Cronos Group Inc. 10-Q

Item 1. Financial Statements Table of Contents Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020 4 Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three months ended M arch 3 1 , 2021 and 2020 (Unaudited) 5 Condensed Consolidated Statements of Changes in Equity for the three months ended March 3 1 , 202 1 and 20 20 (Unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 3 Cronos Group Inc. Condensed Consolidated Balance Sheets (In thousands of U.S. dollars, except share amounts) Table of Contents As of March 31, 2021 As of December 31, 2020 Assets (Unaudited) (Audited) Current assets Cash and cash equivalents $ 1,024,450 $ 1,078,023 Short-term investments 214,925 211,766 Accounts receivable, net (i) 6,997 8,928 Other receivables 3,796 10,033 Current portion of loans receivable, net (ii) 6,717 7,083 Prepaids and other current assets 15,053 11,161 Inventory, net 46,437 44,002 Held-for-sale assets 1,969 1,176 Total current assets 1,320,344 1,372,172 Advances to joint ventures 487 467 Investments in equity accounted investees, net 19,221 19,235 Loan receivable, net (ii) 90,953 87,191 Property, plant and equipment, net 192,123 187,599 Right-of-use assets 8,538 9,776 Intangible assets, net 70,085 69,720 Goodwill 179,531 179,522 Total assets $ 1,881,282 $ 1,925,682 Liabilities Current liabilities Accounts payable and other liabilities $ 29,213 $ 42,102 Current portion of lease obligation 1,130 1,322 Derivative liabilities 272,300 163,410 Total current liabilities 302,643 206,834 Due to non-controlling interests 2,129 2,188 Lease obligation 8,231 8,492 Total liabilities 313,003 217,514 Commitments and contingencies (iii) Shareholders’ equity Share capital (iv, v) 584,912 569,260 Additional paid-in capital 32,090 34,596 Retained earnings 895,503 1,064,509 Accumulated other comprehensive income 58,144 42,999 Total equity attributable to shareholders of Cronos Group 1,570,649 1,711,364 Non-controlling interests ( 2,370 ) ( 3,196 ) Total shareholders’ equity 1,568,279 1,708,168 Total liabilities and shareholders’ equity $ 1,881,282 $ 1,925,682 (i) Net of current expected credit loss allowance on accounts receivable of $ 66 and $ 74 as of March 31, 2021 and December 31, 2020, respectively. (ii) Net of current expected credit loss allowance on loans receivable of $ 3,020 and $ 2,439 as of March 31, 2021 and December 31, 2020, respectively. (iii) Refer to Note 9. Commitments and Contingencies in the notes to condensed consolidated financial statements. (iv) Authorized for issuance as of March 31, 2021: unlimited and December 31, 2020: unlimited. (v) Shares issued as of March 31, 2021: 371,656,590 and December 31, 2020: 360,253,332 . See notes to condensed consolidated financial statements. 4 Cronos Group Inc. Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) (In thousands of U.S dollars, except share and per share amounts, unaudited) Table of Contents Three months ended March 31, 2021 2020 Net revenue, before excise taxes $ 14,654 $ 9,344 Excise taxes ( 2,043 ) ( 912 ) Net revenue 12,611 8,432 Cost of sales 15,574 6,946 Inventory write-down — 7,962 Gross profit (loss) ( 2,963 ) ( 6,476 ) Operating expenses Sales and marketing 10,254 7,112 Research and development (“R&D”) 5,102 4,590 General and administrative 21,906 23,759 Share-based payments 2,499 2,436 Depreciation and amortization 735 687 Total operating expenses 40,496 38,584 Operating loss ( 43,459 ) ( 45,060 ) Other income (loss) Interest income, net 2,329 7,751 Gain (loss) on revaluation of derivative liabilities ( 116,874 ) 113,368 Impairment loss on property, plant and equipment and right-of-use assets ( 1,741 ) — Other loss ( 1,859 ) ( 378 ) Total other income (loss) ( 118,145 ) 120,741 Income (loss) from continuing operations ( 161,604 ) 75,681 Loss from discontinued operations ( 21 ) — Net income (loss) $ ( 161,625 ) $ 75,681 Net income (loss) attributable to: Cronos Group $ ( 161,312 ) $ 76,040 Non-controlling interests ( 313 ) ( 359 ) $ ( 161,625 ) $ 75,681 Other comprehensive income (loss) Foreign exchange gain (loss) on translation $ 16,284 $ ( 113,692 ) Total other comprehensive income (loss) 16,284 ( 113,692 ) Comprehensive loss $ ( 145,341 ) $ ( 38,011 ) Comprehensive income (loss) attributable to: Cronos Group $ ( 146,167 ) $ ( 37,675 ) Non-controlling interests 826 ( 336 ) $ ( 145,341 ) $ ( 38,011 ) Net income (loss) per share (i) Basic - continuing operations $ ( 0.44 ) $ 0.22 Diluted - continuing operations (ii) ( 0.44 ) 0.20 Weighted average number of outstanding shares Basic 363,012,740 348,817,472 Diluted (ii) 363,012,740 374,330,168 (i) For the three months ended March 31, 2021 and 2020, the Company reported a basic and diluted loss from discontinued operations of $ 0.00 per share and $ 0.00 per share and $ 0.00 per share and $ 0.00 per share, respectively. See Note 7. Earnings (Loss) per Share. (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 Note 7. Earnings (Loss) per Share. See notes to condensed consolidated financial statements. 