”) and manufacturing capabilities. The Company offers a portfolio of non-prescription skincare products and early to commercial stage prescription drug products and owns multiple proprietary drug delivery platforms that support the development of patented formulations that can facilitate the delivery of active ingredients into or through the skin.

Supported by a sales force covering Canada and executing a business to business to consumer marketing approach, Crescita sells its non-prescription skincare products domestically through spas, medispas, and medical clinics, as well as internationally, through distributors. Below is a description of the Company’s primary distribution channels:

1) spas: our lead aesthetic skincare brand, Laboratoire Dr Renaud® (“LDR”), is sold to professional aestheticians in spas. The spa environment provides non-invasive skincare solutions to clients. Specializing in anti-aging, dehydration, pigmentation, sensitivity, acne, and rosacea, LDR provides high performance active ingredient product formulations to enhance skincare treatments. LDR is also sold and used for training in aesthetic schools across Canada.

2) medispas and medical clinics: our medical aesthetic skincare brands, Pro-Derm™ and Alyria®, are sold in medispas and medical clinics which require at least one medical doctor to be on staff or affiliated to the establishment. Such establishments offer both non-invasive and invasive procedures for anti-aging, acne, and other skin ailments. Medical aestheticians and the affiliated doctors perform advanced skincare treatments such as chemical peels, advanced retinol facials, microdermabrasion, neurotoxin injections, and various laser and device treatments.

3) international distributors: Some of our skincare brands and formulations are currently sold in certain Asian markets, such as Malaysia and South Korea, through international distributors. In addition, some

of the Company’s products are also sold in the United States (“U.S.”). Dermazulene®, a product specifically designed and created for the Chinese market, is sold through a large cross-border e-commerce platform in China.

Crescita’s portfolio also includes a prescription product called Pliaglis® that utilizes the Company’s proprietary phase-changing topical cream Peel technology – see Transdermal Delivery Technologies. Pliaglis is a topical local anaesthetic cream that provides safe and effective local dermal analgesia on intact skin prior to superficial dermatological procedures. The product is currently approved in over 25 different countries and sold by commercial partners in the U.S., Italy, and Brazil, as well as in Canada by the Company, through its existing sales force in spas and medispas.

Crescita’s expertise in product formulation and development can be leveraged in combination with its patented transdermal delivery technologies to develop and manufacture creams, liquids, gels, ointments and serums under its contract development and manufacturing organization (“CDMO”) infrastructure. Crescita provides its CDMO services to several North American clients under full cGMP (current Canadian Good Manufacturing Practices) conditions and delivers innovative turnkey solutions that integrate production with in-house R&D, supply chain, quality assurance and quality control functions. The Company’s integrated approach aims to simplify its clients’ supply chain and maximize value to ensure timely and cost-effective commercial product launches for its clients. The Company operates out of a 50,000 square-foot facility located in Laval, Québec, which produces the majority of its non-prescription skincare products. Formulations manufactured by or for Crescita include cosmetics, natural health products (“NHP”) and products with Drug Identification Numbers (“DIN”).

The Company runs its operations through its corporate head office located in Laval, Québec and maintains a registered office located at 6733 Mississauga Road, Mississauga, Ontario.


Vision and Growth Strategy

Crescita’s vision is to become a leader in innovative, science-based skincare solutions, providing improved outcomes for all its clients’ skincare concerns. Our growth strategy is comprised of four pillars, each of which is based on the fundamentals of our business model. Together, we refer to these as our “Four-Pillar Growth Strategy.”

• Pillar 1: Organic Growth

• Pillar 2: Strategic Acquisitions and/or In-licensing Agreements

• Pillar 3: Strategic Out-licensing of Assets

• Pillar 4: Contract Development and Manufacturing Services Our strategy was designed to generate growth over the long-term. There have been no changes to our Vision and Growth Strategy since our year ended December 31, 2019. For further details, please refer to the section entitled “Vision and Growth Strategy” on page 6 of Crescita’s 2019 Annual Report, which is available on Crescita’s website at www.crescitatherapeutics.com and which was filed with the CSA on SEDAR at www.sedar.com.

Competitive Conditions

There have been no changes to the Company’s competitive conditions of the Company since our last fiscal year ended December 31, 2019. For further details please refer to the section entitled “Competitive Conditions” on page 7 of the 2019 Annual Report, which can be found on Crescita’s website at www.crescitatherapeutics.com and which has been filed with the CSA on SEDAR at www.sedar.com.

Non-Prescription Skincare Product Portfolio

Laboratoire Dr Renaud® The Laboratoire Dr Renaud skincare line is inspired by nature and joins science and aesthetics to develop personalized solutions to address daily skin concerns such as: aging, acne, rosacea, pigmentation, dehydration, and sensitivity. The product line was founded in France in 1947 by Dr. Louis Raymond Renaud, a renowned French dermatologist, and was launched as a Canadian brand in Montreal in 1963. With science and innovation at the heart of the brand since its inception, products are designed according to the principles of biomimicry which imitate natural processes, making them extremely compatible with the skin. Crescita owns the trademark rights for the skincare line in North America, certain South American countries, and the Pacific Rim as well as the worldwide rights for the formulations. Virtually all the LDR products are manufactured at the Company’s Laval manufacturing facility.

Pro-Derm™

Pro-Derm is a line of high-quality cosmeceutical products sold to physicians operating medispas and medical clinics. Pro-Derm products are used in conjunction with anti-aging medical procedures both pre and post-treatment, such as dermal filler injections for lines and wrinkles, facial peels, laser treatments, aesthetic surgery as well as to prevent the undesired effects of aging. Developed by a Canadian team of chemists and a dermatologist, the products are designed to achieve and maintain healthy-looking skin and to optimize cosmetic procedures offered by physicians. By offering a range of clinically proven effective ingredients, Pro-Derm combines the benefits of both cosmetic and pharmaceutical products. Our formulas are free from parabens, dyes, perfumes, alcohol, mineral oils, and other harsh chemicals, as well as from ingredients of animal origin. Crescita owns the trademark rights for Canada and the worldwide formulations and marketing rights for Pro-Derm. Virtually all the Pro-Derm products are manufactured at the Company’s Laval manufacturing facility.


http://www.crescitatherapeutics.com/


http://www.crescitatherapeutics.com/


Alyria®

Alyria is a comprehensive skincare line developed using scientific research to target major skincare concerns. Alyria offers a complete regimen to help patients achieve healthier-looking skin. Alyria products are sold by physicians and use therapeutic concentrations of some of the most advanced ingredients in proven formulations, delivered through advanced skin optimizing systems. Alyria’s portfolio is complementary to the Company’s Pro-Derm line and can be purchased throughout Canada in various medispas and medical clinics. Crescita owns the trademark rights for Canada, Europe, certain South American countries, and the United States. In addition, Crescita owns the worldwide marketing rights for Alyria, as well as the rights to the product formulations, which are, in some cases, on a non-exclusive basis. The Company has commenced the technology transfer of the manufacturing of the Alyria line of products to its facility and anticipates completion of the transfer by the end of fiscal 2020.

Dermazulene®

Dermazulene is a skincare brand developed specifically to address the skincare needs of Asian consumers. The brand differentiates itself through effective anti-aging, whitening and anti-pollution formulas, while offering novel packaging such as encapsulated products. The brand was launched in China in the first quarter of 2019 through NetEase Kaola, an e-commerce platform of Alibaba Group Holding Limited. Crescita owns the trademark rights to Dermazulene in Canada, China, and the United States.

Prescription Product Portfolio

Pliaglis® Pliaglis is a topical local anaesthetic cream that provides safe and effective local dermal analgesia on intact skin prior to superficial dermatological procedures. The formulation contains a eutectic mixture of 7% lidocaine and 7% tetracaine that utilizes the Company’s proprietary phase-changing topical cream Peel technology. The Peel technology consists of a drug-containing cream which, once applied to a patient’s skin, dries to form a pliable layer that releases drug into the skin. Pliaglis is applied to intact skin for 20 to 30 minutes prior to superficial dermatological procedures such as dermal filler injections, non-ablative laser facial resurfacing, or pulsed-dye laser therapy and 60 minutes prior to procedures such as laser-assisted tattoo removal. Following the application period, the pliable layer is easily removed from the skin allowing the procedure to be performed with minimal to no pain. In clinical studies, the mean duration of anesthesia has been shown to be in the range of 7 to 9 hours after the application of Pliaglis. The product is currently approved in over 25 countries and sold by commercial partners in the U.S., Italy, and Brazil. See Significant Partnerships. In addition, the Company launched Pliaglis in the Canadian medispa market through its existing sales force at the end of the fourth quarter 2019. Commercial activities are in place to create awareness regarding the product’s availability in Canada. However, it is too early to determine what the market acceptance for this product or what its commercial viability will be in Canada. Crescita continues to explore alternatives for the preferred commercial distribution pathway for Pliaglis in the rest-of-world (“ROW”) and is actively seeking to secure licensing partners in geographies that have been identified by management as having the highest strategic priority.

Enhanced Formulation of Pliaglis® The Company developed alternate enhanced formulations of Pliaglis that also contain 7% lidocaine and 7% tetracaine but possess improved application and removal properties compared to Pliaglis with extended patent protection to 2031 in multiple jurisdictions. On July 16, 2019, the United States Patent and Trademark Office (the “USPTO”) granted U.S. Patent No. 10,350,180 for an enhanced formulation of Pliaglis which was subsequently approved by the U.S. Food and Drug Administration (“FDA”) on November 5, 2019. On March 31, 2020, the USPTO granted U.S. Patent No. 10,603,291 which covers both Pliaglis and enhanced formulations of Pliaglis with validity through January 14, 2031. The new patent was listed in the Orange Book by Taro on April 14, 2020.


Product Candidates in Co-Development

In April 2014, Crescita entered into a joint venture with Ferndale Laboratories Inc. (“Ferndale”) and a leading U.S. contract research company (a “CRO” and together the “Development Partners”) to formulate and develop two topical dermatology product candidates (the “Product Candidates”) utilizing the Company’s patented

MMPE™ technology. Under this agreement (the “Original Joint Venture Agreement”), upon completion of the formulations, the Development Partners would oversee and fund the formulations’ advancement through Phase 2 clinical studies, after which, it was anticipated that the Product Candidates would be made available for out-licensing. However, in the second quarter of 2019, the Company finalized an amendment to the Original Joint Venture Agreement that included a financial commitment from the Company to participate in the funding of the Phase 3 clinical development in order to maintain Crescita’s anticipated share of future licensing proceeds. CTX-101 CTX-101 (formerly referred to as MiCal 1), is a topical formulation utilizing a corticosteroid in combination with the Company’s patented MMPE technology to treat plaque psoriasis. On February 11, 2020, the Company announced positive topline results from two pivotal Phase 3 clinical trials for CTX-101. The two Phase 3 multi-centre, randomized, vehicle-controlled, double-blind, parallel group trials were conducted in the United States using the same study design. Both studies met the primary endpoint demonstrating that a statistically significant greater number of patients achieved the Investigator's Global Assessment (“IGA's”) treatment success (p< 0.001) at the end of study. The IGA score is a static evaluation by the investigator of the overall assessment of the patient's disease status within the designated treatment area. These results are based on the Intent to Treat (“ITT”) population and study results in the Per Protocol (“PP”) population were also highly significant as were key secondary endpoints for both studies. The Company is now working with its Development Partners to complete the full development program and clinical reports for these studies for submission to the FDA and has agreed with its Development Partners to initiate licensing discussions. CTX-102 CTX-102 (formerly referred to as MiCal 2), is a topical formulation also utilizing the Company’s patented MMPE technology to treat an undisclosed dermatological skin condition. Initial formulation development efforts for CTX-102 were completed in the second quarter of 2018, while an Investigational New Drug (“IND”) application update was filed on June 25, 2018 including details on the formulations to be evaluated in the first planned Phase 1 vasoconstrictor assay (“VCA”) study. The IND update was accepted by the FDA and the initial Phase 1 VCA study designed to evaluate the relative potency of several formulations, was completed in the first quarter of 2019. The results of the Phase 1 VCA study were encouraging and the Company is now advancing the development program through a pilot Phase 2 study that will provide additional feedback on the safety, user response and clinical efficacy of the lead formulation.


Transdermal Delivery Technologies

Crescita has multiple drug delivery platforms that support the development of patented formulations that deliver active ingredients into or through the skin.

Peel and DuraPeel™ The Peel and DuraPeel technologies are self-occluding, film-forming cream/gel formulations that provide extended release delivery of the active ingredients to the site of application. The cream/gel contains a drug, that when applied to a patient’s skin, forms a pliable layer that releases the active ingredient into the skin for up to 12 hours. The benefits of the Peel and DuraPeel technologies include proven compatibility with a variety of active pharmaceutical ingredients (“APIs”). A self-occluding film reduces product transference risk, provides fast drying time, facilitates easy application and removal, and enables application to large and irregular skin surfaces. While the Peel technology typically involves a single solvent that dries to form a pliable film, the DuraPeel technology involves a two-solvent system which includes: 1) a volatile solvent component that dries to form a self-occluding film and 2) a non-volatile solvent component that remains in the formulation to facilitate prolonged release of the active from the formulation into the skin. Peel technology patents have been issued in 21 countries including the U.S., with the latest expiring in 2031. Patent applications are pending in two countries. DuraPeel patents have been issued in Australia, Canada, Japan, and the U.S. with the latest expiry in 2027. The European patent application is pending.

