Cronos Group Inc. 10-Q

Item 1. Financial Statements (Unaudited) Table of Contents Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 4 Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 5 Condensed Consolidated Statements of Changes in Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019 6 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 8 Notes to Condensed Consolidated Financial Statements 9 3 Cronos Group Inc. Condensed Consolidated Balance Sheets As of September 30, 2020 and December 31, 2019 (In thousands of U.S. dollars, except share amounts, unaudited) As of September 30, 2020 December 31, 2019 Assets Current assets Cash and cash equivalents $ 1,097,846 $ 1,199,693 Short-term investments 202,883 306,347 Accounts receivable (i) 6,086 4,638 Other receivables 10,401 7,232 Current portion of loans receivable 7,781 4,664 Prepaids and other assets 10,532 9,395 Inventory, net 56,359 38,043 Held-for-sale assets 2,066 3,248 Total current assets 1,393,954 1,573,260 Investments in equity accounted investees 19,059 557 Advances to joint ventures 461 19,437 Loan receivable, net 76,148 44,967 Property, plant and equipment 171,404 159,948 Right-of-use assets 9,840 6,546 Intangible assets 68,604 71,235 Goodwill 179,459 214,492 Total assets $ 1,918,929 $ 2,090,442 Liabilities Current liabilities Accounts payable and other liabilities $ 39,012 $ 35,301 Current portion of lease obligation 1,274 427 Derivative liabilities 102,655 297,160 Total current liabilities 142,941 332,888 Due to non-controlling interests 2,889 1,844 Lease obligation 8,612 6,680 Total liabilities $ 154,442 $ 341,412 Commitments and contingencies (ii) Shareholders’ equity Share capital (iii,iv) $ 566,577 $ 561,165 Additional paid-in capital 32,491 23,234 Retained earnings 1,175,742 1,137,646 Accumulated other comprehensive income (loss) ( 7,820 ) 27,838 Total equity attributable to shareholders of Cronos Group 1,766,990 1,749,883 Non-controlling interests ( 2,503 ) ( 853 ) Total shareholders’ equity 1,764,487 1,749,030 Total liabilities and shareholders’ equity $ 1,918,929 $ 2,090,442 (i) Net of current expected credit loss allowance of $ 64 as of September 30, 2020 (December 31, 2019 – $ 136 ) (ii) Refer to Note 19 and Note 20 in the notes to condensed consolidated financial statements. (iii) Authorized for issuance as of September 30, 2020: unlimited (December 31, 2019 – unlimited). (iv) Shares issued as of September 30, 2020: 355,733,914 (as of December 31, 2019: 348,817,472 ) See notes to condensed consolidated financial statements. 4 Cronos Group Inc. Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) For the three and nine months ended September 30, 2020 and 2019 (In thousands of U.S dollars, except share and per share amounts, unaudited) Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Net revenue, before excise taxes $ 13,621 $ 6,269 $ 34,397 $ 17,724 Excise taxes ( 2,263 ) ( 484 ) ( 4,724 ) ( 1,282 ) Net revenue 11,358 5,785 29,673 16,442 Cost of sales 12,895 3,498 29,584 8,507 Inventory write-down — 5,424 11,024 5,424 Gross profit (loss) ( 1,537 ) ( 3,137 ) ( 10,935 ) 2,511 Operating expenses Sales and marketing 7,236 4,591 20,849 9,723 Research and development (“R&D”) 4,734 2,605 12,955 6,076 General and administrative 18,860 16,202 61,048 34,987 Share-based payments 7,916 3,531 12,898 7,949 Depreciation and amortization 886 632 2,252 1,315 Total operating expenses 39,632 27,561 110,002 60,050 Operating loss ( 41,169 ) ( 30,698 ) ( 120,937 ) ( 57,539 ) Other income (expense) Interest income, net 3,781 8,939 15,266 20,455 Share of loss from investments in equity accounted investees ( 1,327 ) ( 565 ) ( 3,293 ) ( 1,504 ) Gain on revaluation of derivative liabilities 105,307 632,482 182,795 1,158,008 Financing and transaction costs ( 40 ) ( 6,083 ) ( 40 ) ( 31,684 ) Impairment loss on goodwill and intangible assets — — ( 40,000 ) — Gain on disposal of other investments 3,974 — 4,743 16,242 Loss on reclassification of held-for-sale assets ( 919 ) — ( 919 ) — Other income (loss) 318 147 334 147 Total other income (loss) 111,094 634,920 158,886 1,161,664 Income (loss) before income taxes 69,925 604,222 37,949 1,104,125 Income tax expense 988 58 988 58 Income from continuing operations $ 68,937 $ 604,164 $ 36,961 $ 1,104,067 Income (loss) from discontinued operations ( 473 ) ( 36 ) ( 519 ) ( 63 ) Net income (loss) $ 68,464 $ 604,128 $ 36,442 $ 1,104,004 Net income (loss) attributable to: Cronos Group $ 69,033 $ 604,410 $ 38,096 $ 1,104,501 Non-controlling interests ( 569 ) ( 282 ) ( 1,654 ) ( 497 ) $ 68,464 $ 604,128 $ 36,442 $ 1,104,004 Other comprehensive income (loss) Foreign exchange gain (loss) on translation $ 26,167 $ ( 12,422 ) $ ( 35,654 ) $ 9,424 Total other comprehensive income (loss) 26,167 ( 12,422 ) ( 35,654 ) 9,424 Comprehensive income (loss) $ 94,631 $ 591,706 $ 788 $ 1,113,428 Comprehensive income (loss) attributable to: Cronos Group $ 95,183 $ 591,996 $ 2,438 $ 1,113,929 Non-controlling interests ( 552 ) ( 290 ) ( 1,650 ) ( 501 ) $ 94,631 $ 591,706 $ 788 $ 1,113,428 Net income (loss) per share Basic - continuing operations $ 0.20 $ 1.78 $ 0.11 $ 3.71 Basic - discontinued operations 0.00 0.00 0.00 0.00 Diluted - continuing operations (i) 0.19 1.62 0.10 0.92 Diluted - discontinued operations (i) 0.00 0.00 0.00 0.00 Weighted average number of outstanding shares Basic 350,288,783 338,957,949 349,397,156 297,964,058 Diluted (i) 369,619,020 369,268,672 374,731,451 333,618,691 (i) In computing diluted earnings per share, incremental common shares are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. See notes to condensed consolidated financial statements. 5 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity (Deficit) For the three months ended September 30, 2020 and 2019 (In thousands of U.S. dollars, except share amounts, unaudited) Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders' equity (deficit) Balance at July 1, 2020 349,886,402 $ 565,221 $ 27,046 $ 1,106,709 $ ( 33,970 ) $ ( 1,951 ) $ 1,663,055 Warrants exercised 5,407,890 619 ( 619 ) — — — — Vesting of options — — 1,551 — — — 1,551 Options exercised 25,534 57 ( 53 ) — — — 4 Vesting of restricted share units, net of withholding taxes 414,088 — 4,217 — — — 4,217 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — — 349 — — — 349 Top-up Rights exercised — 680 — — — — 680 Net income (loss) — — — 69,033 — ( 569 ) 68,464 Other comprehensive income — — — — 26,150 17 26,167 Balance at September 30, 2020 355,733,914 $ 566,577 $ 32,491 $ 1,175,742 $ ( 7,820 ) $ ( 2,503 ) $ 1,764,487 Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders' equity (deficit) Balance at July 1, 2019 336,144,543 $ 423,108 $ 14,779 $ 471,310 $ 11,973 $ ( 112 ) $ 921,058 Shares issued 5,086,586 56,109 — — — — 56,109 Share issuance costs — ( 4 ) — — — — ( 4 ) Vesting of options — — 2,891 — — — 2,891 Options exercised 18,619 38 ( 33 ) ( 25 ) — — ( 20 ) Vesting of restricted share units — — 186 — — — 186 Top-up Rights exercised 2,514,459 45,338 — — — — 45,338 Net income (loss) — — — 604,410 — ( 282 ) 604,128 Other comprehensive loss — — — — ( 12,414 ) ( 8 ) ( 12,422 ) Balance at September 30, 2019 343,764,207 $ 524,589 $ 17,823 $ 1,075,695 $ ( 441 ) $ ( 402 ) $ 1,617,264 See notes to condensed consolidated financial statements. 6 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity (Deficit) For the nine months ended September 30, 2020 and 2019 (In thousands of U.S. dollars, except share amounts, unaudited) Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity (deficit) Balance as of January 1, 2020 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 Warrants exercised 5,407,890 619 ( 619 ) — — — — Vesting of options — — 5,051 — — — 5,051 Options exercised 1,094,464 1,386 ( 1,381 ) — — — 5 Vesting of restricted share units, net of withholding taxes 414,088 — 5,699 — — — 5,699 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 507 — — — 2,507 Top-up Rights exercised — 1,407 — — — — 1,407 Net income (loss) — — — 38,096 — ( 1,654 ) 36,442 Other comprehensive income (loss) — — — — ( 35,658 ) 4 ( 35,654 ) Balance at September 30, 2020 355,733,914 $ 566,577 $ 32,491 $ 1,175,742 $ ( 7,820 ) $ ( 2,503 ) $ 1,764,487 Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity (deficit) Balance as of January 1, 2019 178,720,022 $ 175,001 $ 11,263 $ ( 27,945 ) $ ( 9,870 ) $ 100 $ 148,549 Shares issued 154,917,740 304,411 — — — — 304,411 Share issuance costs — ( 3,722 ) — — — — ( 3,722 ) Warrants exercised 7,390,961 2,034 ( 596 ) — — — 1,438 Vesting of options — — 7,309 — — — 7,309 Options exercised 170,087 356 ( 339 ) ( 861 ) — — ( 844 ) Vesting of restricted share units — — 186 — — — 186 Top-up Rights exercised 2,565,397 46,509 — — — — 46,509 Net income (loss) — — — 1,104,501 — ( 497 ) 1,104,004 Other comprehensive income (loss) — — — — 9,429 ( 5 ) 9,424 Balance at September 30, 2019 343,764,207 $ 524,589 $ 17,823 $ 1,075,695 $ ( 441 ) $ ( 402 ) $ 1,617,264 See notes to condensed consolidated financial statements. 7 Cronos Group Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020 and 2019 (In thousands of U.S. dollars, except share amounts, unaudited) Nine months ended September 30, 2020 2019 Operating activities Net income (loss) $ 36,442 $ 1,104,004 Items not affecting cash: Inventory write-down 11,024 5,424 Share-based payments 12,898 7,949 Depreciation and amortization 5,095 2,956 Share of loss from investments in equity accounted investees 3,293 1,504 Gain on revaluation of derivative liabilities ( 182,795 ) ( 1,158,008 ) Gain on disposal of other investments ( 4,743 ) ( 16,242 ) Impairment loss on goodwill and intangible assets 40,000 — Loss (gain) on unrealized foreign exchange ( 3,020 ) 807 Provision for inventory and doubtful accounts 3,119 — Non-cash sales and marketing 2,505 — Loss on reclassification of held-for-sale assets 919 — Other, net ( 298 ) ( 89 ) Net changes in non-cash working capital ( 29,123 ) ( 25,098 ) Cash flows used in operating activities ( 104,684 ) ( 76,793 ) Investing activities Purchase of short-term investments ( 125,562 ) ( 384,288 ) Proceeds from disposal of short-term investments 220,058 — Investments in equity accounted investees — ( 1,658 ) Proceeds from sale of other investments 4,743 19,614 Advances to joint ventures — ( 15,951 ) Purchase of property, plant and equipment ( 21,334 ) ( 37,622 ) Payment of accrued interest on construction loan payable — ( 89 ) Purchase of intangible assets ( 3,094 ) ( 574 ) Acquisition of Redwood — ( 227,224 ) Advances on loans receivable ( 37,000 ) ( 33,012 ) Proceeds from repayment of loans receivable — 238 Cash assumed on acquisition — 2,957 Cash flows provided by (used in) investing activities 37,811 ( 677,609 ) Financing activities Advance from non-controlling interests ( 187 ) 183 Repayment of lease obligations ( 1,859 ) ( 414 ) Proceeds from Altria Investment — 1,809,556 Proceeds from exercise of Top-up Rights — 31,566 Proceeds from exercise of warrants and options 5 1,455 Withholding taxes paid on equity awards ( 2,148 ) ( 861 ) Share issuance costs — ( 3,722 ) Advance of loans payable — 48,715 Repayment of loans payable — ( 48,309 ) Transaction costs paid on construction loan payable — ( 15,971 ) Cash flows provided by (used in) financing activities ( 4,189 ) 1,822,198 Effect of foreign currency translation on cash and cash equivalents ( 30,785 ) 22,691 Net change in cash and cash equivalents ( 101,847 ) 1,090,487 Cash and cash equivalents, beginning of period 1,199,693 23,927 Cash and cash equivalents, end of period $ 1,097,846 $ 1,114,414 Supplemental cash flow information Interest paid 156 647 Interest received 13,473 9,690 See notes to condensed consolidated financial statements. 