5 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2021 360,253,332 $ 569,260 $ 34,596 $ 1,064,509 $ 42,999 $ ( 3,196 ) $ 1,708,168 Warrants exercised 7,832,859 1,161 ( 1,161 ) — — — — Vesting of options — — 2,064 — — — 2,064 Options exercised 3,570,399 3,213 ( 3,203 ) — — — 10 Vesting of restricted share units — — 435 — — — 435 Withholding taxes paid on share-based awards — — ( 979 ) ( 7,694 ) — — ( 8,673 ) Vesting of common shares issued in connection with the use of certain publicity rights in brand development — — 338 — — — 338 Top-up rights exercised — 11,278 — — — — 11,278 Net income (loss) — — — ( 161,312 ) — ( 313 ) ( 161,625 ) Foreign exchange gain (loss) on translation — — — — 15,145 1,139 16,284 Balance as of March 31, 2021 371,656,590 $ 584,912 $ 32,090 $ 895,503 $ 58,144 $ ( 2,370 ) $ 1,568,279 Number of shares Share capital Additional paid-in capital Retained earnings 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 Vesting of options — — 1,730 — — — 1,730 Vesting of restricted share units — — 706 — — — 706 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 ( 187 ) — — — 1,813 Net income (loss) — — — 76,040 — ( 359 ) 75,681 Foreign exchange gain (loss) on translation — — — — ( 113,715 ) 23 ( 113,692 ) Balance as of March 31, 2020 348,817,472 $ 563,165 $ 25,483 $ 1,213,686 $ ( 85,877 ) $ ( 1,189 ) $ 1,715,268 See notes to condensed consolidated financial statements. 6 Cronos Group Inc. Condensed Consolidated Statements of Cash Flows (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Three months ended March 31, 2021 2020 Operating activities Net income (loss) $ ( 161,625 ) $ 75,681 Items not affecting cash: Inventory write-down — 7,962 Share-based payments 2,499 2,436 Depreciation and amortization 1,880 1,162 Gain (loss) on revaluation of derivative liabilities 116,874 ( 113,368 ) Impairment loss on property, plant and equipment and right-of-use assets 1,741 — Expected credit losses on financial assets and non-cash charges to inventory 681 2,068 Other non-cash operating activities, net 1,749 643 Changes in non-cash working capital: Accounts receivable, net 1,931 472 Other receivables 5,687 ( 1,235 ) Prepaids and other current assets ( 3,737 ) ( 2,439 ) Inventory, net ( 1,007 ) ( 14,319 ) Accounts payable and other liabilities ( 12,675 ) 2,039 Cash flows used in operating activities ( 46,002 ) ( 38,898 ) Investing activities Proceeds from (purchase of) short-term investments, net — 80,333 Purchase of property, plant and equipment ( 6,680 ) ( 6,411 ) Purchase of intangible assets ( 392 ) ( 1,105 ) Advances on loans receivable ( 2,645 ) ( 14,512 ) Other non-cash investing activities, net — 781 Cash flows provided by (used in) investing activities ( 9,717 ) 59,086 Financing activities Repayment of lease obligations ( 613 ) ( 448 ) Withholding taxes paid on share-based awards ( 8,673 ) — Other non-cash investing activities, net 10 — Cash flows provided by (used in) financing activities ( 9,276 ) ( 448 ) Effect of foreign currency translation on cash and cash equivalents 11,422 ( 91,037 ) Net change in cash and cash equivalents ( 53,573 ) ( 71,297 ) Cash and cash equivalents, beginning of period 1,078,023 1,199,693 Cash and cash equivalents, end of period $ 1,024,450 $ 1,128,396 Supplemental cash flow information Interest paid $ — $ 7 Interest received 1,157 7,758 Income taxes paid 624 — See notes to condensed consolidated financial statements. 7 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents 1. Background, Basis of Presentation and Accounting Policies (a) Background Cronos Group Inc. (“Cronos Group” or the “Company”) is incorporated in the Province of British Columbia and under the Business Corporations Act (British Columbia) with principal executive offices at 111 Peter 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 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 3. Investments in Equity Accounted Investees, net . (b) Out-of-period adjustments The Company identified an error in the accounting related to the withholding taxes on the net exercise of stock options, which resulted in an understatement of accounts payable and other liabilities of $ 966 and overstatements of other receivables, retained earnings and common stock of $ 3,202 , $ 3,838 and $ 330 , respectively, as of December 31, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the condensed consolidated balance sheet and the condensed consolidated statement of changes in equity as of March 31, 2021 to correct the error. This error had no impact to the condensed consolidated statement of net income (loss) and comprehensive income (loss). The impact of the out-of-period adjustments are included within the changes in non-cash working capital and withholding taxes paid on share-based awards lines in the Company’s condensed consolidated statements of cash flows. (c) Basis of presentation The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other reporting period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Financial Statements”). Certain prior year amounts have been reclassified to conform to the current year presentation of our condensed consolidated financial statements. These reclassifications had no effect on the reported results of operations and ending shareholder’s equity. (d) Adoption of new accounting pronouncements On January 1, 2021, the Company adopted 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 as well as measuring certain purchased options and forwards contracts to acquire investments. The adoption of ASU No. 2020-01 did not have an impact on the Company’s interim condensed consolidated financial statements. On January 1, 2021, the Company adopted 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. The adoption of ASU No. 2019-12 did not have an impact on the Company’s interim condensed consolidated financial statements. 8 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (e) New accounting pronouncements not yet adopted 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 ASU No. 2020-06 will have on its interim condensed consolidated financial statements. 2. Inventory, net Inventory, net is comprised of the following items: As of March 31, 2021 As of December 31, 2020 Raw materials, net $ 11,182 $ 11,489 Work-in-progress – dry cannabis, net 21,590 20,520 Work-in-progress – cannabis extracts, net 5,036 5,758 Finished goods – dry cannabis, net 5,677 4,894 Finished goods – cannabis extracts, net 2,141 1,011 Supplies and consumables 811 330 Total $ 46,437 $ 44,002 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 three months ended March 31, 2021 and 2020, the Company recorded write-downs related to inventory of $ nil and $ 7,962 , respectively. 3. Investments in Equity Accounted Investees, net 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 cultivating and commercializing cannabis and cannabis products. Cronos Group holds variable interests in Cronos GrowCo through its ownership of 50 % of Cronos GrowCo’s common shares and senior secured debt. 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. 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 hemp and cannabis products. Cronos holds variable interests in Natuera through its ownership of 50 % of Natuera’s common shares and other debt. Natuera’s economic performance is driven by the quantity and strains of cannabis grown, which is mutually determined by the joint venture partners. 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 entity’s 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, net” in the consolidated balance sheets. 9 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents CLS is a wholly owned subsidiary of Cannasoul Analytics Ltd., incorporated with the purpose of establishing a commercial cannabis analytical testing laboratory located on the premises of Cronos Israel (the “Cannasoul Collaboration”). Cronos Israel agreed to advance up to ILS 8,297 ($ 2,483 ) 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 bears 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 4. Loans Receivable, net for further information regarding loans receivable. A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows: Ownership interest As of March 31, 2021 As of December 31, 2020 Cronos Australia 31 % $ — $ — Cronos GrowCo 50 % $ 19,221 $ 19,235 Natuera 50 % — — $ 19,221 $ 19,235 The Company’s share of net earnings (losses) from equity investments accounted for under the equity method of accounting: For the three months ended March 31, 2021 2020 Cronos GrowCo $ ( 299 ) $ ( 311 ) Natuera (i) ( 1,344 ) ( 861 ) $ ( 1,643 ) $ ( 1,172 ) (i) 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 4. Loans Receivable, net. The Company determined that the maximum exposure of loss on investments in non-consolidated investments 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 as of March 31, 2021 and December 31, 2020: Ownership interest As of March 31, 2021 As of December 31, 2020 Cronos Australia 31 % $ 1,553 $ 1,530 Cronos GrowCo 50 % 21,433 21,125 MedMen Canada 50 % 487 467 Natuera 50 % 8,160 8,154 Total $ 31,633 $ 31,276 10 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents 4. Loans Receivable, net As of March 31, 2021 As of December 31, 2020 Natuera Series A loan (i) $ 2,013 $ 3,518 GrowCo Facility (ii) 796 3,137 Add: Accrued interest 3,908 428 Total current portion of loans receivable 6,717 7,083 GrowCo Facility (ii) 76,043 69,939 Mucci promissory note (iii) 13,654 13,324 Cannasoul collaboration loan (iv) 1,215 1,261 Add: Accrued interest 41 2,667 Total long-term portion of loans receivable 90,953 87,191 Total loans receivable, net $ 97,670 $ 94,274 (i) As of March 31, 2021 and December 31, 2020, a current expected credit loss allowance of $ 1,151 and $ 685 , respectively, was recorded against the master loan agreement entered into with Natuera on September 27, 2019 (the “Series A loan”). As of March 31, 2021 and December 31, 2020, a loss allowance of $ 4,582 and $ 3,024 , respectively, was recorded against the 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 3 and Note 14. (ii) As of March 31, 2021 and December 31, 2020, Cronos GrowCo had drawn C$ 98,500 ($ 78,405 ) and C$ 95,150 ($ 74,626 ), respectively, from a credit agreement it entered into with the Company in August 2019 (the “GrowCo Facility”). As of March 31, 2021 and December 31, 2020, a current expected credit loss allowance of $ 1,569 and $ 1,470 , respectively, was recorded against the GrowCo Facility. (iii) As of March 31, 2021 and December 31, 2020, a current expected credit loss allowance of $ 274 and $ 259 , respectively, was recorded against the Mucci promissory note. (iv) As of March 31, 2021 and December 31, 2020 CLS has received ILS 4,149 (approximately $ 1,241 ) from a non-recourse loan. As of March 31, 2021 and December 31, 2020 a current expected credit loss allowance of $ 26 and $ 25 , respectively, was recorded against the Cannasoul collaboration loan. 5. 