What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 241 added, 174 removed, 327 unchanged (56% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2019 (as amended, the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part 2, Item 1A, Risk Factors, of this Quarterly Report.

The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2019 (as amended, the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part 2, Item 1A, Risk Factors, of this Quarterly Report.

Forward-Looking Statements

8 unchanged sentences

hemp (including CBD) products and the scope of any regulations by the U.S.

Federal Drug Administration (the “FDA”), the U.S.

Federal Trade Commission (the “FTC”), the U.S.

Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S.

Federal Drug Administration, the U.S.

Federal Trade Commission, the U.S.

Patent and Trademark Office and any state equivalent regulatory agencies over U.S.

hemp (including CBD) products;

2 unchanged sentences

hemp industry by the U.S.

Department of Agriculture (the “USDA”);

Department of Agriculture;

• the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof;

3 unchanged sentences

• the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids;

• expectations regarding the implementation and effectiveness of key personnel changes;

• the anticipated benefits and impact of the Altria Investment (as defined herein);

11 unchanged sentences

• our ability or plans to identify, develop, commercialize or expand our technology and R&D initiatives in cannabinoids, or the success thereof;

• expectations regarding acquisitions and the anticipated benefits therefrom, including the Redwood Acquisition and the acquisition of certain assets from Apotex Fermentation Inc., including a GMP-compliant fermentation and manufacturing facility in Winnipeg, Manitoba (operating as “Cronos Fermentation”);

• expectations regarding acquisitions and dispositions and the anticipated benefits therefrom, including the Redwood Acquisition and the acquisition of certain assets from Apotex Fermentation Inc., including a GMP-compliant fermentation and manufacturing facility in Winnipeg, Manitoba (operating as “Cronos Fermentation”), and the proposed sale of our Original B.C.

(“OGBC”) production facility;

• expectations regarding revenues, expenses and anticipated cash needs;

30 unchanged sentences

(xiii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations;

and (xiv) other considerations that management believes to be appropriate in the circumstances.

(xiv) our ability to complete planned dispositions, including the sale of OGBC, and, if completed, obtain our anticipated sales price;

and (xv) other considerations that management believes to be appropriate in the circumstances.

While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.

3 unchanged sentences

the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected;

the risk that we will not complete planned dispositions, including the sale of OGBC, or, if completed, obtain our anticipated sales price;

disruption of production, distribution and sales as a result of the COVID-19 pandemic and any adverse effects the COVID-19 pandemic has on the demand for and use of our products;

the implementation and effectiveness of key personnel changes;

disruption from the Altria Investment making it more difficult to maintain relationships with customers, employees or suppliers;

25 unchanged sentences

All references to “dollars” or “$” are to U.S.

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of June 30, 2020 and December 31, 2019.

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of September 30, 2020 and December 31, 2019.

Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates.

2 unchanged sentences

(Exchange rates are shown as C$ per $) As of

June 30, 2020 March 31, 2020 December 31, 2019

September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019

Average rate (i)

2 unchanged sentences

(i) Average rates are three months ended.

The year-to-date average rates used for the six months ended June 30, 2020 was 1.3646.

The year-to-date average rate used for the nine months ended September 30, 2020 was 1.3539.

(Exchange rates are shown as C$ per $) As of

June 30, 2019 March 31, 2019 December 31, 2018

September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018

Average rate (i)

2 unchanged sentences

(i) Average rates are three months ended.

The year-to-date average rates used for the six months ended June 30, 2019 was 1.3337.

The year-to-date average rate used for the nine months ended September 30, 2019 was 1.3292.

Business Overview

3 unchanged sentences

two adult-use brands, COVE ™ and Spinach ™ ;

hemp-derived consumer products brands, Lord Jones ™ and PEACE+ ™ .

and three U.S.

hemp-derived consumer products brands, Lord Jones ™ , Happy Dance ™ and PEACE+ ™ .

Cronos Group reports through two primary business segments:

10 unchanged sentences

Redwood manufactures, markets and distributes U.S.

hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States under the brand Lord Jones ™ .

hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States under the brands Lord Jones ™ and Happy Dance ™ .

The Rest of World operating segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets.

In Canada, Cronos Group operates a wholly owned license holder under the Cannabis Act (Canada), Peace Naturals Project Inc.

(“Peace Naturals”), which has production facilities near Stayner, Ontario (“Peace Naturals Campus”).

(“Peace Naturals”), which has production facilities near Stayner, Ontario (the “Peace Naturals Campus”).

Cronos Group has established four strategic joint ventures in Canada, Israel and Colombia.

Cronos Group additionally holds approximately 31% of the issued capital of Cronos Australia Limited, which is listed on the Australian Securities Exchange under the trading symbol “CAU.” Cronos Group currently exports cannabis products to countries that permit the import of such products, such as Germany, Israel and Australia.

Recent Developments

3 unchanged sentences

The COVID-19 pandemic has resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets.

In response to the pandemic, in the first half of 2020, the governments of many countries, states, cities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures.

In recent weeks, such measures have been eased or lifted in varying degrees by different governments of various countries, states and cities depending on the status of infection rates;

however, the continued spread of COVID-19 has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway.

There can be no guarantee that governments will continue to ease such restrictions, and jurisdictions may pause plans to permit businesses to reopen or roll back the reopening of businesses.

In response to the pandemic, the governments of many countries, states, cities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures.

Such measures have been eased or lifted in varying degrees by different governments of various countries, states and cities during the three months ended September 30, 2020, but remain largely unpredictable.

The continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway.

For example, following an increase in cases during September 2020, Israel entered a mandatory three-week full lockdown with restrictions including the closure of non-essential businesses and limits on public movement.

It is possible that other jurisdictions in which the Company operates may reintroduce more stringent preventative or protective actions which could result in further closures of businesses.

Governments in certain countries such as the U.S., Canada, and those in Europe have responded to the acute economic and market consequences with certain monetary and fiscal policy actions.

Impact on operating results

During the three months ended June 30, 2020, the effects of the COVID-19 pandemic on retail stores and increase of costs in production and sales in the U.S.

During the second quarter of 2020, the effects of the COVID-19 pandemic on retail stores and increase of costs in production and sales in the U.S.

had a material impact on the rate of growth of revenue in the U.S.

segment, with revenue for the segment remaining flat from the three months ended March 31, 2020.

In the U.S., a significant number of the Company’s retail customers have experienced temporary retail store closures in connection with the COVID-19 pandemic, which has negatively impacted sales and demand in the segment.

Gross margins have compressed in the U.S.

segment during the three months ended June 30, 2020 as the Company implemented pay increases to the Company’s production workers as a result of the pandemic and implemented various discounts and initiatives (such as free shipping) and promotional events.

These measures increased the cost of sales and had a material negative impact on the gross margin in the U.S.

The Company expects revenue growth and operating results in the U.S.

segment to continue to be negatively impacted as the decrease in customer demand and retail closures are expected to continue as a result of the pandemic.

The Company does not expect the negative impact to be temporary in nature.

segment, with revenue for the segment remaining flat from the first quarter of 2020.

As a result of these impacts and expectation of future impacts, for the three months ended June 30, 2020, the Company recorded $35 million of impairment charges on its U.S.

reporting unit and $5 million on the Lord Jones ™ brand (refer to Note 13 to the Company’s condensed consolidated financial statements for more information regarding intangibles assets and goodwill).

Revenue and the growth in revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the three and six months ended June 30, 2020.

In both segments there was no material increase in the current expected credit loss as of June 30, 2020 in connection with COVID-19.

reporting unit and $5 million on the Lord Jones™ brand during the second quarter of 2020 (refer to Note 13 to the Company’s condensed consolidated financial statements for more information regarding intangibles assets and goodwill).

During the three months ended September 30, 2020, as a result of the COVID-19 pandemic in the U.S., a significant number of the Company’s retail customers’ stores continued to be challenged by remaining temporarily closed or closing permanently.

Those stores that are open are also faced with operating at reduced staff levels, at reduced opening hours, and controlling cash flows more closely, which has continued to negatively impact sales and demand for our products in the U.S.

The continued negative impact on the Company’s results has been as expected during the three months ended September 30, 2020 and no further impairment charges were recorded to the U.S.

reporting unit or brand as a result.

The Company expects revenue growth and operating results in the U.S.

segment to continue to be negatively impacted as retail closures are expected to continue as a result of the pandemic.

Revenue and the growth in revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the three and nine months ended September 30, 2020.

In both segments there were no material increases in the current expected credit loss as of September 30, 2020 in connection with COVID-19.

The Company will continue to closely monitor the effects of COVID-19 on its operating results.

4 unchanged sentences

The Company will continue to act in accordance with guidance from local, federal, and international health and governmental authorities, such as any government-mandated requirements for people to wear facemasks in all indoor communal spaces or at businesses, and is prepared to make additional operational adjustments, as necessary.

Although the Company’s production facilities currently remain operational, governmental requirements, guidance and health and safety requirements continue to evolve as governmental and health authorities respond to the spread of the virus, reopening plans in certain jurisdictions may be suspended, delayed or quarantines re-imposed and production facilities may experience temporary closures or quarantines if governmental or health authorities make changes to the businesses and workforces allowed to remain operational, which would result in reduced production or suspension of production if such closures are mandated.

Although the Company’s production facilities currently remain operational, governmental requirements, guidance and health and safety requirements continue to evolve as governmental and health authorities respond to the spread of the virus, reopening plans in certain jurisdictions have been and may be further reversed, suspended, delayed or quarantines re-imposed and production facilities may experience further temporary closures or quarantines if governmental or health authorities make changes to the businesses and workforces allowed to remain operational, which would result in reduced production or suspension of production if such closures are mandated.

In addition, if the Company’s employees contract the disease and test positive for COVID-19, depending on the employee’s job duties and access to facilities, this may impact the Company’s ability to keep production and manufacturing facilities open for health and safety reasons.

The impacts of certain closures of the facilities of suppliers and other vendors or these preventative and protective measures in the Company’s supply chain remain uncertain.

The impacts of certain closures of the facilities of suppliers and other vendors or these preventative and protective measures in the Company’s supply chain have not been significant to date but remain uncertain.

Earlier closures at manufacturers in China have resulted in delays of deliveries of batteries and cartridges for cannabis vaporizers and personal protective equipment such as masks and gowns used in Cronos Group’s manufacturing facilities certified in accordance with Good Manufacturing Practices (“GMP”), from such manufacturers in China.

1 unchanged sentence

Closures or other restrictions on the conduct of business operations on third-party manufacturers, suppliers or vendors may cause disruption in Cronos Group’s supply chain.

The Company has experienced some minor delays in shipping and expects that the increased global demand on shipping and transport services, in addition to customs and border control policies put in place in response to the COVID-19 pandemic that require that shipments to undergo a quarantine period may cause the Company to experience further delays in the future which could impact the Company’s ability to obtain materials or deliver products in a timely manner.

The Company has experienced some minor delays in shipping and expects that the increased global demand on shipping and transport services, in addition to customs and border control policies put in place in response to the COVID-19 pandemic that require shipments to undergo a quarantine period may cause the Company to experience further delays in the future which could impact the Company’s ability to obtain materials or deliver products in a timely manner.

In addition, work-from-home policies for certain employees and the effects of the Company’s work-from-home policies may negatively impact productivity, disrupt access to books and records and disrupt the Company’s business.

1 unchanged sentence

Retailers in the U.S.

and Canada have been required to close at times or have curtailed their operations (such as reduced opening hours, reduced staff and reduced traffic in stores) due to the implementation of health and safety measures.

and Canada have been required to close at times or have curtailed their operations (such as reduced opening hours, reduced staff, limiting brand partner visits, and reduced traffic in stores) due to the implementation of health and safety measures.

The slowdown or disruption faced by retailers, in addition to quarantine measures and travel restrictions, impacts the ability of customers to be able to access Cronos Group’s products.

These restrictions on retail stores are mandated by, and differ from, each state or province and continue to change and evolve, which creates uncertainty in forecasting customer demand and sales velocity.

In the U.S., while online sales have continued, certain beauty and other retailers have temporarily closed physical boutiques.

These restrictions on retail stores are mandated by, and differ across, each state or province and continue to change and evolve, which creates uncertainty in forecasting customer demand and sales velocity.

In the U.S., while online sales have continued despite facing pressure, certain beauty and other retailers have temporarily closed physical boutiques, some for at least the duration of 2020.

State specific limitations on retail capacity has also reduced the ability of larger retailers to offer in-store brand education for the Company’s products.

In Canada, retailers have implemented a combination of measures from closing stores, offering curbside delivery (to the extent permitted by a province) and online sales only, reduced store opening hours and reduced number of customers in stores in light of social distancing measures.

Recent suspensions of the ability of private retailers to offer click-and-collect or curbside delivery in certain provinces in Canada may further impact customer demand for products.

Suspensions of the ability of private retailers to offer click-and-collect or curbside delivery in certain provinces in Canada may further impact customer demand for products.