MMPE™ The MMPE technology uses synergistic combinations of certain specific pharmaceutical excipients included in the FDA’s Inactive Ingredient Guide for improved topical delivery of active ingredients into or through the skin. The benefits of this technology include the potential for increased penetration of APIs with the possibility of improved efficacy, lower API concentration and/or reduced dosing. Issued U.S. patents provide intellectual property protection through March 6, 2027. Applications are pending in Australia, Canada, Europe, Mexico, New Zealand, and the United States, with the latest expiry date in 2036.


Pipeline Products

Non-Prescription Skincare Products The non-prescription skincare business requires that the product lines be rejuvenated from time-to-time with new product offerings and product innovations, which, in some cases utilize our patented transdermal delivery technologies. Crescita has established a multi-disciplinary product development committee that screens and identifies new products to be developed or existing products to be upgraded. These new products are selected based on sales and marketing trends, but also include regulatory, manufacturing and cost considerations. The products under development are usually kept confidential for competitive reasons. Prescription Drug Products Crescita has a portfolio of development and commercial stage products and proprietary platform technologies, which include MMPE and DuraPeel. See Transdermal Delivery Technologies. The following table summarizes the Company’s key prescription drug products and product candidates and associated intellectual property.

Product

Therapeutic Area

Stage of Development

Intellectual Property 2

Pliaglis and enhanced formulation of Pliaglis (U.S.)

Local anesthesia prior to cosmetic dermatology procedures

Commercial Patent for Pliaglis expired on September 28, 2019. Two Orange Book listed U.S. patents for enhanced formulation expiring in 2031. Application pending in the U.S. through 2031.

Pliaglis (ROW) Local anesthesia prior to cosmetic dermatology procedures

Commercial Patents granted until September 27, 2020 in EP.

Enhanced formulations of Pliaglis (ROW)

Local anesthesia prior to cosmetic dermatology procedures

Phase 3/4 Patents granted in AU, CA, CN, AT, BE, CH, DE, ES, FR, GB, GR, IT, LU, NL, PL, TR, HK, JP, MX, and RU, with latest expiring in 2031. Application pending in BR through 2031.

CTX-101 1 Plaque Psoriasis Phase 3 Patents granted in the U.S. expiring in 2027. Applications pending in AU, CA, EP, MX, NZ, and U.S. through 2036.

CTX-102 1 Dermatological skin treatment

Phase 1 Patents granted in the U.S. expiring in 2027. Applications pending in AU, CA, EP, MX, NZ, and U.S. through 2036.

Dermatology products

utilizing MMPE 3

Prescription treatments of skin diseases

Pre-clinical Patent granted in the U.S. expiring in 2027. U.S. patent pending through 2027.

1. CTX-101 and CTX-102 (formerly MiCal 1 and 2, respectively), are topical products in co-development with the Company’s Development Partners which utilize our MMPE technology.

2. Country abbreviations defined as follows: Australia (AU), Brazil (BR), Canada (CA), China (CN), Austria (AT), Belgium (BE), Switzerland (CH), Germany (DE), Spain (ES), France (FR), Great Britain (GB), Greece (GR), Italy (IT), Luxembourg (LU), Netherlands (NL), Poland (PL) Turkey (TR), Hong Kong (HK), Japan (JP), Mexico (MX), Russian Federation (RU), United States (U.S.), Patent Cooperation Treaty (PCT), Rest of World (ROW), Europe (EP).

3. Crescita licensed the MMPE technology to a U.S.-based, major dermatological CRO. The licensee, in this case, will oversee and fund the total cost of the development program.


Q1-2020 Year-over-Year Financial Highlights

• Revenue of $3,815, a decrease of $434 or 10.2%;

• Gross margin of $2,464 of 64.6% of revenue, a decrease of $558 or 6.5% of revenue;

• Operating expenses (excluding COGS) of $2,825, an increase of $270 or 10.6%;

• Adjusted EBITDA1 of $112, a decrease of $844 or 88.3%;

• Generated $66 in cash during the quarter, resulting in an ending cash position of $9,334.

1 Adjusted EBITDA is a non-IFRS measure. Please refer to the Non-IFRS and Key Financial Measures and the EBITDA and Adjusted EBITDA Reconciliation sections of this MD&A.

Selected Quarterly Financial Information

1 Adjusted EBITDA is a non-IFRS measure. Please refer to the Non-IFRS Financial Measures.

2 Non-current financial liabilities are the sum of the long-term portions of long-term debt, convertible debentures, other obligations, and lease obligations.

3 Non-current financial liabilities as at March 31, 2019 included the Company’s long-term debt with Knight Therapeutics Inc. The Company repaid, in full, the amount owing of $3,570 in Q4-2019.

2020 2019 $ %

Operations

Revenues 3,815 4,249 (434) -10.2%

Cost of goods sold 1,351 1,227 124 10.1%

Gross profit 2,464 3,022 (558) -18.5%

Gross margin as a percentage of revenue 64.6% 71.1% n/a -6.5%

Operating expenses (excluding COGS) 2,825 2,555 270 10.6%

Operating profit (loss) (361) 467 (828) -177.3%

Interest expense, net 3 124 (121) -97.6%

Foreign exchange (gain) loss (50) 65 (115) -176.9%

Total other (income) expenses (47) 189 (236) -124.9%

Income (loss) before income taxes (314) 278 (592) -212.9%

Deferred income tax expense 180 236 (56) -23.7%

Net income (loss) (494) 42 (536) -1276.2%

Adjusted EBITDA1 112 956 (844) -88.3%

Net (loss) per common share

Basic (0.02)$ -$ (0.02)$ n/a

Diluted (0.02)$ -$ (0.02)$ n/a

Weighted average number of common shares outstanding

Basic 20,700,133 21,016,059 (315,926) -1.5%

Diluted 22,288,869 21,016,059 1,272,810 6.1%

Balance Sheet (As at March 31)

Cash and cash equivalents 9,334 10,879 (1,545) -14.2%

Total assets 26,607 28,923 (2,316) -8.0%

Total non-current financial liabilities2,3 1,270 5,081 (3,811) -75.0%

Total liabilities 6,010 9,575 (3,565) -37.2%

Total equity 20,597 19,348 1,249 6.5%

In tho usands o f C A D , except number o f shares and per share data

Three months ended March 31, Change


Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, a global pandemic. The outbreak has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, border shutdowns between Canada, the United States and other countries, self-imposed quarantine periods, closing of non-essential businesses and social distancing, have caused material disruption to businesses globally, resulting in an economic slowdown. In addition, global equity markets have experienced significant volatility and weakness.

Crescita’s Q1-20 results were not materially impacted due to the timing of the declaration of the pandemic and the ensuing business closures, which occurred at the tail end of the quarter. There have been no comparable events that provide guidance as to the long-term effect of the spread and the duration of the COVID-19 pandemic, and as a result, its ultimate impact on the Company’s business, results of operations and liquidity. A significant number of the Company’s clients in the aesthetic and medical aesthetic sectors, deemed to be non-essential businesses, temporarily closed their practices since on or around March 24, 2020, resulting in lower commercial skincare product sales compared to historical levels in the prior year and prior quarter. The Company’s international business with various affected countries such as Malaysia, South Korea, and China, while unaffected in Q1-20, may be affected in the future, however, the extent and duration of the impact is not known at this time. The Company also anticipates that royalties from international sales of its products may be adversely affected by lower demand and may also be affected by border restrictions.

Even with the phased reopening of certain economies and progressive deconfinement measures being implemented by the provincial governments across Canada and worldwide, it remains unclear what the duration and long-term effects of this pandemic will be on the sector. The pandemic has led to high levels of unemployment in Canada and in other countries and may lead to lower consumer spending. The timing of a recovery of consumer behavior and willingness to spend discretionary income on aesthetic treatments and products may adversely affect the Company’s ability to generate revenue comparable to historical levels.

Crescita’s management has proactively implemented various cost reduction measures to protect its financial flexibility in this uncertain economic time, including but not limited to: (i) the temporary closure of its manufacturing and office facility, where operations are progressively resuming as at the date of this MD&A; (ii) temporary salary reductions for executive management and fees for the Board of Directors; (iii) temporarily reduced-hours and compensation for employees in remote working arrangements; (iv) temporary lay-offs; and (v) the curtailment of discretionary spending including capital expenditures. Refer to Key Business Developments – Reopening of Manufacturing Facility and Production of Hand Sanitizer.

As mentioned, the extent of the impact of COVID-19 on Crescita’s business is unknown and depends on the future developments and evolution of the pandemic, which are highly uncertain. While the Company anticipates that 2020 will present challenges, there are also opportunities for the Company to adapt its commercial activities to the changing business landscape. The following are some of the initiatives the Company has undertaken: (i) the launch of new digital commercial activities through its direct-to-consumer online platform and heightened social media presence and awareness campaign for its brands; (ii) the production & commercialization of hand sanitizer and sanitary product starter kits, not only to support the reopening of our clients’ businesses and to drive incremental commercial sales, but also to help employees, and the community.

As at March 31, 2020, the Company has a strong balance sheet with $9,334 in cash and cash equivalents and further solidified its liquidity position by securing a revolving operating credit facility with a chartered Canadian bank in the amount of $3,500. Refer to Key Business Developments – Credit Facility with the Royal Bank of Canada. Crescita’s executive team is closely monitoring the evolution of the pandemic, updating its business continuity plan, and developing new commercial initiatives as describe above. The health and safety of our employees, clients, and community remains a top priority.


Outlook and Liquidity Update

Our objectives when managing our liquidity and capital structure are to maintain enough cash to fund our operations, including business development and organic growth initiatives to enable us to continue as a going concern, and to meet contractual obligations as they become due. As of March 31, 2020, Crescita had working capital, defined as current assets minus current liabilities, of $11,544 [$11,579 at December 31, 2019], an accumulated deficit of $(40,901) and generated $66 in cash during the quarter. The Company’s cash and current assets at March 31, 2020, were sufficient to meet the Company’s current accounts payable, accrued liabilities and commitments. In addition, the Company has further liquidity available of up to $3,500 under its revolving operating credit facility which bears no financial covenants. Refer to Key Business Developments – Credit Facility with the Royal Bank of Canada.

Our ability to generate revenue and reach profitability is dependent on the successful implementation of our growth strategy. The emergence of the COVID-19 pandemic, causing the virtual shut down of the worldwide economy, could adversely impact the Company’s ability to carry out its plans. The ability to raise additional financing for future activities may be impaired, or such financing may not be available on favourable terms, due to conditions beyond the control of the Company, such as uncertainty in the capital markets. This exposure is discussed in more detail in the “Risks Factors” section of our 2019 annual MD&A and in our most recently filed AIF for the 2019 fiscal year. The situation is dynamic and the ultimate duration and magnitude of the impact on the economy, capital markets and the Company’s financial position cannot be reasonably estimated at this time. The Company is monitoring developments and will adapt its business plans accordingly.

Key Business Developments

Reopening of Manufacturing Facility and Production of Hand Sanitizer On May 11, 2020, the Company started progressively re-opening its manufacturing facility following authorization from the Québec provincial government, and as at the date of this MD&A had rehired approximately 60% of employees that had been temporarily laid off. The Company has put in place several health and safety measures for its employees and visitors according to the recommendations of the CNESST - Commission des normes, de l'équité, de la santé et de la sécurité du travail, the organization mandated by the Government of Québec to administer the province's occupational health and safety plan. On May 5, 2020, the Company received a Natural Product Number (“NPN”) from Health Canada for its hand sanitizer. The NPN indicates that the product’s safety and efficacy has been assessed and approved by Health Canada, allowing the Company to produce and commercialize the product, which is now a part of the List of Hand Sanitizers Approved by Health Canada. Patent Granted for an Enhanced Formulation of Pliaglis On March 31, 2020, the United States Patent and Trademark Office granted U.S. Patent No. 10,603,293 for Solid-Forming Anesthetic Formulations for Pain Control, with validity through January 14, 2031. The U.S. patent was listed in the FDA’s Orange Book on April 14, 2020 for an enhanced formulation of Pliaglis.

Measures in Response to the Novel Coronavirus Pandemic On March 24, 2020, the Company announced the following measures it took in response to the COVID-19 pandemic.

• In accordance with the Québec government-mandated shut-down of all non-essential businesses, the Company temporarily closed its office and production facility in Laval, Québec, effective March 24, 2020. The facility closure regretfully resulted in the temporary layoff of production, sales, and most office personnel. Certain employees deemed critical to maintaining basic services during the shut-down, including customer service, continued working remotely with reduced hours. Product distribution through the Company’s third-party logistics provider remained operational with reduced capacity. The Company’s manufacturing facility has since reopened. See Reopening of Manufacturing Facility and Production of Hand Sanitizer.


• The Company also implemented the following initiatives to conserve cash through the uncertainties and economic pressures posed by the pandemic: (i) temporary base salary reductions for the executive team, including the CEO and CFO, as well as fee reductions for all members of the Company’s Board of Directors, ranging between 25% and 40%; and (ii) the termination of the Company’s automatic securities purchase plan. See Normal Course Issuer Bid.