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 and one warrant of the Company (the “Altria Warrant”), all of which were issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximately 45 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 55 % (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note. The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable. a. The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10 % of the common shares of Cronos (approximately 82.6 million common shares at March 31, 2021) at a per share exercise price of C$ 19.00 , which expires on March 8, 2023. b. The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the R&D partnership with Ginkgo Bioworks Inc. (“Ginkgo”) (the “Ginkgo Strategic Partnership”)), the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance. The price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Strategic Partnership will be C$ 16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. 11 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents c. In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10 -day volume-weighted average price of the common shares of the Company on the TSX for the ten full days preceding such exercise by Altria, provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$ 16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities. A reconciliation of the carrying amounts of the derivative liability for the three months ended March 31, 2021 and 2020: As of January 1, 2021 Revaluation (gain)/loss Exercise of rights Foreign exchange effect As of March 31, 2021 (a) Altria Warrant $ 138,858 $ 92,964 $ — $ 2,834 $ 234,656 (b) Pre-emptive Rights 12,095 7,833 — 245 20,173 (c) Top-up Rights 12,457 16,077 ( 11,278 ) 215 17,471 $ 163,410 $ 116,874 $ ( 11,278 ) $ 3,294 $ 272,300 As of January 1, 2020 Revaluation (gain)/loss Exercise of rights Foreign exchange effect As of March 31, 2020 (a) Altria Warrant $ 234,428 $ ( 88,104 ) $ — $ ( 13,958 ) $ 132,366 (b) Pre-emptive Rights 12,787 1,315 — ( 1,032 ) 13,070 (c) Top-up Rights 49,945 ( 26,579 ) — ( 2,626 ) 20,740 $ 297,160 $ ( 113,368 ) $ — $ ( 17,616 ) $ 166,176 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 three months ended March 31, 2021, the Company’s share price increased from December 31, 2020 resulting in a loss on revaluation of $ 116,874 . During the three months ended March 31, 2020, the Company’s share price decreased from December 31, 2019 resulting in a gain on revaluation of $ 113,368 . 12 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of March 31, 2021 and December 31, 2020 applying the following inputs: As of March 31, 2021 As of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Altria Warrant Pre-emptive Rights Top-up Rights Share price at valuation date (i) $ 11.88 $ 11.88 $ 11.88 $ 8.84 $ 8.84 $ 8.84 Subscription price (i) $ 19.00 $ 16.25 $ 16.25 $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (ii) 0.22 % 0.17 % 0.14 % 0.21 % 0.17 % 0.13 % Weighted average expected life (iii) 1.93 1.25 0.72 2.18 1.50 0.98 Expected annualized volatility (iv) 82 % 82 % 82 % 81 % 81 % 81 % Expected dividend yield — % — % — % — % — % — % (i) Per share in C$. (ii) 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. As of March 31, 2021 and December 31, 2020, the risk-free interest rate uses a range of approximately 0.09 % to 0.86 % and 0.10 % to 0.39 %, respectively, for the Pre-emptive Rights and Top-up Rights. (iii) The expected life represents the period of time, in years, 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. As of March 31, 2021 and December 31, 2020, the expected life uses a range of approximately 0.25 year to 4.50 years and 0.50 year to 5.00 years, respectively. (iv) Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of March 31, 2021. As of December 31, 2020, 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. While a decrease in the inputs noted below would cause a decrease in the carrying value of the derivative liability, there would also be an equal but opposite impact on net income (loss) as of March 31, 2021. Increase as of March 31, 2021 Altria Warrant Pre-emptive Rights Top-up Rights Share price $ 42,479 $ 4,133 $ 4,376 Weighted average expected life 18,051 3,039 683 Expected annualized volatility 35,099 2,865 2,785 These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several factors outside of the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods. 6. Share-based Payments (a) Share-based award plans The Company has granted stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees and non-employee directors under the Stock Option Plan dated May 26, 2015 (the “2015 Stock Option Plan”), the 2018 Stock Option Plan dated June 28, 2018 (the “2018 Stock Option Plan” and, together with the 2015 Stock Option Plan, the “Prior Option Plans”), the 2020 Omnibus Equity Incentive Plan dated March 29, 2020 (the “2020 Omnibus Plan”) and the DSU plan dated August 10, 2019 (the “DSU Plan”). The Company can no longer make grants under the Prior Option Plans. The following table summarizes the total stock-based compensation expense associated with the Company’s stock options and RSUs for the three months ended March 31, 2021 and 2020: For the three months ended March 31, 2021 2020 Vesting of stock options $ 2,064 $ 1,730 Vesting of RSUs 435 706 Total share-based payments $ 2,499 $ 2,436 13 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (b) Stock options Vesting conditions for grants of options