Cronos Group Inc. 10-Q

Item 2. 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 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 internal expectations, estimates, projections, assumptions and beliefs. All information that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology, such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussion of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of historical fact. Forward-Looking Statements include, but are not limited to, statements with respect to: • the uncertainties associated with the COVID-19 pandemic, including our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic, the ability to continue our production, distribution and sale of our products, and demand for and the use of our products by consumers; • laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty regarding the application of United States (“U.S.”) state and federal law to U.S. hemp (including CBD) products and the scope of any regulations by the 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; • 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 (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; • 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; • expectations regarding the implementation and effectiveness of key personnel changes; • the anticipated benefits and impact of the Altria Investment (as defined herein); • the potential exercise of the Altria Warrant (as defined herein), pre-emptive rights and/or top-up rights in connection with the Altria Investment, including proceeds to us that may result therefrom; • expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment; • the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized; • expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic alliances and equity investments, including the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks, Inc. (“Ginkgo”); • our ability to execute on our strategy and the anticipated benefits of such strategy; • expectations of the amount or frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill; 25 Table of Contents • the ongoing impact of the legalization of additional cannabis product types and forms for adult-use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets; • the future performance of our business and operations; • our competitive advantages and business strategies; • the competitive conditions of the industry; • the expected growth in the number of customers using our products; • 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. Ltd. (“OGBC”) production facility; • expectations regarding revenues, expenses and anticipated cash needs; • expectations regarding cash flow, liquidity and sources of funding; • expectations regarding capital expenditures; • the expansion of our production and manufacturing, the costs and timing associated therewith and the receipt of applicable production and sale licenses; • the expected growth in our growing, production and supply chain capacities; • expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations; • expectations with respect to future production costs; • expectations with respect to future sales and distribution channels and networks; • the expected methods to be used to distribute and sell our products; • the anticipated future gross margins of our operations; • accounting standards and estimates; • our ability to timely and effectively remediate any material weaknesses in our internal control over financial reporting; and • expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third-party supply and manufacturing agreements. Certain of the Forward-Looking Statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below. The Forward-Looking Statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including: (i) our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic and the ability to continue our production, distribution and sale of our products and customer demand for and use of our products; (ii) management’s perceptions of historical trends, current conditions and expected future developments; (iii) our ability to generate cash flow from operations; (iv) general economic, financial market, regulatory and political conditions in which we operate; (v) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments; (vi) consumer interest in our products; (vii) competition; (viii) anticipated and unanticipated costs; (ix) government regulation of our activities and products including, but not limited to, the areas of taxation and environmental protection; (x) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (xi) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xii) our ability to conduct operations in a safe, efficient and effective manner; (xiii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations; (xiv) our ability to complete planned dispositions, including the sale of OGBC, and, if completed, obtain our anticipated sales price; and (xv) other considerations that management believes to be appropriate in the circumstances. While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct. 26 Table of Contents By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf. Such factors include, without limitation, the risk that the COVID-19 pandemic may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products; the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected; the risk that we will not complete planned dispositions, including the sale of OGBC, or, if completed, obtain our anticipated sales price; the implementation and effectiveness of key personnel changes; future levels of revenues; consumer demand for cannabis and U.S. hemp products; 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; the success or timing of completion of ongoing or anticipated capital or maintenance projects; business strategies, growth opportunities and expected investment; 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, 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; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; 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 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. Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements. Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned that the Forward-Looking Statements may not be appropriate for any other purpose. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. Forward-Looking Statements are made as of the date they are made and are based on the beliefs, estimates, expectations and opinions of management on that date. We undertake no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements. The Forward-Looking Statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements. Foreign currency exchange rates All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2021, December 31, 2020 and March 31, 2020. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated statements of cash flows of the Company’s foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period using Bloomberg. The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below: (Exchange rates are shown as C$ per $) As of 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 Year-to-date average rate 1.2665 1.3437 1.3411 27 Table of Contents Business Overview 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; two adult-use brands, COVE ™ and Spinach ™ ; and three U.S. hemp-derived consumer products brands, Lord Jones ™ , Happy Dance ™ and PEACE+ ™ . Strategy 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; and • creating and monetizing disruptive intellectual property. 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. 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 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”). 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 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. and Israel. 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, 28 Table of Contents 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 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 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 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. segment. 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. 29 Table of Contents Consolidated Results of Operations: Q1 2021 compared with Q1 2020 Summary of financial results – consolidated (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Net revenue $ 12,611 $ 8,432 $ 4,179 50 % Gross profit (loss) (2,963) (6,476) 3,513 (54) % Gross margin (23) % (77) % N/A 54 pp Adjusted EBITDA (i) $ (37,075) $ (37,055) $ (20) — % (i) See “Non-GAAP measures” for information related to Non-GAAP measures. Net revenue – consolidated (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Net revenue, before excise taxes (i) $ 14,654 $ 9,344 $ 5,310 57 % Excise taxes (2,043) (912) (1,131) 124 % Net revenue $ 12,611 $ 8,432 $ 4,179 50 % (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: • 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 March 31, Change 2021 2020 $ % Cost of sales $ 15,574 $ 6,946 $ 8,628 124 % Inventory write-down — 7,962 (7,962) (100) % Gross profit (loss) (2,963) (6,476) 3,513 (54) % 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. This change was primarily due to: • The increase in net revenue from Q1 2020, as described above. • 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 March 31, Change 2021 2020 $ % Adjusted EBITDA (i) $ (37,075) $ (37,055) $ (20) — % (i) See “Non-GAAP measures” for information related to Non-GAAP measures. 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. 30 Table of Contents • 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: Q1 2021 compared with Q1 2020 Summary of financial results – Rest of World (“ROW”) (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Net revenue $ 10,170 $ 6,256 $ 3,914 63 % Gross profit (loss) (4,139) (7,558) 3,419 (45) % 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 – ROW (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Cannabis flower $ 9,434 $ 2,741 $ 6,693 244 % Cannabis extracts 703 3,400 (2,697) (79) % Other 33 115 (82) (71) % Net revenue $ 10,170 $ 6,256 $ 3,914 63 % For Q1 2021, the ROW segment reported net revenue of $10.2 million, representing an increase of $3.9 million from Q1 2020. This change was primarily due to: 31 Table of Contents • 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 March 31, Change 2021 2020 $ % Cost of sales $ 14,309 $ 5,852 $ 8,457 145 % Inventory write-down — 7,962 (7,962) (100) % Gross profit (loss) (4,139) (7,558) 3,419 (45) % 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. This change was primarily due to: • An increase in net revenue from Q1 2021, as described above. • A decrease in inventory write-downs. Adjusted EBITDA – ROW (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Adjusted EBITDA (i) $ (22,184) $ (29,010) $ 6,826 (24) % (i) See “Non-GAAP measures” for information related to Non-GAAP measures. 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 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 March 31, Change 2021 2020 $ % Net revenue $ 2,441 $ 2,176 $ 265 12 % Gross profit 1,176 1,082 94 9 % 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. 32 Table of Contents Net revenue – U.S. (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Net revenue $ 2,441 $ 2,176 $ 265 12 % For Q1 2021, the U.S. segment reported net revenue of $2.4 million, representing an increase of $0.3 million from Q1 2020. This change was primarily due to: • 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 March 31, Change 2021 2020 $ % Cost of sales $ 1,265 $ 1,094 $ 171 16 % Gross profit 1,176 1,082 94 9 % 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 Q1 2020, as described above. Adjusted EBITDA – U.S. (In thousands of U.S. dollars) For the three months ended March 31, Change 2021 2020 $ % Adjusted EBITDA (i) $ (9,510) $ (5,782) $ (3,728) 64 % (i) See “Non-GAAP measures” for information related to Non-GAAP measures. For Q1 2021, the U.S. 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. 33 Table of Contents Non-GAAP Measures Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This Quarterly Report refers to measures not recognized under U.S. GAAP (“non-GAAP measures”). 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. GAAP. 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. 34 Table of Contents 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 three months ended March 31, 2021 2020 Net income (loss) $ (161,625) $ 75,681 Adjustments 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) Adjustments Depreciation and amortization 1,880 1,162 Adjusted EBITDA $ (37,075) $ (37,055) (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) (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) 35 Table of Contents Liquidity and Capital Resources 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. Summary of cash flows (In thousands of U.S. dollars) For the three months ended March 31, 2021 2020 Cash provided/(used) in operating activities $ (46,002) $ (38,898) Cash provided/(used) in investing activities (9,717) 59,086 Cash provided/(used) by financing activities (9,276) (448) Effect of foreign currency translation on cash and cash equivalents 11,422 (91,037) Net change in cash $ (53,573) $ (71,297) YTD 2021 cash flows vs YTD 2020 cash flows Operating activities 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 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 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 2020 Annual Report. There have been no material changes to these critical accounting policies and estimates. 36 Table of Contents