Provincial purchasers have also similarly, among other things, reduced staff on-site leading to a decrease in delivery time slots for producers to deliver products or reduced frequency or size of their purchase orders.

4 unchanged sentences

The impacts of these current restrictions and measures on certain strategic projects continue to be uncertain.

Existing R&D initiatives continue to proceed, with reduced activity at Ginkgo during the three months ended June, 30, 2020, although the Company still anticipates being able to meet its previously disclosed expected timing for the successful completion of the equity milestones set out in the Ginkgo Strategic Partnership.

Other facility design and expansion projects are currently expected to proceed as planned.

Existing R&D initiatives continue to proceed, with activity at Ginkgo returning to normal from reductions in the second quarter of 2020 after slight delays which extended into the early weeks of the three months ended September 30, 2020.

The Company still anticipates being able to meet its previously disclosed expected timing for the successful completion of the equity milestones set out in the Ginkgo Strategic Partnership.

Other facility design, expansion projects and product development are currently expected to proceed as planned.

However, requirements and restrictions on the operation of businesses and workforces continue to evolve as governmental and health authorities respond to the spread of the virus and changes may result in delays or suspensions if authorities require such activities to be suspended.

6 unchanged sentences

Brand portfolio

During the second quarter of 2020, we continued to expand distribution of cannabis vaporizer devices in the Canadian adult-use market under the COVE ™ and Spinach ™ brands, and for the direct-to-consumer market in Canada under the PEACE NATURALS ™ brand.

Subsequent to the end of the third quarter of 2020, Cronos Group’s U.S.

segment launched a new hemp-derived CBD skincare and personal care brand called Happy Dance™, in partnership with Kristen Bell.

Happy Dance™ products are made with CBD from premium full-spectrum hemp extract and provide consumers with high quality skincare at an accessible price point.

Happy Dance™ launched with three product offerings:

All-Over Whipped Body Butter +CBD, Head-To-Toe Coconut Melt +CBD and Stress Away Bath Bomb +CBD, all of which are currently available online, with intentions to enter the brick and mortar channel in the future.

Through the partnership with Ms.

Bell, Cronos Group looks forward to future introductions of innovative products to the hemp-derived CBD market.

In October 2020, the U.S.

segment launched new full-spectrum tinctures under its hemp-derived CBD brand, Lord Jones™.

The full-spectrum tinctures are available in two flavors, peppermint and orange.

segment anticipates launching a Lord Jones™ branded hemp-derived CBD infused Lip Balm in November 2020.

The Whole Plant Formula CBD Lip Balm is expected to contain 25mg of U.S.

hemp-derived CBD from full-spectrum hemp extract and other premium ingredients including shea butter, mimosa wax, beeswax, and an oil blend to provide additional hydration.

Global sales and distribution

In June 2020, following the successful export of bulk dried flower from Cronos Group to Cronos Israel in April 2020, Cronos Israel commenced sales of PEACE NATURALS ™ branded cannabis to the Israeli medical market.

Cronos Israel will continue to build distribution capabilities for dried flower while it awaits final licensing for the sale of oils and pre-rolls, which is currently expected to be received later in 2020.

Cronos Israel will continue to build its distribution network and brand presence in this rapidly growing medical market.

Cronos Israel has now received the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel.

Subsequent to the end of the third quarter of 2020, in addition to the PEACE NATURALS™ branded dried flower currently sold in the Israel medical market, Cronos Israel began selling PEACE NATURALS™ branded oils into the Israeli medical market.

As part of a regular evaluation of Cronos Group’s global business, the Company intends to move forward with the sale of our OGBC production facility in Armstrong, British Columbia to focus on more efficient assets that better align with our long-term plans.

The OGBC assets are now being carried as held for sale until the disposition of the assets is completed.

Global supply chain

During the second quarter of 2020, Natuera, the Company’s contract manufacturing joint venture in Latin America, a fully licensed operation in Colombia for hemp- and cannabis-derived bulk, consumer, and medicinal cannabinoid products, continued to achieve significant operational milestones.

At the end of April 2020, Natuera completed its first harvest of a non-psychoactive (hemp) cultivar registered with the Colombian Agricultural Institute.

Between May 2020 and July 2020, Natuera successfully completed three test exports of hemp-derived CBD extract to the U.S.

In the third quarter of 2020, Natuera continued to successfully complete imports of hemp-derived CBD extract to the U.S.

for business development and R&D purposes.

With its extraction facility coming online in the first quarter of 2020, Natuera is currently focused on accessing new markets and product development, including developing additional bulk offerings of hemp-derived CBD distillate and water-soluble hemp-derived CBD solutions.

During the second quarter of 2020, the Company amended its previously announced bulk resin supply agreement with MediPharm Labs Inc.

Pursuant to the amendment, the Company’s aggregate remaining purchase commitment for the remainder of the term of the agreement was reduced to approxi mately C$3.0 million ($2.2 million) from C$8.1 million ($6.0 million).

The Company received the remaining committed bulk resin supply during the second quarter of 2020.

Natuera also completed its first export of hemp-derived CBD distillate to the United Kingdom for R&D purposes.

Moreover, Natuera’s wholly-owned subsidiary in Colombia was awarded four quotas by the Colombian government for psychoactive cannabis R&D production:

(i) one cultivation quota to conduct field trials and characterize cultivars;

(ii) one cultivation quota to conduct R&D related to the manufacture of derivatives;

and (iii) two R&D manufacturing quotas to analyze and characterize THC products.

Intellectual property initiatives

In the third quarter of 2020, Cronos Device Labs expanded its scope for cannabinoid research and the R&D center was renamed to Cronos Research Labs.

Cronos Group engages in both understanding the fundamental science behind the interactions of cannabinoids with each other and how those interactions can be leveraged to best deliver on the consumer’s needs.

Additionally, the Company partners with leading scientific institutions engaged in fundamental cannabis science to augment and accelerate the internal efforts.

Cronos Group’s work spans many aspects of cannabis research from strain development to growing conditions to extraction technology to biosynthesis to product development, all supported by advances in analytical sciences.

Enterprise initiatives

Subsequent to the second quarter of 2020, the Company successfully implemented a new ERP system across the Canadian business.

Cronos Group has also commenced work to broaden the reach of the ERP system to the U.S.

business, w hich is currently expected to be launched in the first half of 2021.

The new ERP system will be a meaningful component of the Company’s internal control over financial reporting and is expected to enable the Company to realize efficiencies throughout the finance, supply chain and operations processes.

Cronos Group continues to build and fortify a seasoned management team.