are determined by the Compensation Committee of the Company’s Board of Directors. The typical vesting for stock option grants made under the 2020 Omnibus Plan is annual vesting over three to five years with a maximum term of ten years . The typical vesting for stock option grants made under the Prior Option Plans is quarterly vesting over three to five years with a maximum term of seven years . The Prior Option Plans did not and the 2020 Omnibus Plan does not authorize grants of options with an exercise price below fair market value. The following is a summary of the changes during the three months ended March 31, 2021 and 2020: Weighted average exercise price (C$) (i) Number of options Weighted average remaining contractual term (years) Balance as of January 1, 2021 $ 5.40 13,755,148 2.30 Exercise of options 2.13 ( 5,230,550 ) Cancellation, forfeiture and expiry of options 14.71 ( 25,771 ) Balance as of March 31, 2021 $ 7.38 8,498,827 2.82 Exercisable as of March 31, 2021 $ 5.75 4,896,820 1.46 (i) The weighted average exercise price reflects the conversion of foreign currency-denominated stock options translated into C$ using the average foreign exchange rate as of the date of issuance. 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 Cancellation, forfeiture and expiry of options 17.17 ( 42,889 ) Balance as of March 31, 2020 $ 4.80 14,106,613 2.06 Exercisable as of March 31, 2020 $ 3.11 9,783,544 1.66 The following table summarizes stock options outstanding for the 2020 Omnibus Plan, the 2018 Stock Option Plan, and the 2015 Stock Option Plan: Stock options outstanding as of March 31, 2021 December 31, 2020 2020 Omnibus Plan 2,000,000 2,000,000 2018 Stock Option Plan 1,591,944 1,627,715 2015 Stock Option Plan 4,906,883 10,127,433 Total stock options outstanding 8,498,827 13,755,148 (c) Restricted share units The following is a summary of the changes in RSUs for the three months ended March 31, 2021 and 2020: Number of RSUs (i) Weighted average grant date fair value (C$) (ii) Balance as of January 1, 2021 948,357 $ 7.66 Granted (i) 265,904 13.27 Balance as of March 31, 2021 1,214,261 $ 8.89 (i) RSUs issued in the period vest annually in equal installments over a three-year period following the grant date, subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria. (ii) The weighted average exercise price reflects the conversion of foreign currency-denominated RSUs translated into C$ using the foreign exchange rate as of the date of issuance. Number of RSUs Weighted average grant date fair value (C$) Balance as of January 1, 2020 and March 31, 2020 732,972 $ 15.34 All RSUs outstanding as of March 31, 2021 and December 31, 2020 were granted under the 2020 Omnibus Plan. 14 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (d) Deferred share units The following is a summary of the changes in DSUs during the three months ended March 31, 2021 and 2020: Number of DSUs Financial liability Balance as of January 1, 2021 83,293 $ 577 Loss (gain) on revaluation — 211 Balance as of March 31, 2021 83,293 $ 788 Number of DSUs Financial liability Balance as of January 1, 2020 33,937 $ 255 Loss (gain) on revaluation — ( 50 ) Balance as of March 31, 2020 33,937 $ 205 All DSUs outstanding as of March 31, 2021 and December 31, 2020 were granted under the DSU Plan. (e) Warrants The following is a summary of the changes in warrants during the three months ended March 31, 2021 and 2020: Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2021 $ 0.25 7,987,349 Exercise of warrants 0.25 ( 7,977,349 ) Balance as of March 31, 2021 (i) $ 0.25 10,000 (i) The outstanding warrants were granted in the second quarter of 2016 and expire on May 27, 2021. Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2020 and March 31, 2020 $ 0.26 18,066,662 See Note 5. Derivative Liabilities for further description on the Altria Warrant. 15 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents 7. Earnings (Loss) per Share Basic and diluted earnings (loss) per share from continuing operations are calculated using the following numerators and denominators: For the three months ended March 31, 2021 2020 Basic earnings per share computation Net income (loss) attributable to common shareholders of Cronos Group $ ( 161,312 ) $ 76,040 Weighted average number of common shares outstanding 363,012,740 348,817,472 Basic earnings per share (i) $ ( 0.44 ) $ 0.22 Diluted earnings per share computation Net income (loss) used in the computation of basic earnings per share $ ( 161,312 ) $ 76,040 Adjustment for gain (loss) on revaluation of derivative liabilities — — Net income (loss) used in the computation of diluted income per share $ ( 161,312 ) $ 76,040 Weighted average number of common shares outstanding used in the computation of basic earnings per share 363,012,740 348,817,472 Dilutive effect of warrants — 17,550,444 Dilutive effect of stock options — 7,962,252 Weighted average number of common shares for computation of diluted income (loss) per share 363,012,740 374,330,168 Diluted earnings per share (i) $ ( 0.44 ) $ 0.20 (i) Basic and dilutive earnings per share from discontinued operations were $ 0.00 and $ 0.00 for the three months ended March 31, 2021 and 2020, respectively. (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. The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive or because conditions