Positive Topline Results from Two Pivotal Phase 3 Clinical Studies for CTX-101 On February 11, 2020, the Company announced positive topline results from two pivotal Phase 3 clinical trials for CTX-101 (formerly MiCal 1), an ultra-potent topical corticosteroid product being developed for the treatment of plaque psoriasis using the Company's patented MMPE technology. See Product Candidates in Co-Development.

Award of Cannabis Research License from Health Canada On January 24, 2020, the Company announced that its wholly-owned subsidiary, INTEGA Skin Sciences Inc. (“INTEGA”) was awarded a cannabis research license (the “Research License”) by Health Canada under the Cannabis Act and Cannabis Regulations, allowing the Company to possess cannabis for the purpose of R&D. The Research License was effective immediately and enables the Company to better support the needs of its existing partnerships in the cannabis industry through innovation-driven product development. The Research License is also expected to accelerate R&D programs and reduce the time to market. The Company also intends to develop cannabinoid-infused topical product formulations under its own skincare brands and may do so using its proprietary transdermal delivery technologies at its Laval facility.

Credit Facility with the Royal Bank of Canada On January 22, 2020, the Company announced that it had secured a $3,500 revolving operating credit facility (the “Facility”) with the Royal Bank of Canada (“RBC”). The Facility can be drawn by Crescita for working capital requirements and general corporate purposes and bears interest at RBC's prime rate plus 0.25%. The Facility is secured by a first ranking charge in favour of RBC over the Company's accounts receivable and inventories. Drawings after the first $1,000 on the Facility will be limited to a percentage of the Company's then outstanding accounts receivable and inventory. The Facility bears no financial covenants and no amounts were drawn as at March 31, 2020.

Exclusive Distribution Agreement with Laboratoires FILLMED On January 20, 2020, the Company announced that it entered into a distribution agreement with Laboratoires FILLMED (“FILLMED” and the “FILLMED Agreement”) for the exclusive distribution of the ART-

FILLER® injectables range and New Cellular Treatment Factor® (“NCTF®”) in Canada. FILLMED is a French aesthetic medicine company with expertise in developing aesthetic and cosmetic anti-ageing treatment solutions using hyaluronic acid. The partnership with FILLMED will allow Crescita to expand its product offering

in the medical aesthetic field with the addition of the hyaluronic acid (“HA”) ART-Filler® injectables range and

NCTF® 135 HA, a skin rejuvenation solution indicated primarily for the improvement of skin quality and fine

lines.


Significant Partnerships

Development and License Agreement with Sundial Growers Inc. On October 28, 2019, the Company announced that it had entered into a development and license agreement with Sundial Growers Inc. (“Sundial” and the “Sundial Agreement”), a Canadian licensed producer of cannabis,

granting Sundial the worldwide rights to Crescita’s proprietary transdermal delivery technologies, MMPE™ and

DuraPeel™, for the development of topicals containing cannabis and hemp. The partnership combines Crescita’s expertise in dermal sciences and in the development of patented topical formulations with Sundial’s cannabis production and extraction expertise. The agreement will enable the development of unique, high-quality cannabis and hemp topicals for the Canadian and international non-prescription markets. Sundial will fund the development and formulation costs and will have the worldwide marketing and distribution rights for the newly developed products. Sundial's initial topical offerings will include two products that will utilize the MMPE technology in an effort to deliver faster skin penetration without irritation. Both products are expected to be available for purchase in 2020, however, the uncertainty and unrest created by the COVID-19 pandemic may affect the anticipated launch dates of these products. Crescita will receive tiered royalties on the net worldwide sales for these products and retains the right to leverage its intellectual property for future product development under its own brands. In addition, Sundial will support Crescita in applying for and obtaining the Health Canada Standard Processing License for Cannabis.

Pliaglis Out-licensing Agreements

Out-licensing Agreement with Cantabria Labs and Reacquisition of ROW Pliaglis Rights On April 25, 2019, the Company announced that it had entered into a commercialization license agreement with Cantabria Labs (“Cantabria” and the “Cantabria Agreement”) for an initial term of 15 years, granting Cantabria the exclusive rights to sell and distribute Pliaglis in Italy, Portugal, France and Spain (the “Territories”). As consideration for the rights granted under the Cantabria Agreement, the Company received up-front payments totaling $3,721 (€2,500). In addition, the Company is eligible to receive double-digit royalties on the net sales of Pliaglis in the Territories, with guaranteed minimum royalties per year, and milestones related to the launch and sales performance of Pliaglis in each of the Territories. The first commercial sale of Pliaglis by Cantabria in Italy occurred in June 2019. The minimum guaranteed royalties of $1,738 were recognized up-front as a contract asset in the second quarter of 2019, as prescribed by IFRS 15 – Revenue from Contracts with Customers. The contract asset was measured at the net present value of the future guaranteed minimum sales-based royalties that are expected to be received over the 15-year life of the licensing agreement. Effective April 1, 2019, Crescita reacquired the ROW development and marketing rights for Pliaglis from Galderma S.A. (“Galderma”), a global pharmaceutical company specialized in dermatology. Pliaglis is approved for sale in over 25 ROW countries but is currently only commercialized in Italy and Brazil in the ROW with annual product sales of approximately $3,200 (US$2,500) in these countries in fiscal 2018.

Manufacturing & Supply of Pliaglis in Europe In Q1-20, Cantabria successfully completed the transfer of the manufacturing process and analytical test methods for Pliaglis to its manufacturing facility in Santander, Spain. A manufacturing site variation application seeking approval for Cantabria’s facility to manufacture Pliaglis for the European market was submitted to the European Union member states on April 22, 2020. Out-licensing Agreement with Taro Pharmaceuticals Inc. On April 25, 2017, the Company announced that it had entered into a development and commercialization license agreement with Taro Pharmaceuticals Inc., a subsidiary of Taro Pharmaceutical Industries Ltd. (“Taro” and the “Taro Agreement”). Under the terms of the Taro Agreement, Crescita granted Taro an exclusive license to sell and distribute Pliaglis and an enhanced formulation of Pliaglis in the U.S. market. Taro launched Pliaglis in the U.S in the first quarter of 2018. The Company earns double-digit tiered royalties on Taro’s net sales.


Outstanding Share Data The following table provides the designation and number of each class and series of voting, equity, or convertible securities of Crescita, outstanding:

1 This amount includes 1,725,844 options which have vested. 2 The convertible debentures are convertible into common shares at the option of the holder at a conversion price of $1.00 per share.

Normal Course Issuer Bid

On June 26, 2019, the Company announced that the Toronto Stock Exchange (the “TSX”) approved the Company's intention to make a normal course issuer bid (the “NCIB”) for a portion of its common shares ("Common Shares") as appropriate opportunities arise from time to time. The NCIB enables Crescita to purchase on the open market, through the facilities of the TSX, up to 1,000,000 Common Shares for cancellation. The Common Shares may be purchased under the NCIB commencing June 28, 2019, and ending no later than June 27, 2020, or on such earlier date when the Company completes its purchases or elects to terminate the bid. The Company adopted an automatic securities purchase plan (the “ASPP”) in connection with its NCIB that contained strict parameters regarding how its Common Shares may be repurchased by its broker, Haywood Securities Inc., during times when it would ordinarily not be permitted to purchase Common Shares due to regulatory restrictions or self-imposed blackout periods. The automatic securities purchase plan took effect at the commencement of the NCIB. On March 24, 2020, the Company terminated its ASPP as part of the measures announced to conserve cash and help maintain its financial flexibility through the uncertainties and economic pressures posed by the coronavirus pandemic. The NCIB remains in effect on the same terms and conditions. During the quarter ended March 31, 2020, 84,188 Common Shares were repurchased and cancelled, at an average market price of $0.77 per Common Share, for aggregate consideration including commissions of $68. Since the beginning of the NCIB, the Company has repurchased and cancelled 367,611 shares for $325.

Fluctuations in Operating Results

Crescita’s results of operations have fluctuated significantly from period-to-period in the past and are likely to do so in the future. Crescita anticipates that its quarterly and annual results of operations will be impacted for the foreseeable future by several factors including the impact of the coronavirus pandemic, the timing and amount of product sales, royalties and other payments received pursuant to current and future operations and collaborations and licensing arrangements and the progress and timing of expenditures related to integration and product development efforts. Due to these fluctuations, Crescita believes that the period-to-period comparisons of its operating results are not necessarily a good indicator of future performance.

As at

May 25, 2020

Common shares 20,648,448

Stock options1

2,619,594

Convertible debentures2

1,000,000

Warrants 496,000


Foreign Exchange Rates

Through its international operations, Crescita is exposed to changes in foreign currency rates. Accordingly, as prescribed by IFRS, we value assets, liabilities and transactions measured in foreign currencies using various exchange rates. We report all dollar amounts in Canadian dollars. Please refer to Financial Instruments - Currency Risk for a further discussion on the impact of foreign currency fluctuations on our results of operations.

Results of Operations Revenue by Segment

For the three months ended March 31, 2020, total revenue was $3,815 compared to $4,249 in the prior year’s quarter, representing a decrease of $434 or 10.2% year-over-year. The decrease came primarily from our Licensing and Commercial segments, representing decreases of $350 or 19.4% and $179 or 10.4%, respectively, while our Manufacturing and Services segment posted an increase of $95 or 13.0%. Commercial Skincare The Commercial reportable segment manufactures branded non-prescription skincare products for sale to both the Canadian and international markets, and commercializes the Company’s lead prescription product, Pliaglis, in Canada. The Company’s branded non-prescription products include: Laboratoire Dr. Renaud, Pro-Derm, Alyria and Dermazulene. These premium skincare lines provide solutions for a wide range of skin concerns such as aging, acne, hydration, pigmentation, and rosacea.

In Canada, the Company’s, sales force calls on aesthetic spas, medispas and medical clinics using a business to business to consumer model. International markets include South Korea and Malaysia where the Company sells LDR through distribution partners, and China where Dermazulene is sold through a large e-commerce distributor. The Company recognizes revenue from the sale of products when the goods are shipped or received by the customers depending on the specific arrangement. Commercial Skincare sales for the three months ended March 31, 2020 were $1,539 compared to $1,718 for the three months ended March 31, 2019, representing a decrease of $179 or 10.4%. The decrease was mainly

2020 2019 Change %

U.S. dollar 1.3442 1.3292 1.1%

Euro 1.4811 1.5094 -1.9%

Average rates

For the three months ended March 31,

March 31, March 31,

2020 2019 Change %

U.S. dollar 1.4187 1.3363 6.2%

Euro 1.5584 1.5002 3.9%

Spot rates

2020 2019 $ %

Commercial skincare 1,539 1,718 (179) -10.4%

Licensing and royalties 1,453 1,803 (350) -19.4%

Manufacturing and services 823 728 95 13.0%

Total revenue 3,815 4,249 (434) -10.2%

Change

In thousands of CAD

Three months ended March 31,


driven by lower overall sales of our lead aesthetic skincare product, LDR in the Canadian market as a result of the government-mandated closure of all aesthetic and medical aesthetic clinics due to the COVID-19 pandemic, and higher sales of Dermazulene in Q1-19 due to the launch in China, which did not repeat in Q1-20. Licensing and Royalties The Licensing reportable segment includes revenue generated from licensing the intellectual property related to the Company’s lead prescription product, Pliaglis, or for the use of its transdermal delivery technologies, MMPE and DuraPeel either on an exclusive or non-exclusive basis. The Licensing segment also leverages the Company’s in-house R&D capabilities for the development of new topical products combining its technologies and various selected molecules to fuel future out-licensing agreements in the non-prescription skincare market. The key sources of revenue in this segment are upfront and milestones payments as well as royalties determined using the agreed-upon formulas as described in each respective licensing agreement. Taro has the exclusive rights to sell and distribute Pliaglis and its enhanced formulation in the U.S. and is responsible for all sales and marketing efforts as well as for all other matters related to Pliaglis in this market. The Company earns double-digit tiered royalties on Taro’s product sales. All other royalty revenue is related to the global net sales of Pliaglis. As of April 2019, the Company terminated its licensing agreement with Galderma, reacquiring the ROW Pliaglis rights and immediately licensed the marketing and development rights for Italy, France, Spain, and Portugal to Cantabria. The Company earned a fixed single-digit royalty on Galderma’s product sales and earns a double-digit royalty on Cantabria’s product sales. For the three months ended March 31, 2020, Licensing revenue was $1,453, compared to $1,803 for the three months ended March 31, 2019, representing a decrease of $350 or 19.4%. The Q1-20, licensing revenue was entirely composed of royalties on the U.S. net sales of Pliaglis, whereas in the comparable quarter of 2019, the Company recognized $482 in royalties on the global net sales of Pliaglis, almost exclusively related to the U.S, as well as a $1,321 (US$1,000) sales milestone triggered by Taro reaching the third contractual cumulative sales target. During the fourth quarter 2019, the Company was informed by Taro of certain restrictive amendments to managed care in the U.S. which may have an adverse impact on Pliaglis sales in the future. Although the impact cannot be quantified and its extent remains unknown at this time, the Company, along with Taro, will be closely monitoring sales in the U.S. Manufacturing and Services The Manufacturing and Services reportable segment includes two main revenue streams: 1) revenue from the sale of topical products manufactured to client-specifications under its contract development and manufacturing organization infrastructure; and 2) revenue for product development services.