Subsequent to the second quarter, following the resignation of Robert Rosenheck on July 20, 2020, Summer Frein was named General Manager of the U.S.

hemp-derived CBD business, with oversight of sales, marketing, and operations.

In the third quarter of 2020, the Company implemented a new enterprise resource planning (“ERP”) system across the Canadian business.

Cronos Group has also commenced work to broaden the reach of our ERP system to the U.S.

business, which is currently expected to be launched in the first half of 2021.

The new ERP system will be a meaningful component of the Company's internal control over financial reporting and is expected to enable us to realize efficiencies throughout our supply chain and operations.

On September 9, 2020, Cronos Group expanded its leadership structure to drive its next phase of growth by appointing Kurt Schmidt as President and Chief Executive Officer.

This move coincides with Mike Gorenstein’s appointment to Executive Chairman.

Schmidt brings deep experience in consumer products with decades of leadership experience in the U.S.

and overseas.

Schmidt previously served as Director and Chief Executive Officer of Blue Buffalo Company, Ltd.

from 2012 through 2016.

Prior to joining Blue Buffalo, Mr.

Schmidt was Deputy Executive Vice President at Nestlé S.A., where he was responsible for Nestlé Nutrition, including several science-oriented and heavily regulated businesses.

He also served as a member of Nestlé’s Executive Committee.

Schmidt joined Nestlé in 2007 as part of Nestlé’s acquisition of Gerber Products Company, where he was the President and Chief Executive Officer from 2004 to 2007.

Prior to Gerber, Mr.

Schmidt held a variety of leadership roles at Kraft Foods, Inc.

In addition, the Company further bolstered its senior leadership team by adding Shannon Buggy as Senior Vice President, Global Head of People.

Prior to joining Cronos Group, Ms.

Buggy was the Senior Vice President of Global Human Resources for Nielsen where she led HR strategy for Nielsen Media.

With over 25 years of experience, Ms.

Buggy has a proven track record of leading and managing global human resources teams and driving excellence in talent acquisition, development, retention, employee relations, compensation, benefits, talent management and labor relations.

Additionally during the quarter, as previously disclosed, following the resignation of Robert Rosenheck on July 20, 2020, Summer Frein was named General Manager USA.

Frein joined Cronos Group in January of this year;

however, she worked with Cronos Group in various capacities since 2018.

however, she has worked with Cronos Group in various capacities since 2018.

Previously, Ms.

Frein was employed with Altria, where she led the Strategy and Business Development team’s due diligence in the cannabis space which culminated in Cronos Group’s strategic investment from Altria.

Most recently, she was responsible for leading our U.S.

Most recently, she was responsible for leading the Company’s U.S.

sales efforts, including managing brand and retail partnerships for Lord Jones™.

Frien’s leadership, the Company plans to further expand its U.S.

hemp-derived business including introducing new product formats under Lord Jones ™ and launching new brands that will target different retail channels and consumers.

Frein’s leadership, the Company plans to further expand its U.S.

hemp-derived business, including introducing new product formats under Lord Jones™ and Happy Dance™, that will target different retail channels and consumers.

Consolidated Results of Operations:

2 unchanged sentences

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

8 unchanged sentences

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

4 unchanged sentences

(i) Net revenue, before excise taxes, is calculated net of sales returns and discounts as described under Note 4 to the condensed consolidated financial statements.

For the three months ended June 30, 2020 (“Q2 2020”), we reported net revenues of $9.9 million, representing an increase of $2.2 million from the three months ended June 30, 2019 (“Q2 2019”).

For the three months ended September 30, 2020 (“Q3 2020”), we reported consolidated net revenue of $11.4 million, representing an increase of $5.6 million from the three months ended September 30, 2019 (“Q3 2019”).

This change was primarily due to:

• The Redwood Acquisition in the third quarter of 2019, which resulted in an increase in net revenue of $2.2 million in Q2 2020.

• An increase in sales in the Rest of Wo rld segment in Q2 2020 compared to Q2 2019 due to the continued growth of the adult-use market in Canada and the launch of cannabis vaporizer devices in December 2019, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.

For the six months ended June 30, 2020 (“YTD 2020”), we reported net revenues of $18.3 million, representing an increase of $7.7 million from the six months ended June 30, 2019 (“YTD 2019”).

• An increase in sales in the Rest of World segment in Q3 2020 compared to Q3 2019 due to the continued growth of the adult-use market in Canada and the sale of PEACE NATURALS™ branded cannabis to the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic price reductions on various adult-use cannabis products in certain Canadian provinces in Q3 2020.

• An increase in net revenue in the U.S.

segment of $1.0 million due to Q3 2020 results including a full quarter of Redwood business as opposed to 25 days in Q3 2019.

For the nine months ended September 30, 2020 (“YTD 2020”), we reported consolidated net revenues of $29.7 million, representing an increase of $13.2 million from the nine months ended September 30, 2019 (“YTD 2019”).

This change was primarily due to:

• The Redwood Acquisition in the third quarter of 2019, which resulted in an increase in net revenue of $4.4 million in YTD 2020.

• An increase in sales in the Rest of World segment in YTD 2020 compared to YTD 2019 due to the continued growth of the adult-use market in Canada and the launch of cannabis vaporizer devices in December 2019, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.

• An increase in sales in the Rest of World segment in YTD 2020 compared to YTD 2019 due to the continued growth of the adult-use market in Canada, inclusive of the launch of cannabis vaporizer devices in December 2019 , partially offset by non-recurring wholesale revenue in the Canadian market in 2019.

• The Redwood Acquisition in Q3 2019, which resulted in an increase in net revenue of $5.3 million in YTD 2020 due to a full nine months of revenue in 2020 versus 25 days in 2019.

Cost of sales and gross profit (loss) - consolidated

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

3 unchanged sentences

Gross margin (14) % (54) % N/A 40 pp (37) % 15 % N/A (52) pp

For Q2 2020, we reported gross profit (loss) of $(3.0) million , representing a decrease of $7.0 million from Q2 2019.

For Q3 2020, we reported a consolidated gross loss of $1.5 million , representing a decrease in losses of $1.6 million from Q3 2019.

This change was primarily due to:

• An increase in cost of sales primarily driven by a higher volume of adult-use sales and a decline in wholesale sales.

• An inventory write-down of $3.1 million on dried cannabis and cannabis extracts, primarily driven by cannabis product price compression in the Canadian market.

If not for the inventory write-down, gross profit (loss) would have been $0.1 million, representing a gross margin of 1%.

We anticipate further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.

• The offsetting impact of the Redwood Acquisition in the third quarter of 2019, which contributed $0.6 million of gross profit.

For YTD 2020, we reported gross profit (loss) of $(9.4) million, representing a decrease of $15.1 million from YTD 2019.

• The increase in net revenue from Q3 2019, as described above.

• The impact of the Redwood Acquisition in Q3 2019, which contributed $0.2 million of incremental gross profit in Q3 2020.

• An offsetting increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third party purchased flower and a decline in wholesale sales in Q3 2020.

For YTD 2020, we reported a consolidated gross loss of $10.9 million, representing an increase in losses of $13.4 million from YTD 2019.

This change was primarily due to:

• An inventory write-down of $11.0 million on dried cannabis and cannabis extracts, primarily driven by fixed-price supply contracts negotiated prior to cannabis product price compression due to broader trends of oversupply in the Canadian market and the impact of the Company's operational repurposing of the Peace Naturals Campus.

• An increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third party purchased flower and a decline in wholesale sales in 2020.

• An incremental inventory write-down of $5.6 million in 2020 on dried cannabis and cannabis extracts, primarily driven by fixed-price supply contracts negotiated prior to cannabis product price compression due to broader trends of oversupply in the Canadian market and the impact of the Company’s operational repurposing of the Peace Naturals Campus.

If not for the inventory write-down, gross profit (loss) would have been $0.1 million, representing a gross margin of 0.3%.

We anticipate further inventory write-downs in the short-term due to pricing pressures in the marketplace.

• An increase in cost of sales primarily driven by a higher volume of adult-use sales a nd a decline in wholesale sales.

• The offsetting impact of the Redwood Acquisition in the third quarter of 2019, which contributed $1.7 million of gross profit.

We may incur further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.

• The offsetting impact of the Redwood Acquisition in Q3 2020, which contributed $1.9 million of incremental gross profit in YTD 2020.

Operating loss – consolidated

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

9 unchanged sentences

(i) See “Non-GAAP measures” for information related to Non-GAAP measures.

For Q2 2020, we reported an operating loss of $34.8 million, representing an increase in losses of $18.0 million from Q2 2019.

For Q3 2020, we reported a consolidated operating loss of $41.2 million, representing an increase in losses of $10.5 million from Q3 2019.

This change was primarily due to:

• A decrease in gross profit (loss) from Q2 2019, as described above.

• An increase in general and administrative costs driven by review costs and costs related to the Company’s responses to requests for information from various regulatory authorities related to the previously disclosed restatement of the Company’s 2019 interim financial statements of $3.5 million and an increase in salaries and wages as a result of increased headcount to support the Company’s growth strategy.

• An increase in sales and marketing costs, primarily related to building and developing brands.

• An increase in R&D costs of $1.3 million primarily related to increased spending at the Cronos Device Labs R&D center.

• The Redwood Acquisition in the third quarter of 2019, which resulted in an increase in operating loss of $5.6 million in Q2 2020, driven by increased investments in sales and marketing and general and administrative expenses.

• Activity at Cronos Fermentation’s facilities since the third quarter of 2019, which resulted in an increase in operating loss of $1.2 million in Q2 2020, driven by investments in R&D.

For YTD 2020, we reported an operating loss of $79.8 million, representing an increase in losses of $52.9 million from YTD 2019.

• An increase in share-based payment costs of $4.4 million primarily related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

• An increase in general and administrative costs of $2.7 million related to review costs and costs related to the previously disclosed restatement of the Company’s 2019 interim financial statements of $1.0 million as well as a full quarter of U.S.

segment results versus 25 days in Q3 2019.

• An increase in sales and marketing costs of $2.6 million, primarily related to our ongoing efforts in brand development as well as increased costs due to a full quarter of U.S segment results versus 25 days in Q3 2019.

• An increase in R&D costs of $2.1 million related to increased spending on product development and cannabinoid intellectual property.

• Partially offset by the decrease in gross loss from Q3 2019, as described above.

For YTD 2020, we reported a consolidated operating loss of $120.9 million, representing an increase in losses of $63.4 million from YTD 2019.

This change was primarily due to:

• A decrease in gross profit (loss) from YTD 2019, as described above.

• An increase in general and administrative costs driven primarily by an increase in salaries and wages of $8.5 million as a result of increased headcount in order to support the Company’s growth strategy, review costs and costs related to the Company’s responses to requests for information from various regulatory authorities related to the previously disclosed restatement of the Company’s 2019 interim financial statements of $7.9 million.

• An increase in sales and marketing costs, primarily related to building and developing brands.

• An increase in R&D costs of $4.8 million primarily related to the Ginkgo Strategic Partnership and increased spending at the Cronos Device Labs R&D center.

• The Redwood Acquisition in the third quarter of 2019, which resulted in an increase in operating loss of $12.1 million in YTD 2020, driven by increased investments in sales and marketing and general and administrative expenses.

• Activity at Cronos Fermentation’s facilities since the third quarter of 2019, which resulted in an increase in operating loss of $2.3 million in YTD 2020, driven by investments in R&D.

• Increase in gross loss in YTD 2020 compared to gross profit in YTD 2019, as described above.

• An increase in general and administrative costs driven primarily by an increase in salaries and wages of $8.5 million as a result of increased headcount in order to support the Company’s growth strategy, increased office and general expenses primarily related to the new office premises, review costs and costs related to the previously disclosed restatement of the Company’s 2019 interim financial statements of $8.8 million as well as increased costs due to a full three quarters of U.S.

segment results versus 25 days in 2019 in the same period.

• An increase in sales and marketing costs of $11.1 million, primarily related to brand development as well as increased costs due to a full three quarters of U.S.

segment results versus 25 days in the same period in 2019.

• An increase in R&D costs of $6.9 million primarily related to the Ginkgo Strategic Partnership and increased spending on product development and cannabinoid intellectual property.

• An increase in share-based payment costs of $4.9 million primarily related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

Results of Operations by Business Segment:

Q3 2020 compared with Q3 2019

Summary of financial results – Rest of World

Summary of financial results – Rest of World (“ROW”)

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

7 unchanged sentences

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

3 unchanged sentences

Net revenue $ 9,719 $ 5,110 $ 4,609 90 % $ 23,684 $ 15,767 $ 7,917 50 %

For Q2 2020, we reported net revenue of $7.7 million, representing an increase of $0.1 million from Q2 2019.

For Q3 2020, the ROW segment reported net revenue of $9.7 million, representing an increase of $4.6 million from Q3 2019.

This change was primarily due to:

• An increase in sales due to the continued growth of the adult-use market in Canada and the launch of cannabis vaporizer devices in December 2019, partially offset by non-recurring wholesale revenue in the Canadian market in Q2 2019.