8 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 1. Background Cronos Group Inc. (“Cronos Group” or the “Company”) was incorporated on August 21, 2012 under the Business Corporations Act (Ontario). Effective July 9, 2020, the Company’s legal existence was continued to the Province of British Columbia and under the British Columbia Business Corporations Act. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.” Cronos Group is an innovative global cannabinoid company, with international production and distribution across five continents. The Company is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is building an iconic brand portfolio. Cronos Group’s brand portfolio includes PEACE NATURALS ™ , a global wellness platform; two adult-use brands, COVE ™ and Spinach ™ ; and three U.S. hemp-derived consumer products brands, Lord Jones ™ , Happy Dance ™ and PEACE+ ™ . Cronos Group has established four strategic joint ventures in Canada, Israel, and Colombia. One of these strategic joint ventures, Cronos Israel (as defined herein) is consolidated for financial reporting purposes. The Company also holds approximately 31 % of the issued capital of Cronos Australia Limited (“Cronos Australia”) and accounts for its investment in Cronos Australia under the equity method of accounting. For additional discussion regarding the joint ventures and strategic investment, see Note 6. 2. Summary of Significant Accounting Policies and Changes in Accounting Policy (a) Basis of presentation The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for any other reporting period. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in its Annual Report on Form 10-K/A for the year ended December 31, 2019 (the “Annual Financial Statements”). (b) Basis of consolidation The accompanying condensed consolidated financial statements include the accounts of the Company, and all entities in which the Company has a controlling voting interest and/or is the primary beneficiary of a variable interest as of and for the period presented. The Company consolidates the financial results of the following entities, which the Company controls: Subsidiaries Jurisdiction of incorporation Incorporation date Ownership interest (ii) Cronos Israel G.S. Cultivation Ltd. (i) Israel February 4, 2018 70 % Cronos Israel G.S. Manufacturing Ltd. (i) Israel September 4, 2018 90 % Cronos Israel G.S. Store Ltd. (i) Israel June 28, 2018 90 % Cronos Israel G.S. Pharmacy Ltd. (i) Israel February 15, 2018 90 % (i) These Israeli entities are collectively referred to as “Cronos Israel.” (ii) “Ownership interest” is defined as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest. In the condensed consolidated statements of net income (loss) and comprehensive income (loss), the net income (loss) and comprehensive income (loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of Cronos Israel are presented separately in the shareholders’ equity (deficit) section of the condensed consolidated balance sheets and condensed consolidated statements of changes in equity (deficit). All intercompany transactions and balances are eliminated upon consolidation. 9 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (c) Goodwill and indefinite life intangible assets Goodwill and indefinite life intangible assets are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. The Company performs an impairment test annually in the fourth quarter by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has two reporting units: the U.S. reporting unit and the Rest of World reporting unit. During the second quarter of 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the period represented potential indicators of impairment for the U.S. reporting unit. Accordingly, the Company performed an interim impairment analysis during the second quarter of 2020. No triggering events were identified during the three months ended September 30, 2020. See Note 13 for more information regarding intangibles assets and goodwill. (d) Definite life intangible assets On July 1, 2020, the Company changed its method of amortization for the computer software asset class from an accelerated 50 % double declining method to the straight-line method of five years . The Company determined that the change in estimate to the straight-line method is more appropriate based on the usage of the assets in the asset class. The change in estimate is applied prospectively as of July 1, 2020. Intangible assets with finite useful lives are recorded at cost less any accumulated amortization and accumulated impairment losses. Intangible assets acquired through a business combination are measured at fair value at the acquisition date. The Company capitalizes certain costs incurred in connection with its enterprise resource planning software, which include external direct costs of materials and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of the software for the function intended. All other costs are expensed as incurred. Intangible assets with finite useful lives are amortized over their estimated useful lives using the following methods and rates: Method Rate Software Straight-line 5 years Enterprise resource planning (“ERP”) system Straight-line 5 years Health Canada licenses Straight-line Useful life of corresponding facilities Israeli codes (i) Straight-line Useful life of corresponding facilities (i) The preliminary licenses granted to Kibbutz Gan Shmuel (the Cronos Israel joint venture partner) by the Medical Cannabis Unit of the Israeli Ministry of Health in early 2017 (the “Israeli codes”) were transferred by non-controlling interests to Cronos Israel in exchange for equity interests in the Cronos Israel entities specified above. Amortization begins when assets become available for use. The estimated useful life, amortization method, and rate are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. (e) Assets held for sale and discontinued operations In accordance with Accounting Standards Codification (“ASC”) 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations. During the three months ended September 30, 2020, Original B.C. Ltd. (“OGBC”) met the criteria for “held-for-sale”. As a result, the Company has reflected amounts relating to OGBC as a disposal group classified as held-for-sale on the consolidated balance sheet and included as part of discontinued operations on the consolidated statement of net income (loss) and comprehensive income (loss) for all 10 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) periods presented in this Quarterly Report. OGBC is no longer included in the segment reporting following the reclassification to discontinued operations. The discontinued operations of OGBC are described further in Note 24. The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to total assets and liabilities of the disposal group classified as held-for-sale in the consolidated balance sheet of December 31, 2019: As of December 31, 2019 As previously disclosed Held-for-sale adjustment Adjusted balance Property, plant and equipment $ 161,809 $ ( 1,861 ) $ 159,948 Intangible assets 72,320 ( 1,085 ) 71,235 Goodwill 214,794 ( 302 ) 214,492 The following table presents a reconciliation of the major classes of line items constituting reported operating loss of discontinued operations to net loss of discontinued operations for the three and nine months ended September 30, 2019: Three months ended September 30, 2019 Nine months ended September 30, 2019 As previously disclosed Held-for-sale adjustment Adjusted balance As previously disclosed Held-for-sale adjustment Adjusted balance Operating expenses $ 27,597 $ ( 36 ) $ 27,561 $ 60,126 $ ( 76 ) $ 60,050 Other income (loss) 634,920 — 634,920 1,161,677 ( 13 ) 1,161,664 Net income (loss) from continuing operations 604,128 36 604,164 1,104,004 63 1,104,067 (f) Reclassifications Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the financial statements for the three and nine months ended September 30, 2020. These reclassifications have no effect on the results of reported operating loss, net income, shareholders’ equity or cash flows. See Note 2(e) and Note 24. Corporate expense reclassifications within segment disclosures: In the three months ended September 30, 2020, the Company recorded a reclassification related to the allocation of operating expenses that was determined to be corporate expenses in nature to its segments, which decreased its Rest of World segment net loss by $ 4,626 and increased net loss attributable to corporate expenses by the same amount. This reclassification had no effect on the Company's consolidated statement of net income (loss). See Note 18. Had all these amounts been classified in this manner for the three-month periods ended March 31, 2020 and June 30, 2020, net income (loss) attributable to the Rest of World segment would have increased by $ 2,899 and $ 1,727 , respectively, and increased net loss attributable to corporate expenses by the same amounts. The Company does not consider the effect on year-to-date 2020 results or the effect on comparable quarterly periods to be material, and there was no impact on 2019 full year results. After evaluating the quantitative and qualitative aspects of these reclassifications, the Company concluded that its prior period financial statements were not materially misstated, and, therefore, no restatement was required . Revision of previously issued financial statements: During the three months ended September 30, 2020, the Company identified an error in the manner in which it calculated diluted earnings (loss) per share for the three months ended September 30, 2019. The error had no impact on diluted earnings (loss) per share for the nine months ended September 30, 2019. See Note 16. While the Company had excluded the anti-dilutive effect of the one warrant of the Company (the “Altria Warrant”), refer to Note 15(a) in the calculation of weighted average number of common shares for computation of diluted income (loss) per share, the gain on revaluation of derivative liabilities attributable to the Altria Warrant was incorrectly included in the calculation of diluted earnings (loss) per share, which resulted in an error in the previously reported amount for the three months ended September 30, 2019. Because the average market price of the Company’s common stock remained above the strike price of the Altria Warrant for the nine months ended September 30, 2019, there was no impact on the reported amount for the nine months ended September 30, 2019, and there was no impact in prior or subsequent quarterly periods. 11 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) After evaluating the quantitative and qualitative aspects of this error, the Company concluded that its prior period financial statements were not materially misstated, and, therefore, no restatement was required. However, the Company is revising the previously presented September 30, 2019 diluted earnings (loss) per share and adjustment for gain (loss) on revaluation of derivative liabilities, as follows: Three months ended September 30, 2019 As previously disclosed Adjusted Diluted earnings (loss) per share $ 0.42 $ 1.62 Adjustment for gain (loss) on revaluation of derivative liabilities ( 488,041 ) ( 6,952 ) 3. New Accounting Pronouncements (a) Adoption of new accounting pronouncements On January 1, 2020, the Company adopted ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) (“ASU No. 2018-13”). ASU No. 