for contingently issuable shares were not satisfied at the end of the reporting periods. Three months ended March 31, 2021 2020 Ginkgo equity milestones 14,674,904 14,674,904 Pre-emptive Rights 11,285,001 12,006,740 Top-up Rights – fixed price 11,113,451 25,111,456 Top-up Rights – market price 2,623,082 1,941,349 Altria Warrant 82,590,353 77,514,993 Stock options 8,522,086 2,240,456 Warrants 5,563,176 — Restricted share units 572,970 732,972 Total anti-dilutive securities 136,945,023 134,222,870 16 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents 8. Segment Information Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manage the business, make operating decisions and assess the Company’s performance. The Company determined that it has the following two reportable segments: United States and Rest of World. The United States operating segment consists of the manufacture and distribution of hemp-derived CBD infused products. The Rest of World operating segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets . These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions regarding the allocation of resources. The CODMs review 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. Segment data was as follows for the three months ended March 31, 2021 and 2020: Three months ended March 31, 2021 United States Rest of World Corporate expenses Total Net revenue Cannabis flower $ — $ 9,434 $ — $ 9,434 Cannabis extracts 2,441 703 — 3,144 Other — 33 — 33 Net revenue $ 2,441 $ 10,170 $ — $ 12,611 Share of loss from investments in equity accounted investees $ — $ 1,643 $ — $ 1,643 Interest income 3 2,332 — 2,335 Interest expense — ( 6 ) — ( 6 ) Interest income, net $ 3 $ 2,326 $ — $ 2,329 Depreciation and amortization $ 71 $ 664 $ — $ 735 Impairment loss on property, plant and equipment and right-of-use assets 1,741 — — 1,741 Loss from discontinued operations — 21 — 21 Adjusted EBITDA ( 9,510 ) ( 22,184 ) ( 5,381 ) ( 37,075 ) Total assets 252,449 394,442 1,234,391 1,881,282 Investments in equity accounted investees — 19,221 — 19,221 Goodwill 178,416 1,115 — 179,531 Purchase of property, plant and equipment, net 80 6,600 — 6,680 17 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents Three months ended March 31, 2020 United States Rest of World Corporate expenses Total Net revenue Cannabis flower $ — $ 2,741 $ — $ 2,741 Cannabis extracts 2,176 3,400 — 5,576 Other — 115 — 115 Net revenue $ 2,176 $ 6,256 $ — $ 8,432 Share of loss from investments in equity accounted investees $ — $ 1,172 $ — $ 1,172 Interest income 7 7,751 — 7,758 Interest expense — ( 7 ) — ( 7 ) Interest income, net $ 7 $ 7,744 $ — $ 7,751 Depreciation and amortization 33 654 — 687 Adjusted EBITDA $ ( 5,782 ) $ ( 29,010 ) $ ( 2,263 ) $ ( 37,055 ) Adjusted EBITDA is reconciled to net income (loss) as follows for the three months ended March 31, 2021 and 2020: (In thousands of U.S. dollars) Three months ended March 31, 2021 US ROW Corporate Expenses Total Net income (loss) $ ( 12,092 ) $ ( 142,147 ) $ ( 7,386 ) $ ( 161,625 ) Adjustments 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 ) Adjustments Depreciation and amortization 99 1,781 — 1,880 Adjusted EBITDA $ ( 9,510 ) $ ( 22,184 ) $ ( 5,381 ) $ ( 37,075 ) 18 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (In thousands of U.S. dollars) Three months ended March 31, 2020 US ROW Corporate Expenses Total Net income (loss) $ ( 6,516 ) $ 88,867 $ ( 6,670 ) $ 75,681 Adjustments 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 ) Adjustments Depreciation and amortization 35 1,127 — 1,162 Adjusted EBITDA $ ( 5,782 ) $ ( 29,010 ) $ ( 2,263 ) $ ( 37,055 ) Sources of net revenue for the three months ended March 31, 2021 and 2020 were as follows: Three months ended March 31, 2021 2020 Cannabis flower $ 9,434 $ 2,741 Cannabis extracts 3,144 5,576 Other 33 115 Net revenue $ 12,611 $ 8,432 Net revenue attributed to a geographic region based on the location of the customer were as follows: Three months ended March 31, 2021 2020 Canada $ 7,582 $ 6,091 Israel 2,518 — United States 2,441 2,176 Other countries 70 165 Net revenue $ 12,611 $ 8,432 Property, plant and equipment assets were physically located in the following geographic regions: As of March 31, 2021 As of December 31, 2020 Canada $ 167,363 $ 162,163 Israel 23,480 23,143 United States 1,280 2,293 Total $ 192,123 $ 187,599 The Company sells products through a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenues and greater than 10% of accounts receivable. United States During the three months ended March 31, 2021 and 2020, the U.S. segment had no major customers. As of March 31, 2021 and December 31, 2020, the Company had $ 36 and $ 65 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers. 19 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents Rest of World During the three months ended March 31, 2021, the Rest of World segment earned a total net revenue before excise taxes of $ 8,963 from four major customers, Société Québécoise du Cannabis, Novolog Group, Alberta Gaming, Liquor and Cannabis Commission and Ontario Cannabis Retail Corporation, accounting for 18 %, 17 %, 13 % and 13 %, respectively, of the Company’s total net revenue before excise taxes. During the three months ended March 31, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 4,121 from 3 major customers, together accounting for 49 % of the Company’s total net revenues before excise taxes. As of March 31, 2021 and December 31, 2020, the Company had $ 30 and $ 9 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers. The loss from discontinued operations from the Rest of World segment for the three months ended March 31, 2021 and 2020 was $ 21 and $ nil , respectively. 