Cronos Group Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Table of Contents Reports of KPMG LLP, Independent Registered Public Accounting Firm 67 Consolidated Balance Sheets 71 Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) 72 Consolidated Statements of Changes in Shareholders’ Equity (Deficit) 74 Consolidated Statements of Cash Flows 76 Notes to Consolidated Financial Statements 77 66 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cronos Group Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cronos Group Inc. (the Company) as of December 31, 2020 and December 31, 2019, the related consolidated statements of net income (loss) and comprehensive income (loss), changes in shareholders’ equity (deficit), and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and December 31, 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of sufficiency of audit evidence over inventory As discussed in Note 5 to the consolidated financial statements, inventory consists of raw materials; dry cannabis and cannabis extracts work-in-progress; dry cannabis and cannabis extract finished goods; and supplies and consumables. The Company’s total inventory as of December 31, 2020 was $44,002 thousand. The accuracy of inventory quantities is dependent upon the performance of an annual physical count and appropriately recording adjustments to inventory quantities in the Company’s inventory process. The Company has also identified a material weakness related to inventory as of December 31, 2020. We identified the evaluation of the sufficiency of audit evidence over the accuracy of inventory quantities as a critical audit matter. Evaluating the sufficiency of the audit evidence obtained required especially subjective auditor judgment because of the material weakness described above. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over inventory. We increased the number of inventory samples selected to perform certain procedures compared to those we would have selected if the Company’s internal controls were operating effectively at year end. We performed independent test counts of inventory quantities. We compared the results of our independent test counts to the Company’s inventory records. We confirmed with third parties a selection of inventory quantities held by them. We evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed. 67 Table of Contents Evaluation of the impairment analysis for goodwill in the U.S. reporting unit and the Lord Jones TM brand indefinite life intangible asset As discussed in Note 2(k) to the consolidated financial statements, goodwill and indefinite life intangible assets are not amortized but 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. As discussed in Note 11 to the consolidated financial statements, the Company had $178,414 thousand of goodwill in the U.S. reporting unit and an indefinite life intangible asset of $59,000 thousand from the Lord JonesTM brand. The Company recorded $35,000 thousand of impairment charges on the goodwill recorded in the U.S. reporting unit and $5,000 thousand of impairment charges on the Lord JonesTM brand indefinite life intangible asset in the year ended December 31, 2020. We identified the evaluation of the impairment analysis for goodwill in the U.S. reporting unit and the Lord JonesTM brand indefinite life intangible asset as a critical audit matter. The evaluation of the Company’s key assumptions used in the discounted cash flow valuation model, including the growth rates, the discount rates, and forecasted royalty income from the Lord JonesTM brand indefinite life intangible asset, required a high degree of auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s impairment process, including a control related to the determination and assessment of the reasonableness of key assumptions used in the discounted cash flow valuation model. We evaluated the key assumptions used in the discounted cash flow valuation model, including comparing forecasted growth rates against external analyst expectations for the industry in the United States. We also performed sensitivity analysis on the forecasted growth rates and forecasted royalty income to assess the impact on the Company’s fair value estimate. We compared a selection of royalty rates of comparable entities used by the Company to determine the royalty rate used in the discounted cash flow valuation model to publicly available information. We involved valuation professionals with specialized skills and knowledge who assisted in: • evaluating the discount rate, by comparing it against the internal rate of return and comparing the weighted average cost of capital to a range that was independently developed using publicly available market data for comparable entities. • evaluating the royalty rate, which was applied to estimate forecasted revenues, to calculate forecasted royalty income, using industry knowledge and consideration of comparable brand royalty rates and qualitative factors specific to the brand. /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants We have served as the Company’s auditor since 2018. Vaughan, Canada February 26, 2021 68 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cronos Group Inc.: Opinion on Internal Control Over Financial Reporting We have audited Cronos Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and December 31, 2019, the related consolidated statements of net income (loss) and comprehensive income (loss), changes in shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the following has been identified and included in management’s assessment: Inventory verification: Management failed to properly design and execute sufficient procedures to verify inventory quantities. Specifically, while inventory counts were performed in the fourth quarter, (i) the aggregate value of items excluded from the count exceeded the Company’s materiality threshold, and (ii) human error in count execution, data transposition and reconciliation analysis resulted in inaccurate adjustments. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)(i) of the Form 10-K). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 69 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants February 26, 2021 Vaughan, Canada 70 CRONOS GROUP INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Cronos Group Inc. Consolidated Balance Sheets As of December 31, 2020 and 2019 (In thousands of U.S. dollars) Table of Contents As of December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 1,078,023 $ 1,199,693 Short-term investments 211,766 306,347 Accounts receivable (i) 8,928 4,638 Other receivables 10,033 7,232 Current portion of loans receivable 7,083 4,664 Prepaids and other assets 11,161 9,395 Inventory, net 44,002 38,043 Held-for-sale assets 1,176 3,248 Total current assets 1,372,172 1,573,260 Investments in equity accounted investees 19,235 557 Advances to joint ventures 467 19,437 Loans receivable, net 87,191 44,967 Property, plant and equipment 187,599 159,948 Right-of-use assets 9,776 6,546 Intangible assets 69,720 71,235 Goodwill 179,522 214,492 Total assets $ 1,925,682 $ 2,090,442 Liabilities Current liabilities Accounts payable and other liabilities $ 42,102 $ 35,301 Current portion of lease obligation 1,322 427 Derivative liabilities (ii) 163,410 297,160 Total current liabilities 206,834 332,888 Due to non-controlling interests 2,188 1,844 Lease obligation 8,492 6,680 Total liabilities 217,514 341,412 Commitments and contingencies (iii) Shareholders’ equity Share capital (iv, v) 569,260 561,165 Additional paid-in capital 34,596 23,234 Retained earnings 1,064,509 1,137,646 Accumulated other comprehensive income 42,999 27,838 Total equity attributable to shareholders of Cronos Group 1,711,364 1,749,883 Non-controlling interests ( 3,196 ) ( 853 ) Total shareholders' equity 1,708,168 1,749,030 Total liabilities and shareholders’ equity $ 1,925,682 $ 2,090,442 (i) Net of current expected credit loss allowance of $ 74 as of December 31, 2020 (December 31, 2019 – $ 136 ) (ii) Refer to Note 14 in the notes to the consolidated financial statements. (iii) Refer to Note 20 and Note 21 in the notes to the consolidated financial statements. (iv) Authorized for issuance as of December 31, 2020: unlimited (December 31, 2019 – unlimited). (v) Shares issued as of December 31, 2020: 360,253,332 (as of December 31, 2019: 348,817,472 ) See notes to consolidated financial statements. 71 Cronos Group Inc. Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S dollars, except share and per share amounts) Table of Contents Year ended December 31, 2020 2019 2018 Net revenue, before excise taxes $ 54,353 $ 25,639 $ 13,234 Excise taxes ( 7,634 ) ( 1,889 ) ( 1,113 ) Net revenue 46,719 23,750 12,121 Cost of sales 46,497 12,174 5,908 Inventory write-down 26,055 29,173 — Gross profit (loss) ( 25,833 ) ( 17,597 ) 6,213 Operating expenses Sales and marketing 34,386 23,048 2,537 Research and development 20,366 12,155 1,814 General and administrative 80,529 49,271 13,349 Share-based payments 15,361 11,619 8,151 Depreciation and amortization 2,872 2,090 807 Repurposing charges — 5,328 — Total operating expenses 153,514 103,511 26,658 Operating loss ( 179,347 ) ( 121,108 ) ( 20,445 ) Other income (expense) Interest income, net 18,415 27,969 81 Gain on revaluation of derivative liabilities (i) 129,254 1,276,819 — Impairment loss on goodwill and intangible assets ( 40,000 ) — — Gain on disposal of other investments 4,789 16,277 164 Share of loss from investments in equity accounted investees ( 4,510 ) ( 2,009 ) ( 723 ) Financing and transaction costs ( 40 ) ( 32,208 ) — Other income (loss) ( 1,834 ) 197 — Total other income (expense) 106,074 1,287,045 ( 478 ) Income (loss) before income taxes ( 73,273 ) 1,165,937 ( 20,923 ) Income tax expense 1,347 — — Income (loss) from continuing operations ( 74,620 ) 1,165,937 ( 20,923 ) Loss from discontinued operations ( 650 ) ( 363 ) ( 894 ) Net income (loss) $ ( 75,270 ) $ 1,165,574 $ ( 21,817 ) Net income (loss) attributable to: Cronos Group $ ( 73,137 ) $ 1,166,506 $ ( 21,636 ) Non-controlling interests ( 2,133 ) ( 932 ) ( 181 ) $ ( 75,270 ) $ 1,165,574 $ ( 21,817 ) Net income (loss) per share Basic $ ( 0.21 ) $ 3.76 $ ( 0.12 ) Diluted (ii) ( 0.21 ) 3.33 ( 0.12 ) Weighted average number of outstanding shares Basic 351,576,848 310,067,179 172,269,170 Diluted (ii) 351,576,848 342,811,992 172,269,170 (i) Refer to Note 14 in the notes to the consolidated financial statements (ii) 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 consolidated financial statements. 72 Cronos Group Inc. Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S dollars, except share and per share amounts) Table of Contents Year ended December 31, 2020 2019 2018 Net income (loss) $ ( 75,270 ) $ 1,165,574 $ ( 21,817 ) Other comprehensive income (loss) Foreign exchange gain (loss) on translation 14,951 37,687 ( 12,337 ) Gain on revaluation and disposal of other investments, net of tax — — 3 Total other comprehensive income (loss) 14,951 37,687 ( 12,334 ) Comprehensive income (loss) $ ( 60,319 ) $ 1,203,261 $ ( 34,151 ) Comprehensive income (loss) attributable to: Cronos Group $ ( 57,976 ) $ 1,204,214 $ ( 33,964 ) Non-controlling interests ( 2,343 ) ( 953 ) ( 187 ) $ ( 60,319 ) $ 1,203,261 $ ( 34,151 ) See notes to consolidated financial statements. 73 Cronos Group Inc. Consolidated Statements of Changes in Shareholders’ Equity (Deficit) For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S dollars, except number of share amounts) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2018 149,360,603 $ 62,834 $ 4,734 $ ( 6,293 ) $ 2,458 $ — $ 63,733 Shares issued 15,677,143 115,510 — — — — 115,510 Share issuance costs — ( 7,577 ) — — — — ( 7,577 ) Vesting of options — — 8,151 — — — 8,151 Options exercised 567,940 671 ( 220 ) ( 16 ) — — 435 Warrants exercised 13,114,336 3,563 ( 1,402 ) — — — 2,161 Contribution by non-controlling interests — — — — — 287 287 Net income (loss) — — — ( 21,636 ) — ( 181 ) ( 21,817 ) Other comprehensive income (loss) — — — — ( 12,328 ) ( 6 ) ( 12,334 ) Balance as of December 31, 2018 178,720,022 $ 175,001 $ 11,263 $ ( 27,945 ) $ ( 9,870 ) $ 100 $ 148,549 Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2019 178,720,022 $ 175,001 $ 11,263 $ ( 27,945 ) $ ( 9,870 ) $ 100 $ 148,549 Shares issued 155,773,757 304,411 410 — — — 304,821 Share issuance costs — ( 3,722 ) — — — — ( 3,722 ) Warrants exercised 7,390,961 2,034 ( 596 ) — — — 1,438 Vesting of options — — 11,619 — — — 11,619 Options exercised 190,349 368 ( 351 ) ( 915 ) — — ( 898 ) Vesting of restricted share units — — 889 — — — 889 Top-up Rights exercised 6,742,383 83,073 — — — — 83,073 Net income (loss) — — — 1,166,506 — ( 932 ) 1,165,574 Other comprehensive income (loss) — — — — 37,708 ( 21 ) 37,687 Balance as of December 31, 2019 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 74 Cronos Group Inc. Consolidated Statements of Changes in Shareholders’ Equity (Deficit) For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S dollars, except number of share amounts) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2020 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 Warrants exercised 9,755,642 1,244 ( 1,137 ) — — — 107 Vesting of options — — 7,185 — — — 7,185 Options exercised 1,266,130 1,586 ( 1,577 ) — — — 9 Restricted share units settled 414,088 — — — — — Vesting of restricted share units — — 8,176 — — — 8,176 Taxes withheld on vesting of restricted share units — — ( 2,148 ) — — — ( 2,148 ) Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 863 — — — 2,863 Top-up Rights exercised — 3,265 — — — — 3,265 Net income (loss) — — — ( 73,137 ) — ( 2,133 ) ( 75,270 ) Other comprehensive income (loss) — — — — 15,161 ( 210 ) 14,951 Balance as of December 31, 2020 360,253,332 $ 569,260 $ 34,596 $ 1,064,509 $ 42,999 $ ( 3,196 ) $ 1,708,168 See notes to consolidated financial statements. 75 Cronos Group Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S dollars) Table of Contents Year ended December 31, 2020 2019 2018 Operating activities Net (loss) income $ ( 75,270 ) $ 1,165,574 $ ( 21,817 ) Items not affecting cash: Gain on revaluation of derivative liabilities (i) ( 129,254 ) ( 1,276,819 ) — Impairment on goodwill and intangible assets 40,000 — — Inventory write-down 26,055 29,173 — Provisions for inventory and doubtful accounts 3,741 136 — Share-based payments 15,361 11,619 8,151 Depreciation and amortization 7,045 3,913 1,937 Share of loss from investments in equity accounted investees 4,510 2,009 723 Gain on disposal of other investments ( 4,789 ) ( 16,277 ) ( 164 ) Non-cash sales and marketing 2,863 410 — Income tax expense 1,347 — — Non-cash repurposing costs — 4,439 — Other non-cash operating activity expense (income) ( 123 ) ( 243 ) ( 9 ) Net changes in non-cash working capital ( 33,943 ) ( 54,208 ) 3,662 Net cash provided by (used in) operating activities ( 142,457 ) ( 130,274 ) ( 7,517 ) Investing activities Proceeds from (purchase of) short-term investments, net 95,404 ( 299,923 ) — Investments in equity accounted investees — ( 1,658 ) ( 480 ) Proceeds from sale of other investments 4,789 19,614 747 Advances to joint ventures — ( 15,135 ) ( 5,358 ) Purchase of property, plant and equipment, net of disposals ( 31,412 ) ( 38,664 ) ( 88,308 ) Purchase of intangible assets ( 3,979 ) ( 289 ) ( 278 ) Acquisition of Redwood — ( 224,295 ) — Advances on loans receivable ( 44,652 ) ( 43,337 ) — Other non-cash investing activity expense (income) — 415 ( 231 ) Net cash provided by (used in) investing activities 20,150 ( 603,272 ) ( 93,908 ) Financing activities Advance to non-controlling interests ( 1,019 ) — — Repayment of lease obligations ( 2,414 ) ( 919 ) — Withholding taxes paid on equity awards ( 2,148 ) ( 915 ) ( 16 ) Proceeds from Altria Investment — 1,809,556 — Proceeds from exercise of Top-up Rights — 67,051 — Proceeds from exercise of warrants and options 116 1,455 2,612 Proceeds from share issuance — — 115,510 Share issuance costs — ( 3,722 ) ( 7,577 ) Proceeds from construction loan payable — — 11,583 Repayment of construction loan payable — ( 15,971 ) — Advance under Credit Facility — 48,715 — Repayment of Credit Facility — ( 48,309 ) — Net cash provided by (used in) financing activities ( 5,465 ) 1,856,941 122,112 Effect of foreign currency translation on cash and cash equivalents 6,102 52,371 ( 4,085 ) Increase in cash and cash equivalents ( 121,670 ) 1,175,766 16,602 Cash and cash equivalents, beginning of period 1,199,693 23,927 7,325 Cash and cash equivalents, end of period $ 1,078,023 $ 1,199,693 $ 23,927 (i) Refer to Note 14 in the notes to the consolidated financial statements See notes to consolidated financial statements. 76 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 1. Background Cronos Group Inc. (“Cronos Group” or the “Company”) is incorporated in the Province of British Columbia and under the British Columbia Business Corporations Act with principal executive offices at 111 Peter St. Street, Suite 300, Toronto, Ontario, M5V 2H1. 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 seeking to build 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. 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 (a) Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting periods. The accounting policies adopted in the preparation of the consolidated financial statements were effective as of January 1, 2020. (b) Segment structure The Company undertook a realignment of its management structure along geographic regions in September 2019. As a result, effective September 2019, the Company’s results are reported through the following operating segments: United States and Rest of World. Prior period amounts contained in these consolidated financial statements have been adjusted to conform to the new segment presentation. Refer to Note 29 for additional information. (c) Basis of consolidation The accompanying consolidated financial statements include the accounts of the Company, and all entities in which the Company has a controlling voting interest or is the primary beneficiary of a variable interest as of and for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Investments in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, but does not have control, are accounted for under the equity method of accounting. 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 as described herein. 77 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents In the 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 consolidated balance sheets and consolidated statements of shareholders’ equity (deficit). All intercompany transactions and balances are eliminated upon consolidation. (d) Use of estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates and assumptions include, among other things, valuation of derivative liabilities, fair value of assets and liabilities assumed in business combinations, impairment of goodwill, inventory write-downs, valuation allowance on deferred income tax assets and uncertain tax liabilities. Actual results could differ from those estimates. (e) Revenue recognition The Company’s contracts with customers for the sale of dried cannabis, cannabis oil, cannabinoid-derived products and U.S. hemp-derived personal care products consist of one performance obligation. The Company has concluded that revenue from the sale of these products should be recognized at the point in time when control is transferred to the customer, which is on shipment or delivery, depending on the contract. Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. Net revenue before excise taxes from sale of goods, as presented in the consolidated statements of net income (loss) and comprehensive income (loss), represents revenue from the sale of goods less expected price discounts, and allowances for customer returns. Net revenue before excise taxes excludes excise taxes, which the Company pays as principal and excludes duties and taxes collected on behalf of third parties. Excise taxes are a production tax classified as government remittances payable, which when applicable, become payable when a product is delivered to the customer and are not directly related to the value of revenue. The Company treats shipping and handling activities as a fulfillment cost, classified as cost of sales. Accordingly, the Company accrues all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. Within the Company's Rest of World segment, dried cannabis sales outside of Canada may include profit sharing arrangements with distributors which give rise to variable consideration. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated as the most likely amount, based on the Company’s historical information, at contract inception. The Company’s payment terms vary by customer and product type. For individual consumer sales, payment is due prior to the transfer of control. The Company elected to treat the costs incurred to obtain a contract, primarily related to sales commissions, as an expense in the period incurred and not an asset to be capitalized, as the amortization period of the related asset would be less than one year. Accordingly, the Company will expense the costs to obtain a contract in the period incurred. (f) Investments Variable interest entities ( “ VIE ” ) A VIE is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or equity investors at risk that lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. The Company evaluates whether it is the primary beneficiary of each VIE it identifies on an ongoing basis and considers the impact of any reconsideration events. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To make this determination the Company considers both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company consolidates the VIE when it is determined that it is the primary beneficiary of the VIE. Equity method investments The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling financial interest, using the equity method. Under the equity method, the Company records its proportionate share of income or losses in the consolidated statements of net income (loss) and comprehensive income (loss). If the current fair value of an investment falls below its carrying amount, this may indicate that an impairment loss should be recorded. Any impairment losses recognized cannot be reversed in subsequent periods. 78 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (g) Inventory Inventory is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants, by-products to be extracted, oils, gel caps, tinctures, and boxes. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and irrigation, are capitalized into inventory until the time of harvest. Inventory is stated at the lower of cost and net realizable value, determined using weighted average cost. Cost includes expenditures directly related to manufacturing and distribution of the products. Primary costs include consumables (insect control, fertilizers, soil), packaging, shipping, direct labor, overhead, supplies and small tools, and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, rent, utilities, security, and property taxes. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost and net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable products. During the year ended December 31, 2020, we incurred significant inventory write-downs driven by pricing pressures in the marketplace and will continue assessing pricing pressures on the value of inventory at the end of each reporting period. See Note 5. (h) Definite life intangible assets Intangible assets 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 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”) software 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. (i) Property, plant & equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Rate Building 15 to 25 years Furniture and equipment 5 to 7 years Computer equipment 5 years Leasehold improvements Lesser of term of lease and useful life Equipment under finance lease Lesser of term of lease and useful life 79 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents When assets are disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which increase productivity or extend the useful life of the asset, are capitalized. Interest incurred relating to construction or expansion of buildings is capitalized to construction in progress. The Company ceases the capitalization of interest when construction activities are substantially completed and the facility is available for use. At this point, construction in progress is transferred to the appropriate asset class. Available for use is defined as the point at which the related building receives the requisite regulatory licenses to (i) possess cannabis, (ii) obtain dried cannabis, fresh cannabis, cannabis plants or cannabis plant seeds by cultivating, propagating and harvesting cannabis, and (iii) produce cannabis, other than obtaining it by cultivating, propagating, or harvesting. Depreciation commences at the point the assets are available for use. (j) Leases The Company enters into leases in the normal course of business, primarily for the land-use rights, office premises, and equipment used in the production of its products. At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company performs an analysis over the classification of the lease agreement as either an operating lease or finance lease. A right-of-use asset and the related lease obligation associated with the lease are recorded at the inception of the lease. The right-of-use asset’s recorded amount is based on the present value of future lease payments over the lease term at the commencement date plus any initial direct costs incurred. If the rate implicit in the lease is not readily determinable for the Company’s operating leases, an incremental borrowing rate is generally used based on information available at the lease commencement date to determine the present value of future lease payments. Subsequent changes to these lease payments due to rate updates are recorded as lease expense in the period incurred. Leases with a term of 12 months or less are not recorded on the balance sheet as a lease. The right-of-use asset is subject to impairment testing whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The leased asset is amortized over the shorter of the lease term or its estimated useful life if title does not transfer to the Company, while the leased asset is depreciated in accordance with the Company’s depreciation policy if the title is to eventually transfer to the Company. The Company’s lease agreements generally exclude non-lease components. As a result, non-lease components are accounted for separately for all classes of assets and expensed as incurred. In addition, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For finance leases, from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term, the right-of-use asset is amortized on a straight-line basis and the interest expense is recognized on the lease liability using the effective interest method. For operating leases, lease expense is recognized on a straight-line basis over the term of the lease and presented as a single charge in the consolidated statements of net income (loss) and comprehensive income (loss). (k) Impairment of long-lived assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company groups assets at the lowest level for which cash flows are separately identifiable, referred to as an asset group. The Company prepares projected undiscounted cash flow analyses for each asset or asset group. If the sum of the undiscounted cash flow is less than the carrying value of the asset or asset group, an impairment loss is recognized equal to the excess of the carrying value over the fair value, if any. Impairment losses on assets held for sale are based on the fair value, less costs to sell. Goodwill and indefinite life intangible assets are not amortized. 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. 80 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (l) Repurposing charges The Company’s repurposing charges primarily include employee termination benefits and refurbishment costs. The recognition of repurposing charges requires the Company make certain judgments and estimates regarding the nature, timing, and amount of costs associated with the planned activity. To the extent actual results differ from estimates and assumptions, a revision to the estimated liabilities, requiring the recognition of additional repurposing charges or the reduction of liabilities already recognized may be required. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure these balances are properly stated and the utilization of the reserves are for their intended purpose in accordance with planned activity. (m) Capital stock Capital stock is presented at the fair value at the time of issuance of the shares issued. Costs related to the issuance of shares are reported in equity, net of tax, as a deduction from the issuance proceeds. (n) Foreign currency The Company’s functional currency is the Canadian dollar (“C$”). Prior to the year ended December 31, 2019, the Company reported its financial results in C$, however following the change in the Company’s status from foreign private issuer to a United States (“U.S.”) domestic issuer, the financial results are now reported in U.S dollars (“dollars” or “$”). Functional currencies for the entities in these consolidated financial statements are their respective local currencies, including C$, Australian dollars (“A$”) and Israeli New Shekel (“ILS”). The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2020 and 2019. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and the consolidated statements of cash flows of the Company’s foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period. The cumulative translation adjustments (“CTA”) resulting from translating the consolidated financial statements into their dollar reporting currency are recorded in other comprehensive income (loss). Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency by applying the foreign exchange rate in effect at the balance sheet date. Revenues and expenses are translated using the average foreign exchange rate for the reporting period. Realized and unrealized foreign currency differences are recognized in the consolidated statements of net income (loss) and comprehensive income (loss). Transactions in foreign currencies are translated into the functional currency using the exchange rate prevailing at the date of the transaction and are recorded in other comprehensive income. Exchange differences arising from operating transactions are recorded in net income for the period. (o) Income taxes The Company uses the liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includes the enactment date. The Company determines deferred tax assets including net operating losses and liabilities, based on temporary differences between the book and tax bases of assets and liabilities. A valuation allowance is established to reduce some or all net deferred tax assets to amounts that are more likely than not to be realized. The Company considers all available evidence, both positive and negative including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies, in assessing the need for a valuation allowance. The Company has a full valuation allowance against its net deferred tax assets, and has concluded, based on the weight of all available evidence, that it is more likely than not that the net deferred tax assets will not be realized, primarily due to the historical net operating losses. The valuation allowance against the net deferred tax assets does not in any way impact the Company’s ability to use future tax deductions such as the Company’s net operating loss carryforwards; rather, the valuation allowance indicates, according to the provisions of Accounting Standards Codification 740, Income Taxes, it is more likely than not that the deferred tax assets will not be realized. The valuation allowance that was established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets will be realized. The Company’s income tax expense for future periods will be reduced to the extent of corresponding decreases in our valuation allowance. There is uncertainty regarding any future realization of the benefit by the Company of all or part of our net deferred tax assets. 81 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The Company uses a two-step approach for evaluating uncertain tax positions. Step one, recognition, requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. If a tax position is not considered “more likely than not” to be sustained, no benefits of the position are recognized. If we determine that a position is “more likely than not” to be sustained, then we proceed to step two, measurement, which is based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with income tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, our net operating loss and credit carryforwards could be materially impacted in the period which such determination is made. The Company recognizes uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense in the consolidated statements of net income (loss) and comprehensive income (loss). Accrued interest and penalties are included in accounts payable and other liabilities in the consolidated balance sheets. (p) Share-based compensation As described in more detail below, the Company has five share-based compensation plans under which awards have been made: the 2020 Omnibus Plan (as defined below), the 2018 Stock Option Plan (as defined below), the 2015 Stock Option Plan (as defined below), the Employment Inducement Award Plan #1 (the “Employment Inducement Award Plan”) and a cash-settled deferred share unit (“DSU”) plan for non-executive directors. Share-based compensation consists of equity-settled share-based awards such as stock options and restricted share units (“RSUs”) that are issued to eligible employees, non-executive directors, and non-employees. Cash-settled deferred share units (“DSUs”) that are issued to non-executive directors are recorded in accounts payable and other liabilities with the fair value adjustment recorded in other income (loss). Equity instruments granted are initially measured at fair value on the grant date. The fair value of the stock options are determined using the Black-Scholes option pricing model. The fair value of RSUs and DSUs are determined using the market price. This is recognized on a straight-line basis in the consolidated statements of net income (loss) and comprehensive income (loss) over the vesting period for employees, and over the contractual term for non-employees. The fair value of the payout of cash-settled DSUs 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 related costs for all equity-settled share-based awards are reflected in additional paid-in capital until the awards are exercised. Upon exercise, shares are issued and the amount previously reflected in the additional paid-in capital is, along with any proceeds paid upon exercise, credited to share capital. Forfeitures are estimated at the time of grant, and the Company revises these estimates in subsequent periods if there is a difference in actual forfeitures and the estimates. (q) Net earnings (loss) per share The Company presents basic and diluted net earnings (loss) per share data for its common shares. Basic net earnings (loss) per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potentially dilutive common shares that are issuable upon exercise of warrants, stock options and the Altria Warrant (as defined below) as well as the vesting of RSUs outstanding. (r) Cash and cash equivalents and short-term investments Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less. Cash and cash equivalents include amounts held in dollars, C$ and ILS and security deposits. 82 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Short-term investments consist of debt securities that (i) have original maturities of greater than three months and (ii) the Company has the ability to convert into cash within one year. Short-term investments are classified as held-to-maturity. Our investments classified as held-to-maturity are recorded at cost. Interest earned on short-term investments is recorded in other receivables on the consolidated balance sheet and interest income on the consolidated statement of comprehensive income (loss). Cash inflows and outflows related to the purchase and maturity of short-term investments are classified as investing activities in the Company’s consolidated statements of cash flows. (s) Derivative liabilities For financial instruments that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of net income (loss) and comprehensive income (loss) each period. The Company does not enter into or hold derivative financial instruments for trading or speculative purposes. Derivative liabilities are initially recognized at fair value at the date on which the derivative contract was entered into. Any attributable transaction costs are recognized in net income (loss) as incurred. Subsequent to initial recognition, derivative liabilities are measured at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in comprehensive income. For more details on derivative liabilities consisting of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights, see Note 14. (t) Fair value measurements The carrying value of the Company’s cash and cash equivalents, accounts receivable, other receivables, loan receivable, account payables and other liabilities and holdbacks payable approximate fair value, given their short-term nature. Cronos Group uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities, noted as Level 1 measurements, and the lowest priority to unobservable inputs, noted as Level 3 measurements. The following are the three levels of inputs used to measure fair value: • Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets and liabilities. • Level 2 – valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3 – valuation techniques using the inputs for the asset or liability that are not based on observable market data. The Company’s policy for determining when transfers between levels of the fair value hierarchy occur is based on the date of the event or changes in circumstances that caused the transfer. (u) Acquisitions The accounting basis for each acquisition is dependent on whether the integrated set of assets and activities acquired constitutes a business. A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The cost of acquisition is allocated to the assets acquired on a relative fair value basis. No goodwill is recognized in an asset acquisition. If it is determined that a business is not acquired, the transaction is accounted for as an asset acquisition and the relevant values are finalized prior to the next reporting period. On the other hand, when a business is acquired, the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805 is applied, which requires that once control of the business is obtained, the assets and liabilities of the acquired business, including amounts attributable to non-controlling interests, be recorded at their respective fair values as of the date of acquisition. Any excess of purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions, including fees for accounting, legal, professional consulting and valuation specialists, are expensed as incurred. Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined. For business combinations achieved in stages, the Company’s previously held interest in the acquiree is remeasured at its subsequent acquisition date fair value, with the resulting gain or loss recorded in the consolidated statements of net income (loss) and comprehensive income (loss). For a pre-existing relationship between the Company and acquiree that is not extinguished on the business combination, such a relationship is considered effectively settled as part of the business combination even if it is not legally cancelled. At the acquisition date, it becomes an intercompany relationship and is eliminated upon consolidation. 83 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Contingent consideration in a business combination is initially measured at fair value. Subsequently all liability classified as contingent consideration is remeasured at fair value at each reporting period until the contingency is resolved and any change in the fair value following the date of acquisition is recorded in the consolidated statements of net income (loss) and comprehensive income (loss). All equity classified as contingent consideration is not remeasured and its subsequent settlement is accounted for within equity. (v) Assets held for sale and discontinued operations In accordance with 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 year ended December 31, 2020, OGBC, formerly included within the Rest of World segment, 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 periods presented in this Annual 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 30. 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 ASU No. 2018-13 did not have a material impact on the Company’s 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 ASU No. 2018-15 did not have a material impact on the Company’s 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 ASU No. 2017-04 was applied prospectively and the Company follows a one-step model for goodwill impairment. (b) New accounting pronouncements not yet adopted 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 has evaluated the impact of ASU No. 2019-12 and the adoption will not have a material impact on the Company’s consolidated financial statements. 84 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents In January 2020, the Financial Accounting Standards Board 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. The Company has evaluated the impact of ASU No. 2020-01 and does not expect the adoption to have a material impact to the Company’s 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 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU No. 2020-06 on its consolidated financial statements and related disclosures. 4. Revenues from Contracts with Customers Cronos Group disaggregates net revenues based on product type. For further discussion, see Note 29. Receivables were $ 8,928 at December 31, 2020 (December 31, 2019 – $ 4,638 ). The Company recorded a current expected credit loss allowance of $ 74 as of December 31, 2020 (December 31, 2019 – $ 136 ). Cronos Group 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. Cronos Group records an allowance for cash discounts, which is included as a contra-asset against receivables on the Company’s 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 included 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 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 is immaterial. 5. Inventory Inventory is comprised of the following items: As of December 31, 2020 2019 Raw materials $ 11,489 $ 2,469 Work-in-progress – dry cannabis 20,520 11,538 Work-in-progress – cannabis extracts 5,758 17,975 Finished goods – dry cannabis 4,894 1,798 Finished goods – cannabis extracts 1,011 2,624 Supplies and consumables 330 1,639 Total $ 44,002 $ 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 year ended December 31, 2020, the Company recorded write-downs related to inventory of $ 26,055 (December 31, 2019 – $ 29,173 , December 31, 2018 - $ nil ) driven by pricing pressures in the Canadian marketplace. As of December 31, 2020, an inventory reserve of $ 1,229 was recorded (December 31, 2019 – $ nil ) in cost of sales. 85 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 6. Investments 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. 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. Natuera is a joint venture registered in Luxembourg with the objective of cultivating and commercializing medical cannabis 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. 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 $ 2,574 ) 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 8 for further information regarding loans receivable . 86 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (a) Equity Method Investments A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows: Ownership interest Carrying Amount December 31, 2020 December 31, 2019 Cronos Australia (i) 31 % $ — $ ( 346 ) Cronos GrowCo (ii) 50 % 19,235 1,501 Natuera 50 % — ( 598 ) $ 19,235 $ 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 ($ 37,010 ), 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 as of and for the years ended December 31: 2020 2019 2018 Whistler Medicinal Marijuana Company (“Whistler”) (i) $ — $ 29 $ 178 Cronos Australia ( 363 ) ( 1,101 ) ( 588 ) Cronos GrowCo ( 1,537 ) ( 167 ) ( 100 ) MedMen Canada — 35 ( 213 ) Natuera (ii) ( 2,610 ) ( 805 ) — $ ( 4,510 ) $ ( 2,009 ) $ ( 723 ) (i) Whistler was incorporated in British Columbia, Canada and is a license holder under the Cannabis Act (Canada) with production facilities in British Columbia, Canada. The Company fully divested its investment in Whistler during 2019. See Note 7. (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 8. The following is a summary of financial information for the Company’s equity method investments as of and for the year ended December 31: 2020 2019 2018 Current assets $ 19,126 $ 23,200 $ 7,121 Non-current assets 122,099 76,212 27,129 Current liabilities 24,223 52,796 3,746 Non-current liabilities 76,313 33,189 13,201 Revenue 367 52 5,344 Gross profit ( 631 ) — — Net loss ( 11,453 ) ( 2,048 ) ( 874 ) 87 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (b) Advances to Joint Ventures 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 — — 37 — 37 Advances to joint ventures recovered from (applied to) carrying amount of investments — — ( 38 ) — ( 38 ) Effect from foreign exchange ( 4 ) ( 461 ) 1 — ( 464 ) As of December 31, 2020 $ 467 $ — $ — $ — $ 467 MedMen Canada (i) Cronos GrowCo (ii) Cronos Australia (iii) Natuera Total As of January 1, 2019 $ 1,244 $ 2,970 $ 475 $ — $ 4,689 Advances (repayments) ( 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 footnote (ii) to the first table set forth under Note 6(a). (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. The Company determined that the maximum exposure to loss on variable interest entities is limited to the Company’s initial investment, advances and/or loans for each variable interest entity. The following is a summary of the maximum exposure to loss for the year ended December 31, 2020 and 2019: Ownership interest Other Net Assets (Liabilities) Maximum Exposure to Loss Cronos Australia 31 % $ 8,976 $ 1,530 Cronos GrowCo 50 % 109,329 21,125 MedMen Canada 50 % — 467 Natuera 50 % ( 6,849 ) 8,154 Balance as of December 31, 2020 $ 111,456 $ 31,276 Ownership interest Other Net Assets (Liabilities) Maximum Exposure to Loss Cronos Australia 31 % $ 10,900 $ 1,355 Cronos GrowCo 50 % 3,091 20,700 MedMen Canada 50 % ( 199 ) 642 Natuera 50 % ( 358 ) 4,888 Balance as of December 31, 2019 $ 13,434 $ 27,585 88 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 7. Other Investments Other investments consist of investments in common shares and warrants of several companies in the cannabis industry. As of December 31, 2020 and December 31, 2019, the Company did not hold any other investments. The gains and losses on sale of other investments are classified as fair value through net income (loss). The gains (losses) recognized in net income (loss) related to other investments were as follows: Year ended December 31, 2020 2019 2018 Gain recognized in net income (loss) Canopy Growth Corporation (“Canopy”) (i) $ — $ 51 $ 166 Vivo Cannabis (“Vivo”) - shares (ii) — — ( 173 ) Vivo Cannabis - share warrants (ii) — — 171 Whistler (iii) — 15,530 — Aurora Cannabis Inc. (“Aurora”) (iv) 4,789 696 — $ 4,789 $ 16,277 $ 164 (i) During the year ended December 31, 2019, the Company sold all remaining 11,062 common shares of Canopy (2018 – 18,436 common shares) for net proceeds of $ 355 (2018 – $ 530 ) recorded as a gain on disposal of other investments in other income (expense). Upon adoption of ASU 2016-01 during the year ended December 31, 2018, the gains and losses on the Canopy investment were reclassified from fair value through other comprehensive income to fair value through net income. (ii) During the year ended December 31, 2018, the Company exercised 182,927 share warrants for aggregate consideration of $ 87 for additional shares of Vivo. During the year ended December 31, 2018, the Company then sold all 182,927 shares of Vivo for proceeds of $ 216 . Upon adoption of ASU 2016-01 during the year ended December 31, 2018, the gains and losses on the Vivo Cannabis shares investment were reclassified from fair value through other comprehensive income to fair value through net income. (iii) 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 year ended December 31, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $ 19,259 . A gain on disposal of other investments was recorded in other income (expense) as a result. (iv) For the year ended December 31, 2020, in connection with the achievement of certain milestones related to the Whistler Transaction, the Company received 980,662 common shares of Aurora. During the year ended December 31, 2020, the Company sold all 980,662 of the Aurora common shares, for gross proceeds of approximately $ 4,789 (C$ 6,404 ), recorded as a gain on disposal of other investments in other income (expense). 89 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 8. Loans Receivable As of December 31, 2020 December 31, 2019 Current portion Natuera Series A Loan (i) $ 3,518 $ 4,575 GrowCo Credit Facility (ii) 3,137 — Add: Accrued interest 428 89 Total current portion of loans receivable 7,083 4,664 Long term portion GrowCo Credit Facility (ii) 69,939 31,678 Mucci Promissory Note (iii) 13,324 12,587 Cannasoul Collaboration loan (iv) 1,261 — Add: Accrued interest 2,667 702 Total long-term portion of loans receivable 87,191 44,967 Total loans receivable $ 94,274 $ 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 the Series A Loan 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 %. In December 2020, the Series A Loan was amended to extend its maturity date to September 1, 2021 from March 1, 2021. As of December 31, 2020, a current expected credit loss allowance of $ 685 was recorded against the Natuera Series A loan. A loss allowance of $ 3,024 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 (approximately $ 78,430 ) 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 not later than December 31, 2021. Repayment of principal will be made on a quarterly basis commencing on March 31, 2021. The GrowCo 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 December 31, 2020, Cronos GrowCo had drawn C$ 95,150 ($ 74,626 ) from the GrowCo Credit Facility. Subsequent to December 31, 2020, the terms of the GrowCo Credit Facility were amended, such that any interest accrued from April 1, 2021 to December 31, 2021 will be payable not later than December 31, 2022, and repayment of principal will be made on a quarterly basis commencing on March 31, 2022. As of December 31, 2020, a current expected credit loss allowance of $ 1,470 was recorded against the GrowCo Credit Facility. (iii) On June 28, 2019, the Company entered into a promissory note receivable agreement (the “Mucci Promissory Note”) for C$ 16,350 (approximately $ 12,823 ) 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. Subsequent to December 31, 2020, the terms of the Mucci Promissory Note were amended, such that interest accrued under the Mucci Promissory Note until July 1, 2022, is payable by way of capitalization on the principal amount and interest thereafter must be paid in cash on a quarterly basis. As of December 31, 2020, a current expected credit loss allowance of $ 259 has been recorded against the Mucci Promissory Note. (iv) On April 1, 2020, Cronos Israel entered into the Cannasoul Collaboration. Cronos Israel has agreed to advance approximately ILS 8,297 (approximately $ 2,574 ) 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. For the year ended December 31, 2020, CLS has received ILS $ 4,148 (approximately $ 1,287 ). As of December 31, 2020, a current expected credit loss allowance of $ 25 has been recorded against the Cannasoul Collaboration loan. 90 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 9. Loans Payable As of December 31, 2020, the Company did not have any loans payable. On January 23, 2019, the Company entered into a credit agreement with the Canadian Imperial Bank of Commerce, as administrative agent and lender, and the Bank of Montreal, as lender, in respect of a C$ 65,000 ($ 48,715 ) secured non-revolving term loan credit facility (the “Credit Facility”). The loan was guaranteed by the Company’s wholly owned Canadian subsidiaries and secured by substantially all present and after-acquired property of the Company and its wholly owned Canadian subsidiaries. The Company used the funds available under the Credit Facility to fully repay the construction loan payable, consisting of C$ 21,311 ($ 15,971 ) in loan principal and C$ 275 ($ 206 ) in accrued interest and fees, calculated for the period from January 1, 2019 to January 22, 2019. On March 8, 2019, the Credit Facility was fully repaid. In connection with the Credit Facility, the Company incurred financing costs of C$ 523 ($ 395 ) which were expensed upon repayment of the Credit Facility. 10. Property, Plant and Equipment Property, plant and equipment, net consisted of the following: As of December 31, 2020 2019 Cost Land $ 3,197 $ 3,071 Building 158,586 149,690 Furniture and equipment 18,824 10,079 Computer equipment 710 526 Leasehold improvements 3,740 1,758 Construction in progress 20,837 3,569 Less: accumulated depreciation and amortization ( 18,295 ) ( 8,745 ) Balance as of December 31 $ 187,599 $ 159,948 Depreciation expense included in costs of sales relating to manufacturing equipment and production facilities for the year ended December 31, 2020 was $ 3,447 (December 31, 2019 – $ 1,812 ; 2018 – $ 374 ). Depreciation expense included in operating expenses related to general office space and equipment for the year ended December 31, 2020 was $ 2,058 (December 31, 2019 – $ 1,444 ; 2018 – $ 261 ). The remaining depreciation is included in inventory. For the year ended December 31, 2020, there was no capitalized interest included in construction in progress (2019 – $ nil ; 2018 –$ 89 ). 11. 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. Significant inputs include discount rate, growth rates, and cash flow projections. 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 recorded $ 35,000 of impairment charges on the U.S. reporting unit and $ 5,000 of impairment charges on the Lord Jones™ brand during year ended December 31, 2020. Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (a) Intangible assets Intangible assets are comprised of the following items: Weighted average amortization period (in years) As of December 31, 2020 Cost Accumulated amortization Impairment charges Net Software 5 $ 610 $ ( 291 ) $ — $ 319 ERP system 5 3,955 ( 274 ) — 3,681 Health Canada licenses 17 7,526 ( 1,254 ) — 6,272 Lord Jones TM brand N/A 64,000 — ( 5,000 ) 59,000 Trademarks N/A 148 — — 148 Israeli codes (i) 25 322 ( 22 ) — 300 $ 76,561 $ ( 1,841 ) $ ( 5,000 ) $ 69,720 (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 TM 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 was $ 814 for the year ended December 31, 2020 (December 31, 2019 – $ 646 ; 2018 – $ 546 ). Intangible asset additions in 2020 primarily relate to the implementation of a new ERP system. Intangible asset additions in the year ended December 31, 2019 included the Lord Jones™ brand for $ 64 million. There were no material disposals of intangible assets in 2020 or 2019. The amortization expense for the next five years on intangible assets in use is estimated to be as follows: 2021 – $ 1,047 ; 2022 – $ 998 ; 2023: $ 964 ; 2024 – $ 952 ; 2025 – $ 664 . (b) Goodwill As of December 31, 2019 Additions Impairment charges Effect of foreign exchange As of December 31, 2020 Peace Naturals $ 1,078 $ — $ — $ 30 $ 1,108 Redwood 213,414 — ( 35,000 ) — 178,414 $ 214,492 $ — $ ( 35,000 ) $ 30 $ 179,522 92 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 12. Leases The Company has entered into leases primarily for the land-use rights, office premises and equipment used in the production of cannabis, U.S. hemp 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 the option will be exercised, the impact of the 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. The Company’s finance leases were not material for any of the periods presented. As of December 31, 2020 2019 Lease cost Operating lease cost $ 2,479 $ 760 Short-term lease cost 60 373 Total lease cost $ 2,539 $ 1,133 Weighted-average remaining lease term – operating leases 6 5 Weighted-average discount rate – operating leases 8.86 % 12.00 % 13. General and Administrative Expenses General and administrative expense are comprised of the following items: Year ended December 31, 2020 2019 2018 Salaries and wages $ 26,742 $ 17,829 $ 4,240 Professional and consulting 15,135 15,369 5,242 Office and general 17,845 13,407 3,713 Review costs related to restatement of 2019 interim financial statements (i) 9,688 — — Current expected credit loss 2,512 136 — Other 8,607 2,530 154 Total $ 80,529 $ 49,271 $ 13,349 (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. 93 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 14. 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, refer to Note 15, issued to a wholly owned subsidiary of Altria and one warrant of the Company (the “Altria Warrant”), refer to Note 16(a), issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximate 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 80.1 million common shares as of December 31, 2020) at a per share exercise price of C$ 19.00 , which expires at 5:00 p.m. (Toronto time) on March 8, 2023. The number of common shares of the Company to which the holder is entitled, and the corresponding exercise price, is subject to adjustment in the event of a share dividend, share issuance, distribution, or share subdivision, split or other division, share consolidation, reverse-split or other aggregation, share reclassification, a capital reorganization, consolidation, amalgamation, arrangement, binding share exchange, merger or other combination, certain securities issuances, repurchases, redemptions or certain other actions that would result in a reduction in the number of common shares of the Company outstanding, in each case, executed by the Company. If and whenever there is a reclassification of the common shares or a capital reorganization of the Company, or a consolidation, amalgamation, arrangement, binding share exchange or merger of the Company, in each case executed by the Company and pursuant to which (i) in the event the consideration received by the Company’s shareholders is exclusively cash, the Company or the successor entity (as applicable) is required to purchase the Altria Warrant in cash equal to the amount by which the purchase price per share paid for the common shares acquired exceeds the exercise price of the Altria Warrant multiplied by the number of common shares that would have been issuable upon exercise of the Altria Warrant immediately prior to any such transaction, and (ii) in the event the consideration received by the Company’s shareholders is not exclusively cash, the Altria Warrant will remain outstanding in accordance with its terms until any subsequent exercise of the Altria Warrant, at which time the holder thereof will receive in lieu of each share that would have been issuable upon the exercise of the Altria Warrant immediately prior to any such transaction, the kind and amount of cash, the number of shares or other securities or property resulting from any such transaction that such holder would have been entitled to receive had such holder been the registered holder of such shares that would have been issuable upon the exercise of the Altria Warrant on the record date or effective date of the transaction (as applicable). 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 (the “Ginkgo Agreement”), refer to Note 20(b)), 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; provided that if the consideration paid in connection with any such issuance is non-cash, the price per common share of the Company that would have been received had such common shares been issued for cash consideration will be determined by an independent committee (acting reasonably and in good faith); provided further that 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 Agreement 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 %. 94 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 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 10 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 have been expensed as financing costs in 2019. Reconciliations of the carrying amounts of the derivative liability are presented below: As of January 1, 2020 Gain on revaluation Exercise of Rights Effect of FX As of December 31, 2020 (a) Altria Warrant $ 234,428 $ ( 95,045 ) $ — $ ( 525 ) $ 138,858 (b) Pre-emptive Rights 12,787 ( 885 ) — 193 12,095 (c) Top-up Rights 49,945 ( 33,324 ) ( 3,227 ) ( 937 ) 12,457 $ 297,160 $ ( 129,254 ) $ ( 3,227 ) $ ( 1,269 ) $ 163,410 As of March 8, 2019 Gain on revaluation Exercise of Rights Effect of FX As of December 31, 2019 (a) Altria Warrant $ 1,086,920 $ ( 869,630 ) $ — $ 17,138 $ 234,428 (b) Pre-emptive Rights 92,548 ( 81,070 ) — 1,309 12,787 (c) Top-up Rights 386,152 ( 326,119 ) ( 15,478 ) 5,390 49,945 $ 1,565,620 $ ( 1,276,819 ) $ ( 15,478 ) $ 23,837 $ 297,160 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 year ended December 31, 2020, the Company’s share price decreased from December 31, 2019 resulting in a gain on revaluation of $ 129,254 . 95 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of December 31, 2020 and December 31, 2019, applying the following inputs: As of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Share price at grant date (per share in C$) $ 8.84 $ 8.84 $ 8.84 Subscription price (per share in C$) $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (i) 0.21 % 0.17 % 0.13 % Weight average expected life (in years) (ii) 2.18 1.50 0.98 Expected annualized volatility (iii) 81 % 81 % 81 % Expected dividend yield 0 % 0 % 0 % As of December 31, 2019 Altria Warrant Pre-emptive Rights Top-up Rights Share price at grant date (per share in C$) $ 9.97 $ 9.97 $ 9.97 Subscription price (per share in C$) $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (i) 1.69 % 1.73 % 1.71 % Weight average expected life (in years) (ii) 3.18 1.25 1.66 Expected annualized volatility (iii) 82 % 82 % 82 % Expected dividend yield 0 % 0 % 0 % (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 0.10 % to 0.39 % as of December 31, 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 0.50 years to 5 years as of December 31, 2020 (December 31, 2019 – 0.25 years to 6 years). (iii) Volatility was based on the blended historical volatility levels of the Company and peer companies. The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. As of December 31, 2020, there would be an equal but opposite impact on net income (loss), refer to Note 15, and as of December 31, 2019, there would be an equal but opposite impact on share capital. Decrease as of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Share price at issuance date $ 25,819 $ 2,527 $ 2,989 Weighted average expected life 13,541 1,988 2,121 Expected annualized volatility 26,183 2,269 2,602 Decrease as of December 31, 2019 Altria Warrant Pre-emptive Rights Top-up Rights Share price at issuance date $ 36,436 $ 2,743 $ 9,577 Weighted average expected life 17,471 2,366 2,178 Expected annualized volatility 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 uncontrollable factors, which could significantly affect the fair value of these derivative liabilities in future periods. 96 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 15. Capital Stock The Company is authorized to issue an unlimited number of no par value common shares. The holders of the common shares are entitled to receive dividends, which may be declared from time to time, and are entitled to one vote per share at shareholder meetings of the Company. All common shares are ranked equally with regards to the Company’s residual net assets. The following is a summary of common shares issued, other than in connection with outstanding options and warrants (see Note 16): 2020 2019 2018 Altria Investment (i) — 149,831,154 — Redwood Acquisition (ii) — 5,086,586 — Private placement (iii) — 856,017 — Bought deal offering (iv) — — 15,677,143 — 155,773,757 15,677,143 (i) During the year ended December 31, 2019, the Company issued 149,831,154 common shares to Altria for aggregate gross proceeds of $ 1,809,556 , net of issuance costs of $ 3,722 . The gross proceeds were first allocated to the derivative liabilities issued in connection with the Altria Investment, and the residual of $ 248,302 was allocated to share capital. Pursuant to the Altria Investment, the Company incurred transaction costs of $ 25,223 , of which $ 3,642 was allocated to share capital and $ 21,581 to the derivative liabilities based on the relative fair values assigned to the respective components. Refer to Note 14 for additional information. (ii) During the year ended December 31, 2019, the Company issued 5,086,586 common shares with a fair value of $ 56,109 related to the acquisition (the “Redwood Acquisition”) of certain subsidiaries of Redwood Holding Group, LLC (collectively, “Redwood”). Refer to Note 27 for additional information. (iii) During the year ended December 31, 2019, the Company issued 856,017 common shares to Kristen Bell, an accredited investor in a private placement (“Private Placement”) in reliance on Section 4(a)(2) of the Securities Act in connection with the use of certain publicity rights in brand development. The common shares vest in three equal installments on each of (a) January 31, 2020, (b) June 23, 2021, and (c) 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 10 -day volume weighted average price per share of the Company’s common shares on Nasdaq. (iv) During the year ended December 31, 2018, the Company issued 15,677,143 common shares for aggregate gross proceeds of $ 115,510 through bought deal offerings, net of issuance costs of $ 7,577 . There were no share repurchases during the year ended December 31, 2020, 2019 or 2018. 16. Share-based Payments (a) Warrants The following is a summary of the changes in warrants during the year ended December 31, 2020 and December 31, 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 ( 10,079,313 ) Balance as of December 31, 2020 $ 0.25 7,987,349 Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2019 $ 0.26 25,457,623 Exercise of warrants 0.26 ( 7,390,961 ) Balance as of December 31, 2019 $ 0.26 18,066,662 For a description of the Altria Warrant, see Note 14. As of December 31, 2020, the Company had outstanding warrants as follows: Grant date Expiry date Weighted average exercise price (C$) Number of warrants May 13 – 27, 2016 May 13 – 27, 2021 $ 0.25 7,987,349 As of December 31, 2020 $ 0.25 7,987,349 97 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (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. 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. The 2018 Stock Option Plan terminated the Company’s ability to grant equity under 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. 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. The 2020 Omnibus Plan terminated the Company’s ability to grant equity awards under the 2018 Stock Option Plan and restricted stock units under the Employment Inducement Plan. Options represent the right to purchase Company common shares on the date of exercise at a stated exercise price. The exercise price of an option generally must be at least equal to the fair market value of the Company common shares on the date of grant. The Compensation Committee of the Board (“Compensation Committee”) may provide for options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being subject to the Company’s right of repurchase that lapses as the shares vest. Vesting conditions for grants of options are determined by the Compensation Committee. The typical vesting for stock option grants is quarterly vesting over three to five years . The maximum term of options granted under the 2020 Omnibus Plan is seven years . Participants under the 2020 Omnibus Plan are eligible to be granted options to purchase shares at an exercise price established upon approval of the grant by the Compensation Committee. When options are granted, the exercise price is, with respect to a particular date, the closing price as reported by the TSX or the Nasdaq and, if the shares are not traded on the TSX or the Nasdaq, any other stock exchange on which the Company’s common shares are traded (as selected by the Compensation Committee in good faith taking into account applicable legal and tax requirements) on the immediately preceding trading day (the “Fair Market Value”). The 2020 Omnibus Plan does not authorize grants of options with an exercise price below the Fair Market Value. The equity plans described above have the following stock options outstanding: Shares outstanding as of December 31, 2020 2019 2018 2020 Omnibus Plan 2,000,000 — — 2018 Stock Option Plan 1,627,715 1,817,287 285,000 2015 Stock Option Plan 10,127,433 12,332,215 12,617,995 Total stock options outstanding 13,755,148 14,149,502 12,902,995 For the year ended December 31, 2020, the total stock-based compensation expense associated with the equity plans was $ 7,185 (December 31, 2019 – $ 10,278 ; December 31, 2018 - $ 8,151 ). 98 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (ii) Summary of changes The following is a summary of the changes in options during the year ended December 31, 2020 and December 31, 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 2.03 ( 2,131,939 ) Cancellation, forfeiture and expiry of options 14.34 ( 262,415 ) Balance as of December 31, 2020 $ 5.40 13,755,148 2.30 Exercisable at December 31, 2020 $ 3.75 9,643,682 1.34 (i) The weighted average exercise price reflects the conversion of foreign currency-denominated options at the exchange rates as of December 31, 2020. For foreign currency-denominated options, the weighted average exercise prices are translated using exchange rates as of the settlement date. Weighted average exercise price (C$) Number of options Weighted average remaining contractual term (years) Balance as of January 1, 2019 $ 2.99 12,902,995 3.35 Issuance of options 20.08 1,534,162 Exercise of options 3.48 ( 282,572 ) Cancellation, forfeiture and expiry of options 2.27 ( 5,083 ) Balance as of December 31, 2019 $ 4.84 14,149,502 2.56 Exercisable at December 31, 2019 $ 2.93 9,034,714 2.27 (iii) Fair value of options issued The fair value of the options issued during the year was determined using the Black-Scholes option pricing model, using the following inputs: 2020 2019 Share price at grant date (per share) C$ 6.96 C$ 15.34 – $ 24.75 Exercise price (per option) (i) C$ 6.96 C$ 15.34 – $ 24.75 Risk-free interest rate 0.43 % 1.39 % – 1.62 % Expected life of options (in years) (ii) 5 5 Expected annualized volatility 91 % 82 % Expected dividend yield — — Weighted average Black-Scholes value at grant date (per option) C$ 4.84 C$ 13.03 Forfeiture rate — — (i) The weighted average exercise price reflects the conversion of foreign currency-denominated options at the exchange rates as of December 31, 2020. For foreign currency-denominated options, the weighted average exercise prices are translated using exchange rates as of the settlement date. (ii) The expected life of the awards represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees’ and non-employees’ historical exercise and, where relevant, post-vesting employment termination behavior. Volatility was estimated by using the historical volatility of the Company’s share price, adjusted for the Company’s expectation of volatility going forward. 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. The weighted average fair value per share at grant date of the options during the year ended December 31, 2020 was C$ 4.84 per share (December 31, 2019 – C$ 13.03 per share). (c) Restricted share units RSUs are granted under the 2020 Omnibus Plan. RSUs represent an equivalent amount of Company common shares on the date of issuance at fair value. Fair value is determined using the closing price of the trading day immediately preceding the date of grant. RSUs issued under the 2020 Omnibus Plan typically vest over a three-year period following the grant date, have no performance requirements and no forfeiture rate. 99 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents On July 20, 2020, the Company entered into separation agreements with Robert Rosenheck and another 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 year ended December 31, 2020. For the year ended December 31, 2020, the Company recorded $ 8,176 (December 31, 2019 – $ 889 ) in share-based compensation expense related to these RSUs. No RSUs were granted in 2018. The following is a summary of the changes in RSUs: Number of RSUs Weighted average grant date fair value (C$) Balance at January 1, 2020 732,972 $ 15.34 Granted 957,854 7.66 Exercised ( 732,972 ) 15.34 Cancellation and forfeitures ( 9,497 ) 7.52 Balance at December 31, 2020 948,357 $ 7.66 Number of RSUs Weighted average grant date fair value (C$) Balance at January 1, 2019 — $ — Granted 732,972 15.34 Balance at December 31, 2019 732,972 $ 15.34 (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 date 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. No DSUs were granted during 2018. The following is a summary of the changes in DSUs: Number of DSUs Financial liability Balance at January 1, 2020 33,397 $ 255 Granting and vesting of DSUs 58,380 338 Liabilities settled ( 8,484 ) ( 46 ) Loss (gain) on revaluation — 30 Balance at December 31, 2020 83,293 $ 577 Number of DSUs Financial liability Balance at January 1, 2019 — $ — Granting and vesting of DSUs 33,397 452 Loss (gain) on revaluation — ( 197 ) Balance at December 31, 2019 33,397 $ 255 100 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 17. Earnings (loss) Per Share Basic and diluted earnings (loss) per share from continuing operations are calculated using the following numerators and denominators: 2020 2019 2018 Basic earnings (loss) per share computation Income (loss) from continuing operations attributable to common shareholders of Cronos Group $ ( 72,487 ) $ 1,166,869 $ ( 20,742 ) Weighted average number of common shares outstanding 351,576,848 310,067,179 172,269,170 Basic earnings (loss) per share $ ( 0.21 ) $ 3.76 $ ( 0.12 ) Diluted earnings (loss) per share computation Income (loss) from continuing operations used in the computation of basic earnings (loss) per share $ ( 72,487 ) $ 1,166,869 $ ( 20,742 ) Adjustment for gain on revaluation of derivative liabilities — ( 24,416 ) — Income (loss) from continuing operations used in the computation of diluted income (loss) per share ( 72,487 ) 1,142,453 ( 20,742 ) Weighted average number of common shares outstanding used in the computation of basic earnings (loss) per share 351,576,848 310,067,179 172,269,170 Dilutive effect of warrants — 19,481,352 — Dilutive effect of stock options — 10,649,487 — Dilutive effect of restricted share units — 732,972 — Dilutive effect of Altria Warrant — — — Dilutive effect of Top-up Rights – exercised and exercisable fixed price — 1,881,002 — Weighted average number of common shares for computation of diluted income (loss) per share 351,576,848 342,811,992 172,269,170 Diluted earnings (loss) per share (i) $ ( 0.21 ) $ 3.33 $ ( 0.12 ) (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. Basic and diluted loss per share from discontinued operations are calculated using the following numerators and denominators: 2020 2019 2018 Basic loss from discontinued operations per share computation Loss from discontinued operations attributable to common shareholders of Cronos Group $ ( 650 ) $ ( 363 ) $ ( 894 ) Weighted average number of common shares outstanding 351,576,848 310,067,179 172,269,170 Basic loss from discontinued operations per share (i) $ 0.00 $ 0.00 $ ( 0.01 ) (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. 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. 2020 2019 2018 Ginkgo Equity Milestones 14,674,904 14,674,904 — Pre-emptive Rights 11,534,475 12,006,740 — Top-up Rights – fixed price 17,214,621 25,103,456 — Top-up Rights – market price 3,413,065 1,255,223 — Altria Warrant 80,056,296 77,514,993 — Warrants 15,147,116 — 25,457,623 Stock options 9,218,674 1,315,787 12,902,995 Restricted share units 79,611 — — Total anti-dilutive securities 151,338,762 131,871,103 38,360,618 101 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 18. Accumulated Other Comprehensive Income (Loss) The following is a continuity schedule of accumulated other comprehensive income (loss): 2020 2019 2018 Net unrealized gain (loss) on revaluation and disposal of other investments Balance at January 1 $ 5 $ 5 $ 446 Cumulative effect from adoption of ASU 2016-01 — — ( 444 ) Net unrealized (loss) gain — — 3 Balance at December 31 5 5 5 Net foreign exchange gain (loss) on translation of foreign operations Balance at January 1 27,833 ( 9,875 ) 2,456 Net unrealized (loss) gain 15,161 37,708 ( 12,331 ) Balance at December 31 42,994 27,833 ( 9,875 ) Total other comprehensive income (loss) $ 42,999 $ 27,838 $ ( 9,870 ) 19. Income Taxes For financial reporting purposes, income (loss) from continuing operations before income taxes includes the following components: Year ended December 31, 2020 2019 2018 Rest of World $ 12,679 $ 1,169,007 $ ( 20,923 ) United States ( 85,952 ) ( 3,070 ) — Total $ ( 73,273 ) $ 1,165,937 $ ( 20,923 ) The loss before income taxes above excludes losses from discontinued operations of $ 650 for the year ended December 31, 2020 (December 31, 2019 – $ 363 ; December 31, 2018 – $ 894 ). Income tax expense consists of the following components: Year ended December 31, 2020 2019 2018 Current: Rest of World $ 1,024 $ — $ — United States 323 — — Total $ 1,347 $ — $ — Deferred: Rest of world $ — $ — $ — United States — — — Total $ — $ — $ — Included in accounts payable and other liabilities as of December 31, 2020 is $ 865 (December 31, 2019 – $ nil ; December 31, 2018 – $ nil ) related to current income tax expense above. 102 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Income tax differs from that computed using the combined Canadian federal and provincial statutory income tax rate of 26.5 %. Reconciliation of the expected income tax to the effective tax rate in continuing operations is as follows: Year ended, 2020 2019 2018 Income (loss) before income taxes $ ( 73,273 ) $ 1,165,937 $ ( 20,923 ) Effective income tax rate 26.5 % 26.5 % 26.5 % Expected income tax expense (benefit) $ ( 19,417 ) $ 308,973 $ ( 5,545 ) Non-taxable income ( 711 ) ( 2,156 ) 14 Non-deductible share-based compensation 2,498 2,839 2,466 Non-deductible expenses 1,364 764 — Non-deductible transaction costs 3,146 1,523 — Effect of provincial tax rate difference ( 15 ) ( 44 ) ( 64 ) Effect of tax rates outside of Canada ( 362 ) 70 — Fair value gain on financial liabilities ( 34,250 ) ( 338,409 ) — Changes in valuation allowance 48,227 25,808 3,437 Other 867 632 ( 308 ) Income tax expense (recovery), net $ 1,347 $ — $ — The valuation allowance recorded against the loss on discontinued operations is not reflected in the effective tax rate reconciliation presented above for continuing operations. The following table summarizes the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and December 31, 2019: As of 2020 2019 Deferred assets: Tax loss carryforwards $ 67,476 $ 30,908 Interest expense carryforwards 1,407 — Deferred financing costs 4,233 5,690 Share issuance cost 1,573 2,217 Finance lease obligation 1,953 1,491 Plant and equipment 5,945 871 Investment 307 395 Intangible asset 4,218 — Reserve 1,858 — Other 570 482 Total deferred tax assets 89,540 42,054 Less valuation allowance ( 85,935 ) ( 36,948 ) Net deferred tax assets 3,605 5,106 Deferred tax liabilities: Inventory — ( 1,227 ) Plant and equipment — — Intangible assets — ( 2,126 ) Investment — — License ( 1,662 ) ( 293 ) Right-of-use assets ( 1,943 ) ( 1,460 ) Total deferred tax liabilities ( 3,605 ) ( 5,106 ) Net deferred tax liability $ — $ — 103 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents The realization of deferred tax assets is dependent on the Company’s generating sufficient taxable income in the years that the temporary differences become deductible. A valuation allowance has been provided for the deferred tax assets that the Company determined did not meet the more-likely-than-not recognition threshold under U.S. GAAP. As of December 31, 2020, the Company had net operating losses in Canada, the U.S., and Israel available to offset future years’ taxable income of approximately $ 177,651 , $ 62,851 , and $ 14,042 , respectively. As of December 31, 2019, the Company had net operating losses in Canada, the U.S., and Israel available to offset future years’ taxable income of approximately $ 92,773 , $ 14,374 , and $ 8,763 , respectively. The net operating losses in Canada will begin to expire, for purposes of carryforward, in fiscal year 2032. The net operating losses in the U.S. can be carried forward indefinitely for federal purposes. The net operating losses in Israel can be carried forward indefinitely. Utilization of the net operating loss carryforwards may be subject to limitations under the tax laws applicable in each tax jurisdiction due to ownership changes that could occur in the future. These ownership changes could limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax expense. Specifically, if Altria exercises its warrant the Company would recognize a change in control event and certain Canadian net operating loss carryforwards may be limited. Due to the existence of the valuation allowance, limitations created by ownership changes, if any, will not impact the Company’s effective tax rate. The Company files federal income tax returns in Canada, Israel and the U.S. The Company has open tax years with the taxation jurisdictions. These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations and tax treaties, as they relate to the amount, timing, or inclusion of revenue and expense. Jurisdiction Open Years Canada 2016 – 2020 United States 2018 – 2020 Israel 2019 – 2020 The following table outlines the movements in the valuation allowance: Balance at beginning of year Change due to foreign exchange Increase Balance at end of year Year ended December 31, 2020 $ ( 36,948 ) $ ( 693 ) $ ( 48,294 ) $ ( 85,935 ) Year ended December 31, 2019 ( 7,931 ) ( 998 ) ( 28,019 ) ( 36,948 ) As of December 31, 2020 and December 31, 2019, the Company recorded a valuation allowance of $ 85,935 and $ 36,948 , respectively. The valuation allowance increased by $ 48,294 and $ 28,019 during the years ended December 31, 2020 and December 31, 2019, respectively. The increase in the valuation allowance during the years ended December 31, 2020 and December 31, 2019 was primarily due to an increase in net operating loss carryforwards, the utilization of which did not meet the more-likely-than-not recognition threshold. Accounting guidance clarifies the accounting for uncertain tax positions and prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, the authoritative guidance addresses the de-recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. Only tax positions that meet the more-likely-than-not recognition threshold may be recognized. There were no identified unrecognized tax benefits as of December 31, 2020 or December 31, 2019. The Company considers all earnings and profits of its subsidiaries outside Canada to be indefinitely reinvested. As of December 31, 2020 and December 31, 2019, the amount of undistributed earnings upon which income taxes have not been provided is immaterial to these consolidated financial statements. 104 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 20. Commitments (a) Lease Commitments The following is a summary of the Company’s future minimum lease payments under operating leases for its premises due in future fiscal years: As of December 31, 2020 2021 $ 2,381 2022 2,302 2023 2,201 2024 1,711 2025 1,505 2026 and thereafter 1,916 In addition to the minimum lease payments, the Company is required to pay realty taxes and other occupancy costs in accordance with the terms of the lease agreements. (b) R&D commitments (i) Ginkgo. On September 4, 2018, the Company announced an R&D partnership with Ginkgo Bioworks Inc. (“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 is 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. (c) 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. See Note 25. (d) 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”) 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 10 -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: 105 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (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 10 -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 Securities and Exchange Commission of the Company’s audited year-end financial statements for the first fiscal year during which such milestones are achieved. 21. 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 its consolidated financial condition but could be material to its results of operations for any particular reporting period depending, in part, on its results for that period. (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. The court has consolidated the cases, and the consolidated amended complaint alleges violations of Section 10(b) of 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 consolidated amended complaint generally alleges 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 the Board 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 consolidated amended complaint does not quantify a damage request. Defendants moved to dismiss on February 8, 2021. On June 3, 2020, an alleged shareholder filed a Statement of Claim, as amended on August 12, 2020, 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 Amended 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 the Board as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Amended 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 the Board 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 Amended Statement of Claim does not quantify a damage request. (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. 106 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (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. On December 4, 2020, a Third Amended Statement of Claim was filed, which added a second alleged consumer. The Third Amended 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 Third Amended 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 Third Amended Statement of Claim also seeks interest and costs associated with the action. The Company has not responded to the Third Amended Statement of 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 did 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 Annual Report, the plaintiff has not refiled the complaint. 22. Supplementary Cash Flow Information The net changes in non-cash working capital items are as follow: Year ended December 31, 2020 2019 2018 Accounts receivable $ ( 4,724 ) $ ( 702 ) $ ( 2,569 ) Prepaids and other receivables ( 5,300 ) ( 10,509 ) ( 2,382 ) Current portion of loans receivable — ( 4,585 ) — Inventory ( 28,094 ) ( 51,888 ) ( 4,092 ) Accounts payable and other liabilities 4,175 13,476 12,705 Total $ ( 33,943 ) $ ( 54,208 ) $ 3,662 23. 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 $ 1,403,491 as of December 31, 2020 (December 31, 2019 – $ 1,586,978 ). 107 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (i) Accounts receivable The Company had accounts receivable of $ 8,928 as of December 31, 2020 (December 31, 2019 – $ 4,638 ). 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, amongst 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 year ended December 31, 2020, the Company recognized an approximate CECL of $ 74 (December 31, 2019 – $ 136 ). The Company has assessed that there is a concentration of credit risk as 78 % of the Company’s accounts receivable were due from four customers as of December 31, 2020 (December 31, 2019 – 56 % due from two customers) with an established credit history with the Company. (ii) Cash and cash equivalents, short-term investments, and other receivables The Company held cash and cash equivalents of $ 1,078,023 at December 31, 2020 (December 31, 2019 – $ 1,199,693 ). The short-term investments and related interest receivable of $ 211,766 (December 31, 2019 – $ 306,347 ) represents short-term investments with a maturity of less than a year and accrued interest as of December 31, 2020. 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 had advances to joint ventures of $ 467 as of December 31, 2020 (December 31, 2019 – $ 19,437 ). 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 the loss allowance on these advances as of December 31, 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 had accounts payable of $ 12,107 as of December 31, 2020 (December 31, 2019 – $ 9,194 ). 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 December 31, 2020, 64 % of the Company’s payables were due to four vendors (December 31, 2019 – 42 % due to three vendors). (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. The Company manages risk by having a portfolio of securities from multiple issuers, such that the Company was not materially exposed to any one issuer. 108 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (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. During the year ended December 31, 2020, the Company had net interest income of $ 18,415 (December 31, 2019 – $ 27,969 ). A 10% change in the interest rate in effect on December 31, 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 year ended December 31, 2020, the Company’s average variable interest rate fell 1.49 %, which resulted in a decrease of net interest income of $ 15,671 in the period. During the year ended December 31, 2019, the Company’s average variable interest rate did not materially change. (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 December 31, 2020, the Company had foreign currency gain (loss) on translation of $ 14,951 (December 31, 2019 – $ 37,687 ). A 10% change in the exchange rates for the foreign currencies would affect the carrying value of net assets by approximately $ 170,817 as of December 31, 2020 (December 31, 2019 – $ 174,902 ). 24. 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 December 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. As of December 31, 2020 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,078,023 $ — $ — $ 1,078,023 Short-term investments 211,766 — — 211,766 Derivative liabilities — — 163,410 163,410 As of 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 — — 297,160 297,160 109 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 25. 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”): Year ended December 31, 2020 2019 Altria Pinnacle – expense $ 1,199 $ 3,479 Total $ 1,199 $ 3,479 No expenses for consulting services from Altria Pinnacle during the year ended December 31, 2018. The following is a summary of amounts payable related to the consulting services with Altria Pinnacle: As of December 31, 2020 2019 Altria Pinnacle – payable $ — $ 1,152 Total $ — $ 1,152 During 2019, the Company purchased machinery and equipment amounting to $ 1,258 from a subsidiary of Altria, which was fully paid for during the year. Refer to Note 14 for further information on the derivative liabilities related to the Altria Investment. There were no other material related party transactions during the years ended December 31, 2020, December 31, 2019 and December 31, 2018. 26. Non-monetary Transactions The Company had no non-monetary transactions during the year ended December 31, 2020 or 2018. 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 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). 110 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 27. Business Combinations On September 5, 2019, the Company closed the Redwood Acquisition. Redwood manufactures, markets and distributes U.S. hemp-derived supplements and cosmetics product through e-commerce, retail and hospitality channels in the U.S. under the brand Lord Jones™. Redwood’s products use high quality U.S. hemp extract that retains naturally occurring phytocannabinoids and terpenes found in the plant. The Company plans to leverage Redwood’s capabilities to capitalize on the significant demand to further create and scale U.S. hemp-derived consumer products and brands. In 2019, the Company acquired all the issued and outstanding shares of each of the four Redwood operating subsidiaries for an aggregate consideration of $ 283,300 , which included $ 227,191 in cash and 5,086,586 common shares of the Company with a fair value of $ 56,109 . The fair value of the shares issued as part of the consideration paid was based on the volume weighted average trading price of the common shares on Nasdaq on each of the ten consecutive trading days prior to the date of the Membership Interest Purchase Agreement dated August 1, 2019 (the “MIPA”), by and among the Company, Redwood Holding Group, LLC, and certain Key Persons solely for the purposes as described in the MIPA, at C$ 14.74 per share. The Redwood Acquisition was unanimously approved by the board of directors of Redwood Holdings Group, LLC and by the Board following the unanimous recommendation of a special committee of independent directors (“Special Committee”). A Special Committee composed entirely of independent directors of the Company was formed to evaluate and make recommendations to the Board since one of our directors, Jason Adler, and Michael Gorenstein, our Executive Chairman and former President and Chief Executive Officer, each held an indirect interest in Redwood Holding Group, LLC by way of their interest in certain funds affiliated with Gotham Green Partners, which funds were equity holders in Redwood Holding Group, LLC. Jason Adler is the co-founder and Managing Member of Gotham Green Partners, a private equity firm focused primarily on early-stage investing in companies in the cannabis industry, and Michael Gorenstein is a co-founder and non-managing Member of Gotham Green Partners. The Special Committee engaged Perella Weinberg Partners LP as financial advisor. The Redwood Acquisition was accounted for as a business combination as defined in ASC 805 Business Combinations. As a result of the change in control of Redwood, the assets and liabilities of Redwood are recorded at fair value in the consolidated financial statements of the Company. The following table summarizes the Company’s finalized allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date. September 5, 2019 Fair value of net assets acquired Cash $ 2,896 Accounts receivable (i) 647 Prepaid expenses and other assets 265 Inventory 2,806 Property and equipment 1,890 Right-of-use assets 3,533 Intangible assets (ii) 64,037 Goodwill 213,414 Accounts payable and accrued liabilities ( 2,688 ) Lease obligations ( 3,500 ) $ 283,300 (i) The fair value of acquired accounts receivable is $ 647 . No loss allowance was recognized on acquisition. (ii) Intangible assets include the fair value of brand name of $ 64,000 , the remaining balance relates to software. For the year ended December 31, 2019, acquisition-related costs of $ 8,531 were expensed. These costs are included in the consolidated statement of net income (loss) in financing and transaction costs. The goodwill recognized represents the excess over the fair value of the net tangible and intangible assets acquired as a part of the Redwood acquisition. This goodwill is attributable to the expertise and reputation of the assembled workforce acquired, the expected synergies, and other intangible assets that do not qualify for separate recognition. The goodwill is no t deductible for income tax purposes. The Relief-from-Royalty Method was used to value the intangible asset relating to the Lord Jones™ brand. Significant inputs include discount rate, growth rates, and cash flow projections. 111 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents During the period from September 5, 2019 to December 31, 2019, the Company recognized $ 3,364 in revenues and a net loss of $ 2,613 from Redwood operations. If the acquisition had occurred on January 1, 2019, the Company estimates that for the year ended December 31, 2019, it would have recorded an increase of $ 12,266 in revenues and a decrease of $ 1,112 in net income and that for the year ended December 31, 2018, it would have recorded an increase of $ 7,630 in revenues and an increase of $ 1,533 in net income. There were no business combinations during the years ended December 31, 2020 or December 31, 2018. 28. Repurposing Charges During the year ended December 31, 2019, the Company commenced initiatives to better align its evolving business and its strategy. Certain facilities at the Peace Naturals campus were repurposed from cultivation activities to provide for the following activities: additional R&D activities focused on new technologies for value-added product manufacturing; production and manufacturing of derivative products; and increased vault and warehousing capabilities. The activities associated with the repurposing were completed as of December 31, 2019. The following table presents information associated with this plan: Year ended December 31, 2019 Employee termination benefits $ 889 Impairment costs associated with plan 4,439 $ 5,328 During the year ended December 31, 2019, an inventory write-down associated with the repurposing cost of $ 1,940 was included as part of inventory write-down on the consolidated statements of net income (loss) and comprehensive income (loss). The Company did not incur any further significant costs related to the repurposing activities. No repurposing costs were incurred during the years ended December 31, 2020 or December 31, 2018. As of December 31, 2020, there was no accrued liability associated with the Company’s repurposing initiative (December 31, 2019 - $ 907 ). All repurposing related charges were incurred within the Rest of World segment. 29. 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. For the years ended December 31, 2020 and December 31, 2019, 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 adjusted earnings (loss) before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as the measure of segment profit or loss to evaluate performance of and allocate resources for its reportable segments. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, non-cash items and items that do not reflect management’s assessment of on-going business performance. 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. Inter-segment transactions are recorded at the stated values as agreed to by the segments. 112 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Segment data was as follows for the year ended December 31, 2020: United States Rest of World Corporate Total Consolidated statements of net income (loss) and comprehensive income (loss) Net revenue Cannabis flower $ — $ 27,932 $ — $ 27,932 Cannabis extracts 9,495 8,759 — 18,254 Other — 533 — 533 Net revenue 9,495 37,224 — 46,719 Share of loss from equity accounted investees — ( 4,510 ) — ( 4,510 ) Interest revenue 16 18,585 — 18,601 Interest expense ( 34 ) ( 152 ) — ( 186 ) Interest income (expense), net ( 18 ) 18,433 — 18,415 Depreciation and amortization 234 2,638 — 2,872 Income tax expense 323 1,024 — 1,347 Loss from discontinued operations — ( 650 ) — ( 650 ) Adjusted EBITDA ( 28,019 ) ( 98,349 ) ( 20,885 ) ( 147,253 ) Consolidated balance sheets Total assets 253,745 388,351 1,283,586 1,925,682 Investments in equity accounted investees — 19,235 — 19,235 Goodwill 178,414 1,108 — 179,522 Purchase of property, plant and equipment 385 31,027 — 31,412 Segment data was as follows for the year ended December 31, 2019: United States Rest of World Corporate Total Consolidated statements of net income (loss) and comprehensive income (loss) Net revenue Cannabis flower $ — $ 15,020 $ — $ 15,020 Cannabis extracts 3,364 5,338 — 8,702 Other — 28 — 28 Net revenue 3,364 20,386 — 23,750 Share of loss from equity accounted investees — ( 2,009 ) — ( 2,009 ) Interest revenue 6 29,207 — 29,213 Interest expense — ( 1,244 ) — ( 1,244 ) Interest income, net 6 27,963 — 27,969 Depreciation and amortization 46 2,044 — 2,090 Income tax expense — — — — Loss from discontinued operations — ( 363 ) — ( 363 ) Adjusted EBITDA ( 1,703 ) ( 84,826 ) ( 11,779 ) ( 98,308 ) Consolidated balance sheets Total assets 293,985 309,854 1,486,603 2,090,442 Investments in equity accounted investees — 557 — 557 Goodwill 213,414 1,078 — 214,492 Purchase of property, plant and equipment 259 38,405 — 38,664 113 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Segment data was as follows for the year ended December 31, 2018: United States Rest of World Corporate Total Consolidated statements of net income (loss) and comprehensive income (loss) Net revenue Cannabis flower $ — $ 9,210 $ — $ 9,210 Cannabis extracts — 2,732 — 2,732 Other — 179 — 179 Net revenue — 12,121 — 12,121 Share of loss from equity accounted investees — ( 723 ) — ( 723 ) Interest revenue — 220 — 220 Interest expense — ( 139 ) — ( 139 ) Interest income, net — 81 — 81 Depreciation and amortization — 807 — 807 Income tax expense — — — — Loss from discontinued operations — ( 894 ) — ( 894 ) Adjusted EBITDA — ( 10,357 ) — ( 10,357 ) Consolidated balance sheets Total assets — 183,471 — 183,471 Investments in equity accounted investees — 2,960 — 2,960 Goodwill — 1,314 — 1,314 Purchase of property, plant and equipment — 88,308 — 88,308 Adjusted EBITDA is reconciled to net income (loss) as follows for the years ended December 31, 2020, 2019 and 2018: (in thousands of U.S. dollars) Year ended December 31, 2020 US ROW Corporate Expenses Total Net income (loss) $ ( 77,368 ) $ 32,671 $ ( 30,573 ) $ ( 75,270 ) Adjustments Interest expense (income), net 18 ( 18,433 ) — ( 18,415 ) Income tax expense 323 1,024 — 1,347 Impairment loss on goodwill and intangible assets 40,000 — — 40,000 Financing and transaction costs 40 — — 40 Gain on revaluation of derivative liabilities — ( 129,254 ) — ( 129,254 ) Gain on disposal of other investments — ( 4,789 ) — ( 4,789 ) Share of loss from equity accounted investees — 4,510 — 4,510 Loss from discontinued operations — 650 — 650 Other loss (income) 20 1,814 — 1,834 Review costs related to restatement of 2019 interim financial statements — — 9,688 9,688 Share-based payments 8,714 6,647 — 15,361 Adjusted EBIT ( 28,253 ) ( 105,160 ) ( 20,885 ) ( 154,298 ) Adjustments Depreciation and amortization 234 6,811 — 7,045 Adjusted EBITDA ( 28,019 ) ( 98,349 ) ( 20,885 ) ( 147,253 ) 114 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents (in thousands of U.S. dollars) Year ended December 31, 2019 US ROW Corporate Expenses Total Net income (loss) $ ( 3,070 ) $ 1,180,241 $ ( 11,597 ) $ 1,165,574 Adjustments Interest income, net ( 6 ) ( 27,963 ) — ( 27,969 ) Impairment loss on goodwill and intangible assets — — — — Repurposing charges — 7,268 — 7,268 Financing and transaction costs 117 32,091 — 32,208 Gain on revaluation of derivative liabilities — ( 1,276,819 ) — ( 1,276,819 ) Gain on disposal of other investments — ( 16,277 ) — ( 16,277 ) Share of loss from equity accounted investees — 2,009 — 2,009 Loss from discontinued operations — 363 — 363 Other loss (income) 182 ( 197 ) ( 182 ) ( 197 ) Share-based payments 900 10,719 — 11,619 Adjusted EBIT ( 1,877 ) ( 88,565 ) ( 11,779 ) ( 102,221 ) Adjustments Depreciation and amortization 174 3,739 — 3,913 Adjusted EBITDA $ ( 1,703 ) $ ( 84,826 ) $ ( 11,779 ) $ ( 98,308 ) (in thousands of U.S. dollars) Year ended December 31, 2018 Net income (loss) $ ( 21,817 ) Adjustments Interest income, net ( 81 ) Loss (gain) on disposal of other investments ( 164 ) Share of loss (income) from equity accounted investees 723 Loss from discontinued operations 894 Share-based payments 8,151 Adjusted EBIT ( 12,294 ) Adjustments Depreciation and amortization 1,937 Adjusted EBITDA $ ( 10,357 ) Sources of net revenue were as follows: Year ended December 31, 2020 2019 Cannabis flower $ 27,932 $ 15,020 Cannabis extracts 18,254 8,702 Other 533 28 Net revenue $ 46,719 $ 23,750 Net revenue attributed to a geographic region based on the location of the customer were as follows: Year ended December 31, 2020 2019 Canada $ 34,538 $ 20,202 United States 9,495 3,364 Other countries 2,686 184 Total $ 46,719 $ 23,750 115 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents Property, plant and equipment assets were physically located in the following geographic regions: As of December 31, 2020 2019 Canada $ 162,163 $ 139,160 United States 2,293 2,103 Other countries 23,143 18,685 Total $ 187,599 $ 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 annual revenues and greater than 10% of accounts receivable. United States During the years ended December 31, 2020 and December 31, 2019, the Company had no major customers in the U.S. segment. As of December 31, 2020, $ 65 in expected credit losses has been recognized on receivables from contract with customers (December 31, 2019 – $ 12 ). Refer to Note 23(a). Rest of World During the year ended December 31, 2020, the Company earned a total net revenue before excise taxes of $ 34,295 from four major customers (December 31, 2019 – $ 7,597 ; December 31, 2018 – $ 2,186 from two and one major customers, respectively), accounting for 63 % of the Company’s revenues (December 31, 2019 – 32 %; December 31, 2018 – 17 %). As of December 31, 2020, $ 9 (December 31, 2019 – $ 124 ; December 31, 2018 – $ nil ) in expected credit losses has been recognized on receivables from contract with customers. Refer to Note 23(a). 30. Discontinued Operations and Held-for-sale Assets During the year ended December 31, 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 consolidated financial statements. Accordingly, the property, plant and equipment assets of OGBC are separately reported as assets and liabilities held-for-sale as of December 31, 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 below. For the year ended December 31, 2020, the Company recorded $ 1,860 as a loss on held-for-sale assets, including $ 919 as a valuation allowance loss upon reclassification of property, plant and equipment assets as held-for-sale in Q3 2020, and a further $ 941 impairment charge on held-for-sale assets in Q4 2020 upon surrender of the OGBC Health Canada licenses. OGBC was formerly included within the Rest of World segment. The following table summarizes the financial information for discontinued operations as of December 31, 2020: Year ended December 31, 2020 2019 2018 Consolidated statements of net income (loss) and comprehensive income (loss) OGBC income (loss) from discontinued operations, net of income taxes $ ( 650 ) $ ( 363 ) $ ( 894 ) As of December 31, 2020 2019 Consolidated balance sheets Long-term assets classified as discontinued operations $ 1,176 $ 3,248 116 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019, and 2018 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 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 years ended December 31, 2019 and December 31, 2018: Year ended December 31, 2019 As previously disclosed Held-for-sale adjustment Adjusted balance Inventory write-down $ ( 29,440 ) $ 267 $ ( 29,173 ) Operating expenses ( 103,620 ) 109 ( 103,511 ) Other income (loss) 1,287,058 ( 13 ) 1,287,045 Net income (loss) from continuing operations 1,165,574 363 1,165,937 Year ended December 31, 2018 As previously disclosed Held-for-sale adjustment Adjusted balance Operating expenses $ ( 27,554 ) $ 896 $ ( 26,658 ) Other income (loss) ( 476 ) ( 2 ) ( 478 ) Net income (loss) from continuing operations ( 21,817 ) 894 ( 20,923 ) 117 T able of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.