Clients in the Manufacturing and Services segment use Crescita’s CDMO services to manufacture their products either under a private label or brand name and may use a combination of Crescita’s existing formulations or novel formulations, with or without the utilization of our transdermal delivery technologies.

Manufacturing and Services revenue was $823 for the three months ended March 31, 2020, compared to $728 for the three months ended March 31, 2019. The increase of $95 or 13.0% was mainly due to the timing of CDMO shipments in the current quarter, partly offset by R&D product development services rendered in Q1-19 which did not repeat in the current quarter.


Revenue Distribution The following charts provide additional information regarding our revenue mix for the quarter by geography and reportable segment for the three months ended March 31, 2020:

By Geography (based on client’s domicile) By Segment

A. Canada B. U.S. C. ROW

76% 20%

4%

Major Customers Under IFRS 8, major customers are those that account for greater than 10% of the Company’s consolidated revenues. The Company had two major customers that accounted for 49% of the Company’s total revenue for the three months ended March 31, 2020, and two major customers that accounted for 54% of revenue for the three months ended March 31, 2019.

Cost of Goods Sold and Gross Profit by Segment

The CODM uses gross profit as the measure to assess the performance and allocate resources to the Company’s segments. Gross profit is calculated by subtracting the cost of goods sold (“COGS”) from revenue, either on a consolidated or on a by segment basis. Gross margin, as reported below and elsewhere in this MD&A is an expression of gross profit as a percentage of revenue, either on a consolidated or by segment basis.

The cost of goods sold primarily includes: the costs associated with manufacturing and packaging our products, provisions for inventory obsolescence, the cost of products purchased from third parties, as well as the costs related to earning out-licensing revenue.

For the three months ended March 31, 2020, total COGS were $1,351, compared to $1,227 for the three months ended March 31, 2019, representing an increase of $124 or 10.1%. The year-over-year increase was mainly due to higher COGS related to the timing and mix of CDMO sales in our Manufacturing and Services segment, partly offset by the lower cost of earning royalties on the net sales of Pliaglis in the Licensing segment. For the three months ended March 31, 2020, gross profit was $2,464, representing a margin of 64.6%, compared to $3,022 or 71.1%, respectively, for the comparable three-month period of 2019, a decrease of $558 or 6.5% of revenue. The decrease was mainly attributable to lower sales in the Commercial Skincare segment and lower royalty revenue from the Licensing segment.

2020 2019 $ %

Revenue 3,815 4,249 (434) -10.2%

Cost of goods sold 1,351 1,227 124 10.1%

Gross profit 2,464 3,022 (558) -18.5%

Gross margin as a percentage of total revenue 64.6% 71.1% n/a -6.5%

Change

In thousands of CAD


A. Commercial Skincare B. Licensing and Royalties C. Manufacturing and Services

40% 38% 22%

A.

B.

.

C.

C.

A.

B.


Commercial Skincare

Gross profit in the Commercial segment was $751, representing a margin of 48.8% for the three months ended March 31, 2020, compared to $938 or a margin of 54.6%, respectively, for the three months ended March 31, 2019. The decreases in gross profit of $187 and in gross margin of 5.8% were mainly attributable to lower segment revenue as explained previously, combined with higher COGS in the current quarter related to incremental inventory obsolescence charges and unfavourable manufacturing variances. Licensing and Royalties

Gross profit in the Licensing segment was $1,453, representing a margin of 100% for the three months ended March 31, 2020, compared to $1,725 and a margin of 95.7%, respectively for the three months ended March 31, 2019. The decreases in gross profit of $272 and in gross margin 4.3% were primarily related to the overall lower segment revenue as explained previously. Manufacturing and Services

Gross profit in the Manufacturing and Services segment was $260, representing a margin of 31.6% for the three months ended March 31, 2020, compared to $359 and a margin of 49.3% for the three months ended March 31, 2019. The decrease in gross margin of 17.7% was related to unfavourable revenue mix and lower product development revenue versus Q1-19. Gross margins generated by the Manufacturing and Services segment are dependent on the specific terms of agreements and vary by customer. The timing of customer orders and the mix of customers will continue to have an impact on our segment margins.

2020 2019 $ %

Revenue 1,539 1,718 (179) -10.4%

Cost of goods sold 788 780 8 1.0%

Segment gross profit 751 938 (187) -19.9%

Gross margin as a percentage of segment revenue 48.8% 54.6% n/a -5.8%

Change

In thousands of CAD


2020 2019 $ %

Revenue 1,453 1,803 (350) -19.4%

Cost of goods sold - 78 (78) -100.0%

Segment gross profit 1,453 1,725 (272) -15.8%

Gross margin as a percentage of segment revenue 100.0% 95.7% n/a 4.3%

Change

In thousands of CAD


2020 2019 $ %

Revenue 823 728 95 13.0%

Cost of goods sold 563 369 194 52.6%

Segment gross profit 260 359 (99) -27.6%

Gross margin as a percentage of segment revenue 31.6% 49.3% n/a -17.7%

Change

In thousands of CAD



Operating Expenses (excluding COGS)

Total operating expenses for the three months ended March 31, 2020 were $2,825, compared to $2,555 for the three months ended March 31, 2019, representing a net year-over-year increase of $270 or 10.6%. The increase was driven by higher selling, general and administrative (“SG&A”) expenses of $251 and higher amortization and depreciation charges of $58, partly offset by a decrease in research and development expenses of $39. At the end of the first quarter, in response to the COVID-19 pandemic, the Company temporary closed its manufacturing and office facility, temporarily laying off approximately 60% of its employees. Only those deemed essential to business continuity remained employed with reduced hours and corresponding compensation. In addition, executive team base salaries, and fees of the Company’s Board of directors were reduced in the range between 25% and 40%. The current quarter’s results do not reflect any savings from the Company’s cash conservation measures due to the timing of their implementation at the end of the quarter. Management continues to monitor the evolution of the pandemic and may continue the above-mentioned cost containment measures or add new ones in order to maintain as much financial flexibility through this uncertain time. Research and Development R&D expenses are mainly composed of employee compensation costs, clinical trial costs, clinical manufacturing and scale-up costs and other third-party laboratory testing costs. In the normal course of its business, the Company allocates a significant part of its R&D resources to the rejuvenation of its non-prescription skincare lines for product development and product reformulations, as well as to support its Manufacturing and Services and Licensing businesses. Such product portfolio rejuvenation and innovation activities are ongoing and are a key success factor for Crescita, allowing the Company to remain competitive in its product offerings. To a lesser extent, the Company also incurs formulation development costs related to our prescription product candidates such as CTX-101 and CTX-102. R&D expenditures vary depending on the stage of development of products and product candidates in Crescita’s pipeline and management’s allocation of Crescita’s internal resources to these activities and to each product specifically. In general, costs borne by Crescita are limited to pre-clinical testing costs as well as costs related to the formulations and development of test batches. The Company also leverages its in-house R&D function for the development of new topical products combining its technologies and various selected molecules to fuel future out-licensing agreements in the non-prescription skincare market. R&D expenses for the three months ended March 31, 2020 were $228 compared to $267 for the three months ended March 31, 2019, representing a decrease of $39 or 14.6%. Selling, General and Administrative For the three months ended March 31, 2020, SG&A expenses were $2,183, compared to $1,932 for the three months ended March 31, 2019, representing a year-over-year increase of $251 or 13.0%. The increase was mainly driven by higher advertising and promotion expenses to support our branded product portfolio, an increase in overall compensation expenses as a result of certain vacancies in the prior year’s quarter, as well as an increase in consulting fees.

2020 2019 $ %

Research and development 228 267 (39) -14.6%

Selling, general and administrative 2,183 1,932 251 13.0%

Amortization and depreciation 414 356 58 16.3%

Total operating expenses 2,825 2,555 270 10.6%

Change

In thousands of CAD



Amortization and Depreciation Amortization expense was $414 for the three months ended March 31, 2020, compared to $356 in the comparable three-month period of 2019, representing an increase of $58 or 16.3%, mainly due to the accelerated amortization of intangible assets. In 2019, the Company reassessed the useful lives of certain intangible assets to better reflect the Company’s current competitive landscape, resulting in accelerated amortization of these intangible assets.

Other (Income) Expenses

Interest Interest expense was $92 for the three months ended March 31, 2020, compared to $159 for the three months ended March 31, 2019. The year-over-year decrease of $67 was primarily a result of the repayment in full of the Knight Loan in December 2019. Amounts also included in interest expense related to the interest accretion on other obligations related to the acquisition of Alyria and on the convertible debentures. Interest income was $89 for the three months ended March 31, 2020, compared to $35 for the three months ended March 31, 2019. The Company earns interest on its cash balances and short-term investments. In addition, the Company records interest income accretion on the contract assets related to the guaranteed minimum royalties recognized under the Cantabria Agreement. Refer to note 8 - Revenue to the Q1-20 Interim Financial Statements. Foreign Currency (Gain) Loss For the three months ended March 31, 2020, the Company recorded a net foreign currency gain of $50, compared to a net foreign currency loss of $65 for the three months ended March 31, 2019. The $115 favourable variance from year to year was primarily driven by the timing of payments and settlements of foreign currency denominated balances, the revaluation of certain items on the consolidated statement of financial position as well as combined with the volatility of foreign exchange rates.

Net Income (Loss) and Net (Loss) per Common Share

Income (Loss) before Income Taxes For the three months ended March 31, 2020, the Company reported a loss before income taxes of $(314), compared to income of $278 reported for the three months ended March 31, 2019. The year-over-year decrease of $592 was mainly attributable to: 1) the reduction in gross margin of $558 across all segments, as explained previously; 2) the increase in SG&A costs of $251 mainly in connection with higher advertising and

2020 2019 $ %

Interest expense 92 159 (67) -42.1%

Interest income (89) (35) (54) 154.3%

Foreign exchange (gain) loss (50) 65 (115) -176.9%

Total other (income) expenses (47) 189 (236) -124.9%

In thousands of CAD dollars

For the tree months ended March 31, Change

2020 2019 $ %

Income (loss) before income taxes (314) 278 (592) -212.9%


Net income (loss) (494) 42 (536) -1276.2%

Net (loss) per common share

- basic (0.02)$ -$ (0.02)$ n/a

- diluted (0.02)$ -$ (0.02)$ n/a


- basic 20,700,133 21,016,059 (315,926) -1.5%

- diluted 22,288,869 21,016,059 1,272,810 6.1%

In thousands of CAD except number of shares and per share amounts

Three months ended March 31, Change


promotion expenses, headcount-related costs and consulting services; 3) higher depreciation and amortization charges of $58 due to the accelerated amortization of intangible assets, partly offset by 4) a reduction in R&D expenses of $39; 5) a reduction in net interest expense of $121 as a result of the repayment in full of the Knight Loan in the fourth quarter 2019 and the interest income accretion recognized on the contract asset related to the Cantabria agreement; as well as 6) the favourable impact of foreign exchange gains year-over-year in the amount of $115. Deferred Income Tax Expense For the three months ended March 31, 2020, the Company recognized $180 in deferred income tax expense, compared to $236 for the three months ended March 31, 2019. Both amounts relate to the taxable income generated in the Crescita legal entity. Net Income (Loss) Net loss was $494 for the three months ended March 31, 2020, a decrease of $536 when compared to the Net income of $42 reported in the comparable quarter of the prior year. The year-over-year variance was mainly driven by the same factors as identified above under the sections entitled Income (Loss) before Income Taxes, and Deferred Income Tax Expense. Weighted Average Number of Shares Outstanding The basic and diluted weighted average number of shares were both affected by the shares purchased for cancellation under the Company’s NCIB. The weighted average number of diluted shares outstanding for the periods was further impacted by the number of options and warrants that were “in the money”, as well as the dilutive impact of convertible debentures.

Adjusted EBITDA

The following table provides a reconciliation between net income (loss), as reported in accordance with IFRS, and EBITDA and Adjusted EBITDA, for the quarters ended March 31, 2020 and 2019. Please refer to the section entitled Income (Loss) before Income Taxes for details.

2020 2019 $ %

Net income (loss) (494) 42 (536) -1276.2%

Add:

Depreciation and amortization 414 356 58 16.3%

Interest expense, net 3 124 (121) -97.6%


EBITDA 103 758 (655) -86.4%

Add: #DIV/0!

Equity-settled stock-based compensation 59 133 (74) -55.6%

Foreign currency loss - 65 (65) -100.0%

Less: - #DIV/0!