9. Commitments and Contingencies (a) Commitments There has been no material change in the information regarding commitments as disclosed in the Company’s Annual Financial Statements. (b) 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 financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results for that quarter. (i) 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 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The 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 disclosures relating to the Audit Committee of the Board of Directors’ 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 of Directors 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 of Directors was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Amended Statement of Claim does not quantify a damage request. (ii) 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. 20 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (iii) Litigation relating to marketing, distribution and sale of products On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. On December 4, 2020, a Third Amended Statement of Claim was filed, which added a second alleged consumer. The Third Amended Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Third Amended Statement of Claim seeks a total of C$ 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 Holding Group, LLC (“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 Quarterly Report, the plaintiff has not refiled the complaint. The Company expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase. 10. Financial Instruments (a) 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 March 31, 2021 and December 31, 2020 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. March 31, 2021 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,024,450 $ — $ — $ 1,024,450 Short-term investments 214,925 — — 214,925 Derivative liabilities — — 272,300 272,300 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 There were no transfers between categories during the periods presented. 21 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (b) Financial Risks The Company’s activities expose it to a variety of financial risks, including credit risk, market risk, interest rate risk, liquidity risk, and foreign currency rate risk. (i) 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 $ 1,348,325 and $ 1,403,491 as of March 31, 2021 and December 31, 2020, respectively. (a) C ash and cash equivalents, short-term investments, and other receivables The Company held cash and cash equivalents of $ 1,024,450 and $ 1,078,023 as of March 31, 2021 and December 31, 2020, respectively. The short-term investments and related interest receivable of $ 214,925 and $ 211,766 , as of March 31, 2021 and December 31, 2020 respectively, represents short-term investments with a maturity of less than a year and accrued interest as of period end. The cash and cash equivalents and short-term investments, including guaranteed investment certificates and bankers’ acceptances, are held with central banks and financial institutions that are highly rated. In addition to interest receivable, other receivables include sales taxes receivable from the government. As such, the Company has assessed an insignificant loss allowance on these financial instruments. (b) Accounts receivable An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, among others, the failure of a debtor to engage in a repayment plan and a failure to make contractual payments for a period of greater than 120 days past due. As of March 31, 2021 and December 31, 2020, the Company recorded a current expected credit loss allowance of $ 66 and $ 74 , respectively. As of March 31, 2021, the Company has assessed that there is a concentration of credit risk, as 63 % of the Company’s accounts receivable were due from three customers with an established credit history with the Company. As of December 31, 2020, 78 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. (ii) Market risk Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, market and economic conditions, and equity and commodity prices. The Company is exposed to market risk in divesting its investments, such that unfavorable market conditions could result in dispositions of investments at less than their carrying values. Further, the revaluation of securities classified as fair value through net income could result in significant write-downs of the Company’s investments, which would have an adverse impact on the Company’s financial position, unless these would flow through other comprehensive income. The Company manages market risk by having a portfolio of securities from multiple issuers so that the Company is not materially exposed to any one issuer. (iii) Interest rate risk Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of income and expense recorded on the cash equivalents and short-term investments, and the market value of all interest-earning assets, other than those which possess a short-term to maturity. A 10% change in the interest rate in effect on March 31, 2021 and December 31, 2020 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 three months ended March 31, 2021 and 2020, the Company had net interest income of $ 2,329 and $ 7,751 , respectively. 22 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents (iv) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and arises principally from the Company’s accounts payable and other liabilities. The Company’s policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations as they become due. Further, the Company’s management is responsible for ensuring funds exist and are readily accessible to support business opportunities as they arise. The Company’s funding was primarily provided in the form of capital raised through the issuance of common shares and warrants. As of March 31, 2021, the Company had assessed a concentration risk of vendors as 26 % of accounts payables were due to two vendors. As of December 31, 2020, the Company had assessed a concentration risk of vendors as 64 % due to four vendors. (v) Foreign currency risk Currency rate risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on investments in equity investees denominated in dollars, A$ and C$, and other assets and liabilities denominated in A$ 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. During the three months ended March 31, 2021 and 2020, the Company had foreign currency gain (loss) on translation of $ 16,284 and $( 113,692 ), respectively. A 10% change in the exchange rates for the U.S. dollar would affect the carrying value of net assets by approximately $ 156,828 and $ 170,817 as of March 31, 2021 and December 31, 2020, respectively. 11. Held-For-Sale Assets and Discontinued Operations During the year ended December 31, 2020, the Company advanced its plans for the sale and disposal of substantially all of the assets of Original B.C. Ltd. (“OGBC”) and as a result, OGBC’s results of operations were reclassified as discontinued operations in the accompanying condensed consolidated financial statements. As of March 31, 2021, the assets and liabilities of OGBC continue to meet the definition of discontinued operations and are included as “held-for-sale” assets on the condensed consolidated balance sheet as of March 31, 2021 and December 31, 2020, and loss from discontinued operations on the condensed consolidated statements of net income and comprehensive income for the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2021, the Company advanced its plans for the sale of land and office premises (approximately 80,173 combined square feet) located in Winnipeg, Manitoba, Canada and accounted for in the Rest of World segment. The sale is expected to be made within the next twelve months and the criteria for the land and office premises to be classified as “held-for-sale” were met during the three months ended March 31, 2021. As a result, the assets are classified as “held-for-sale” assets as of March 31, 2021. The following table summarizes the financial information for discontinued operations: Three months ended March 31, 2021 2020 Loss from discontinued operations, net of income taxes $ ( 21 ) $ — March 31, 2021 December 31, 2020 OGBC assets classified as held-for-sale $ 1,195 $ 1,176 Other property, plant and equipment classified as held-for-sale 774 — Held-for-sale assets $ 1,969 $ 1,176 12. Related Party Transactions and Balances There have been no material related party transactions during the three months ended March 31, 2021 and 2020. As of March 31, 2021 and December 31, 2020 there were no material related party receivables or payables. 23 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except gram and share amounts) Table of Contents 13. Impairment Loss on Property, Plant and Equipment and Right-of-Use Assets During the three months ended March 31, 2021, the Company recognized an impairment charge of $ 1,019 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. The significant change in the extent and manner in which the leasehold improvements are being used and the expectation that, more likely than not, the leasehold improvements will be disposed of before the end of their useful life triggered an impairment. The right-of-use lease asset associated with the leasehold improvements was also written down as a result of our decision to no longer use the leased premises. The Company recognized an impairment charge on the de-recognition of the right-of-use asset of $ 702 during the three months ended March 31, 2021. Both the impairment charges are recognized in the statement of net income (loss) as an impairment loss on property, plant and equipment and right-of-use assets. 14. Subsequent Events On April 1, 2021, the Company and an affiliate of Agroidea (“AGI”), the other joint venture partner of Natuera, agreed to convert all advances made to Natuera under the Series A Loan, plus accrued interest, into equity. Total aggregate gross advances to Natuera under the Series A Loan were $ 15,500 , of which the Company advanced 50 % and AGI advanced the remaining 50 %, for an amount of $ 7,750 each. As a result, the Company transferred the carrying value of the loan of $ 2,013 plus accrued interest, which approximates fair value, to investments in equity accounted investees in respect of Natuera. 24 Table of Contents