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. The adoption of this standard was applied prospectively and did not have a material impact on the Company’s condensed consolidated financial statements. On January 1, 2020, the Company adopted ASU No. 2018-15, Intangibles – Goodwill and Other Internal-use-software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 2018-15”). ASU No. 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. The guidance in ASU No. 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of this standard was applied prospectively and did not have a material impact on the Company’s condensed consolidated financial statements. On January 1, 2020, the Company adopted ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”). ASU No. 2017-04 eliminates step 2 from the goodwill impairment test and instead requires an entity to measure the impairment of goodwill assigned to a reporting unit if the carrying value of assets and liabilities assigned to the reporting unit, including goodwill, exceeds the reporting unit’s fair value. The guidance in ASU No. 2017-04 is effective for annual and interim goodwill tests completed by the Company beginning on January 1, 2020. The adoption of this standard was applied prospectively and the Company follows a one-step model for goodwill impairment. (b) New accounting pronouncements not yet adopted In January 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU No. 2020-01”). ASU No. 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The guidance in ASU No. 2020-01 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of the adoption of ASU No. 2020-01, but anticipates that the adoption will not have a material impact on its condensed consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application of U.S. GAAP-related changes in enacted tax laws or rates and employee stock option plans. ASU No. 2019-12 is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect of the adoption of ASU No. 2019-12, but anticipates that the adoption will not have a material impact on its condensed consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt –Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU No 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU No. 2020-6 is effective for fiscal years beginning after December 15, 2021, and interim 12 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) periods within those fiscal years. The Company is currently evaluating the impact ASU No. 2020-06 will have on its financial statements . 4. Revenues from Contracts with Customers Cronos Group disaggregates net revenues based on product type. For further discussion, see Note 18. Receivables were $ 6,086 as of September 30, 2020 (December 31, 2019 – $ 4,638 ). The Company recorded a current expected credit loss allowance on receivables of $ 64 as of September 30, 2020 (December 31, 2019 – $ 136 ). The Company offers discounts to customers for prompt payment and calculates cash discounts as a percentage of the list price based on historical experience and agreed-upon payment terms. The Company records an allowance for cash discounts, which is included as a contra-asset against receivables on the Company’s condensed consolidated balance sheets. Revenue is measured net of returns. As a result, the Company is required to estimate the amount of returns based on the historical data by customer and product type, adjusted for forward-looking information. This is recorded as a provision against accounts receivable on the Company’s consolidated balance sheets. The Company estimates sales returns based principally on historical volume and return rates, as a reduction to revenues. The difference between actual sales and estimated sales returns is recorded in the period in which the actual amounts become known. These differences, if any, have not had a material impact on the Company’s condensed consolidated financial statements. Upon return, products can be extracted from dried cannabis, resold, or destroyed depending on the nature of the product. The Company has assessed that the amount recoverable from returned products for the nine months ended September 30, 2020 is not material. 5. Inventory, net Inventory is comprised of the following items: As of September 30, 2020 December 31, 2019 Raw materials $ 10,214 $ 2,469 Work-in-progress – dry cannabis 25,799 11,538 Work-in-progress – cannabis extracts 13,436 17,975 Finished goods – dry cannabis 4,514 1,798 Finished goods – cannabis extracts 2,067 2,624 Supplies and consumables 329 1,639 Total $ 56,359 $ 38,043 Inventory is written down for any obsolescence such as slow-moving or non-marketable products, or when the net realizable value of inventory is less than the carrying value. For the nine months ended September 30, 2020, the Company recorded write-downs related to inventory of $ 11,024 (for the three and nine months ended September 30, 2019 – $ 5,424 ). No inventory write-downs were recorded during the three months ended September 30, 2020. As of September 30, 2020, an inventory reserve of $ 1,403 was recorded (September 30, 2019 – $nil) 13 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 6. Investments and Advances to Joint Ventures Variable interest entities The Company holds variable interests in Cronos Growing Company Inc. (“Cronos GrowCo”), Natuera S.à.r.l (“Natuera”), MedMen Canada Inc. (“MedMen Canada”) and Cannasoul Lab Services Ltd. (“CLS”). Cronos GrowCo is a joint venture incorporated under the Canada Business Corporations Act (“CBCA”) on June 14, 2018 with the objective of building a cannabis production greenhouse, applying for cannabis licenses under the Cannabis Act (Canada), and growing, cultivating, extracting, producing and selling cannabis in accordance with such licenses. Cronos Group holds variable interests in Cronos GrowCo through its ownership of 50 % of Cronos GrowCo’s common shares and senior secured debt in Cronos GrowCo. Cronos GrowCo’s economic performance is driven by the quantity and strains of cannabis grown. The joint venture partners mutually determine the quantity and strains of cannabis grown. Natuera is a joint venture registered in Luxembourg with the objective of cultivating and commercializing hemp and cannabis products to serve the export market. Cronos holds variable interests in Natuera through its ownership of 50 % of Natuera’s common shares and other debt in the entity. Natuera’s economic performance is driven by the quantity and strains of cannabis to be grown. The joint venture partners mutually determine the quantity and strains of cannabis grown. MedMen Canada is a joint venture incorporated under the CBCA on March 13, 2018, with the objective of the retail sale and marketing of cannabis products in Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 20 years. Cronos holds variable interests in MedMen Canada through its ownership of 50 % of MedMen Canada’s common shares and other subordinated debt in the entity. MedMen Canada’s economic performance is driven by the quantity and strains of cannabis sold. Subject to applicable law, the joint venture partners mutually determine the quantity and strains of cannabis to be sold in MedMen Canada’s retail stores, if and when stores are opened. The Company’s investments in Cronos GrowCo, Natuera and MedMen Canada are exposed to economic variability from each entity’s performance; however, the Company does not consolidate the entities as it does not have the power to direct the activities that most significantly impact each entities’ economic performance. Thus, Cronos Group is not considered the primary beneficiary of each entity. These investments are accounted for as equity method investments classified as “Investments in equity accounted investees” in the consolidated balance sheets. CLS is a wholly owned subsidiary of Cannasoul Analytics Ltd., incorporated with the purpose of establishing a commercial cannabis analytical testing laboratory located on the premises of Cronos Israel (the “Cannasoul Collaboration”). Cronos Israel will advance ILS 8,297 (approximately $ 2,446 ) by a non-recourse loan to CLS over a period of two years from April 1, 2020 for the capital and operating expenditures of the laboratory. The loan will bear interest at 3.5 % annually. Cronos Israel will receive 70 % of the profits of the laboratory until such time as it has recovered 150 % of the amounts advanced to CLS, after which time it will receive 50 % of the laboratory profits. As a result, the Company is exposed to economic variability from CLS’s performance. The Company does not consolidate CLS as it does not have the power to direct the activities that most significantly impact the entity’s economic performance; thus, the Company is not considered the primary beneficiary of the entity. The carrying amount of the non-recourse loan is recorded under loans receivable and the full loan amount, ILS 8,297 , represents the Company’s maximum potential exposure to losses through the Cannasoul Collaboration. See Note 10 for further information regarding loans receivable. 14 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (a) Net investment in equity accounted investees A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows: Carrying Amount Ownership % September 30, 2020 December 31, 2019 Cronos Australia (i) 31 % $ — $ ( 346 ) Cronos GrowCo (ii) 50 % 19,059 1,501 MedMen Canada 50 % — — Natuera 50 % — ( 598 ) $ 19,059 $ 557 (i) On October 25, 2019, Cronos Australia issued 40 million new shares in an initial public offering at an offering price of A$ 0.50 per share. The Company’s ownership in Cronos Australia decreased from 50 % to 31 % on November 7, 2019 when Cronos Australia began trading on the Australian Securities Exchange. This resulted in a reconsideration event, which required the reassessment of the Company’s variable interest entity conclusion. Upon reconsideration, the Company determined that the entity was no longer a variable interest entity as of December 31, 2019 and is now reported under the equity method. (ii) On September 25, 2020, the Company and 2645485 Ontario Inc. (“Mucci”), the other joint venture partner of Cronos GrowCo, agreed to capitalize certain historical advances made by each shareholder to Cronos GrowCo. Total aggregate gross advances to Cronos GrowCo, excluding any amounts advanced by the Company to Cronos GrowCo under the GrowCo Credit Facility, were C$ 49,300 ($ 37,932 ), of which the Company advanced 50 % and Mucci advanced the remaining 50 % for an amount of C$ 24,650 ($ 18,505 ) each. As a result, the Company transferred the advances of C$ 24,650 ($ 18,505 ) to investments in equity accounted investees in respect of Cronos GrowCo.. The Company’s share of net earnings (losses) from equity investments accounted for under the equity method of accounting: For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Whistler Medicinal Marijuana Company (“Whistler”) $ — $ — $ — $ 29 Cronos Australia (i) ( 57 ) ( 251 ) ( 292 ) ( 892 ) Cronos GrowCo ( 401 ) ( 60 ) ( 902 ) ( 87 ) MedMen Canada — 32 — 36 Natuera (ii) ( 869 ) ( 286 ) ( 2,099 ) ( 590 ) $ ( 1,327 ) $ ( 565 ) $ ( 3,293 ) $ ( 1,504 ) (i) The Company’s share of accumulated net losses in excess of its equity investment and advances in Cronos Australia was $ 512 for the nine months ended September 30, 2020 (September 30, 2019 – $ nil ). (ii) The Company’s share of accumulated net losses in excess of its equity investment in Natuera has been applied as a loss allowance on the loan receivable. See Note 6(b) and Note 10. 