For YTD 2020, we reported net revenue of $14.0 million, representing an increase of $3.3 million from YTD 2019.

• An increase in sales due to the continued growth of the adult-use market in Canada and the sale of PEACE NATURALS™ branded cannabis to the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in Q3 2019 and strategic pricing reductions on various adult-use cannabis products in certain Canadian provinces in Q3 2020.

For YTD 2020 the ROW segment reported net revenue of $23.7 million, representing an increase of $7.9 million from YTD 2019.

This change was primarily due to:

• An increase in sales due to the continued growth of the adult-use market in Canada, inclusive of the launch of cannabis vaporizer devices in December 2019, partially offset by non-recurring wholesale revenue in the Canadian market in 2019.

Cost of sales and gross profit (loss) – Rest of World

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

3 unchanged sentences

Gross margin (23) % (70) % N/A 47 pp (56) % 13 % N/A (69) pp

For Q2 2020, we reported gross profit (loss) of $(3.5) million, representing a decrease of $7.6 million from Q2 2019.

For Q3 2020, the ROW segment reported a gross loss of $2.2 million, representing a decrease in losses of $1.4 million from Q3 2019.

This change was primarily due to:

• An increase in cost of sales primarily driven by a higher volume of adult-use sales and a decline in wholesale sales.

• An inventory write-down of $3.1 million on dried cannabis and cannabis extracts, primarily driven by cannabis product price compression in the Canadian market.

If not for the inventory write-down, segment gross profit (loss) would have been $(0.5) million, representing a gross margin of (6)%.

We anticipate further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.

For YTD 2020, we reported gross profit (loss) of $(11.1) million, representing a decrease of $16.7 million from YTD 2019.

• An increase in net revenue from Q3 2019, as described above.

• A partially offsetting increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower and a decline in wholesale sales in Q3 2020.

The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.

For YTD 2020, the ROW segment reported a gross loss of $13.3 million, representing an increase in losses of $15.3 million from YTD 2019.

This change was primarily due to:

• An increase in cost of sales primarily driven by a higher volume of adult-use sales and the associated third-party purchased flower and a decline in wholesale sales in YTD 2020.

The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.

• An additional inventory write-down of $5.6 million in 2020 on dried cannabis and cannabis extracts, primarily driven by fixed-price supply contracts negotiated prior to cannabis product price compression due to broader trends of oversupply in the Canadian market and the impact of the Company’s operational repurposing of the Peace Naturals Campus.

If not for the inventory write-down, segment gross profit (loss) would have been $(2.2) million, representing a gross margin of (9)%.

We anticipate further inventory write-downs in the short-term due to pricing pressures in the marketplace.

• An increase in cost of sales primarily driven by a higher volume of adult-use sales and a decline in wholesale sales.

We may incur further inventory write-downs due to pricing pressures in the marketplace, as well as increased marginal production costs at the Peace Naturals Campus.

• Partially offsetting increase in net revenue from YTD 2019, as described above.

Operating loss – Rest of World

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

2 unchanged sentences

(i) See “Non-GAAP measures” for information related to Non-GAAP measures.

For Q2 2020, we reported an operating loss of $22.1 million representing an increase in losses of $5.4 million from Q2 2019.

For Q3 2020, the ROW segment reported an operating loss of $18.0 million, representing a decrease in losses of $3.2 million from Q3 2019.

This change was primarily due to:

• A decrease in gross profit (loss) from Q2 2019, as described above.

• An increase in R&D costs primarily related to increased spending at the Cronos Device Labs R&D center.

• Activity at Cronos Fermentation’s facilities since the third quarter of 2019, which resulted in an increase in operating loss in Q2 2020, driven by investments in R&D.

• A partially offsetting decrease in professional and consulting fees from Q2 2019.

For YTD 2020, we reported an operating loss of $54.0 million, representing an increase in losses of $27.1 million from YTD 2019.

• A decrease in gross loss from Q3 2019, as described above.

• A decrease in general and administrative costs from Q3 2019 driven by a reclassification of $4.6 million to corporate expenses in Q3 2020, which had no effect on the Company’s consolidated statement of net income (loss).

• A partially offsetting increase in R&D costs related to increased spending on product development and cannabinoid intellectual property.

For YTD 2020, the ROW segment reported an operating loss of $72.0 million, representing an increase in losses of $23.9 million from YTD 2019.

This change was primarily due to:

• A decrease in gross profit (loss) from YTD 2019, as described above.

• An increase in general and administrative costs from YTD 2019 driven by an increase in salaries and wages as a result of increased headcount to support the Company’s growth strategy.

• An increase in sales and marketing costs primarily related to building and developing brands and products for the first full year of sales into the Canadian adult-use market.

• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and increased spending at the Cronos Device Labs R&D center.

• Activity at Cronos Fermentation’s facilities from since third quarter of 2019, which resulted in an increase in operating loss in YTD 2020, driven by investments in R&D.

• An increase in gross loss from YTD 2019, as described above.

• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and costs related to increased spending on product development and cannabinoid intellectual property.

• An increase in general and administrative costs from YTD 2019 driven by an increase in salaries and wages as a result of increased headcount to support the Company’s growth strategy and increased office and general expenses primarily related to the new office premises.

• An increase in sales and marketing costs primarily related to building and developing our brands and prod ucts in the Canadian adult-use market.

Summary of financial results – United States

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

Net revenue $ 2,174 $ — N/A N/A $ 4,350 $ — N/A N/A

Gross profit 587 — N/A N/A 1,669 — N/A N/A

Gross margin 27 % N/A N/A N/A 38 % N/A N/A N/A

Net revenue $ 1,639 $ 675 $ 964 143 % $ 5,989 $ 675 $ 5,314 787 %

Gross profit 666 443 223 50 % 2,335 443 1,892 427 %

Gross margin 41 % 66 % N/A (25) pp 39 % 66 % N/A (27) pp

Reported and adjusted operating loss (i)

$ (5,575) $ — N/A N/A $ (12,098) $ — N/A N/A

$ (12,191) $ (830) (11,361) 1,369 % $ (24,289) $ (830) (23,459) 2,826 %

(i) See “Non-GAAP measures” for information related to Non-GAAP measures.

1 unchanged sentence

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

Net revenue $ 2,174 — N/A N/A $ 4,350 — N/A N/A

segment reported net revenue of $2.2 million for Q2 2020 and $4.4 million for YTD 2020.

These results were primarily due to:

• The temporary closure of a significant number of customers’ physical retail stores as a result of preventive measures undertaken in response to the COVID-19 pandemic negatively impacted revenue growth for Q2 2020 despite an increase in product offerings.

Net revenue $ 1,639 $ 675 $ 964 143 % $ 5,989 $ 675 $ 5,314 787 %

For Q3 2020, the U.S.

segment reported net revenue of $1.6 million, representing an increase of $1.0 million from Q3 2019.

This change was primarily due to:

• An increase in sales primarily driven by a full quarter of results in Q3 2020 as opposed to 25 days in Q3 2019.

For YTD 2020, the U.S.

segment reported net revenue of $6.0 million, representing an increase of $5.3 million from YTD 2019.

This change was primarily due to:

• An increase in sales primarily due to a full three quarters of U.S.

segment results in 2020 as opposed to 25 days in the same period in 2019.

Cost of sales and gross profit (loss) – United States

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

Cost of sales $ 1,587 $ — N/A N/A $ 2,681 $ — N/A N/A

Gross profit 587 — N/A N/A 1,669 — N/A N/A

Gross margin 27 % N/A N/A N/A 38 % N/A N/A N/A

segment reported gross profits of $0.6 million for Q2 2020 and $1.7 million for YTD 2020, with gross profit margins of 27% and 38%, respe ctively.

The results are primarily due to:

• A decrease in gross margin of 23pp for Q2 2020 compared to the three months ended March 31, 2020 due to an increase in labor costs during the COVID-19 pandemic as well as increased discounts, sales and other promotions in the direct-to-consumer channel to drive online sales growth in an effort to offset the negative impact of retail store closures during the COVID-19 pandemic.

Cost of sales $ 973 $ 232 $ 741 319 % $ 3,654 $ 232 $ 3,422 1,475 %

Gross profit 666 443 223 50 % 2,335 443 1,892 427 %

Gross margin 41 % 66 % N/A (25) pp 39 % 66 % N/A (27) pp

For Q3 2020, the U.S.

segment reported gross profits of $0.7 million, with gross profit margins of 41%, representing an increase of $0.2 million from Q3 2019.

This change was primarily due to an increase in net revenue from Q3 2019, as described above, offset by:

• An increase in cost of sales primarily driven by a full quarter of results in Q3 2020 as opposed to 25 days in the same period in 2019.

• A decrease in gross margin of (25)pp for Q3 2020 compared to Q3 2019 primarily due to increased discounts, sales and other promotions and new product introductions.

For YTD 2020, the U.S.

segment reported gross profits of $2.3 million, with gross profit margins of 39%, representing an increase of $1.9 million from YTD 2019.

This change was primarily due to an increase in net revenue from YTD 2019, as described above, offset by:

• An increase in cost of sales primarily driven by a full three quarters of U.S.

segment results in Q3 2020 as opposed to 25 days in the same period in 2019.

• A decrease in gross margin of (27)pp YTD 2020 compared to YTD 2019 primarily due to increased discounts, sales and other promotions and new product introductions.

Operating loss – United States

(In thousands of U.S.

dollars) For the three months ended June 30, Change For the six months ended June 30, Change

dollars) For the three months ended September 30, Change For the nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

Reported and adjusted operating loss (i)

$ (5,575) $ — N/A N/A $ (12,098) $ — N/A N/A

$ (12,191) $ (830) $ (11,361) 1,369 % $ (24,289) $ (830) $ (23,459) 2,826 %

(i) See “Non-GAAP measures” for information related to Non-GAAP measures.

For Q3 2020, the U.S.

segment reported operating loss of $5.6 million.

segment reported an operating loss of $12.2 million, representing an increase in losses of $11.4 million.

These results were primarily due to:

• A decrease in the gross margin for YTD 2020, as described above.

• Sales and marketing costs incurred in relation to the continued roll-out of new U.S.

hemp-derived CBD products under the Lord Jones ™ brand.

• An increase in share-based payment costs related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

segment in Q3 2020.

• Sales and marketing costs incurred in relation to the new U.S.

hemp-derived CBD products under the Lord Jones ™ and Happy Dance ™ brands.

• Increased general and administration costs in Q3 2020 driven by salaries and wages costs incurred to support the Company’s growth strategy across a variety of functions.

• Partially offset by increased gross profit for Q3 2020, as described above.

For YTD 2020, the U.S.

segment reported operating loss of $12.1 million.

segment reported an operating loss of $24.3 million, representing an increase in losses of $23.5 million.

These results were primarily due to:

• A decrease in the gross margin for YTD 2020, as described above.

• A full three quarters of U.S.

segment results in Q3 2020 as opposed to 25 days in the same period in 2019.

• An increase in share-based payment costs of $6.7 million primarily related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

• Sales and marketing costs incurred in relation to the continued roll-out of new U.S.

hemp-derived CBD products under the Lord Jones ™ brand.

hemp-derived CBD products under the Lord Jones ™ and Happy Dance ™ brands.

• Increased general and administration costs in YTD 2020 driven by salaries and wages costs incurred to support the Company’s growth strategy across a variety of functions.

• Partially offset by increased gross profit for YTD 2020, as described above.

Non-GAAP Measures

9 unchanged sentences

Management reviews operating loss on an adjusted basis, which excludes certain income and expense items that management believes are not part of underlying operations.

These items typically include non-recurring charges such as the financial statement review costs related to the restatement of the 2019 financial statements and the Company’s responses to the reviews of such interim financial statement by various regulatory authorities (see Part II, Item 1, Legal Proceedings , of this Quarterly Report for a discussion of the regulatory reviews relating to the restatement of the 2019 interim financial statements).

These items typically include non-recurring charges such as the financial statement review costs related to the restatement of the 2019 financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part II, Item 1, Legal Proceedings , of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management does not view either of these items to be part of underlying results as they may be highly variable, may be unusual or infrequent, are difficult to predict or can distort underlying business trends and results.

2 unchanged sentences

(In thousands of U.S.

dollars) For the three months ended June 30, For the six months ended June 30,

dollars) For the three months ended September 30, For the nine months ended September 30,

2020 2019 2020 2019

Reported operating loss $ (41,169) $ (30,698) $ (120,937) $ (57,539)

Review costs related to restatement of 2019 interim financial statements 3,459 — 7,866 —

Review and defense costs related to restatement of 2019 interim financial statements 958 — 8,824 —

Adjusted operating loss $ (40,211) $ (30,698) $ (112,113) $ (57,539)

1 unchanged sentence

Management reviews operating loss by business segment, which excludes corporate expenses, and adjusted operating loss by business segment, which further excludes certain income and expense items that management believes are not part of the underlying segment’s operations.