Foreign currency gain 50 - 50 n/a

Adjusted EBITDA 112 956 (844) -88.3%


For the three months ended March 31, Change


Liquidity and Capital Resources Consolidated Statement of Cash Flows

Cash and Cash Equivalents Cash and cash equivalents were $9,334 as at March 31, 2020 compared to $10,879 as at March 31, 2019, representing a year-over-year decrease of $1,545. During the fourth quarter ended December 31, 2019, the Company repaid in full its outstanding long-term debt of $3,570. Operating Activities For the three months ended March 31, 2020, cash provided by operating activities was $266 compared to $2,398 for the three months ended March 31, 2019. The year-over-year decrease of $2,132 was mainly driven by the decrease in cash generated from operations of $562, and the unfavorable movement in non-cash working capital items of $1,570. The decrease in cash from operations was due to the same drivers as those explaining the reduction in our Adjusted EBITDA. Refer to Income (Loss) before Income Taxes for further details. The net change in non-cash working capital of $69 for the current quarter was mainly driven by an increase in accounts payable, partly offset by an increase in accounts receivable related to the timing of revenue collection. For the three months ended March 31, 2019, the net change in non-cash working capital of $1,639 was mainly driven by the net impact of the collection of the receivable related to Pliaglis royalty and milestone revenue which was outstanding at the end of 2018, partly offset by an increase in inventory to meet planned demand. The timing of our working capital inflows and outflows will always have an impact on the cash flow from operations. Investing Activities For the three months ended March 31, 2020, the Company invested $24, compared to $34 invested in the three months ended March 31, 2019. Both amounts primarily related to plant equipment and facility upgrades. Financing Activities For the three months ended March 31, 2020, cash used in financing activities totaled $203 compared to $75 for the three months ended March 31, 2019. During the first quarter of 2020, the Company: 1) paid $85 under its lease obligation for its manufacturing and office facility; 2) used $68 to pay for the purchase for cancellation of 84,188 Common Shares under the Company’s normal course issuer bid; and 3) paid $50 for amounts owing in connection with the acquisition of the Alyria product line.

Change

2020 2019 $

Net income (loss) (494) 42 (536)

Items not involving cash flows 691 717 (26)

Cash from operations 197 759 (562)

Net change in non-cash working capital 69 1,639 (1,570)

Cash provided by operating activities 266 2,398 (2,132)

Cash used in investing activities (24) (34) 10

Cash used in financing activities (203) (75) (128)

Effect of foreign exchange rates on cash and cash equivalents 27 1 26

Net change in cash and cash equivalents during the period 66 2,290 (2,224)

Cash and cash equivalents, beginning of the period 9,268 8,589 679

Cash and cash equivalents, end of the period 9,334 10,879 (1,545)

In thousands of CAD



Commitments The Company has commitments under a lease for the rental of its manufacturing and office facility. This lease is accounted for entirely on the Consolidated Statement of Financial Position under IFRS 16 – Leases. There have been no material changes to these commitments since our year ended December 31, 2019. Refer to Note 3 – Summary of Significant Accounting Policies in the Company’s annual consolidated financial statements for the year ended December 31, 2019 for further details.

Financial Instruments and Risk Management

The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1 - determined by reference to quoted prices in active markets for identical assets and liabilities.

Level 2 - include those where valuations are determined using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly.

Level 3 - valuations are those based on inputs that are unobservable and significant to the overall fair value measurement. The following table provides the fair value measurement hierarchy of the financial instruments measured at fair value subsequent to initial recognition in the Consolidated Statements of Financial Position as at:

March 31, 2020 December 31, 2019

In thousands of CAD dollars Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Recurring fair value measurements

Contingent consideration – Alyria acquisition - - (20) - - (20)

Valuation Methods and Assumptions Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes to the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company did not have any transfer of assets and liabilities between Level 1, Level 2 and Level 3 of the fair value hierarchy during the three months ended March 31, 2020 and 2019. The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies. However, considerable judgment is required to develop these estimates. Accordingly, these estimated values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. Level 3 liabilities include obligations of the Company for the contingent consideration payable for the royalty earn-out relating to the acquisition of the Alyria product line. The fair value of the contingent consideration receivable and payable is revalued at each reporting period based on management’s best estimate using the discounted cash flow method. The fair values of the Company’s non-current obligations, which are presented at amortized cost using the effective interest method, have been estimated using rates currently available to the Company for obligations with similar terms and remaining maturities. The fair values of these instruments approximate their carrying values and would be classified as Level 2.

The fair value of contract assets, which is presented at amortized cost using the effective interest method, has been determined by discounting the future cash flows using observable inputs, such as interest rate yield curves or credit spreads. The fair value of the contract asset approximates its carrying value as it is related to the Cantabria Agreement.


Risk Factors The following is a discussion of liquidity, credit and market risks and related mitigation strategies that have been identified. This is not an exhaustive list of all risks nor will the mitigation strategies eliminate all risks listed. Liquidity Risk The Company anticipates that its current cash, revolving operating credit facility, and the revenue it expects to generate from product sales, upfront, milestone and royalty payments related to out-licensing its products and/or technologies, will fund Crescita’s operations as currently planned for 2020 and beyond. Additional funding may be required for the development of new products and/or for future acquisitions.

The Company’s exposure to liquidity risk is dependent on the sales growth and profitability of its operations which will be impacted by the status of competitive products and the success of the Company in developing and maintaining markets for its products. In addition, a number of other factors will have an impact on liquidity risk including the level of R&D expenditures for product candidates, costs associated with maintaining regulatory approvals, the timing of payments received or made under licensing arrangements and the acquisition costs of licenses for new products or technologies. Credit Risk Credit risk is the risk of financial loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that may subject the Company to credit risk consist of cash and amounts receivable from global customers. The Company manages its exposure to credit risk by holding cash on deposit in major financial institutions. The Company’s accounts receivables are subject to normal industry risks in each geographic region in which the Company operates. However, the Company has updated its expected credit losses (“ECL”) on the entire accounts receivable balance in order to adjust for the potential impact of the COVID-19 pandemic on the collectability of its accounts receivable. In addition, the Company is exposed to credit-related losses on sales to its customers outside North America due to potentially higher risks of enforceability and collectability. As at March 31, 2020, 4% of accounts receivables related to customers outside North America and the E.U., compared to 14% as at December 31, 2019.

The contract assets in the amount of $1,637 is related to the Cantabria Agreement and is denominated in euros. As at March 31, 2020, the Company had two customers that accounted for approximately 70% of the total accounts receivable, compared to three customers that accounted for approximately 67% of the total accounts receivable as at December 31, 2019. Pursuant to their collection terms, accounts receivables were aged as follows:

March 31, December 31,

2020 2019

Current 2,679 1,931

0-30 days past due 90 197



Over 90 days past due 54 121

2,843 2,502

Allowance for doutful accounts (99) (69)

Total accounts receivable 2,744 2,433



Interest Rate Risk The Company’s practice is to minimize interest rate cash flow risk exposures on its financing. The Company is currently not exposed to interest rate variability as its convertible debt instruments bear a fixed interest rate of 9% per year and it had not drawn any amounts on its Facility as at March 31, 2020.

Currency Risk The Company operates internationally, which gives rise to a risk that earnings and cash flows may be adversely affected by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the U.S. dollar and euro, but also transacts in other foreign currencies. As at March 31, 2020, the Company did not use financial instruments to hedge these risks. Starting in April 2020, the Company entered into option contracts to economically hedge the impact of currency fluctuations in anticipated transactions denominated in U.S. dollars.

The significant balances in foreign currencies were as follows:

Based on the aforementioned net exposure as at March 31, 2020, and assuming that all other variables remain constant, a 10% appreciation or depreciation of the Canadian dollar against the U.S. dollar would have an effect of $89 on total comprehensive income (loss) and a 10% appreciation or depreciation of the Canadian dollar against the euro would have an effect of $169 on total comprehensive income (loss).

In terms of the euro, the Company has four exposures: (i) its euro-denominated cash held in its Canadian operations; (ii) the cost of purchasing raw materials and packaging materials priced in euros or sourced from European suppliers that are needed for production at the Canadian manufacturing facility; (iii) royalties and milestones from licensing agreements regarding Pliaglis; and (iv) its net investment and net cash flows in its European operations. In terms of the U.S. dollar, the Company has five exposures: (i) its U.S. dollar-denominated cash held in its Canadian operations; (ii) the cost of purchasing raw materials and packaging materials priced in U.S. dollars or sourced from U.S. suppliers required for production at the Canadian manufacturing facility (iii) royalties and milestones from licensing agreements regarding Pliaglis; (iv) its net investment and net cash flows in its U.S. operations and (v) revenue generated in U.S. dollars from its product sales to U.S. customers.

March 31, December 31, March 31, December 31,

2020 2019 2020 2019

Cash and cash equivalents 46 29 309 1,025

Accounts receivable 51 52 1,505 1,028

Other current assets 93 82 6 3

Contract assets 1,002 1,086 - -

Accounts payable and accrued liabilities (107) (91) (1,192) (1,130)

1,085 1,158 628 926

Euros (€) U.S. Dollars



Off-Balance Sheet Arrangements Crescita does not have any off-balance sheet arrangements.

Guarantees The Company periodically enters into research, licensing, distribution, or supply agreements with third parties that include indemnification provisions that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third-party intellectual property claims or damages arising from these transactions. In some cases, the maximum potential amount of future payments that could be required under these indemnification provisions is unlimited. These indemnification provisions generally survive termination of the underlying agreements. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay. Historically, the Company has not made any indemnification payments under such agreements and no amounts have been accrued in the results presented for three months ended March 31, 2020 and 2019.

Capability to Deliver Results

The Company will need to spend resources to research, develop and manufacture and commercialize its products and technologies. Crescita may finance these activities through existing cash, revenue generated from product sales to its customers, royalty and milestone payments, licensing and co-development agreements for other new drug candidates or of its existing products in territories where they are not currently licensed or sold, by drawing on its Facility, by raising funds in the capital markets or by incurring debt. Despite the COVID-19 impact outlined earlier in the present document, Crescita’s management believes that the Company has sufficient capital resources coming from its cash and investment accounts and operating credit facility to support its ongoing business operations and execute its Four-Pillar growth strategy. Crescita is dependent on its sales force for the marketing and sale of its products to its Canadian customers. In certain foreign jurisdictions, Crescita relies on its commercial partners to market and sell its products. Management believes that it has appropriate in-house personnel with the experience and expertise to market and sell its existing products and to develop its pipeline. To execute the current business plan, Crescita may selectively add key personnel and in the future, may need to hire additional staff as activities expand. In addition, market acceptance of the Company’s products by consumers, physicians or patients will depend on distribution channels accepting the product for sale.


Eight Quarter Summary - Selected Financial Information

1 Revenue for Q2-19 included $3,721 in up-front payments as well as $1,738 in guaranteed future minimum royalties, which were

recognized up-front but are to be received over the term of the Cantabria Agreement.

2 Adjusted EBITDA is a non-IFRS measure. Please refer to the Non-IFRS Financial Measures. On January 1, 2019, the Company adopted IFRS

16 – Leases (“IFRS 16”). Prior periods were not restated to reflect the adoption of IFRS 16.

3 Long-term debt represents the short and long-term portions of the Company’s long-term debt with Knight Therapeutics Inc. On December 21,

2019, the Company repaid the entire balance outstanding of $3,570 and currently has no long-term debt.

4 Non-current financial liabilities are defined as the sum of the long-term portions of long-term debt, convertible debentures, other

obligations, and lease obligations, following the adoption of IFRS 16 on January 1, 2019. Prior periods were not restated.

In thousands of CAD except number of shares and per share amounts

Growth - Revenue by Segment

Commercial Skincare 1,539 2,213 1,705 1,966 1,718 1,937 1,432 1,821

Licensing1 1,453 1,019 2,537 6,700 1,803 3,441 2,379 328

Manufacturing and Services 823 588 665 696 728 826 653 162

Revenue 3,815 3,820 4,906 9,362 4,249 6,204 4,464 2,311

Profitability

Total Operating Expenses (incl. COGS) 4,176 4,406 4,428 4,753 3,782 4,844 3,956 3,727

Income (loss) from continuing operations before income

taxes (314) (717) 332 3,287 278 3,113 369 (636)

Net income (loss) (494) (483) 88 2,208 42 3,112 369 (661)

Adjusted EBITDA2 112 6 939 5,083 956 1,787 846 (1,565)

Share Information

Net income (loss) per common share

Basic (0.02)$ (0.02)$ -$ 0.11$ 0.00$ 0.15$ 0.02$ (0.03)$

Diluted (0.02)$ (0.02)$ -$ 0.10$ 0.00$ 0.15$ 0.02$ (0.03)$


Basic 20,700 20,767 20,921 21,016 21,016 21,016 21,016 21,007

Diluted 22,289 22,541 22,706 22,486 21,016 21,016 21,016 21,007

Financial Position

Cash and cash equivalents 9,334 9,268 13,005 11,689 10,879 8,589 8,213 9,094

Long-term debt3 - - 3,564 3,558 3,552 3,546 3,529 3,512

Total assets 26,607 26,837 32,537 31,534 28,923 27,565 24,780 23,858

Total non-current financial liabilities41,270 1,386 5,001 5,049 5,081 2,914 3,317 3,439

Mar. 31,

2019As at and for the three months ended,

Mar 31,

2020

Dec 31,

2019

Sep. 30,

2019

Jun. 30,

20191

Dec. 31,

2018

Sep. 30,

2018

Jun. 30,

2018


Critical Accounting Policies and Use of Estimates The Company’s significant accounting policies are described in note 3 of the audited consolidated financial statements for the year ended December 31, 2019. The preparation of the audited consolidated financial statements and these condensed consolidated interim financial statements in conformity with IFRS requires management to make estimates and assumptions in applying its accounting policies, that affect the reported amounts of assets, liabilities and equity, and the accompanying disclosures at the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management has identified key areas of judgments, estimations or use of managerial assumptions that it believes are most critical to understanding the consolidated financial statements. These accounting estimates are considered critical because they require management to make subjective and/or complex judgments that are inherently uncertain and because they could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. The Company’s actual results could differ from these estimates and such differences could be material. These key areas are disclosed in Note 4 – Use of Estimates and Judgments to the Company’s Consolidated Financial Statements for the year ended December 31, 2019. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. There have been no comparable events that provide guidance as to the effect that the spread of COVID-19 may have, and, as result, its ultimate impact on the Company’s business, results of operations and financial condition. The extent of the impact will depend on future developments, which are highly uncertain, subject to change and difficult to predict with meaningful precision.

The Company considered the potential impact of COVID-19 when making certain estimates and judgments relating to the preparation of these Q1-20 Interim Financial Statements. In addition to the estimates and judgments disclosed in the 2019 annual consolidated financial statements, the following areas of judgments and estimates were updated:

Impairment on Non-Financial Assets The Company performed an annual impairment test of its non-financial assets at December 31, 2019, and concluded that no impairment existed. As at March 31, 2020, the Company updated this assessment mainly to reflect the impact of the temporary closure of its manufacturing facility, as well as the anticipated second quarter 2020 decrease in demand for its non-prescription skincare products and contract manufacturing services, provided by its wholly-owned subsidiary, INTEGA Skin Sciences Inc. (“INTEGA”). In addition, the Company also assessed the impact of the COVID-19 pandemic on its supply chain.

Consistent with its annual impairment assessment, The Company used a post-tax discount rate of 14% to determine the recoverable amount of the INTEGA cash generating unit, based on the fair value less costs to sell method. Based on the updated calculation, the recoverable amount exceeded the INTEGA cash generating unit carrying value and accordingly, the Company did not recognize an impairment charge for the three months ended March 31, 2020. A 50-basis point increase in the post-tax discount rate would have resulted in an impairment charge of approximately $500 at March 31, 2020. A 5% decrease in the expected future net cash inflows, evenly distributed over the future periods, would have resulted in an impairment charge of approximately $600 at March 31, 2020. Expected Credit Losses The Company also updated its expected credit losses on the entire accounts receivable balance in order to adjust for the potential impact of the COVID-19 pandemic which did not result in significant impact.

Cash Flow Projections Considering the current environment, the Company has also updated its cash flow projections. The Company anticipates that its current cash balance, amounts available through its revolving operating credit facility, as well as the revenue it expects to generate from product sales, upfront, milestone and royalty payments related


to out-licensing its products and, or its technologies, will be sufficient to fund Crescita’s operations as currently planned for 2020 and beyond.

While there is no material impact to the Company’s condensed consolidated interim financial statements as of and for the three months ended March 31, 2020, the Company’s future assessment of the magnitude and duration of COVID-19 could result in a material impact to the Company’s consolidated financial statements in future reporting periods.

Multiple elements in out-licensing agreements The Company may enter into licensing and collaboration agreements for product development, licensing, supply and distribution for its commercial products and product candidates. Out-licensing agreements are not standardized and could contain specific clauses that may lead to different accounting conclusions. The terms of the agreements may include non-refundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations. Those multiple elements, or separately identifiable components, are recognized based on their stand-alone selling price and achievement of revenue recognition criteria. The non-standard nature of these agreements gives rise to the risk that revenues could be misstated due to the complexity of the multi-element out-licensing contracts.

Inventory Valuation The Company values its inventories on a first-in, first-out basis at the lower of cost and replacement cost for raw materials and packaging, and the lower of cost and net realizable value for finished goods. In determining net realizable value, the Company considers such factors as yield, shelf life and expiry of finished goods, turnover or aging, expected future demand and historic experience. A change in the underlying assumptions related to these factors could affect the valuation of inventory and have a corresponding effect on cost of sales. Management reviews the carrying value of inventories at the end of each fiscal year. As part of the review, management is required to make certain assumptions when determining expected realizable values and estimates an allowance for obsolescence based on product life and historical sales. Any write downs in value may be reversed if the circumstances which caused them, cease to exist. Refer to Note 6, Inventories, in the Company’s Consolidated Financial Statements for the year ended December 31, 2019.

Share-based Payments The Company measures the cost of share-based payments, either equity or cash-settled, with employees by reference to the fair value of the equity instrument or underlying equity instrument at the date on which they are granted. In addition, cash-settled share-based payments are revalued to fair value at every reporting date.

Estimating fair value for share-based payments requires management to determine the most appropriate valuation model for a grant, which is dependent on the terms and conditions of each grant. In valuing certain types of share-based payments, such as incentive stock options and share appreciation rights, the Company uses the Black-Scholes option pricing model.

Several assumptions are used in the underlying calculation of fair values of the Company's stock options and share appreciation rights using the Black-Scholes option pricing model, including the expected life of the option, stock price volatility and forfeiture rates. Details of the assumptions used are included in Note 19, Share-Based Compensation and Other Share-Based Payments to the Company’s Consolidated Financial Statements for the year ended December 31, 2019.

Valuation of Deferred Income Tax Assets Management uses estimates when determining income tax provisions and deferred income tax assets. Significant judgment is required to determine the probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be utilized. Such estimates are made as part of the budget process by jurisdiction on an undiscounted basis. Management also exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period, the history of taxable profits and availability of prudent tax planning strategies. Changes in market conditions, changes in tax legislation, patent challenges and other factors could adversely affect the probable future taxable profits. The carrying amount of deferred income tax assets is reassessed at each reporting period and reduced to the extent that it is no longer probable that


sufficient taxable profits will be available to utilize all or part of the deferred income tax assets. Unrecognized deferred income tax assets are reassessed at each reporting period and are recognized to the extent that it is probable that there will be sufficient taxable income for the asset to be recovered.

Management’s Responsibility for Financial Reporting Disclosure Controls and Procedures and Internal Control Over Financial Reporting

Disclosure controls and procedures (“DCP”) are designed to provide reasonable assurance that information required to be disclosed by the Company in its filings under Canadian securities legislation is recorded, processed, summarized, and reported in a timely manner. The system of DCP includes, among other things, the Company’s Corporate Disclosure and Code of Conduct and Business Ethics policies, the review and approval procedures of the Corporate Disclosure Committee and continuous review and monitoring procedures by senior management. Management, under the supervision of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), have designed, or caused to be designed, internal controls over financial reporting (“ICFR”) in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Due to its inherent limitations, DCP and ICFR may not prevent or detect all misstatements, errors, and fraud. In addition, the design of any system of control is based upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote or that the degree of compliance with the policies or procedures may not deteriorate. Accordingly, even effective DCP and ICFR can only provide reasonable, not absolute, assurance of achieving the control objectives for financial and other reporting. The Company evaluated the effectiveness of its disclosure controls and procedures and internal controls over financial reporting, supervised by and with the participation of the CEO and the CFO as of March 31, 2020. The CEO and the CFO concluded that, based on this evaluation, the Company’s disclosure controls and procedures and internal controls over financial reporting were adequate and effective, at a reasonable level of assurance.


Risk Environment Risk Factors

An investment in the securities of the Company is speculative and involves a high degree of risk. An investor should carefully consider the risks and uncertainties discussed in detail in the Company’s Annual MD&A filed on SEDAR on March 18, 2020 for the year ended December 31, 2019 and the “Risk Factors” section of the Company’s AIF filed on March 25, 2020 before making an investment decision. In addition, an investor should consider all other information contained in this MD&A and other continuous disclosure documents issued by the Company. Additional risks and uncertainties not presently known to the Company or that the Company believes to be immaterial may also adversely affect the Company’s business. If any one or more of the disclosed risks occur, the Company’s business, financial condition and results of operations could be seriously harmed. COVID-19 Pandemic

During the three months ended March 31, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. This has resulted in governments worldwide, including the Canadian Federal and Provincial governments, enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel restrictions, self-imposed quarantine periods, temporary closures or restrictions of non-essential businesses, limitations on public gatherings, and social distancing guidelines, have caused material disruption to businesses globally and in Canada resulting in an economic slowdown. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions; however, the success of these interventions is not currently determinable. Further, depending on the duration of the pandemic, or if the pandemic were to worsen, existing emergency measures may be extended, or additional restrictive measures may be implemented, causing further economic impact and uncertainty.

At this stage, it is not possible to predict what additional measures and restrictions will be imposed by governmental authorities and the period in time during which the measures and restrictions will apply. Any additional border closures and economic and supply chain disruptions could materially affect the Company’s financial results and operations. The COVID-19 pandemic could also cause significant further impacts to product demand in connection with an ensuing economic downturn and contribute to supply shortages, trade disruption, temporary staff shortages and temporary closures of facilities. The extent to which COVID-19 and its effect on the economy will impact the Company’s financial results and operations is highly uncertain and may lead to adverse changes in the Company’s cash flows, working capital levels, debt balances, operating results and financial position in the future. The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the Company’s business is not known at this time. Refer to Impact of COVID-19 Pandemic on page 13.

Litigation

From time-to-time, during the ordinary course of business, Crescita may be threatened with, or named as, a defendant in various legal proceedings including lawsuits based upon product liability, personal injury, breach of contract and lost profits or other consequential damage claims. Although the outcome of such matters is not predictable with assurance, the Company has no reason to believe that the disposition of any such current matter could reasonably be expected to have a material adverse effect on the Company’s financial position, results of operations or the ability to carry on any of its business activities.

Additional Information

Additional information relating to the Company, including the Company’s most recently filed AIF, can be found on SEDAR at www.sedar.com.



NOTICE TO READER The accompanying condensed consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company’s management. The Company’s independent external auditors, Ernst & Young LLP, have not performed a review or an audit of these condensed consolidated interim financial statements in accordance with Canadian generally accepted

standards for a review of interim financial statements by an entity’s auditor. The condensed consolidated interim financial statements have been prepared by management and include the selection of appropriate accounting principles, judgments and estimates necessary to prepare these financial statements in accordance with International Financial Reporting Standards. Management has determined such amounts on a reasonable basis in order to ensure that the condensed consolidated interim financial statements are presented fairly in all material respects.


CRESCITA THERAPEUTICS INC. CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(Unaudited)

As at

March 31, 2020 As at

December 31, 2019

(In thousands of Canadian dollars) Notes $ $

Assets

Current

Cash and cash equivalents 9,334 9,268

Accounts receivable 13 2,744 2,433

Inventories 4 3,780 3,784

Other current assets 5, 13 426 437

Total current assets 16,284 15,922

Non-current

Contract assets 8, 13 1,562 1,584

Property, plant and equipment 636 648

Right-of-use asset 456 533

Intangible assets 7,270 7,571

Deferred tax assets 399 579

Total assets 26,607 26,837

Liabilities and Equity

Current

Accounts payable and accrued liabilities 13 4,322 3,935

Current portion of lease obligation 368 358

Current portion of other obligations 50 50

Total current liabilities 4,740 4,343 Convertible debentures 904 895

Lease obligation 200 295

Other obligations 166 196

Total liabilities 6,010 5,729

Equity

Common shares issued 7 58,184 58,422

Contributed surplus 2,177 1,948

Accumulated other comprehensive income (AOCI) 1,137 1,145

Deficit (40,901) (40,407)

Total equity 20,597 21,108

Total liabilities and equity 26,607 26,837

See accompanying Notes.


CRESCITA THERAPEUTICS INC. CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three months ended

March 31, 2020 Three months ended

March 31, 2019

(In thousands of Canadian dollars, except per share data and number of shares) Notes $ $

Revenues 8 3,815 4,249

Operating expenses

Cost of goods sold 4, 11 1,351 1,227

Research and development 9, 11 228 267

Selling, general and administrative 9, 11 2,183 1,932

Depreciation and amortization 11 414 356

Operating profit (loss) (361) 467

Other expenses (income)

Interest expense 92 159

Interest income (89) (35)

Foreign currency (gain) loss (50) 65

Total other (income) expenses (47) 189

Income (loss) before income taxes (314) 278

Deferred income tax expense 180 236

Net income (loss) (494) 42

Other comprehensive income (loss) to be reclassified to net income (loss) in subsequent periods

Unrealized gain (loss) on translation of foreign operations (net of income taxes)

(8) 285

Total comprehensive income (loss) (502) 327

Net loss per common share 10

- basic $(0.02) $ -

- diluted $(0.02) $ -

Weighted average number of common shares outstanding 10

- basic 20,700,133 21,016,059

- diluted 22,288,869 21,016,059



CRESCITA THERAPEUTICS INC. CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

Common Shares Contributed

Surplus Deficit AOCI Total

(In thousands of Canadian dollars, except for number of shares) 000’s $ $ $ $ $

Notes 7, 9 7, 9 9

Balance, December 31, 2018 21,016,059 59,220 1,120 (42,143) 810 19,007

First time adoption of IFRS 16 - - - (119) - (119)

Net income - - - 42 - 42

Share-based compensation expense - - 133 - - 133 Unrealized gain on translation of foreign

operations (net of income tax recovery of $263) - - - - 285 285

Balance, March 31, 2019 21,016,059 59,220 1,253 (42,220) 1,095 19,348

Net income - - - 1,813 - 1,813 Class A shares purchased and cancelled (note 7) (273,876) (772) 523 - - (249) Class A shares purchased but not cancelled (note 7) - (26) 18 - - (8)

Share-based compensation expense - - 154 - - 154 Unrealized gain on translation of foreign

operations (net of income tax recovery of $64) - - - - 50 50

Balance, December 31, 2019 20,742,183 58,422 1,948 (40,407) 1,145 21,108

Net loss - - - (494) - (494)

Class A shares cancelled (note 7) (9,547) - - - - - Class A shares purchased and cancelled

(note 7) (84,188) (238) 170 - - (68)

Share-based compensation expense - - 59 - - 59 Unrealized loss on translation of foreign

operations (tax effect of nil) - - - - (8) (8)

Balance, March 31, 2020 20,648,448 58,184 2,177 (40,901) 1,137 20,597



CRESCITA THERAPEUTICS INC. CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(Unaudited)

Three months ended


March 31, 2019

(In thousands of Canadian dollars) Notes $ $

Operating Activities

Net income (loss) (494) 42

Adjustments for:

Depreciation and amortization 11 414 356

Share-based compensation expense 9 59 133

Inventory write-down 4 50 21

Deferred income taxes 180 236

Other (12) (29)

197 759

Net change in non-cash working capital 12 69 1,639

Cash provided by operating activities 266 2,398

Investing Activities

Acquisition of property, plant, and equipment (24) (34)

Cash used in investing activities (24) (34)

Financing Activities

Payment of lease obligation (85) (75)

Purchase of Class A shares 7 (68) -

Payment of other obligations (50) -

Cash used in financing activities (203) (75)

Effect of exchange rate changes on cash 27 1

Net change in cash and cash equivalents during the period 66 2,290

Cash and cash equivalents, beginning of period 9,268 8,589

Cash and cash equivalents, end of period 9,334 10,879

Supplemental Cash Flow Information

Interest paid (i) 17 129

Interest received (i) 20 18

(i) Amounts paid and received were reflected as operating cash flows in the consolidated interim statements of cash flows. See accompanying Notes.


CRESCITA THERAPEUTICS INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

All amounts shown are in thousands of Canadian dollars, unless noted otherwise. 1. CORPORATE INFORMATION Crescita Therapeutics Inc. (“Crescita” or the “Company”) is a Canadian commercial dermatology company with in-house research & development (“R&D”) and manufacturing capabilities. The Company offers a portfolio of non-prescription skincare products and early to commercial stage prescription drug products and owns multiple proprietary drug delivery platforms that support the development of patented formulations that can facilitate the delivery of active ingredients into or through the skin. The Company’s corporate functions are carried out through its headquarters located at 2805, Place Louis-R-Renaud, Laval, Québec, H7V 0A3. Crescita maintains its registered office at 6733 Mississauga Road, Suite 610, Mississauga, Ontario, L5N 6J5. 2. BASIS OF PREPARATION Statement of Compliance These condensed consolidated interim financial statements (“Interim Financial Statements”) have been prepared by management in accordance with IAS 34 – Interim Financial Reporting (“IAS 34”), as issued by the International Accounting Standards Board (“IASB”). Accordingly, these Interim Financial Statements do not include all disclosures required for annual financial statements and should be read in conjunction with the annual consolidated financial statements of the Company for the year ended December 31, 2019, which are available on SEDAR at www.sedar.com. These Interim Financial Statements were issued and effective on May 26, 2020, the date they were approved by the Board of Directors. Basis of Measurement These Interim Financial Statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value. Items included in the financial statements of each consolidated entity in the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency). These Interim Financial Statements are presented in Canadian dollars, which is the Company’s functional currency. Use of Estimates and Judgements The preparation of the Interim Financial Statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity, the accompanying disclosure of contingent assets and liabilities at the date of these Interim Financial Statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management has identified key areas of judgements, estimations or use of managerial assumptions that it believes are most critical to understanding the Interim Financial Statements. These accounting estimates are considered critical because they require management to make subjective and/or complex judgements that are inherently uncertain and because they could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. The Company’s actual results could differ from these estimates and such differences could be material. These key areas are disclosed in Note 4 – Use of Estimates and Judgments to the Company’s Consolidated Financial Statements for the year ended December 31, 2019. Impact of the COVID-19 Pandemic On March 11, 2020, the World Health Organization (“WHO”) declared the novel strain of coronavirus (“COVID-19”) a global pandemic. There have been no comparable events that provide guidance as to the effect that the spread of COVID-19 may have, and as a result its ultimate impact on the Company’s business, results of operations and financial condition. The extent of the impact will depend on future developments which are highly uncertain, subject to change and difficult to predict with meaningful precision. On March 24, 2020, the Company announced that in accordance with the provincial and federal government-mandated shut-down of all non-essentials businesses to help slow the spread of COVOD-19, it temporarily closed its manufacturing



and office facility. On May 11, 2020, the Company started progressively re-opening its manufacturing facility following authorization from the Québec provincial government. The Company considered the potential impact of COVID-19 when making certain estimates and judgements relating to the preparation of these Interim Financial Statements. In addition to the estimates and judgments disclosed in the 2019 annual consolidated financial statements, the following areas of judgments and estimates were updated: Impairment on Non-Financial Assets The Company performed an annual impairment test of its non-financial assets at December 31, 2019 and concluded that no impairment existed. As at March 31, 2020, the Company updated this assessment mainly to reflect the impact of the temporary closure of its manufacturing facility as well as the anticipated second quarter 2020 decrease in demand for its non-prescription skincare products and contract manufacturing services, provided by its wholly-owned subsidiary, INTEGA Skin Sciences Inc. (“INTEGA”). In addition, the Company also assessed the impact of the COVID-19 pandemic on its supply chain. Consistent with its annual impairment assessment, the Company used a post-tax discount rate of 14% to determine the recoverable amount of the INTEGA cash generating unit based on the fair value less costs to sell method. Based on the updated calculation, the recoverable amount of the INTEGA cash generating unit exceeded the carrying value and accordingly, the Company did not recognize an impairment charge as at March 31, 2020. A 50-basis point increase in the post-tax discount rate would have resulted in an impairment charge of approximately $500 at March 31, 2020. A 5% decrease in the expected future net cash inflows, evenly distributed over the future periods would have resulted in an impairment charge of approximately $600 at March 31, 2020. Expected Credit Losses The Company also updated its expected credit losses (“ECL”) on the entire accounts receivable balance in order to adjust for the potential impact of the COVID-19 pandemic which did not result in any significant impact. Cash Flow Projections Considering the current environment, the Company has also updated its cash flow projections. The Company anticipates that its current cash balance, amounts available through its revolving credit facility as well as the revenue it expects to generate from product sales, upfront, milestone and royalty payments related to out-licensing its products and technologies will be sufficient to fund Crescita’s operations as currently planned for 2020 and beyond. While there is no material impact to the Company’s Interim Financial Statements as of and for the three months ended March 31, 2020, the Company’s future assessment of the magnitude and duration of COVID-19 could result in a material impact to the Company’s consolidated financial statements in future reporting periods. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The policies applied in these Interim Financial Statements are based on International Financial Reporting Standards (“IFRS”). All significant accounting policies have been applied on a basis consistent with those followed in the most recent annual consolidated financial statements for the year ended December 31, 2019. 4. INVENTORIES Inventories consisted of the following as at:


$ $

Raw materials 1,666 1,739 Work-in-process 746 644 Finished goods 1,368 1,401

3,780 3,784

During the three months ended March 31, 2020, inventories in the amount of $1,301 were recognized in cost of goods sold [$1,128 for the three months ended March 31, 2019]. During the three months ended March 31, 2020, $50 of finished goods were written down [$21 for the three months ended March 31, 2019].


There were no reversals of prior write-downs during the three months ended March 31, 2020 [$nil for the three months ended March 31, 2019]. 5. OTHER CURRENT ASSETS Other current assets consisted of the following as at:


$ $

Prepaid expenses 225 226 Deposits 61 61 Sales taxes receivable 65 77 Current portion of contract assets (Note 8) 75 73

426 437

6. CREDIT FACILITY On February 26, 2020, the Company completed a credit agreement with a Canadian Chartered Bank (the “Bank”), consisting of a revolving operating credit facility (the “Facility”) for an authorized amount up to $3,500. Loans drawn on the Facility are secured by a first-ranking charge in favour of the Bank over the Company's accounts receivable and inventories. Drawings in excess of the first $1,000 are limited to a percentage of the Company’s outstanding accounts receivable and inventory. The Facility bears interest at the Bank’s Prime rate plus 0.25% and does not have any financial covenants. No amounts had been drawn from the Facility as at March 31, 2020. 7. SHARE CAPITAL Authorized

• Unlimited common shares, voting, without par value

• Unlimited first and second preferred shares, non-voting, non-participating, issuable in series, number, designation, rights, privileges, restrictions, and conditions are determinable by the Company’s board of directors

Issued and Outstanding The following table summarizes Crescita’s outstanding common shares:

Number 000s

Amount $

Balance, December 31, 2018 21,016 59,220 Shares purchased and cancelled (274) (772) Shares purchased - (26)

Balance, December 31, 2019 20,742 58,422 Shares cancelled (10) - Shares purchased and cancelled (84) (238)

Balance, March 31, 2020 20,648 58,184

On June 26, 2019, the Company announced that the Toronto Stock Exchange (“TSX”) approved the Company's intention to make a normal course issuer bid (the “NCIB”) for a portion of its Class A common shares (“Common Shares”) as appropriate opportunities arise from time to time. The NCIB enables the Company to purchase, through the facilities of the TSX, up to 1,000,000 Common Shares for cancellation on the open market. The Common Shares may be purchased under the NCIB commencing June 28, 2019, and ending no later than June 27, 2020, or on such earlier date when the Company completes its purchases or elects to terminate the bid. The Company may terminate the NCIB provided that the insiders of the Company are not in a trading blackout and the Company is not otherwise in possession of any material undisclosed information about its business. The Company adopted an automatic securities purchase plan (the “ASPP”) in connection with its NCIB that contains strict parameters regarding how its Common Shares may be repurchased by its broker during times when it would ordinarily not be permitted to purchase Common Shares due to regulatory restrictions or self-imposed blackout periods. The automatic securities purchase plan took effect at the commencement of the NCIB. On March 24, 2020, the Company terminated its Automatic Share Purchase Plan. The NCIB remains in effect on the same terms and conditions as previously disclosed.


During the three months ended March 31, 2020, the Company purchased for cancellation 84,188 Common Shares with a carrying value of $238 for a cash consideration of $68. The excess of the carrying value over the purchase price in the amount of $170 was recorded to contributed surplus. 8. REVENUE The following table presents external revenues disaggregated by reportable segment, revenue source and geographic area (based on the customer’s billing address):

For the three months ended March 31,

Canada U.S. ROW Total

2020 2019 2020 2019 2020 2019 2020 2019

$ $ $ $ $ $ $ $

Commercial Skincare

Product Sales 1,384 1,496 27 42 128 180 1,539 1,718

1,384 1,496 27 42 128 180 1,539 1,718

Licensing and Royalties

Out-licensing Revenue 1,453 1,765 - - - 38 1,453 1,803

1,453 1,765 - - - 38 1,453 1,803

Manufacturing and Services

Product Sales 73 37 750 610 - - 823 647 Service Revenue - 61 - 20 - - - 81

73 98 750 630 - - 823 728

Balance, March 31 2,910 3,359 777 672 128 218 3,815 4,249

Contract Assets Under IFRS 15 Revenues from Contracts with Customers, contract assets represent the present value of the minimum guaranteed sales-based royalties that are expected to be received over the life of licensing agreements that the company may enter into from time to time. Contract asset balances are reduced as the contractual minimums are realized throughout the life of the agreement. The timing of revenue recognition, billings and cash collections results in accounts receivables and unbilled receivables, representing the contract assets. Generally, billing occurs subsequent to revenue recognition, resulting in accounts receivables. The Company’s contract assets relate to license revenue attributable to minimum guaranteed sales-based royalties which have not been billed at the reporting date. Unbilled receivables will be billed, and subsequently transferred to accounts receivable, in accordance with the agreed-upon contractual terms. The following table presents the movements in the current and long-term portions of the contract assets:

$

Balance, December 31, 2019 1,657

Amounts billed to customers and transferred to accounts receivable (74)

Interest accretion 54

Balance, March 31, 2020 1,637

Less: current portion (Note 5) 75

Long-term balance 1,562

Major Customers Under IFRS 8 Operating Segments (“IFRS 8”), major customers are those that account for greater than 10% of the Company’s consolidated revenues. For the three months ended March 31, 2020, the Company had two major customers that accounted for 49% of the Company's total revenue [two major customer that accounted for 54% of revenues for the three months ended March 31, 2019].


9. SHARE-BASED COMPENSATION AND OTHER SHARE-BASED PAYMENTS Share Option Plan The following is a summary of Crescita’s outstanding options:

Number of Options

Range of Exercise Price

Weighted Average Exercise Price

000’s $ $

Balance, December 31, 2019 2,676 0.43 - 3.12 0.89 Granted - - - Forfeited (25) 0.46 - 1.65 0.65 Expired (31) 0.74 0.74 Exercised - - -

Balance, March 31, 2020 2,620 0.43 - 3.12 0.90

The following table summarizes the outstanding and exercisable Crescita options held by directors, officers, employees and consultants as at March 31, 2020:

Outstanding Exercisable

Exercise Price Range

Number of Options

Remaining Contractual Life

Weighted Average

Exercise Price Vested

Options

Weighted Average

Exercise Price

$ 000’s years $ 000’s $

0.43 - 0.74 1,828 7.58 0.57 934 0.60 1.21 - 1.42 135 1.82 1.36 135 1.36 1.63 - 1.91 620 6.14 1.63 620 1.63

3.12 37 0.21 3.12 37 3.12

2,620 6.84 0.90 1,726 1.09

Summary of Share-based Compensation Share-based compensation expense is as follows:

Three months ended


March 31, 2019

$ $

Stock option compensation expense 59 133

Share-based compensation expense 59 133

Recorded in the consolidated interim statements of income (loss) and comprehensive income (loss) as follows:

Research and development expenses - 14

Selling, general and administrative expenses 59 119

Share-based compensation expense 59 133


10. NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted earnings per share (EPS) were computed as follows:

Three months ended


March 31, 2019

Net (loss) income attributable to common equity holders (494) 42

Interest on convertible debentures, net of income taxes 23 -

Dilutive net (loss) income attributable to common equity holders (471) 42

Weighted-average number of common shares outstanding 20,700,133 21,016,059

Net effect of stock options, warrants and convertible debentures 1,588,736 -

Weighted-average number of diluted common shares 22,288,869 21,016,059

EPS Basic $(0.02) $ -

Diluted $(0.02) $ -

The following table presents the maximum number of shares that would be outstanding if all dilutive and potentially dilutive instruments were exercised or converted as at:

March 31, 2020 March 31, 2019

000’s 000’s

Common shares issued and outstanding (Note 7) 20,648 21,016 Stock options outstanding (Note 9) 2,620 2,612 Convertible debentures 1,000 1,000 Warrants 496 661

24,764 25,289

11. EXPENSES BY NATURE The consolidated interim statements of income (loss) and comprehensive income (loss) include the following expenses by nature: (a) Employee costs:

Three months ended


March 31, 2019

$ $

Short-term employee wages, bonuses, and benefits 1,698 1,568 Share-based payments (Note 9) 59 105

Total employee costs 1,757 1,673

Included in: Cost of goods sold 357 282 Research and development expenses 185 217 Selling, general and administrative expenses 1,215 1,174

Total employee costs 1,757 1,673

(b) Depreciation and amortization:

Three months ended


March 31, 2019

$ $

Depreciation included in cost of goods sold 97 94 Depreciation and amortization included in selling, general and administrative expenses(i) 317 262

Total depreciation and amortization 414 356 (i) Selling, general and administrative expenses included $301 of amortization of intangible assets and $16 of depreciation of tangible

assets for the three months ended March 31, 2020 [$243 and $19 respectively for the three months ended March 31, 2019].


12. NET CHANGE IN NON-CASH WORKING CAPITAL

The net change in non-cash working capital consisted of the following:

Three months ended


March 31, 2019

$ $

Accounts receivable (401) 2,036

Inventories (46) (361)

Other current assets and Contract assets 85 (108)

Accounts payable and accrued liabilities 431 72

Net change in non-cash working capital 69 1,639

13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1 - determined by reference to quoted prices in active markets for identical assets and liabilities. Level 2 - include those where valuations are determined using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 - valuations are those based on inputs that are unobservable and significant to the overall fair value measurement. The following table provides the fair value measurement hierarchy of the financial instruments measured at fair value subsequent to initial recognition in the consolidated statements of financial position as at:


Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Recurring fair value measurements Contingent payments relating to Alyria acquisition - - (20) - - (20)

Valuation Methods and Assumptions Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes to the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company did not have any transfer of assets and liabilities between Level 1, Level 2 and Level 3 of the fair value hierarchy during the three months ended March 31, 2020 and 2019. The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies. However, considerable judgment is required to develop these estimates. Accordingly, these estimated values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. Level 3 liabilities include obligations of the Company for the contingent consideration payable relating to the royalty earn-out relating in connection with the acquisition of the Alyria product line. The fair value of the contingent consideration payable is revalued at each reporting period based on management’s best estimate using the discounted cash flow method. The fair values of the Company’s non-current obligations, which are presented at amortized cost using the effective interest method, have been estimated using rates currently available to the Company for obligations with similar terms and remaining maturities. The fair values of these instruments approximate their carrying values and would be classified as Level 2. The fair value of contract assets, which is presented at amortized cost using the effective interest method, has been determined by discounting the future cash flows using observable inputs, such as interest rate yield curves or credit spreads. The fair value of the contract asset approximates its carrying value as it is related to the license agreement signed with Cantabria Labs (“Cantabria”) in April 2019 for the exclusive rights to sell and distribute the Company’s lead prescription product, Pliaglis, in Italy, Portugal, France and Spain.


Risk Factors The following is a discussion of liquidity, credit and market risks and related mitigation strategies that have been identified. This is not an exhaustive list of all risks nor will the mitigation strategies eliminate all risks listed. Liquidity Risk The Company anticipates that its current cash, revolving credit facility and the revenue it expects to generate from product sales, upfront, milestone and royalty payments related to out-licensing its products and/or its transdermal delivery technologies, will fund Crescita’s operations as currently planned for 2020 and beyond. Additional funding may be required for the development of new products and/or for future acquisitions. The Company’s exposure to liquidity risk is dependent on the sales growth and profitability of its operations which will be impacted by the status of competitive products and the success of the Company in developing and maintaining markets for its products. In addition, a number of other factors will have an impact on liquidity risk including the COVID-19 pandemic, the level of research and development expenditures for product candidates, costs associated with maintaining regulatory approvals, the timing of payments received or made under licensing arrangements and the acquisition costs of licenses for new products or technologies. Credit Risk Credit risk is the risk of financial loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that may subject the Company to credit risk consist of cash and amounts receivable from global customers. The Company manages its exposure to credit risk by holding cash on deposit in major financial institutions. The Company’s accounts receivables are subject to normal industry risks in each geographic region in which the Company operates. However, the Company has updated its ECL on the entire accounts receivable balance in order to adjust for the potential impact of the COVID-19 pandemic on the collectability of its accounts receivable. In addition, the Company is exposed to credit-related losses on sales to its customers outside North America due to potentially higher risks of enforceability and collectability. As at March 31, 2020, 4% of accounts receivables related to customers outside North America and the E.U. [December 31, 2019 - 14%]. The contract assets in the amount of $1,637 is related to the Cantabria Agreement and is denominated in euros. As at March 31, 2020, the Company had two customers that accounted for approximately 70% [three customers that accounted for approximately 67% as at December 31, 2019] of the total accounts receivables. Pursuant to their collection terms, accounts receivables were aged as follows:


$ $

Current 2,679 1,931 0-30 days past due 90 197 31-60 days past due 18 248 61-90 days past due 2 5 Over 90 days past due 54 121

2,843 2,502 Allowance for doubtful accounts (99) (69)

2,744 2,433

Interest Rate Risk The Company’s practice is to minimize interest rate cash flow risk exposures on its financing. The Company is currently not exposed to interest rate variability as its convertible debt instruments bear a fixed interest rate of 9% per year and it had not drawn any amounts on its Facility as at March 31, 2020.


Currency Risk The Company operates internationally, which gives rise to a risk that earnings and cash flows may be adversely affected by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the U.S. dollar and euro, but also transacts in other foreign currencies. As at March 31, 2020, the Company did not use financial instruments to hedge these risks. Starting in April 2020, the Company entered into option contracts to economically hedge the impact of currency fluctuations in anticipated transactions denominated in U.S. dollars. The significant balances in foreign currencies were as follows:

Euros U.S. Dollars

March 31,

2020 December 31,

2019 March 31,

2020 December 31,

2019

€ € $ $

Cash and cash equivalents 46 29 309 1,025 Accounts receivable 51 52 1,505 1,028 Other current assets 93 82 6 3 Contract assets 1,002 1,086 - - Accounts payable and accrued liabilities (107) (91) (1,192) (1,130)

1,085 1,158 628 926

Based on the aforementioned net exposure as at March 31, 2020, and assuming that all other variables remain constant, a 10% appreciation or depreciation of the Canadian dollar against the U.S. dollar would have an effect of $89 on total comprehensive income (loss) and a 10% appreciation or depreciation of the Canadian dollar against the euro would have an effect of $169 on total comprehensive income (loss). In terms of the euro, the Company has four exposures: (i) its euro-denominated cash held in its Canadian operations; (ii) the cost of purchasing raw materials and packaging materials priced in euros or sourced from European suppliers that are needed for production at the Canadian manufacturing facility; (iii) royalties and milestones from licensing agreements regarding Pliaglis; and (iv) its net investment and net cash flows in its European operations. In terms of the U.S. dollar, the Company has five exposures: (i) its U.S. dollar-denominated cash held in its Canadian operations; (ii) the cost of purchasing raw materials and packaging materials priced in U.S. dollars or sourced from U.S. suppliers that are needed for productions at the Canadian manufacturing facility; (iii) royalties and milestones from licensing agreements regarding Pliaglis; (iv) its net investment and net cash flows in its U.S. operations; and (v) revenues generated in U.S. dollars from its product sales to U.S. customers. 14. SEGMENTED INFORMATION IFRS 8 requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (the “CODM”) for allocating resources to the segment and for assessing its performance. Based on its analysis, the Company has determined that its CODM is its Chief Executive Officer. As a result of certain realignments in the 2020 strategic planning process, effective January 1, 2020, the Company now has three reportable segments: (i) Commercial Skincare; (ii) Licensing and Royalties; (iii) Manufacturing and Services. Prior to this, the Company operated its business as one segment. Commercial Skincare The Commercial Skincare reportable segment manufactures branded non-prescription skincare products for sale to both the Canadian and international markets. The Company’s branded non-prescription products include: Laboratoire Dr. Renaud (“LDR”), Pro-Derm, Alyria and Dermazulene. These premium skincare lines provide solutions for a wide range of skin concerns such as aging, acne, hydration, pigmentation, and rosacea. In Canada, the Company’s sales force calls on aesthetic spas, medispas and medical clinics using a business to business to consumer business model. International markets include South Korea and Malaysia where the Company sells LDR through distribution partners, and China where Dermazulene is sold through a leading e-commerce distributor. The Company recognizes revenue from the sale of products when the goods are shipped or received by the customers depending on the specific arrangement.


Licensing & Royalties The Licensing and Royalties (“Licensing”) reportable segment includes revenue generated from licensing the intellectual property related to the Company’s lead prescription product, Pliaglis, or for the use of its transdermal delivery technologies, MMPE™ and DuraPeel, on either an exclusive or non-exclusive basis. The Licensing segment also leverages the Company’s in-house R&D capabilities for the development of new topical products combining its technologies and various selected molecules in order to fuel future out-licensing agreements in the non-prescription skincare market. The key revenue components in the Licensing segment are upfront and milestones payments as well as royalties determined using the agreed-upon formulas as described in each respective licensing agreement. Manufacturing and Services The Manufacturing and Services reportable segment includes two main revenue streams: 1) revenue from the sale of topical products manufactured to client-specifications under its contract development and manufacturing organization (“CDMO”) infrastructure; and 2) revenue for product development services. Clients in the Manufacturing and Services segment use Crescita’s CDMO services to manufacture either under a private label or brand name and may use a combination of Crescita’s existing formulations or novel formulations, with or without the utilization of our transdermal delivery technologies. Corporate and Other The Corporate and Other total includes all the operating expenses, financing costs and corporate income tax expenses incurred by the Company to support its public company infrastructure and the three operating segments.

Commercial

Skincare Licensing &

Royalties Manufacturing

and Services Corporate and Other

Total

Three months ended March 31, 2020 $ $ $ $ $

Revenue 1,539 1,453 823 - 3,815

Cost of goods sold 788 - 563 - 1,351

751 1,453 260 - 2,464

Expenses

Research and development - - - 228 228

Selling, general and administrative - - - 2,183 2,183

Depreciation and amortization - - - 414 414

Other (income) expenses - - - (47) (47)

Deferred income tax expense - - - 180 180

Total Expenses - - - 2,958 2,958

751 1,453 260 (2,958) (494)

Commercial

Skincare Licensing &

Royalties Manufacturing

and Services Corporate and Other

Total

Three months ended March 31, 2019 $ $ $ $ $

Revenue 1,718 1,803 728 - 4,249

Cost of goods sold 780 78 369 - 1,227

938 1,725 359 - 3,022

Expenses

Selling, general and administrative - - - 1,932 1,932

Depreciation and amortization - - - 356 356

Other (income) expenses - - - 189 189

Deferred income tax expense - - - 236 236

Total Expenses - - - 2,980 2,980

938 1,725 359 (2,980) 42


first quarter 2020 interim report · management’s discussion and analysis may 26, 2020 basis of...

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