15 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (b) Advances to joint venture MedMen Canada (i) Cronos GrowCo (ii) Cronos Australia (iii) Natuera Total As of January 1, 2020 $ 471 $ 18,966 $ — $ — $ 19,437 Transfer to investments in equity accounted investees (ii) — ( 18,505 ) — — ( 18,505 ) Interest on advances — — 35 — 35 Advances to joint ventures recovered from (applied to) carrying amount of investments — — ( 36 ) — ( 36 ) Effect from foreign exchange ( 10 ) ( 461 ) 1 — ( 470 ) As of September 30, 2020 $ 461 $ — $ — $ — $ 461 MedMen Canada (i) Cronos GrowCo (ii) Cronos Australia (iii) Natuera Total As of January 1, 2019 $ 1,244 $ 2,970 $ 475 $ — $ 4,689 Advances (repayment) ( 852 ) 15,494 274 219 15,135 Advances to joint ventures recovered from (applied to) carrying amount of investments 35 22 ( 779 ) ( 224 ) ( 946 ) Effect from foreign exchange 44 480 30 5 559 As of December 31, 2019 $ 471 $ 18,966 $ — $ — $ 19,437 (i) Advance is unsecured, non-interest bearing, and there are no terms of repayment. (ii) On September 25, 2020, the Company and Mucci agreed to capitalize historical advances made by each shareholder to Cronos GrowCo. The Company capitalized C$ 24,650 ($ 18,505 ) through a transfer of aggregate gross advances from advances to joint ventures to investments in equity accounted investees in respect of Cronos GrowCo. Refer to Note 6(a)(ii). (iii) A$ 1,500 is governed by an unsecured loan bearing interest at a rate of 12 % per annum, calculated and compounded daily, in arrears, on the amounts advanced from the date of each advance. The loan is due on January 1, 2022. If the loan is overdue, the outstanding amount bears interest at an additional 2 % per annum. 7. Other Investments Other investments consist of investments in common shares and warrants of several companies in the cannabis industry. As of September 30, 2020, the Company did not hold any other investments. The gain and losses on sale of other investments are classified as fair value through net income. During the three months ended September 30, 2020, in connection with the achievement of the final milestone related to the Whistler Transaction (defined below), the Company received 402,561 shares of Aurora Cannabis Inc. (“Aurora”). The Company subsequently sold all 402,561 of the Aurora shares during the three months ended September 30, 2020 for gross proceeds of approximately $ 3,974 (C$ 5,354 ) recorded as a gain on disposal of other investments in other income (expense). During the nine months ended September 30, 2020, in connection with the achievement of certain milestones related to the Whistler Transaction, the Company received 980,662 shares of Aurora. The Company sold all 980,662 of the Aurora shares during the nine months ended September 30, 2020 for gross proceeds of approximately $ 4,743 (C$ 6,404 ) recorded as a gain on disposal of other investments in other income (expense). On March 4, 2019, the Company sold all 2,563 shares of Whistler, representing approximately 19.0 % of Whistler’s issued and outstanding common shares, to Aurora, in connection with Aurora's acquisition of Whistler (the “Whistler Transaction”). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares. During the nine months ended September 30, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $ 19,259 recorded as a gain on disposal of other investments in other income (expense). No transactions occurred during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company sold all remaining 11,062 common shares of Canopy Growth Corporation (“Canopy”) for net proceeds of $ 355 recorded as an other item in the other income (expense). 16 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 8. Accumulated Other Comprehensive Income (Loss) The following are continuity schedules of accumulated other comprehensive income (loss): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Net unrealized gain (loss) on revaluation and disposal of other investments Balance beginning of period $ 5 $ 5 $ 5 $ 5 Balance as of September 30 $ 5 $ 5 $ 5 $ 5 Net foreign exchange gain (loss) on translation Balance beginning of period $ ( 33,975 ) $ 11,968 $ 27,833 $ ( 9,875 ) Net unrealized (loss) gain 26,150 ( 12,414 ) ( 35,658 ) 9,429 Balance as of September 30 ( 7,825 ) ( 446 ) ( 7,825 ) ( 446 ) Total accumulated other comprehensive income (loss) $ ( 7,820 ) $ ( 441 ) $ ( 7,820 ) $ ( 441 ) 9 . Leases The Company has entered into leases primarily for land-use rights, office premises and equipment used in the production of cannabis and related products. The Company’s leases have terms which range from three years to six years , excluding land use rights, which generally extend to 15 years. These leases often include options to extend the term of the lease for up to 10 years. When it is reasonably certain that an option will be exercised, the impact of such option is included in the lease term for purposes of determining total future lease payments. Operating leases greater than one year are included in right-of-use assets and operating lease liabilities. Finance leases are included in property, plant and equipment on the Company’s consolidated balance sheet. During the nine months ended September 30, 2020, the Company recognized two new operating leases for office premises which are included within the lease obligation and right-of-use lines in the condensed consolidated balance sheet. In June 2020, the Company terminated an operating lease for an office premise. The lease was removed from the lease obligation and right-of-use balances in the condensed consolidated balance sheet. The Company’s finance leases were not material as of September 30, 2020 and December 31, 2019. 17 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 10. Loans Receivable, net As of September 30, 2020 December 31, 2019 Current portion Natuera Series A loan (i) $ 5,210 $ 4,575 GrowCo Credit Facility (ii) 2,254 — Add: Accrued interest 317 89 Total current portion of loans receivable 7,781 4,664 Long term portion GrowCo Credit Facility (ii) 60,408 31,678 Mucci Promissory Note (iii) 12,648 12,587 Cannasoul Collaboration loan (iv) 1,187 — Add: Accrued interest 1,905 702 Total long-term portion of loans receivable 76,148 44,967 Total loans receivable $ 83,929 $ 49,631 (i) On July 24, 2020, the Company and its joint venture partner entered into an amendment to the Series A Loan with Natuera to increase the principal amount of the Series A Loan by $ 6,350 , to an aggregate principal amount of $ 15,500 , of which the Company has committed to fund 50 % and its joint venture partner has committed to fund the remaining 50 %. Outstanding principal amounts continue to bear interest at a fixed annual rate of 5.67 % and the maturity date of the Series A Loan has been extended to March 1, 2021. For the nine months ended September 30, 2020, a loss allowance of $ 2,552 was recorded against the Natuera Series A Loan related to the Company’s share of net loss from Natuera in excess of the carrying value of the equity method investment. Refer to Note 6. (ii) On August 23, 2019, the Company entered into a credit agreement with Cronos GrowCo in respect of a C$ 100,000 ($ 75,140 ) secured non-revolving term loan credit facility (the “GrowCo Credit Facility”). The GrowCo Credit Facility will mature on March 31, 2031 and will bear interest at varying rates based on the Canadian prime rate as announced by the Bank of Montreal. Interest began to accrue as of the closing date of the GrowCo Credit Facility and is payable on a quarterly basis until maturity, except that any interest accrued prior to March 31, 2021 will be payable no later than December 31, 2021. Repayment of principal will be made on a quarterly basis commencing on March 31, 2021. The credit facility is secured by substantially all present and after acquired property of Cronos GrowCo and its subsidiaries. Mucci, the other 50 % shareholder of Cronos GrowCo, has provided a limited recourse guarantee in favor of Cronos GrowCo, secured by Mucci’s shares in Cronos GrowCo. As of September 30, 2020, Cronos GrowCo had drawn C$ 85,150 ($ 63,981 ) from the Cronos GrowCo Credit Facility. For the nine months ended September 30, 2020, a current expected credit loss allowance of $ 1,317 was recorded against the GrowCo Facility. (iii) On June 28, 2019, the Company entered into a promissory note receivable agreement (the “Mucci Promissory Note”) for C$ 16,350 ($ 12,285 ) with Mucci. The outstanding principal amount of the Mucci Promissory Note bears interest at 3.95 % annually and is due within 90 days of demand. The Company does not intend to demand the loan within 12 months. Interest accrued under the Mucci Promissory Note until July 1, 2021 is payable by way of capitalization on the principal amount and interest thereafter must be paid in cash on a quarterly basis. The Mucci Promissory Note is secured by a general security agreement covering all the assets of Mucci. For the nine months ended September 30, 2020, a current expected credit loss allowance of $ 258 has been recorded against the Mucci loan. (iv) On April 1, 2020, Cronos Israel entered into the Cannasoul Collaboration. Cronos Israel has agreed to advance approximately ILS 8,297 (approximately $ 2,495 ) by a non-recourse loan to CLS over a period of two years for the capital and operating expenditures of the laboratory. The outstanding principal on the loan bears interest at 3.5 % annually and will be repaid through the profits generated from the Cannasoul Collaboration. As of September 30, 2020, CLS has received ILS 4,149 (approximately $ 1,198 ). For the nine months ended September 30, 2020, a current expected credit loss allowance of $ 25 has been recorded against the Cannasoul Collaboration loan. 18 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 11. Derivative Liabilities On March 8, 2019, the Company closed the previously announced investment in the Company (the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. As of the closing date of the Altria Investment, the Altria Investment consisted of 149,831,154 common shares of the Company as of the closing date, issued to a wholly owned subsidiary of Altria and the Altria Warrant, issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximately 45 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 55 % (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note. The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable. a. The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10 % of the common shares of Cronos (approximately 79.1 million common shares at September 30, 2020) at a per share exercise price of C$ 19.00 which expires on March 8, 2023. b. The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the R&D partnership with Ginkgo Bioworks Inc. (“Ginkgo”) (the “Ginkgo Strategic Partnership”), which is discussed in Note 19(a)(i) below, the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance. The price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Strategic Partnership will be C$ 16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. c. In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10 -day volume-weighted average price of the common shares of the Company on the TSX for the ten full days preceding such exercise by Altria, provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$ 16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities; related transaction costs of $ 22,355 were expensed as financing costs during the year ended December 31, 2019. 19 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) A reconciliation of the carrying amounts of the derivative liability is presented below: As of July 1, 2020 (Gain) / loss on revaluation Exercise of rights Effect from foreign exchange As of September 30, 2020 (a) Altria Warrant $ 165,958 $ ( 82,495 ) $ — $ 2,374 $ 85,837 (b) Pre-emptive Rights 16,180 ( 8,702 ) — 143 7,621 (c) Top-up Rights 23,576 ( 14,110 ) ( 680 ) 411 9,197 $ 205,714 $ ( 105,307 ) $ ( 680 ) $ 2,928 $ 102,655 As of January 1, 2020 (Gain) / loss on revaluation Exercise of rights Effect from foreign exchange As of September 30, 2020 (a) Altria Warrant $ 234,428 $ ( 140,547 ) $ — $ ( 8,044 ) $ 85,837 (b) Pre-emptive Rights 12,787 ( 4,777 ) — ( 389 ) 7,621 (c) Top-up Rights 49,945 ( 37,471 ) ( 1,407 ) ( 1,870 ) 9,197 $ 297,160 $ ( 182,795 ) $ ( 1,407 ) $ ( 10,303 ) $ 102,655 Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments. During the nine months ended September 30, 2020, the Company’s share price decreased from December 31, 2019 resulting in a gain on revaluation of $ 182,795 . The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of September 30, 2020 and December 31, 2019 applying the following inputs: As of September 30, 2020 As of December 31, 2019 Altria Warrant Pre-emptive Rights Top-up Rights Altria Warrant Pre-emptive Rights Top-up Rights Share price at valuation date (per share in C$) $ 6.69 $ 6.69 $ 6.69 $ 9.97 $ 9.97 $ 9.97 Subscription price (per share in C$) $ 19.00 $ 16.25 $ 16.25 $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (i) 0.25 % 0.24 % 0.20 % 1.69 % 1.73 % 1.71 % Weighted average expected life (in years) (ii) 2.43 1.75 1.13 3.18 1.25 1.66 Expected annualized volatility (iii) 81 % 81 % 81 % 82 % 82 % 82 % Expected dividend yield — % — % — % — % — % — % (i) The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. The risk-free interest rate uses a range of approximately 0.12 % to 0.36 % as of September 30, 2020 (December 31, 2019 – 1.66 % to 1.73 %) for the Pre-emptive Rights and Top-up Rights. (ii) The expected life in years represents the period of time that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. The expected life uses a range of approximately 0.25 year to 5.25 years as of September 30, 2020 (December 31, 2019 – 0.25 year to 6 years). (iii) Volatility was based on an equally weighted blended historical volatility level of the underlying equity securities of the Company and peer companies. 20 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. A decrease in the inputs noted below would cause a decrease in derivative liability and as of September 30, 2020, there would be an equal but opposite impact on net income (loss). Decrease as of September 30, 2020 Decrease as of December 31, 2019 Altria Warrant Pre-emptive Rights Top-up Rights Altria Warrant Pre-emptive Rights Top-up Rights Share price $ 16,133 $ 1,598 $ 2,196 $ 36,436 $ 2,743 $ 9,577 Weighted average expected life 9,996 1,304 1,999 17,471 2,366 2,178 Expected annualized volatility 19,188 1,737 2,347 33,343 2,180 7,714 These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several factors outside of the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods. 12. Property, Plant and Equipment Property, plant and equipment, net consisted of the following: As of September 30, 2020 December 31, 2019 Cost Land $ 3,037 $ 3,071 Building 148,112 149,690 Furniture and equipment 17,161 10,079 Computer equipment 669 526 Leasehold improvements 3,400 1,758 Construction in progress 14,267 3,569 Less: accumulated depreciation ( 15,242 ) ( 8,745 ) Total $ 171,404 $ 159,948 Depreciation expense included in cost of sales relating to manufacturing equipment and production facilities for the nine months ended September 30, 2020 was $ 1,935 (September 30, 2019 – $ 1,628 ). Depreciation expense included in operating expenses related to general office space and equipment for the nine months ended September 30, 2020 was $ 1,682 (September 30, 2019 – $ 577 ). The remaining depreciation is included in inventory. For the nine months ended September 30, 2020, there was no capitalized interest included in construction in progress (September 30, 2019 – $ 367 ). 21 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 13. Intangible Assets and Goodwill The ongoing restrictions and closures experienced by retail stores in the U.S. as a result of the COVID-19 pandemic have negatively impacted sales and demand which has resulted in slower than expected revenue growth in the U.S. reporting unit. The Company expects the revenue growth and operating results in the U.S. reporting unit 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 performed an interim impairment test as of June 30, 2020 on the U.S. reporting unit, which holds the Redwood goodwill, as well as the indefinite-lived intangible asset (Lord Jones™ brand) to determine whether the carrying amount of the reporting unit and intangible asset exceeded their respective fair values. The Company reassessed its estimates and forecasts during the second quarter of 2020 to determine the fair values of the reporting unit and intangible asset. The fair values were determined using a discounted cash flow method on the reporting unit and the relief-from-royalty method on the Lord Jones™ brand. Based on these valuations, the carrying value exceeded the fair value resulting in an impairment on both the reporting unit as well as the Lord Jones™ brand. The Company does not believe the declines in fair values are temporary. The Company recorded $ 35,000 of impairment charges on the U.S. reporting unit and $ 5,000 on the Lord Jones™ brand for the nine months ended September 30, 2020. No impairment loss was recorded for either goodwill or intangible assets during the three months ended September 30, 2020 or during the three and nine months ended September 30, 2019. (a) Intangible assets Intangible assets are comprised of the following items: Weighted average amortization period (in years) As of September 30, 2020 Cost Accumulated amortization Impairment charges Net Software 5 $ 575 $ ( 234 ) $ — $ 341 ERP system 5 2,851 ( 130 ) — 2,721 Health Canada licenses 17 7,211 ( 1,102 ) 6,109 Lord Jones ™ brand N/A 64,000 — ( 5,000 ) 59,000 Trademarks N/A 146 — — 146 Israeli codes (i) 25 300 ( 13 ) — 287 $ 75,083 $ ( 1,479 ) $ ( 5,000 ) $ 68,604 (i) The Israeli codes were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities specified above. Weighted average amortization period (in years) As of December 31, 2019 Cost Accumulated amortization Net Software 5 $ 541 $ ( 202 ) $ 339 Health Canada licenses 17 7,387 ( 821 ) 6,566 Lord Jones ™ brand N/A 64,000 — 64,000 Trademarks N/A 36 — 36 Israeli codes (i) 25 298 ( 4 ) 294 $ 72,262 $ ( 1,027 ) $ 71,235 (i) The Israeli codes were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities specified above. The aggregate amortization for the nine months ended September 30, 2020 was $ 570 (September 30, 2019 – $ 480 ). There were no disposals of software during the three months ended September 30, 2020 and 2019. The amortization expense for the next five years on intangible assets in use is estimated to be as follows: 2021 – $ 573 ; 2022 – $ 562 ; 2023: $ 529 ; 2024 – $ 524 ; 2025 – $ 509 . 22 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (b) Goodwill As of December 31, 2019 Additions Impairment charges Effect of foreign exchange As of September 30, 2020 Peace Naturals 1,078 — — ( 33 ) 1,045 Redwood 213,414 — ( 35,000 ) — 178,414 $ 214,492 $ — $ ( 35,000 ) $ ( 33 ) $ 179,459 14. General and Administrative Expenses General and administrative expense are comprised of the following items: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Salaries and wages $ 4,611 $ 7,789 $ 18,412 $ 13,137 Professional and consulting 4,295 4,694 13,144 11,948 Office and general 4,449 1,643 11,064 7,166 Review costs related to restatement of 2019 interim financial statements (i) 958 — 8,824 — Other 4,547 2,076 9,604 2,736 Total $ 18,860 $ 16,202 $ 61,048 $ 34,987 (i) These financial statement review costs include costs related to the restatement of the Company’s 2019 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement. 15. Share-based Payments (a) Warrants The following is a summary of the changes in warrants during the nine months ended September 30, 2020 and 2019: Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2020 $ 0.26 18,066,662 Exercise of warrants 0.27 ( 5,626,410 ) Balance as of September 30, 2020 $ 0.25 12,440,252 Balance as of January 1, 2019 $ 0.26 25,457,623 Exercise of warrants 0.26 ( 7,390,961 ) Balance as of September 30, 2019 $ 0.26 18,066,662 As of September 30, 2020, the Company had outstanding warrants as follows. For a description of the Altria Warrant, see Note 11. Grant date Expiry date Weighted average exercise price (C$) Number of warrants October 8 – 28, 2015 October 8 – 28, 2020 $ 0.31 452,903 May 13 – 27, 2016 May 13 – 27, 2021 0.25 11,987,349 As of September 30, 2020 $ 0.25 12,440,252 23 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (b) Stock options (i) Stock option plans The Company adopted an amended and restated stock option plan dated May 26, 2015 (the “2015 Stock Option Plan”) which was approved by shareholders of the Company at the annual general meeting of shareholders held on June 28, 2017. The 2015 Stock Option Plan allowed the Company’s Board of Directors (the “Board”) to award options to purchase shares to directors, officers, key employees and service providers of the Company. As of June 28, 2018, no further awards will be granted under the 2015 Stock Option Plan; however, shares may be purchased via option exercise by the holders of any outstanding options previously issued under the 2015 Stock Option Plan. As of September 30, 2020, options to purchase 10,443,447 Company common shares were outstanding under the 2015 Stock Option Plan. On June 28, 2018, the shareholders of the Company approved a stock option plan (the “2018 Stock Option Plan”), which replaced the 2015 Stock Option Plan. As of June 25, 2020, the date on which the 2020 Omnibus Plan (as defined below) was approved by the shareholders of the Company, no further awards will be granted under the 2018 Stock Option Plan; however, shares may be purchased via option exercise by the holders of any outstanding options previously issued under the 2018 Stock Option Plan. As of September 30, 2020, options to purchase 1,641,759 Company common shares were outstanding under the 2018 Stock Option Plan. On March 29, 2020, the Board adopted a new omnibus equity incentive plan (the “2020 Omnibus Plan”), which was approved by the shareholders of the Company at the annual and special meeting of shareholders held on June 25, 2020. The 2020 Omnibus Plan provides for grants of stock options, share appreciation rights, restricted shares, restricted share units (“RSUs”) and other share-based or cash-based awards, which are subject to terms as determined by the Compensation Committee of the Board, and awards may be granted to eligible employees, non-employee directors and consultants. As of September 30, 2020, options to purchase 2,000,000 Company common shares were outstanding under the 2020 Omnibus Plan. For the three and nine months ended September 30, 2020, the total stock-based compensation expense associated with the stock options was $ 1,551 and $ 5,051 respectively (September 30, 2019 – $ 3,531 and $ 7,949 , respectively). (ii) Summary of changes The following is a summary of the changes during the nine months ended September 30, 2020 and 2019: Weighted average exercise price (C$) Number of options Weighted average remaining contractual term (years) Balance as of January 1, 2020 $ 4.84 14,149,502 2.56 Issuance of options (i) 6.96 2,000,000 Exercise of options 2.04 ( 1,841,863 ) Cancellation, forfeiture and expiry of options 15.06 ( 222,433 ) Balance as of September 30, 2020 $ 5.34 14,085,206 2.54 Exercisable as of September 30, 2020 $ 3.56 9,381,601 1.57 Balance as of January 1, 2019 $ 2.99 12,902,995 3.35 Issuance of options 20.08 1,534,162 Exercise of options 3.72 ( 254,199 ) Cancellation, forfeiture and expiry of options — ( 5,083 ) Balance as of September 30, 2019 $ 4.83 14,177,875 2.81 Exercisable as of September 30, 2019 $ 2.66 7,442,390 2.47 (i) On September 9, 2020, options to purchase 2,000,000 Company common shares were granted to Kurt Schmidt in connection with his appointment as President and Chief Executive Officer of the Company under the 2020 Omnibus Plan. 24 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (iii) Fair value of options issued The fair value of the options issued was determined using the Black-Scholes option pricing model, using the following inputs: For the nine months ended September 30, 2020 2019 Share price at grant date (per share) C$ 6.96 C$ 15.34 - C$ 24.75 Exercise price (per option) C$ 6.96 C$ 15.34 - C$ 24.75 Risk-free interest rate 0.43 % 1.39 % - 1.62 % Expected life of options (in years) (i) 5 5 Expected annualized volatility 91 % 89 % Expected dividend yield — % — % Weighted average Black-Scholes value at grant date (per option) C$ 4.84 C$ 10.6 - C$ 15.91 Forfeiture rate — % — % (i) The expected life of the awards represents the period of time stock options are expected to be outstanding and is estimated considering vesting terms and employees’ and non-employees’ historical exercise and post-vesting employment termination behavior. Volatility was based on an equally weighted blended historical volatility level of the underlying equity securities of the Company and peer companies. The risk-free interest rate was based on the Bank of Canada government bonds with a remaining term equal to the expected life of the options at the grant date. During the nine months ended September 30, 2020, the weighted average fair value per share at grant date of options was C$ 4.84 (nine months ended September 30, 2019 - C$ 13.32 ). (c) Restricted share units For the three and nine months ended September 30, 2020, the Company reco rded $ 6,365 and $ 7,847 , respectively (for three and nine months ended September 30, 2019 – $ 186 ) in share-based compensation expense related to the issuance of RSUs during such periods. The following is a summary of the changes in RSUs from January 1, 2020 to September 30, 2020: Number of RSUs Weighted average grant date fair value (C$) Balance as of January 1, 2020 732,972 $ 15.34 Granted (i) 814,874 7.32 Vested and issued (ii) ( 732,972 ) 15.34 Cancellation and forfeitures ( 9,497 ) 7.52 Balance as of September 30, 2020 805,377 $ 7.32 (i) On September 9, 2020, the Company issued 450,000 RSUs to Mr. Schmidt in connection with his appointment as President and Chief Executive Officer of the Company under the 2020 Omnibus Plan. The RSUs vest on September 10, 2023, subject to Mr. Schmidt’s continued employment through such date. The vesting of such RSUs is not subject to the achievement of any performance criteria. In August 2020 and May 2020, the Company issued an aggregate of 85,597 and 279,277 RSUs, respectively, to certain employees under the 2020 Omnibus Plan. Each RSU entitles the holder thereof to receive upon vesting one common share of the Company. The RSUs vest annually in equal installments over a three-year period following the grant date, subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria. (ii) On July 20, 2020, the Company entered into separation agreements with Robert Rosenheck and another Redwood Wellness, LLC (“Redwood”) employee pursuant to which they resigned from their employment with Redwood. In connection with such separation agreements, 732,972 outstanding and unvested RSUs were accelerated and vested during the three months ended September 30, 2020. 25 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) The following is a summary of the changes in RSUs from January 1, 2019 to September 30, 2019: Number of RSUs Weighted average grant date fair value (C$) Balance as of January 1, 2019 — $ — Granted (i) 732,972 15.34 Balance as of September 30, 2019 732,972 $ 15.34 (i) During the three months ended September 30, 2019, the Company issued an aggregate of 732,972 RSUs to Mr. Rosenheck and another Redwood employee in connection with the acquisition of four Redwood Holding Group, LLC subsidiaries. These RSUs were accelerated and vested during the three months ended September 30, 2020. (d) Deferred share units On August 10, 2019, the Company established a cash-settled deferred share unit plan (“DSU Plan”) pursuant to which its non-executive directors receive deferred share units (“DSUs”). The DSU Plan is designed to promote a greater alignment of long-term interests between non-executive directors and shareholders. The number of DSUs granted under the DSU Plan (including fractional DSUs) is determined by dividing the amount of remuneration payable by the closing price as reported by the TSX on the trading day immediately preceding the day of grant. DSUs are payable at the time a non-executive director ceases to hold the office of director for any reason and are settled by a lump-sum cash payment, in accordance with the terms of the DSU Plan, based on the fair value of the DSUs at such time. The fair value of the cash payout is determined by multiplying the number of DSUs vested at the payout date by the closing price as reported by the TSX on the trading day immediately preceding the payout date. The fair value of the cash payout is determined at each reporting date based on the fair value of the Company’s common shares at the reporting date and is recorded within other liabilities. The following is a summary of the changes in DSUs from January 1, 2020 to September 30, 2020: Number of DSUs Financial liability Balance as of January 1, 2020 33,397 $ 255 Granting and vesting of DSUs 58,380 338 Liabilities settled ( 8,484 ) ( 46 ) Loss (gain) on revaluation — ( 128 ) Balance as of September 30, 2020 83,293 $ 419 The following is a summary of the changes in DSUs from January 1, 2019 to September 30, 2019: Number of DSUs Financial liability Balance as of January 1, 2019 — $ — Granting and vesting of DSUs 33,937 454 Loss (gain) on revaluation — ( 147 ) Balance as of September 30, 2019 33,937 $ 307 26 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 16. Earnings (Loss) Per Share Basic and diluted earnings (loss) per share from continuing operations are calculated using the following numerators and denominators: For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Basic earnings per share computation Net income (loss) attributable to common shareholders of Cronos Group $ 69,506 $ 604,446 $ 38,615 $ 1,104,564 Weighted average number of common shares outstanding 350,288,783 338,957,949 349,397,156 297,964,058 Basic earnings per share (i) $ 0.20 $ 1.78 $ 0.11 $ 3.71 Diluted earnings per share computation Net income (loss) used in the computation of basic earnings per share $ 69,506 $ 604,446 $ 38,615 $ 1,104,564 Adjustment for gain (loss) on revaluation of derivative liabilities ( 680 ) ( 6,952 ) ( 1,407 ) ( 798,799 ) Net income (loss) used in the computation of diluted income per share $ 68,826 $ 597,494 $ 37,208 $ 305,765 Weighted average number of common shares outstanding used in the computation of basic earnings per share 350,288,783 338,957,949 349,397,156 297,964,058 Dilutive effect of warrants 12,514,864 17,792,227 17,126,222 20,080,244 Dilutive effect of stock options 6,688,620 10,435,804 7,992,139 11,030,736 Dilutive effect of RSUs 126,753 732,972 215,934 732,972 Dilutive effect of Altria Warrant — — — 1,833,853 Dilutive effect of Top-up Rights – exercised and exercisable fixed price — 1,349,720 — 1,976,828 Weighted average number of common shares for computation of diluted income (loss) per share 369,619,020 369,268,672 374,731.451 333,618,691 Diluted earnings per share (i) $ 0.19 $ 1.62 $ 0.10 $ 0.92 (i) Basic and dilutive earnings per share from discontinued operations were $ 0.00 for the three and nine months ended September 30, 2020 and 2019. The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive or because conditions for contingently issuable shares were not satisfied at the end of the reporting periods. Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Ginkgo equity milestones 14,674,904 14,674,904 14,674,904 14,674,904 Pre-emptive Rights 12,006,740 12,006,740 12,006,740 12,006,740 Top-up Rights – fixed price 22,551,531 25,126,670 22,551,531 25,126,670 Top-up Rights – market price 3,065,570 1,255,223 3,065,570 1,255,223 Altria Warrant 79,051,981 76,392,046 79,051,981 — Stock options 2,017,176 1,346,902 1,571,134 51,830 Total anti-dilutive securities 133,367,902 130,802,485 132,921,860 53,115,367 27 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 17. Related Party Transactions and Balances On March 8, 2019, in connection with the Altria Investment, Altria, through certain of its wholly owned subsidiaries, purchased a 45 % equity interest in the Company. The Company incurred the following expenses for consulting services from Altria Pinnacle LLC, a subsidiary of Altria (“Altria Pinnacle”): Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Altria Pinnacle – expense $ 160 $ 1,772 $ 1,113 $ 1,772 Total $ 160 $ 1,772 $ 1,113 $ 1,772 The following is a summary of amounts payable related to the consulting services with Altria Pinnacle: As of September 30, 2020 December 31, 2019 Altria Pinnacle – payable $ 5 $ 1,152 Total $ 5 $ 1,152 During 2019, the Company purchased machinery and equipment amounting to $ 1,258 from a subsidiary of Altria. Refer to Note 19 for additional information. Refer to Note 11 for further information on the derivative liabilities related to the Altria Investment. There were no other material related party transactions for the three and nine months ended September 30, 2020 and 2019. 18. Segment Information Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manage the business, make operating decisions and assess the Company’s performance. The Company determined that it has the following two reportable segments: United States and Rest of World. The United States operating segment consists of the manufacture and distribution of hemp-derived CBD infused products. 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 . These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions regarding the allocation of resources. The CODMs review operating income (loss) as the measure of segment profit or loss to evaluate performance of and allocate resources for its reportable segments. Operating income (loss) is defined as net revenue less cost of sales and operating expenses. Corporate expenses are expenses that relate to the consolidated business and not to an individual operating segment. The Company’s method of allocating corporate costs is refined periodically. Reporting by operating segments follows the same accounting policies as those used to prepare the consolidated financial statements. The operating segments are presented in accordance with the same criteria used for internal reporting prepared for the CODMs. Intersegment transactions are recorded at the stated values as agreed to by the segments. 28 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) Segment data was as follows for the three months ended September 30, 2020: Three months ended September 30, 2020 United States Rest of World Corporate expenses Total Consolidated statements of net income (loss) and comprehensive income (loss) Net revenue Cannabis flower $ — $ 7,958 $ — $ 7,958 Cannabis extracts 1,639 1,504 — 3,143 Other — 257 — 257 Net revenue $ 1,639 $ 9,719 $ — $ 11,358 Share of loss from investments in equity accounted investees $ — $ 1,327 $ — $ 1,327 Interest income 3 3,844 — 3,847 Interest expense — ( 66 ) — ( 66 ) Interest income, net $ 3 $ 3,778 $ — $ 3,781 Impairment loss on goodwill and intangible assets $ — $ — $ — $ — Depreciation and amortization 35 851 — 886 Income tax expense 143 845 — 988 Income (loss) from discontinued operations — ( 473 ) — ( 473 ) Net income (loss) ( 14,004 ) 93,447 ( 10,979 ) 68,464 Segment data was as follows for the nine months ended September 30, 2020: Nine months ended September 30, 2020 United States Rest of World Corporate expenses Total Consolidated statements of net income (loss) and comprehensive income (loss) Net revenue Cannabis flower $ — $ 16,373 $ — $ 16,373 Cannabis extracts 5,989 6,821 — 12,810 Other — 490 — 490 Net revenue $ 5,989 $ 23,684 $ — $ 29,673 Share of loss from investments in equity accounted investees $ — $ 3,293 $ — $ 3,293 Interest income 16 15,406 — 15,422 Interest expense — ( 156 ) — ( 156 ) Interest income, net $ 16 $ 15,250 $ — $ 15,266 Impairment loss on goodwill and intangible assets $ 40,000 $ — $ — $ 40,000 Depreciation and amortization 104 2,148 — 2,252 Income tax expense 143 845 — 988 Income (loss) from discontinued operations — ( 519 ) — ( 519 ) Net income (loss) ( 71,571 ) 132,704 ( 24,691 ) 36,442 Consolidated balance sheets Total assets $ 251,835 $ 369,621 $ 1,297,473 $ 1,918,929 Investments in equity accounted investees — 19,059 — 19,059 Goodwill 178,414 1,045 — 179,459 Purchase of property, plant and equipment, net 294 21,040 — 21,334 29 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) Sources of net revenue for the three and nine months ended September 30, 2020 and 2019 were as follows: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Cannabis flower $ 7,958 $ 4,266 $ 16,373 $ 12,187 Cannabis extracts 3,143 1,500 12,810 4,138 Other 257 19 490 117 Net revenue $ 11,358 $ 5,785 $ 29,673 $ 16,442 Net revenue attributed to a geographic region based on the location of the customer were as follows: Three months ended September 31, Nine months ended September 31, 2020 2019 2020 2019 Canada $ 9,205 $ 5,093 $ 22,712 $ 15,416 United States 1,639 675 5,989 675 Other countries 514 17 972 351 Net revenue $ 11,358 $ 5,785 $ 29,673 $ 16,442 Property, plant and equipment assets were physically located in the following geographic regions: As of September 30, 2020 As of December 31, 2019 Canada $ 146,292 $ 139,160 United States 2,302 2,103 Other countries 22,810 18,685 Total $ 171,404 $ 159,948 The Company sells products through a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenues and greater than 10% of accounts receivable. United States During the three and nine months ended September 30, 2020 and 2019, the U.S. segment had no major customers. As of September 30, 2020, $ 41 (December 31, 2019 – $ 12 ) in expected credit losses has been recognized on receivables from contracts with customers. Rest of World During the three months ended September 30, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 9,790 from four major customers, Société Québécoise du Cannabis, Alberta Gaming, Liquor and Cannabis Commission, Ontario Cannabis Retail Corporation, and BC Liquor Distribution Branch accounting for 26 %, 22 %, 20 % and 14 %, respectively, of the Company’s total revenue (three months ended September 30, 2019 – $ 3,351 from two major customers, together accounting for 58 % of the Company’s total revenues). During the nine months ended September 30, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 22,142 from the same four major customers as mentioned above, accounting for 18 %, 23 %, 16 %, and 17 %, respectively, of the Company’s total revenue (nine months ended September 30, 2019 – $ 7,101 from two major customers, together accounting for 43 % of the Company’s total revenues). As of September 30, 2020, $ 23 (December 31, 2019 – $ 124 ) in expected credit losses has been recognized on receivables from contracts with customers. During the three months ended September 30, 2020, the Company classified OGBC as held-for-sale. The loss from discontinued operations from the Rest of World segment for the three and nine months ended September 30, 2020 was $ 473 and $ 519 , respectively. The loss from discontinued operations from the Rest of World segment for the three and nine months ended September 30, 2019 was $ 36 and $ 63 , respectively. 30 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 19. Commitments (a) R&D commitments (i) Ginkgo. On September 4, 2018, the Company announced an R&D partnership with Ginkgo to develop scalable and consistent production of eight target cannabinoids, including THC, CBD and a variety of other lesser known and rarer cannabinoids. As part of this partnership, Cronos Group has agreed to issue up to 14,674,903 common shares of the Company (aggregate value of approximately $ 100,000 as of July 17, 2018 assuming all milestones are met) (collectively the “Ginkgo Equity Milestones”) in tranches and $ 22,000 in cash subject to Ginkgo’s achievement of certain milestones and to fund certain R&D expenses, including foundry access fees. (ii) Technion. On October 15, 2018, the Company entered into a sponsored research agreement with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”). Research will be focused on the use of cannabinoids and their role in regulating skin health and skin disorders. The Company has committed to $ 1,784 of research funding over a period of three years . An additional $ 4,900 of cash payments will be paid to Technion upon the achievement of certain milestones. (b) Altria consulting services On February 18, 2019, the Company entered into an agreement with a wholly owned subsidiary of Altria (which agreement was subsequently amended and restated to substitute Altria Pinnacle as a party thereto), to receive strategic advisory and project management services from Altria Pinnacle (the “Services Agreement”). Pursuant to the Services Agreement, the Company will pay Altria Pinnacle a monthly fee equal to the product of 105 % and the sum of: (i) all costs directly associated with the services incurred during the monthly period, and (ii) a reasonable and appropriate allocation of indirect costs incurred during the monthly period. The Company will also pay all third-party direct charges incurred during the monthly period in connection with the services, including any reasonable and documented costs, fees and expenses associated with obtaining any consent, license or permit. The Services Agreement will remain in effect until terminated by either party. (c) Use of publicity rights in brand development On December 23, 2019, the Company issued 856,017 restricted common shares to Kristen Bell, an accredited investor, in a private placement (“Private Placement – 2019”) in reliance on Section 4(a)(2) of the Securities Act of 1933 in connection with the use of certain publicity rights in the brand development of Happy Dance™. One-third of such common shares vested on January 31, 2020 with the remaining shares vesting in two equal installments on June 23, 2021, and December 23, 2022. The issuance did not involve a public offering and was made without general solicitation or advertising. The total fair value of the consideration paid for the issuance of such common shares was approximately $ 6,000 . The fair value of the shares was calculated using the ten -day volume weighted average price per share of the Company’s common shares on Nasdaq. Additional restricted common shares are issued when certain performance milestones are achieved: (i) First Performance Issuance: if, prior to December 23, 2022, the product line generates at least $ 50,000 in net revenue, additional common shares with an aggregate value of $ 1,000 will be issued. (ii) Second Performance Issuance: if, prior to December 23, 2022, the product line generates at least $ 100,000 in net revenue, additional common shares with an aggregate value of $ 1,000 will be issued (together with the First Performance Issuance noted above). The number of common shares that would be issued upon achieving the foregoing milestones will be determined based on the ten -day volume weighted average price per share of the Company’s common shares on Nasdaq as of the trading day immediately prior to the date of filing with the SEC of the Company’s audited year-end financial statements for the first fiscal year during which such milestones are achieved. 31 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 20. Contingencies The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution and sale of its products. Many of these legal proceedings are in the early stages of litigation and seek damages that are unspecified or not quantified. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe these legal proceedings, individually or in the aggregate, will have a material adverse effect on the its financial condition but could be material to the its results of operations for a quarterly period depending, in part, on its results for that quarter. (a) Class action complaints relating to restatement On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in the U.S. District Court for the Eastern District of New York against the Company and its former Chief Executive Officer (now Executive Chairman) and Chief Financial Officer alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The complaints generally allege that certain of the Company’s prior public statements about revenues and internal controls were incorrect based on the Company’s March 2, 2020, disclosure that the Audit Committee of its Board of Directors was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel. The complaints do not quantify a damage request. Defendants have not yet responded to the complaints. On June 3, 2020, an alleged shareholder filed a Statement of Claim in the Ontario Superior Court of Justice in Toronto, Ontario, Canada, seeking, among other things, an order certifying the action as a class action on behalf of a putative class of shareholders and damages of an unspecified amount. The Statement of Claim names the Company, its former Chief Executive Officer (now Executive Chairman), Chief Financial Officer, former Chief Financial Officer and Chief Commercial Officer, and current and former members of its Board of Directors as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Statement of Claim generally alleges that certain of the Company’s prior public statements about revenues and internal controls were misrepresentations based on the Company’s March 2, 2020 disclosure that the Audit Committee of its Board of Directors was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Statement of Claim does not quantify its damage request. The Company and the other named defendants have not yet filed a response to the Statement of Claim. (b) Regulatory reviews relating to restatement The Company has been responding to requests for information from various regulatory authorities relating to its previously disclosed restatement of its financial statements for the first three quarters of 2019. The Company is responding to all such requests for information and cooperating with all regulatory authorities. The Company cannot predict the outcome of any such regulatory review or investigation and it is possible that additional investigations or one or more formal proceedings may be commenced against the Company and its current and former officers and directors in connection with these regulatory reviews and investigations. (c) Litigation relating to marketing, distribution and sale of products On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. The Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Statement of Claim seeks a total of C$ 500 million for breach of contract, compensatory damages, and unjust enrichment or such other amount as may be proven in trial and C$ 5 million in punitive damages against each defendant, including the Company. The Statement of Claim also seeks interest and costs associated with the action. The Company has not responded to the Statement of the Claim. A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business alleging, among other things, violations of state consumer protection, health and advertising laws. On April 8, 2020, a putative class action complaint was filed in the U.S. District Court for the Central District of California against Redwood, alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and breaches of the California Commercial Code for breach of express warranties and implied warranty of merchantability with respect to Redwood’s marketing and sale of U.S. hemp products. The complaint does not quantify a damage request. On April 10, 2020, the class action complaint was dismissed for certain pleading deficiencies and the plaintiff was granted leave until April 24, 2020 to amend the complaint to establish federal subject matter jurisdiction. On April 28, 2020, the action was dismissed without prejudice for failure to prosecute and for failure to comply with a court order. As of the date of this Quarterly Report, the plaintiff has not refiled the complaint. 32 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) The Company expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase. 21. Financial Instruments The Company’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, and market risk (including interest rate risk) and foreign currency risk. (a) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short-term investments, loan receivable, and advances to joint ventures. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $ 1,401,606 as of September 30, 2020 (December 31, 2019 – $ 1,586,978 ). (i) Accounts receivable An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, among others, the failure of a debtor to engage in a repayment plan, and a failure to make contractual payments for a period of greater than 120 days past due. For the three months ended September 30, 2020, the Company recorded a current expected credit loss allowance of $ 64 (December 31, 2019 – $ 136 ). The Company has assessed that there is a concentration of credit risk, as 59 % of the Company’s accounts receivable were due from four customers as of September 30, 2020 (December 31, 2019 – 56 % due from two customers) with an established credit history with the Company. (ii) C ash and cash equivalents, short-term investments, and other receivables The Company held cash and cash equivalents of $ 1,097,846 as of September 30, 2020 (December 31, 2019 – $ 1,199,693 ). The short-term investments and related interest receivable of $ 202,883 as of September 30, 2020 (December 31, 2019 – $ 306,347 ) represents short-term investments with a maturity of less than a year and accrued interest as of period end. The cash and cash equivalents and short-term investments, including guaranteed investment certificates and bankers’ acceptances, are held with central banks and financial institutions that are highly rated. In addition to interest receivable, other receivables include sales taxes receivable from the government. As such, the Company has assessed an insignificant loss allowance on these financial instruments. (iii) Advances to joint ventures The Company has assessed the credit risk of advances to joint ventures based on the financial position of the borrowers, and the regulatory and economic environment of the borrowers. The expected loss rates are based on the historical credit losses experienced. Where appropriate, the historical loss rates are adjusted to reflect current and forward-looking information. The Company has assessed an expected credit loss allowance on these advances as of September 30, 2020 to be $ nil (December 31, 2019 – $ nil ). (b) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and arises principally from the Company’s accounts payable and other liabilities. The Company’s policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations as they become due. Further, the Company’s management is responsible for ensuring funds exist and are readily accessible to support business opportunities as they arise. The Company’s funding is primarily provided in the form of capital raised through the issuance of common shares and warrants. As of September 30, 2020, the Company had no concentration risk of vendors (December 31, 2019 – 42 % due to three vendors). 33 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) (c) Market risk Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, market and economic conditions, and equity and commodity prices. The Company is exposed to market risk in divesting its investments, such that unfavorable market conditions could result in dispositions of investments at less than their carrying values. Further, the revaluation of securities classified as fair value through net income could result in significant write-downs of the Company’s investments, which would have an adverse impact on the Company’s financial position, unless these would flow through other comprehensive income. The Company manages market risk by having a portfolio of securities from multiple issuers so that the Company is not materially exposed to any one issuer. (d) Interest rate risk Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of income and expense recorded on the cash equivalents and short-term investments, and the market value of all interest-earning assets, other than those which possess a short-term to maturity. A 10% change in the interest rate in effect on September 30, 2020 and December 31, 2019, would not have a material effect on (i) fair value of the cash equivalents and short-term investments as the majority of the portfolio has a maturity date of three months or less, or (ii) interest income. Management continues to monitor external interest rates and revise the Company’s investment strategy as a result. During the nine months ended September 30, 2020, the Company had net interest income of $ 15,266 (September 30, 2019 – $ 20,455 ). During the three and nine months ended September 30, 2020, the Company’s average variable interest rate fell 0.03 % and 1.44 %, respectively. Had the interest rates been consistent, net interest income would have increased by $ 303 and $ 15,214 , respectively for the three and nine months ended September 30, 2020. (e) Currency rate risk Currency rate risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on advances to joint ventures denominated in A$ and C$. The Company is further exposed to this risk through subsidiaries operating in Israel and the U.S. as the Company’s functional currency is in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure to currency rate risk. As such, the Company’s financial position and financial results may be adversely affected by the unfavorable fluctuations in currency exchange rates. As of September 30, 2020, the Company had foreign currency gain (loss) on translation of $( 35,654 ) (September 30, 2019 – $ 9,424 ). A 10% change in the exchange rates for the U.S. dollar would affect the carrying value of net assets by approximately $ 176,449 as of September 30, 2020 (December 31, 2019 –$ 174,902 ). 34 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 22. Fair Value Measurement The Company complies with ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values are determined by: • Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. • Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. September 30, 2020 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,097,846 $ — $ — $ 1,097,846 Short-term investments 202,883 — — 202,883 Derivative liabilities — — 102,655 102,655 December 31, 2019 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,199,693 $ — $ — $ 1,199,693 Short-term investments 306,347 — — 306,347 Derivative liabilities — — 297,160 297,160 There were no transfers between categories during the periods presented. 23. Supplementary Cash Flow Information The net changes in non-cash working capital items are as follows: For the nine months ended September 30, 2020 2019 Accounts receivable $ ( 1,448 ) $ ( 1,991 ) Other receivables ( 3,169 ) ( 3,315 ) Prepaids and other assets ( 1,137 ) ( 5,930 ) Current portion of loans receivable — ( 4,607 ) Inventory, net ( 18,316 ) ( 33,903 ) Accounts payable and other liabilities 3,711 23,676 Cumulative effect from foreign exchange ( 8,764 ) — Add back: net working capital assumed on acquisition — 972 Total $ ( 29,123 ) $ ( 25,098 ) 35 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2020 (In thousands of U.S. dollars, except for gram and share amounts, unaudited) 24. Held-For-Sale Assets and Discontinued Operations During the three months ended September 30, 2020, the Company advanced its plans for the sale and disposal of substantially all of the assets of OGBC. As a result, OGBC’s results of operations have been reclassified as discontinued operations in the accompanying condensed consolidated financial statements. Accordingly, the assets and liabilities of OGBC are separately reported as assets and liabilities “held-for-sale” as of September 30, 2020 on the consolidated balance sheet. For comparative purposes, amounts in the prior periods have been reclassified to conform to current year presentation, as disclosed in Note 2(e). The Company recorded $ 919 as a valuation allowance upon reclassification of assets as held-for-sale on OGBC for the three and nine months ended September 30, 2020. The following table summarizes the financial information for discontinued operations: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Consolidated statements of net income (loss) and comprehensive income (loss) OGBC income from discontinued operations, net of income taxes $ ( 473 ) $ ( 36 ) $ ( 519 ) $ ( 63 ) As of September 30, 2020 December 31, 2019 Consolidated balance sheets Long-term assets classified as discontinued operations 2,066 3,248 25 . Non-monetary Transactions During the nine months ended September 30, 2020, the Company had no non-monetary transactions. On March 28, 2019, the Company entered into two transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin from the third party and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for at the carrying value of inventory transferred by the Company, which equaled the value of the cannabis resin received. No revenue was recognized as a result of this transaction and no gain or loss was recognized in the condensed consolidated statements of net income (loss) and comprehensive income (loss). In September 2019, the Company entered into three transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin and cannabis tincture oil and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for in accordance with ASC 845 Non-monetary transactions at the carrying value of inventory transferred by the Company. $ 2,300 was recognized in revenue as a result of this transaction and no gain or loss was recognized in the consolidated statements of net income (loss) and comprehensive income (loss). 36