Corporate expenses are expenses that relate to the consolidated business and not to an individual operating segment while the income and expense items typically include non-recurring charges such as the financial statement review costs related to the restatement of the 2019 financial statements and the reviews of such interim financial statement by various regulatory authorities (see Part II, Item 1, Legal Proceedings , of this Quarterly Report for a discussion of the regulatory reviews relating to the restatement of the 2019 interim financial statements).

Management does not view the income and expense items above to be part of underlying results of the segment as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.

Corporate expenses are expenses that relate to the consolidated business and not to an individual operating segment while the income and expense items typically include non-recurring charges such as the financial statement review costs related to the restatement of the 2019 financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part II, Item 1, Legal Proceedings , of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management believes that adjusted operating loss by business segment provides useful insight into underlying segment trends and results and will provide a more meaningful comparison of year-over-year results going forward.

1 unchanged sentence

(In thousands of U.S.

dollars) For the three months ended June 30, 2020

dollars) For the three months ended September 30, 2020

Rest of World Total Segments Corporate Expenses Total

Reported operating loss $ (12,191) $ (17,999) $ (30,190) $ (10,979) $ (41,169)

Review costs related to restatement of 2019 interim financial statements — — — 3,459 3,459

Review and defense costs related to restatement of 2019 interim financial statements — — — 958 958

Adjusted operating loss $ (12,191) $ (17,999) $ (30,190) $ (10,021) $ (40,211)

(In thousands of U.S.

dollars) For the six months ended June 30, 2020

dollars) For the nine months ended September 30, 2020

Rest of World Total Segments Corporate Expenses Total

Reported operating loss $ (24,289) $ (71,957) $ (96,246) $ (24,691) $ (120,937)

Review costs related to restatement of 2019 interim financial statements — — — 7,866 7,866

Review and defense costs related to restatement of 2019 interim financial statements — — — 8,824 8,824

Adjusted operating loss $ (24,289) $ (71,957) $ (96,246) $ (15,867) $ (112,113)

(In thousands of U.S.

dollars) For the three months ended September 30, 2019

Rest of World Total Segments Corporate Expenses Total

Reported and adjusted operating loss $ (830) $ (21,228) $ (22,058) $ (8,640) $ (30,698)

(In thousands of U.S.

dollars) For the nine months ended September 30, 2019

Rest of World Total Segments Corporate Expenses Total

Reported and adjusted operating loss $ (830) $ (48,069) $ (48,899) $ (8,640) $ (57,539)

Liquidity and Capital Resources

As of June 30, 2020, we had $1,109.7 million in cash and cash equivalents and $213.6 million in short-term investments which comprise the majority of the Company’s cash position.

As of September 30, 2020, we had $1,097.8 million in cash and cash equivalents and $202.9 million in short-term investments which comprise the majority of the Company’s cash position.

Cronos Group believes that the existing cash and cash equivalents and the short-term investments will be sufficient to fund the business operations and capital expenditures over the next twelve months.

1 unchanged sentence

(In thousands of U.S.

dollars) For the six months ended June 30,

dollars) For the nine months ended September 30,

Cash provided/(used) in operating activities $ (104,684) $ (76,793)

3 unchanged sentences

Net change in cash $ (101,847) $ 1,090,487

2020 cash flows vs 2019 cash flows

YTD 2020 cash flows vs YTD 2019 cash flows

Operating activities

During the six months ended June 30, 2020, we used $77.2 million of cash in operating activities as compared t o cash used o f $56.8 million in the six months ended June 30, 2019, representing an increase in cash used of $20.4 million.

This change is primarily driven by an increase of $37.9 million in operating expenses from the six months ended June 30, 2019.

During the nine months ended September 30, 2020, we used $104.7 million of cash in operating activities as compared to cash used of $76.8 million in the nine months ended September 30, 2019, representing an increase in cash used of $27.9 million.

This change is primarily driven by an increase in operating expenses from the nine months ended September 30, 2019.

Investing activities

During the six months ended June 30, 2020, we generated $39.8 million of cash through investing activities, as compared to $588.6 million of cash used in investing activities in the six months ended June 30, 2019, representing an increase of $628.4 million in cash provided.

This change is primarily driven by cash received from proceeds from the disposal of short-term investments of $203.7 million (2019 – $nil) partially offset by purchases of short-term investments of $124.6 million (2019 – $556.9 million).

Additionally, during the six months ended June 30, 2020, purchases of property, plant and equipment were $13.3 million compared to $20.9 million in the six months ended June 30, 2019.

The increase was partially offset by advances on loans receivable of $24.0 million (2019 – $12.2 million) primarily related to an increase in drawdowns on the GrowCo Credit Facility.

During the nine months ended September 30, 2020, we generated $37.8 million of cash through investing activities, as compared to $677.6 million of cash used in investing activities in the nine months ended September 30, 2019, representing an increase of $715.4 million in cash provided.

This change is primarily driven by the Redwood Acquisition resulting in the payment of cash consideration of $227.2 million during the nine months ended September 30, 2019 as well as cash received from proceeds from the disposal of short-term investments of $220.1 million (2019 – $nil), partially offset by purchases of short-term investments of $125.6 million (2019 – $384.3 million).

Additionally, during the nine months ended September 30, 2020, purchases of property, plant and equipment were $21.3 million compared to $37.6 million in the nine months ended September 30, 2019.

The increase was partially offset by advances on loans receivable of $37.0 million (2019 – $33.0 million) primarily related to an increase in draw-downs on the GrowCo Credit Facility.

Financing activities

During the six months ended June 30, 2020, cash used by financing activities was $1.2 million, as compared to $1,791.4 million of cash provided by financing activities in the six months ended June 30, 2019, representing a decrease of $1,792.6 million in cash provided.

This change is primarily driven by proceeds from the strategic investment from Altria of $1,809.6 million that was partially offset by the transaction costs paid on the construction loan payable of $16.0 million in the six months ended June 30, 2019, which were not present in the six months ended June 30, 2020.

During the nine months ended September 30, 2020, cash used in financing activities was $4.2 million, as compared to $1,822.2 million of cash provided by financing activities in the nine months ended September 30, 2019, representing a decrease of $1,826.4 million in cash provided.

This change is primarily driven by proceeds from the strategic investment from Altria of $1,809.6 million that was partially offset by the transaction costs paid on the construction loan payable of $16.0 million in the nine months ended September 30, 2019, which were not present in the nine months ended September 30, 2020.

Critical Accounting Policies and Estimates

The Company’s critical accounting policies and estimates are discussed in the Annual Report on Form 10-K/A for the year ended December 31, 2019.

There have no material changes to these critical accounting policies and estimates.

There have been no material changes to these critical accounting policies and estimates.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis