What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-05 · 235 added, 353 removed, 215 unchanged (73% of the section changed)

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

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

The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”) and Part I, Item 1A, Risk Factors, of the Annual Report.

Forward-Looking Statements

This Quarterly Report, the documents incorporated into this Quarterly Report by reference, other reports we file with, or furnish to, the U.S.

Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon our current expectations, estimates, projections, assumptions and beliefs.

Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon our current internal expectations, estimates, projections, assumptions and beliefs.

All information that is not clearly historical in nature may constitute Forward-Looking Statements.

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

Federal Drug Administration, the U.S.

Federal Trade Commission, the U.S.

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

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

Drug Enforcement Administration (the “DEA”), the U.S.

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

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

hemp (including CBD) products;

• expectations regarding the regulation of the U.S.

• the laws and regulations and any amendments thereto relating to the U.S.

hemp industry in the U.S., including the promulgation of regulations for the U.S.

hemp industry by the U.S.

Department of Agriculture;

Department of Agriculture (the “USDA”) and relevant state regulatory authorities;

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

• our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact;

• the ability to successfully create and launch brands and further create, launch and scale U.S.

hemp-derived consumer products, including through the Redwood Acquisition (as defined herein), and cannabis products in jurisdictions where such products are legal and that we currently operate in;

• our ability to successfully create and launch brands and further create, launch and scale U.S.

hemp-derived consumer products and cannabis products;

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

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• the expected growth in the number of customers using our products;

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

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

• our ability or plans to identify, develop, commercialize or expand our technology and research and development (“R&D”) initiatives in cannabinoids, or the success thereof;

• expectations regarding acquisitions and dispositions and the anticipated benefits therefrom, including the proposed sale of our Original B.C.

(“OGBC”) production facility;

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• expectations with respect to future production costs;

• expectations with respect to future sales and distribution channels;

• expectations with respect to future sales and distribution channels and networks;

• the expected methods to be used to distribute and sell our products;

• our future product offerings;

• the anticipated future gross margins of our operations;

• accounting standards and estimates;

• our ability to timely and effectively remediate material weaknesses in our internal control over financial reporting;

• expectations regarding our distribution network;

• our ability to timely and effectively remediate any material weaknesses in our internal control over financial reporting;

• expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third-party supply and manufacturing agreements.

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

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

the implementation and effectiveness of key personnel changes;

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

future levels of revenues;

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hemp products;

our ability to manage disruptions in credit markets or changes to our credit rating;

our ability to manage disruptions in credit markets or changes to our credit ratings;

future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses;

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the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all);

the potential effects of judicial, regulatory or other proceedings on our business, financial condition, results of operations and cash flows;

the potential effects of judicial, regulatory or other proceedings, or threatened litigation or proceedings, on our business, financial condition, results of operations and cash flows;

volatility in and/or degradation of general economic, market, industry or business conditions;

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the anticipated effects of actions of third parties such as competitors, activist investors or federal (including U.S.

federal), state, provincial, territorial or local regulatory authorities, self-regulatory organizations, plaintiffs in litigation or persons threatening litigation;

federal), state, provincial, territorial or local regulatory authorities or self-regulatory organizations;

changes in regulatory requirements in relation to our business and products;

and the factors discussed under Part I, Item 1A, Risk Factors, of the Annual Report and Item 1A, Risk Factors in Part II of this Quarterly Report.

and the factors discussed under Part I, Item 1A, “Risk Factors” of the Annual Report.

Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements.

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All currency amounts in this Quarterly Report are stated in U.S.

dollars, which is the Company’s reporting currency, unless otherwise noted.

dollars, which is our reporting currency, unless otherwise noted.

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

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

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2021, December 31, 2020 and March 31, 2020.

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

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

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

Average rate (i)

1.3323 1.3856 1.3437 1.3268

Spot rate 1.3308 1.3576 1.4062 1.2990

(i) Average rates are three months ended.

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

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

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

Average rate (i)

1.3204 1.3377 1.3296 1.2955

March 31, 2021 March 31, 2020 December 31, 2020

Average rate 1.2665 1.3437 1.3036

Spot rate 1.2563 1.4062 1.2751

(i) Average rates are three months ended.

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

Year-to-date average rate 1.2665 1.3437 1.3411

Business Overview

We are an innovative global cannabinoid company with international production and distribution across five continents.

We are committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are building an iconic brand portfolio.

Cronos Group is an innovative global cannabinoid company with international production and distribution across five continents.

Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is building an iconic brand portfolio.

Cronos Group’s brand portfolio includes PEACE NATURALS ™ , a global wellness platform;

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

Cronos Group reports through two primary business segments:

“United States” and “Rest of World.”

We seek to create value for shareholders by focusing on four core strategic priorities:

• growing a portfolio of iconic brands that resonate with consumers;

Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities:

• growing a portfolio of iconic brands that responsibly elevate the consumer experience;

• developing a diversified global sales and distribution network;

• establishing an efficient global supply chain;

• creating and monetizing disruptive intellectual property in the industries in which we operate.

• creating and monetizing disruptive intellectual property.

Business segments

Cronos Group reports through two primary business segments:

Cronos Group reports through two segments:

“United States” and “Rest of World.” These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region.

On September 5, 2019, as a result of the acquisition (the “Redwood Acquisition”) of four Redwood Holding Group, LLC subsidiaries (collectively, “Redwood”), the Company established the United States business segment, which includes only the results of Redwood since the date of acquisition.

Redwood manufactures, markets and distributes U.S.

The United States segment manufactures, markets and distributes U.S.

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

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

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

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

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

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

In Israel, the Company operates under the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and cannabis oils in the Israeli medical market.

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

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

Recent Developments

COVID-19 pandemic

In December 2019, an outbreak of a novel strain of coronavirus, COVID-19, was identified in Wuhan, China.

Since then, COVID-19 has spread across the globe, including the U.S., Canada, and other countries in which the Company or its affiliates operate (including Australia, Colombia, and Israel) and has subsequently been recognized as a pandemic by the World Health Organization.

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

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

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

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

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

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

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

Impact on operating results

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

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

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

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

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

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

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

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

reporting unit or brand as a result.

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

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

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

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

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

Production and supply chain

The Company’s global production facilities currently remain operational.

To comply with governmental orders or other health and safety requirements, the Company has:

(i) reduced the number of personnel working on-site at its production facilities to only the roles that are necessary to be performed on site, (ii) implemented work-from-home policies for other employees whose work can be performed off-site, and (iii) implemented other additional health and safety measures such as, among other things, enhanced hygiene and sanitation procedures, modified work schedules and social distancing protocols at its production facilities.

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

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

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

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

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

Most delays have been ameliorated as manufacturers are now operational in China but other vendors or suppliers along the Company’s supply chain could be potentially impacted.

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

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

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

Even if the Company’s production facilities continue to remain open, mandatory or voluntary self-quarantines and travel restrictions may limit the Company’s employees’ ability to access facilities, and this, together with impacts on the Company’s supply chain and the uncertainty produced by the rapidly evolving nature of the COVID-19 pandemic, may result in reduced or suspended production.

Retailers in the U.S.

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

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

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

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

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

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

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

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

In addition, while various provinces in Canada have continued to increase the number of retail stores during the COVID-19 pandemic, we expect that the expansion of retail stores in various provinces in Canada will be delayed or slowed down in the current circumstances.

We anticipate that uncertainty created by these measures on forecasting customer demand and sales will continue as long as such measures are in place.

Demand for the Company’s products could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a potential decline in the level of demand for vaporizer products or in discretionary spending as result of a general economic slowdown.

Macroeconomic impacts

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

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

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

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

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

In addition, a recession or market correction resulting from the spread of COVID-19 would likely materially affect the Company’s business and the value of its common shares.

Collectively, effects of the COVID-19 pandemic have adversely affected the Company’s results of operations and, if the effects continue unabated, could continue to do so as long as these measures to combat the COVID-19 pandemic stay in effect.

At this time, neither the duration nor scope of the disruption can be predicted, therefore, the ultimate impact to the Company’s business cannot be reasonably estimated but such impact could materially adversely affect the Company’s business and financial results.

Liquidity and capital resource impact

Despite the impacts of the COVID-19 pandemic, the Company believes that the significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months.

The impact of reduced interest rates has inhibited the Company’s ability to generate interest income in the short-term but this has not, and is not expected to have, a material impact on the liquidity or capital resources of the Company.

Brand portfolio

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

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

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

Happy Dance™ launched with three product offerings:

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

Through the partnership with Ms.

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

In October 2020, the U.S.

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

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

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

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

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

Global sales and distribution

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

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

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

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

COVID-19 update

The COVID-19 pandemic continues to impact the global economy and, specifically, the U.S., Canada, Israel, and the other countries in which the Company or its affiliates operate (including Australia and Colombia).

Cronos Group continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic.

As the global situation continues to change rapidly, ensuring the health and safety of our employees remains one of our top priorities.

In the U.S., various states have begun rolling back their COVID-19 related restrictions as the continued rollout of vaccines has accelerated.

This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell the Company’s products.

There are, however, indications that the pace of vaccinations may be slowing.

Any reinstatement of restrictions on the operations of retail outlets could negatively impact the Company’s short-term results of operations in the U.S.

In Canada, in response to a recent surge in infection rates, individual provinces are taking increasingly stronger measures to slow infection rates, including stay-at-home orders and temporary closures of retail outlets, including cannabis stores.

Most provinces, however, allow curbside pick-up or delivery, replacing in-person visits to cannabis stores.

The measures taken to slow infection rates are expected to have a negative impact on the Company’s short-term revenue growth in Canada.

The roll-out of vaccines in individual provinces has continued, but the pace of the roll-out has varied between the provinces, and the rate of vaccination in Canada is lower than in the U.S.

In Israel, COVID-19 restrictions have been gradually eased as vaccination rates have increased to cover over 50% of its population and daily infection rates remain low.

Occupancy limitations are still in place in retail outlets, including those that sell the Company’s products.

The Company does not expect these measures to have a material impact on the Company’s short-term revenue growth in Israel.

In both the U.S.

and ROW segments, there were no material increases in the current expected credit loss in connection with COVID-19.

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

Collectively, the effects of the COVID-19 pandemic have adversely affected the Company’s results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect.

At this time,

neither the duration nor scope of the disruption can be predicted;

therefore, the ultimate impact to the Company’s business cannot be reasonably estimated but such impact could materially adversely affect the Company’s business and financial results.

Despite the impacts of the COVID-19 pandemic, the Company believes that its significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months.

The impact of reduced interest rates has inhibited the Company’s ability to generate interest income, but this has not had, and is not expected to have, a material impact on the liquidity or capital resources of the Company.

Brand and Product Portfolio

In April 2021, Cronos Group announced that its Lord Jones™ brand launched a robust brand campaign entitled, “A Higher Order”.

The campaign features new creative assets along with a mix of market activations including out-of-home advertising and television spots in select U.S.

test markets.

This new Lord Jones™ campaign reaffirms the Company’s commitment to robust, breakthrough marketing and brand building that aims to bring high-quality U.S.

hemp-derived CBD products to adult consumers.

In the coming weeks, Cronos Group’s mainstream adult-use brand, Spinach™, intends to launch edibles, a new product category for Cronos Group, in the Canadian adult-use market.

This product has been developed by the Company’s world class innovation and R&D teams in partnership with various teams throughout the organization such as consumer insights, marketing, and sales.

Cronos Group approaches product launches with an aim to be the best, not necessarily the first.

The adult-use edibles are differentiated from what is currently on the market and seeks to provide an elevated experience for the consumer.

The Company’s new edibles capabilities will serve as a platform for future innovation that is expected to provide Cronos Group with a robust competitive advantage.

In April 2021, the Lord Jones™ brand launched a new product, the Lord Jones™ CBD Bump & Smooth Body Serum, which is designed to deliver non-abrasive chemical exfoliation that reduces bumpiness to reveal smoother, brighter looking skin.

The product is available on the Lord Jones™ website and is expected to be on Sephora's website and in their retail outlets in the coming weeks.

In the first quarter of 2021, Cronos Israel successfully launched PEACE NATURALS™ branded pre-rolls into the Israeli medical cannabis market.

This launch follows the successful launch of dried flower and oils to the Israeli medical cannabis market in 2020.

Cronos Israel continues to execute in Israel's rapidly growing market.

Global Supply Chain

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

for business development and R&D purposes.

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

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

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

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

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

In the first quarter of 2021, Natuera, the Company’s joint venture in Latin America, successfully exported THC cannabis derivatives from Colombia to the U.S.

for R&D purposes.

The import was conducted under a DEA permit for R&D purposes.

Additionally, Natuera's wholly owned subsidiary has been granted quotas by Colombia's Ministry of Justice and Law and Ministry of Health and Social Protection for the cultivation and manufacture of psychoactive cannabis into THC products for commercial export.

In the first quarter of 2021, Cronos GrowCo, the Company’s joint venture in Canada, continued to become operational in phases, completing its first harvest in the first quarter of 2021.

In addition to having a cultivation license for the operations contemplated by the first phase of the project, Cronos GrowCo has received a processing license, allowing it to sell into the Canadian cannabis wholesale market.

Intellectual Property Initiatives

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

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

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

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

In April 2021, Cronos Fermentation, Cronos Group’s GMP-standard fermentation and manufacturing facility in Winnipeg, Manitoba, received its processing license.

This is a significant milestone not just for Cronos Group, but for the evolution of the industry and advancements in science that will be applied in an effort to elevate the consumer experience.

Enterprise Initiatives

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

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

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

In April 2021, Cronos Group announced the launch of its U.S.

Cronos Employees Political Action Committee (the “Employees PAC”).

The Employees PAC was established to support and educate legislators who are open to responsibly advancing legislation and regulation for U.S.

hemp-derived CBD products in the U.S.

market and supporting a regulated, safe and legal federal cannabis industry in the U.S.

Subsequent to the end of the first quarter in April 2021, the Company expanded the implementation of its new enterprise resource planning (“ERP”) system to the U.S.

This follows the implementation of a new ERP system across the Canadian business in the third quarter of 2020.

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

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

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

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

and overseas.

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

from 2012 through 2016.

Prior to joining Blue Buffalo, Mr.

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

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

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

Prior to Gerber, Mr.

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

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

Prior to joining Cronos Group, Ms.

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

With over 25 years of experience, Ms.

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

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

Frein joined Cronos Group in January of this year;

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

Previously, Ms.

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

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

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

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

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

Consolidated Results of Operations:

2 unchanged sentences

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

1 unchanged sentence

Gross profit (loss) (2,963) (6,476) 3,513 (54) %

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

Reported operating loss $ (41,169) $ (30,698) $ (10,471) 34 % $ (120,937) $ (57,539) $ (63,398) 110 %

Adjusted operating loss (i)

Gross margin (23) % (77) % N/A 54 pp

Adjusted EBITDA (i)

$ (37,075) $ (37,055) $ (20) — %

2 unchanged sentences

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

3 unchanged sentences

Net revenue $ 12,611 $ 8,432 $ 4,179 50 %

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

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

This change was primarily due to:

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

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

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

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

(i) Net revenue, before excise taxes, is calculated net of sales returns and discounts.

For the three months ended March 31, 2021 (“Q1 2021”), we reported consolidated net revenue of $12.6 million, representing an increase of $4.2 million from the three months ended March 31, 2020 (“Q1 2020”).

This change was primarily due to:

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

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

• Continued growth of the adult-use market in Canada and sales in the Israeli medical market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020.

• An increase in sales in the U.S.

segment in Q1 2021 compared to Q1 2020, primarily driven by the introduction of new hemp-derived CBD products.

Cost of sales and gross profit (loss) - consolidated

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

Cost of sales $ 15,574 $ 6,946 $ 8,628 124 %

Inventory write-down — 5,424 (5,424) N/A 11,024 5,424 5,600 N/A

Inventory write-down — 7,962 (7,962) (100) %

Gross profit (loss) (2,963) (6,476) 3,513 (54) %

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

Gross margin (23) % (77) % N/A 54 pp

For Q1 2021, we reported a consolidated gross loss of $3.0 million, representing a decrease in losses of $3.5 million from Q1 2020.

1 unchanged sentence

• The increase in net revenue from Q1 2020, as described above.

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

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

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

This change was primarily due to:

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

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

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

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

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

Operating loss – consolidated

• A decrease in inventory write-downs in the Rest of World (“ROW”) segment.

Adjusted EBITDA – consolidated

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

Sales and marketing $ 7,236 $ 4,591 $ 2,645 58 % $ 20,849 $ 9,723 $ 11,126 114 %

Research and development 4,734 2,605 2,129 82 % 12,955 6,076 6,879 113 %

General and administrative 18,860 16,202 2,658 16 % 61,048 34,987 26,061 74 %

Share-based payments 7,916 3,531 4,385 124 % 12,898 7,949 4,949 62 %

Depreciation and amortization 886 632 254 40 % 2,252 1,315 937 71 %

Operating expenses 39,632 27,561 12,071 44 % 110,002 60,050 49,952 83 %

Reported operating loss (41,169) (30,698) (10,471) 34 % (120,937) (57,539) (63,398) 110 %

Adjusted operating loss (i)

Adjusted EBITDA (i)

$ (37,075) $ (37,055) $ (20) — %

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

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

This change was primarily due to:

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

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

segment results versus 25 days in Q3 2019.

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

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

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

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

This change was primarily due to:

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

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

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

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

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

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

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

For Q1 2021, we reported a consolidated Adjusted EBITDA loss of $37.1 million, representing a marginal increase from Q1 2020.

This was primarily due to:

• An increase in sales and marketing costs due to brand development in the U.S.

segment, partially offset by a decrease in sales and marketing spend in the ROW segment.

• An increase in research and development costs primarily driven by increased spending on product development and developing cannabinoid intellectual property.

• Offsetting decreases in gross loss, as described above, and general and administrative costs.

Other items affecting the comparability of net income (loss) during Q1 2021 and Q1 2020

Interest income, net

For Q1 2021, we reported interest income, net of $2.3 million representing a decrease of $5.4 million from Q1 2020.

Net interest income in the first quarter of 2021 decreased compared to the first quarter of 2020 primarily due to a lower interest earning account during the three months ended March 31, 2021 compared to the interest earning accounts during the three months ended March 31, 2020.

Gain/loss on revaluation of derivative liabilities

For Q1 2021, we reported a loss on revaluation of derivative liabilities of $116.9 million representing a decrease of $230.2 million from Q1 2020.

The valuation of derivative liabilities is based on inputs such as the Company’s share price and volatility, expected term and expected risk-free interest rate which have in the past, and may in the future, fluctuate significantly period-to-period.

The Company expects continued changes in derivative valuations.

For further information, see Note 5.

Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1 “Financial Statements” of this Quarterly Report.

Review costs related to restatement of 2019 interim financial statements

For Q1 2021, we reported review costs related to the restatement of 2019 interim financial statements of $2.0 million, which are included within general and administrative expenses in the consolidated statements of net income (loss) representing a decrease of $2.4 million from Q1 2020.

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.

Impairment loss on property, plant and equipment and right-of-use assets

For Q1 2021, we reported an impairment loss on property, plant and equipment of $1.0 million related to leasehold improvements located within leased premises, encompassing approximately 6,000 square feet, in Los Angeles, California, which the Company determined it no longer had plans to use.

An impairment loss on the associated right-of-use asset of $0.7 million was also recorded during Q1 2021.

No impairment loss was recognized on leasehold improvements or right-of-use assets during Q1 2020.

Results of Operations by Business Segment:

2 unchanged sentences

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

1 unchanged sentence

Gross profit (loss) (4,139) (7,558) 3,419 (45) %

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

Reported and adjusted operating loss (i)

Gross margin (41) % (121) % N/A 80 pp

Adjusted EBITDA (i)

$ (22,184) $ (29,010) $ 6,826 (24) %

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

Net revenue – Rest of World

Net revenue – ROW

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

5 unchanged sentences

This change was primarily due to:

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

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

This change was primarily due to:

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

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

• Continued growth of the adult-use cannabis flower market in Canada and sales in the Israeli medical cannabis market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 and a decrease in cannabis extract sales in Canada primarily due to fluctuating provincial demand.

Cost of sales and gross profit (loss) – ROW

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

Cost of sales $ 14,309 $ 5,852 $ 8,457 145 %

Inventory write-down — 5,424 (5,424) N/A 11,024 5,424 5,600 N/A

Inventory write-down — 7,962 (7,962) (100) %

Gross profit (loss) (4,139) (7,558) 3,419 (45) %

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

Gross margin (41) % (121) % N/A 80 pp

For Q1 2021, the ROW segment reported a gross loss of $4.1 million, representing a decrease in losses of $3.4 million from Q1 2020.

1 unchanged sentence

• An increase in net revenue from Q1 2021, as described above.

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

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

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

This change was primarily due to:

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

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

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

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

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

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

Operating loss – Rest of World

• A decrease in inventory write-downs.

Adjusted EBITDA – ROW

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

Reported and adjusted operating loss (i)

Adjusted EBITDA (i)

$ (22,184) $ (29,010) $ 6,826 (24) %

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

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

For Q1 2021, the ROW segment reported an Adjusted EBITDA loss of $22.2 million, representing a decrease in losses of $6.8 million from Q1 2020.

This change was primarily due to:

• A decrease in gross loss from Q1 2020, as described above.

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

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

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

This change was primarily due to:

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

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

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

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

Summary of financial results – United States

• A decrease in general and administrative expenses related to a decrease in professional and consulting fees.

• A partially offsetting increase in research and development costs primarily driven by increased spending on product development and developing cannabinoid intellectual property.

Summary of financial results – United States (“U.S.”)

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

1 unchanged sentence

Gross profit 1,176 1,082 94 9 %

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

Reported and adjusted operating loss (i)

Gross margin 48 % 50 % N/A (2) pp

Adjusted EBITDA (i)

$ (9,510) $ (5,782) (3,728) 64 %

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

Net revenue – United States

Net revenue – U.S.

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

3 unchanged sentences

This change was primarily due to:

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

For YTD 2020, the U.S.

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

This change was primarily due to:

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

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

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

• An increase in product sales in the U.S.

segment in Q1 2021 compared to Q1 2020, primarily driven by the introduction of new U.S.

hemp-derived CBD products.

Cost of sales and gross profit (loss) – U.S.

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

1 unchanged sentence

Gross profit 1,176 1,082 94 9 %

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

Gross margin 48 % 50 % N/A (2) pp

For Q1 2021, the U.S.

segment reported gross profits of $1.2 million, with gross profit margins of 48%, representing an increase of $0.1 million from Q1 2020.

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

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

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

For YTD 2020, the U.S.

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

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

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

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

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

Operating loss – United States

This change was primarily due to:

• An increase in net revenue from Q1 2020, as described above.

Adjusted EBITDA – U.S.

(In thousands of U.S.

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

dollars) For the three months ended March 31, Change

2021 2020 $ %

Reported and adjusted operating loss (i)

Adjusted EBITDA (i)

$ (9,510) $ (5,782) $ (3,728) 64 %

1 unchanged sentence

For Q1 2021, the U.S.

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

These results were primarily due to:

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

segment in Q3 2020.

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

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

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

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

For YTD 2020, the U.S.

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

These results were primarily due to:

• A full three quarters of U.S.

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

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

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

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

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

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

segment reported an Adjusted EBITDA loss of $9.5 million, representing an increase in losses of $3.7 million.

This change was primarily due to:

• An increase in sales and marketing costs related to brand development.

Non-GAAP Measures

2 unchanged sentences

GAAP (“non-GAAP measures”).

These non-GAAP measures do not have a standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.

Rather, these non-GAAP measures are provided as a supplement to corresponding GAAP measures to provide additional information regarding the results of operations from management’s perspective.

Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

All non-GAAP measures presented in this Quarterly Report are reconciled to their closest reported GAAP measure.

Reconciliations of historical adjusted financial measures to corresponding GAAP measures are provided below.

Adjusted operating loss

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

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

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

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

Management uses adjusted operating loss for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

(In thousands of U.S.

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

2020 2019 2020 2019

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

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

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

Adjusted operating loss by business segment

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

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

Management does not view the income and expense items above to be part of underlying results of the segment as they may be highly variable, may be unusual or infrequent, are difficult to predict and can distort underlying business trends and results.The Company’s method of allocating corporate costs is refined periodically.

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

Management uses adjusted operating loss by business segment for planning, forecasting and evaluating segment performance, including allocating resources and evaluating results relative to employee compensation targets.

(In thousands of U.S.

dollars) For the three months ended September 30, 2020

Rest of World Total Segments Corporate Expenses Total

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

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

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

These non-GAAP measures do not have a standardized meaning prescribed by U.S.

GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.

Rather, these non-GAAP measures are provided as a supplement to corresponding U.S.

GAAP measures to provide additional information regarding the results of operations from management’s perspective.

Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S.

All non-GAAP measures presented in this Quarterly Report are reconciled to their closest reported U.S.

GAAP measure.

Reconciliations of historical adjusted financial measures to corresponding U.S.

GAAP measures are provided below.

Adjusted EBITDA

Management reviews Adjusted EBITDA, a non-GAAP measure which excludes non-cash items and items that do not reflect management’s assessment of on-going business performance.

Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for:

impairment loss on property, plant and equipment and right-of-use assets, loss (gain) on revaluation of derivative liabilities, other loss (income), loss from discontinued operations, share-based payments and review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part II, Item 1 “Legal Proceedings” of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of period-over-period results.

Management uses Adjusted EBITDA for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

Adjusted EBITDA by segment

Management also reviews adjusted earnings (loss) before interest, tax, depreciation and amortization by segment (“Adjusted EBITDA by segment”), a non-GAAP measure which excludes non-cash items and items that do not reflect management’s assessment of on-going business performance.

Corporate expenses are removed from Adjusted EBITDA by segment.

Corporate expenses are expenses that relate to the consolidated business.

The Company’s method of allocating corporate expenses is refined periodically.

Management defines Adjusted EBITDA by segment as net income (loss) by segment before interest, tax expense, depreciation and amortization adjusted for the same items that are adjusted in consolidated Adjusted EBITDA.

Management believes that Adjusted EBITDA by segment provides useful insight into underlying segment trends and results and provides a more meaningful comparison of period-over-period segment results.

Management uses Adjusted EBITDA by segment for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

Adjusted EBITDA and Adjusted EBITDA by segment is reconciled to net income (loss) as follows for Q1 2021 and Q1 2020:

(In thousands of U.S.

dollars) For the nine months ended September 30, 2020

Rest of World Total Segments Corporate Expenses Total

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

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

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

dollars) For the three months ended March 31,

Net income (loss) $ (161,625) $ 75,681

Interest income, net (2,329) (7,751)

Impairment loss on property, plant and equipment and right-of-use assets 1,741 —

Loss (gain) on revaluation of derivative liabilities 116,874 (113,368)

Other loss 1,859 378

Loss from discontinued operations 21 —

Share-based payments 2,499 2,436

Review costs related to restatement of 2019 interim financial statements 2,005 4,407

Adjusted EBIT (38,955) (38,217)

Depreciation and amortization 1,880 1,162

Adjusted EBITDA $ (37,075) $ (37,055)

(In thousands of U.S.

dollars) For the three months ended September 30, 2019

Rest of World Total Segments Corporate Expenses Total

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

dollars) Three months ended March 31, 2021

US ROW Corporate

Expenses Total

Net income (loss) $ (12,092) $ (142,147) $ (7,386) $ (161,625)

Interest income, net (3) (2,326) — (2,329)

Impairment loss on property, plant and equipment and right-of-use assets 1,741 — — 1,741

Loss on revaluation of derivative liabilities — 116,874 — 116,874

Other loss — 1,859 — 1,859

Loss from discontinued operations — 21 — 21

Share-based payments 745 1,754 — 2,499

Review costs related to restatement of 2019 interim financial statements — — 2,005 2,005

Adjusted EBIT (9,609) (23,965) (5,381) (38,955)

Depreciation and amortization 99 1,781 — 1,880

Adjusted EBITDA $ (9,510) $ (22,184) $ (5,381) $ (37,075)

(In thousands of U.S.

dollars) For the nine months ended September 30, 2019

Rest of World Total Segments Corporate Expenses Total

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

dollars) Three months ended March 31, 2020

US ROW Corporate

Expenses Total

Net income (loss) $ (6,516) $ 88,867 $ (6,670) $ 75,681

Interest income, net (7) (7,744) — (7,751)

Gain on revaluation of derivative liabilities — (113,368) — (113,368)

Other loss — 378 — 378

Share-based payments 706 1,730 — 2,436

Review costs related to restatement of 2019 interim financial statements — — 4,407 4,407

Adjusted EBIT (5,817) (30,137) (2,263) (38,217)

Depreciation and amortization 35 1,127 — 1,162

Adjusted EBITDA $ (5,782) $ (29,010) $ (2,263) $ (37,055)

Liquidity and Capital Resources

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

As of March 31, 2021, we had $1,024.5 million in cash and cash equivalents and $214.9 million in short-term investments, which comprise the majority of the Company’s cash position.

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

1 unchanged sentence

(In thousands of U.S.

dollars) For the nine months ended September 30,

dollars) For the three months ended March 31,

Cash provided/(used) in operating activities $ (46,002) $ (38,898)

5 unchanged sentences

Operating activities

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

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

During the three months ended March 31, 2021, we used $46.0 million of cash in operating activities as compared to cash used of $38.9 million in the three months ended March 31, 2020, representing an increase in cash used of $7.1 million.

This change is primarily driven by an increase in cost of sales and operating expenses, partially offset by changes in working capital during the three months ended March 31, 2021.

Investing activities

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

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

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

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

During the three months ended March 31, 2021, we used $9.7 million of cash in investing activities, compared to $59.1 million of cash provided by investing activities during the three months ended March 31, 2020, representing a decrease of $68.8 million in cash provided by investing activities.

This change is primarily driven by a decrease in the net effect of the purchases of, and proceeds from the maturities of short-term investments during the three months ended March 31, 2021, due to the timing of purchases and maturities of short-term investments.

Financing activities

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

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

During the three months ended March 31, 2021, cash used in financing activities was $9.3 million, compared to $0.4 million of cash used in financing activities during the three months ended March 31, 2020, representing a decrease of $8.9 million in cash used in financing activities.

This change is primarily driven by taxes withheld on share-based awards during the three months ended March 31, 2021.

Critical Accounting Policies and Estimates

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

The Company’s critical accounting policies and estimates are discussed in the 2020 Annual Report.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis