What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-18 compared with 2021-08-06 · 293 added, 267 removed, 297 unchanged (65% of the section changed)

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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 June 30, 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.

of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 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”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report.

Forward-Looking Statements

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

• expectations related to our announced realignment (the “Realignment”) and any progress, challenges and effects related thereto as well as changes in strategy, metrics, investments, reporting structure, costs, operating expenses, employee turnover and other changes with respect thereto;

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

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• 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.

• 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;

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• 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;

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

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

(“OGBC”) production facility;

• uncertainties as to our ability to exercise the PharmaCann Option (as defined herein) in the near term or the future or in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S.

• expectations regarding acquisitions and dispositions and the anticipated benefits therefrom;

• uncertainties as to our ability to exercise the PharmaCann Option (as defined herein) in the near term or the future in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S.

and our ability to realize the anticipated benefits of the transaction with PharmaCann (as defined herein);

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• 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 growth in our growing, production and supply chain capacities;

• expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations;

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(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;

(xv) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann;

and (xvi) other considerations that management believes to be appropriate in the circumstances.

(xiv) our ability to realize the expected cost-savings, efficiencies and other benefits of our Realignment and employee turnover related thereto;

(xv) our ability to complete planned dispositions and, if completed, obtain our anticipated sales price;

(xvi) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann;

and (xvii) 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.

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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.

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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 risk that we will not complete planned dispositions or, if completed, obtain our anticipated sales price;

the implementation and effectiveness of key personnel changes;

the risks that our Realignment will not result in the expected cost-savings, efficiencies and other benefits or will result in greater than anticipated turnover in personnel;

future levels of revenue;

the implementation and effectiveness of key personnel changes;

future levels of revenues;

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legal or regulatory obstacles that could prevent us from being able to exercise the PharmaCann Option and thereby realizing the anticipated benefits of the transaction with PharmaCann;

dilution of our fully-diluted ownership of PharmaCann and the loss of our rights as a result of that dilution;

our remediation of material weaknesses in our internal control over financial reporting and the improvement of our control environment and our systems, processes and procedures;

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.

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 not to place undue reliance on these Forward-Looking Statements because of their inherent uncertainty and to appreciate the limited purposes for which they are being used by management.

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.

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

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of June 30, 2021, June 30, 2020 and December 31, 2020.

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of September 30, 2021, September 30, 2020 and December 31, 2020.

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

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

June 30, 2021 June 30, 2020 December 31, 2020

September 30, 2021 September 30, 2020 December 31, 2020

Average rate 1.2593 1.3323 1.3036

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Year-to-date average rate 1.2519 1.3539 1.3411

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Business Overview

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

Cronos Group is an innovative global cannabinoid company with international production and distribution across four 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+ ™ .

Cronos Group’s diverse international brand portfolio includes Spinach ® , PEACE NATURALS ® , Lord Jones ® , Happy Dance ® and PEACE+™.

The Company no longer produces or distributes products under the COVE ® brand.

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

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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.

As of September 30, 2021, Cronos Group additionally held 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

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Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which the Company operates.

Although we have not yet seen a significant impact, we continue to monitor our supply chain closely.

In Canada, COVID-19 restrictions began gradually easing at the end of June 2021 as the vaccination rate increases.

Each province is responsible for implementing re-opening plans and certain provinces, including Ontario, are progressing through phases of re-opening which may permit continued increases to the allowance of in-person shopping, typically in the form of percentage of store capacity.

Although we have not yet seen a significant impact from these challenges, we continue to monitor our supply chain closely.

In Canada, COVID-19 related restrictions continued to be removed as the vaccination rate increased.

All provinces have some form of cannabis retail open to consumers, whether it be restricted in-person shopping, curb-side pickup or delivery.

The lockdown measures taken in the first six months of 2021 to slow infection rates negatively impacted the Company’s short-term revenue growth in Canada.

However, if provincial reopening plans are effective across some provinces in the third quarter of 2021, we expect to partially mitigate this negative impact.

However, we expect the reopening plans implemented in the third quarter of 2021 to partially mitigate this negative impact in the remainder of 2021.

In Israel, most COVID-19 restrictions have been removed as vaccination rates have increased.

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The Company does not expect the remaining COVID-19 restrictions to have a material impact on the Company’s short-term revenue growth in Israel.

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In both the U.S.

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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.

In June 2021, Cronos Group announced a strategic investment (the “PharmaCann Investment”) in PharmaCann Inc.

(“PharmaCann”), a leading vertically integrated U.S.

cannabis company.

A wholly owned subsidiary of Cronos Group purchased an option (the “PharmaCann Option”) to acquire an approximately 10.5% ownership stake in PharmaCann on a fully-diluted basis for a total consideration of approximately $110.4 million.

PharmaCann has a broad geographic footprint in the U.S.

and has built an efficient, effective and scalable operating model, including six production facilities and 24 dispensaries operating under the Verilife™ brand across the following six limited license states:

New York, Illinois, Ohio, Maryland, Pennsylvania and Massachusetts.

PharmaCann continues to invest in its manufacturing infrastructure and brand development to capitalize on the significant consumer retail and business-to-business wholesale opportunities.

Following the exercise of the PharmaCann Option (which will be based upon various factors, including the status of U.S.

federal cannabis legalization), Cronos Group and PharmaCann will enter into commercial agreements that would permit each party to offer its products through either party’s distribution channels.

Strategic and Organizational Update

As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, the Company has determined that now is the right time to implement the Realignment of its business around its brands.

The organizational and cost initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time.

The program will consist of the following:

Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;

Evaluating the Company's global supply chain and performing product reviews, and pricing and distribution optimization in order to reduce fixed expenses and reduce complexity;

Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S.

adult-use market entry.

Brand and Product Portfolio

In June 2021, Cronos Group launched SOURZ by Spinach™, an exciting new line of cannabis gummies with bold and unique dual flavor combinations, into the Canadian adult-use market.

SOURZ by Spinach™ delivers bold fruit flavors in a distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile, differentiating the product and elevating the consumer experience.

SOURZ by Spinach™ has quickly risen to being one of the top performing brands in the edibles category.

In June 2021, Cronos Group launched Spinach™ DABZ, a new line of cannabis concentrates, into the Canadian adult-use market.

Spinach™ DABZ are 100% cannabis-derived with no color remediation or additives to preserve terpenes and full spectrum cannabinoids.

Broadening the reach of Cronos Group’s Spinach™ brand into new and emerging categories with differentiated products will continue to be the key driver of innovation initiatives.

During the second quarter of 2021, the Spinach™ brand also launched a 28-gram format for Spinach™ flower, Spinach™ Nuggetz, and a new flower SKU, Spinach™ GMO Cookies, in select markets in Canada.

In June 2021, the Company officially re-launched PEACE+™, Cronos Group’s U.S.

hemp-derived CBD offering that is positioned in the mainstream market through its direct-to-consumer website, peaceplus.com.

PEACE+™’s initial product portfolio consists of four tinctures.

The Company intends to expand the product portfolio over time with innovative U.S.

hemp-derived CBD products.

Subsequent to the end of the second quarter of 2021, in July 2021, Happy Dance™ launched a new facial skin care product, Look Alive CBD Face Moisturizer.

This moisturizer has a whipped, light texture and is packed with hydrating ingredients such as avocado oil, hyaluronic acid and high-quality U.S.

hemp-derived CBD.

The product is now available online to U.S.

consumers through the brand’s direct-to-consumer website, doahappydance.com, and online at ULTA.com and is expected to become available in ULTA Beauty™ stores throughout the U.S.

in the coming weeks.

In the third quarter of 2021, the Company continued to build on the success of its dried flower portfolio with the introduction of new high potency cultivars, Atomic Sour Grapefruit and Cocoa Bomba, in select markets in Canada.

These launches, in addition to the launch of Spinach ® GMO Cookies earlier in 2021, are further solidifying the Company’s strength in the dried flower category in the Canadian adult-use cannabis market.

In October 2021, Cronos Group launched its first cultured cannabinoid product, SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy.

The SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy builds on Cronos Group’s successful SOURZ by Spinach ® platform, utilizing the distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile.

In addition, in January 2022, the Company launched a 1-gram vape featuring THC and CBG under the SPINACH FEELZ™ brand in the Canadian adult-use cannabis market.

The Company, through the SPINACH FEELZ™ brand, plans to produce a variety of cannabis products that will prominently feature rare cannabinoids, designed to deliver unique and enhanced experiences made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids, like THC and CBD.

Global Supply Chain

In the third quarter of 2021, Cronos GrowCo, the Company’s joint venture in Canada, continued to build on success of its first harvest in the first quarter of 2021.

With its processing license in hand, Cronos GrowCo has begun selling to Canadian license holders in the

wholesale market.

In addition, the Company has begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of the Company’s Canadian cannabis supply chain.

Intellectual property initiatives

In June 2021, Cronos Group and Ginkgo Bioworks, Inc.

(“Ginkgo”) announced an amended collaboration and license agreement that will enable the companies to accelerate the commercialization of cultured cannabinoids at scale.

The amended agreement follows the receipt of Cronos Fermentation’s processing license in April 2021, and most recently the receipt of its license issued by the Canada Revenue Agency.

With the amended agreement and both licenses in hand, Cronos Fermentation commenced commercial-scale production of cannabigerol (“CBG”) in June 2021.

Cronos Group is prioritizing rare cannabinoids, such as CBG, and plans to sequence commercial production and subsequent product launches based on this approach.

Cronos Group expects that the final productivity target for CBG will be achieved prior to September 2021, as previously announced.

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Kendrick Ashton Jr.

was elected to Cronos Group’s Board of Directors at the Annual Meeting of Shareholders held on June 25, 2021.

Ashton is the Co-Founder and Co-Chief Executive Officer of The St.

James, a leading developer and operator of performance, wellness and lifestyle brands, experiences and destinations.

Prior to founding The St.

James in 2014, Mr.

Ashton was a founding member and Managing Director of Perella Weinberg Partners, a boutique financial services firm founded in 2006.

Prior to joining Perella Weinberg Partners, Mr.

Ashton was an investment banker at Goldman, Sachs & Co.

and gained legal experience at Cravath, Swaine & Moore LLP and Wachtell, Lipton, Rosen & Katz.

Ashton is a member of the Board of Trustees of the Colonial Williamsburg Foundation, the Board of Trustees of the National Urban League, the Board of Directors of Archbishop John Carroll High School and the Board of Directors of Bellwether Education Partners and is an emeritus member of the Board of Visitors and Foundation Board of the College of William & Mary.

In April 2021, Thomas Cohn joined Cronos Group as Head of Regulatory and Product.

Cohn joined Cronos Group from The Avon Company, where he served as General Counsel and Corporate Secretary.

Cohn also served as Deputy General Counsel, Regulatory at NBTY, Inc., a leading vertically integrated manufacturer, marketer and distributor of nutritional supplements with global operations.

Prior to his time at NBTY, Inc., Mr.

Cohn served in various roles at the Federal Trade Commission (“FTC”) from 1991 to 2008, including as Director and Assistant Director of its Northeast Region, where he was responsible for managing antitrust and consumer protection investigations and law enforcement actions, as well as local and regional outreach efforts to educate consumers, businesses, and law enforcement agencies on fraud identification and avoidance, and how to comply with antitrust and consumer protection laws enforced by the FTC.

In July 2021, Anthony Parisi joined Cronos Group as Global Head of Audit, a newly formed role for the Company.

Parisi joins Cronos Group with over 20 years of audit experience, most recently serving as Vice President of Global Audit and Risk Management for Reliance Worldwide Corporation, an ASX listed company.

In June 2021, Carlos Cortez joined Cronos Group as Vice President & Controller, a role which includes serving as the Company’s principal accounting officer.

Cortez joins Cronos Group with over 18 years of experience, most recently serving as Corporate Controller of SharpSpring, Inc., a publicly traded cloud-based marketing technology company.

Prior to his time at SharpSpring, Inc., Mr.

Cortez was the Senior Finance Director – Record to Report for Discovery, Inc., a publicly traded global media company, from August 2019 until December 2020.

Prior to his time at Discovery, Inc., Mr.

Cortez spent five years as Corporate Controller for Malibu Boats, Inc., a publicly traded manufacturer of recreational powerboats.

In August 2021, Cronos Group announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”) under the Ginkgo Strategic Partnership, which supports the launch of the Company’s SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy.

In November 2021, Cronos Group achieved the final productivity target for a second cannabinoid, cannabigerovarinic acid (“CBGVA”), which is a crucial step to developing cultured tetrahydrocannabivarin (“THCV”), releasing the second equity milestone to Ginkgo.

The Company appointed Jeff Jacobson Senior Vice President, Head of Growth (North America).

Jacobson previously served as the Company's General Manager of Canada and Europe.

Jacobson has been with Cronos Group since December 2016 and previous to that was a co-founder of Peace Naturals.

Jacobson's expertise and experience in licensing and compliance, new business development, project management and resource management help Cronos Group lead in domestic and international markets.

The Company appointed John Griese Senior Vice President, Head of Operations (North America).

Griese joined Cronos Group in August 2021 as the Vice President of Operations.

Griese has worked with several cannabis organizations and was most recently the Chief Operating Officer ("COO") for The Supreme Cannabis Company, Inc.

Prior to Supreme, Mr.

Griese garnered cannabis experience during California’s adult use implementation as COO for global cannabis company Creso Pharma Limited.

Prior to that he spent the majority of his career in supply chain and operations with PepsiCo, Inc., Nestle and Sofina Foods Inc.

Griese’s experience in building supply chains around the world will help the Company win in the markets we are in today, while staying nimble in order to move fast and pivot as the industry changes over time.

Consolidated Results of Operations

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Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods .

For the three months ended June 30, For the six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

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Inventory write-down — — 11,961 11,024

Gross loss (15,784) (2,922) (18,747) (9,398)

Gross profit (730) (1,537) (19,477) (10,935)

Operating expenses:

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Depreciation and amortization 1,251 886 3,029 2,252

Impairment loss on goodwill and indefinite-lived intangible assets 142 — 235,056 40,000

Impairment loss on long-lived assets 1,784 — 4,739 —

Total operating expenses 55,684 39,632 378,482 150,002

Operating loss (56,414) (41,169) (397,959) (160,937)

Other income (loss) 117,553 (72,949) (592) 47,792

Loss from discontinued operations (561) (46) (582) (46)

Other income 133,839 111,094 134,988 198,886

Income tax benefit (expense) 159 (988) 159 (988)

Income (loss) from discontinued operations 82 (473) (500) (519)

Net income (loss) 77,666 68,464 (263,312) 36,442

Net loss attributable to non-controlling interests (279) (726) (592) (1,085)

Net loss attributable to non-controlling interest (250) (569) (842) (1,654)

Net income (loss) attributable to Cronos Group $ 77,916 $ 69,033 $ (262,470) $ 38,096

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Summary of select financial results

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

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Cost of sales 21,137 12,895 8,242 64 % 56,156 29,584 26,572 90 %

Inventory write-down 11,961 3,062 8,899 291 % 11,961 11,024 937 8 %

Gross loss (15,784) (2,922) (12,862) 440 % (18,747) (9,398) (9,349) 99 %

Inventory write-down — — — N/A 11,961 11,024 937 8 %

Gross profit (730) (1,537) 807 53 % (19,477) (10,935) (8,542) (78) %

Gross margin (4) % (14) % N/A 10 pp (40) % (37) % N/A (3) pp

For the three months ended June 30, 2021, we reported consolidated net revenue of $15.6 million, representing an increase of $5.7 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021 we reported consolidated net revenue of $28.2 million, representing an increase of $9.9 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increase was primarily due to the continued growth of the adult-use market in Canada and increased sales in the Israeli medical market.

For the three months ended September 30, 2021, we reported consolidated net revenue of $20.4 million, representing an increase of $9.0 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported consolidated net revenue of $48.6 million, representing an increase of $19.0 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to the continued growth of the adult-use market in Canada, increased sales in the Israeli medical market, and increased sales of U.S.

hemp-derived CBD products in the U.S.

Cost of sales

For the three months ended June 30, 2021, we reported consolidated cost of sales of $19.4 million, representing an increase of approximately $9.7 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, we reported consolidated cost of sales of $35.0 million, representing an increase of approximately $18.3 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increase was primarily due to the increase in sales volume noted above as well as start-up costs associated with new product development in the ROW segment.

For the three months ended September 30, 2021, we reported consolidated cost of sales of $21.1 million, representing an increase of approximately $8.2 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported consolidated cost of sales of $56.2 million, representing an increase of approximately $26.6 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to increased sales volume noted above as well as start-up costs associated with new product development in the ROW segment, increased inventory valuation adjustments, and increased production costs on new product launches in the U.S.

Inventory write-downs

For the three months ended June 30, 2021, we reported consolidated inventory write-downs of $12.0 million, representing an increase of approximately $8.9 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, we reported consolidated inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increases in inventory-write downs were primarily related to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

For the three months ended June 30, 2021, we reported consolidated gross loss of $15.8 million, representing an increase in losses of $12.9 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, we reported gross loss of $18.7 million, representing an increase in losses of $9.3 million from the six months ended June 30, 2020.

For the three month comparative periods, the changes in gross loss and gross margin percentage were primarily due to inventory write-downs in the ROW segment, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 as well as start up costs associated with new product development in the ROW segment.

For the six month comparative periods, the changes in gross loss and gross margin percentage were primarily due to the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 as well as start up costs associated with new product development in the ROW segment.

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For the three months ended September 30, 2021 and September 30, 2020, we reported no inventory write-downs.

For the nine months ended September 30, 2021, we reported consolidated inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020.

For the nine month comparative period, the increase in inventory-write downs was primarily related to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

For the three months ended September 30, 2021, we reported consolidated gross profit of $(0.7) million, representing an increase in gross profit of $0.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported gross profit of $(19.5) million, representing a decrease in gross profit of $8.5 million from the nine months ended September 30, 2020.

For the three month comparative period, the changes in gross profit and gross margin were primarily due to increased sales of cannabis extracts in the Canadian market in the third quarter of 2021, which carries a higher gross profit and gross margin than other product categories.

For the nine month comparative periods, the changes in gross profit and gross margin were primarily due to inventory write-downs in the ROW segment during the second quarter of 2021, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 as well as start-up costs associated with new product development in the ROW segment.

Operating expenses

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

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Depreciation and amortization 1,251 886 365 41 % 3,029 2,252 777 35 %

Impairment loss on goodwill and indefinite-lived intangible assets 142 — 142 N/A 235,056 40,000 195,056 488 %

Impairment loss on long-lived assets 1,784 — 1,784 N/A 4,739 — 4,739 N/A

Total operating expenses $ 55,684 $ 39,632 $ 16,052 41 % $ 378,482 $ 150,002 $ 228,480 152 %

Sales and marketing

For the three months ended June 30, 2021, sales and marketing expenses were $13.2 million, representing an increase of $6.7 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, sales and marketing expenses were $23.5 million, representing an increase of $9.9 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increase was primarily due to an increase in ongoing advertising and marketing campaigns related to our brands in the U.S.

For the three months ended September 30, 2021, sales and marketing expenses were $10.8 million, representing an increase of $3.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, sales and marketing expenses were $34.3 million, representing an increase of $13.4 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to an increase in advertising and marketing campaigns related to our brands in the U.S.

segment, which began in the second half of 2020 as well as increased headcount and related costs tied to these marketing efforts.

During the first half of 2020, new hiring and spending on sales and marketing were delayed in the U.S.

During the nine months ended September 30, 2020, new hiring and spending on sales and marketing were delayed in the U.S.

segment due to the impact of COVID-19.

Research and development

For the three months ended June 30, 2021, research and development expenses were $5.2 million, representing an increase of $1.6 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, research and development expenses were $10.3 million, representing an increase of $2.1 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, this increase was primarily driven by increased spending on product development and developing cannabinoid intellectual property in the ROW segment.

For the three months ended September 30, 2021, research and development expenses were $6.5 million, representing an increase of $1.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, research and development expenses were $16.8 million, representing an increase of $3.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, this increase was primarily driven by increased spending on product development and developing cannabinoid intellectual property in the ROW segment.

General and administrative

For the three months ended June 30, 2021, general and administrative expenses were $22.4 million, representing an increase of $4.0 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, general and administrative expenses were $44.3 million, representing an increase of $2.1 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, this change was primarily due to increased advisory fees associated with strategic initiatives including the PharmaCann investment, which did not take place during the comparable periods in 2020.

For the three months ended September 30, 2021, general and administrative expenses were $32.5 million, representing an increase of $13.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, general and administrative expenses were $76.9 million, representing an increase of $15.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to an increase in the allowance for expected credit losses of $13.2 million on our loan receivables with equity method investees in the ROW segment as well as increased headcount in both the ROW and U.S.

The increase was offset by a decrease in share based payments related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

segment in the third quarter of 2020.

Depreciation and amortization

For the three months ended June 30, 2021, depreciation and amortization expenses were $1.0 million, representing an increase of $0.4 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, depreciation and amortization expenses were $1.8 million, representing an increase of $0.4 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the change was primarily due to the increased capital expenditures in the ROW segment in the second half of 2020.

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For the three months ended September 30, 2021, depreciation and amortization expenses were $1.3 million, representing an increase of $0.4 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, depreciation and amortization expenses were $3.0 million, representing an increase of $0.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was primarily due to the increased capital expenditures in the ROW segment since December 31, 2020.

Impairment loss on goodwill and indefinite-lived intangible assets

For the nine months ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets was $235.1 million, representing an increase of $195.1 million from the nine months ended September 30, 2020.

For the nine month comparative periods, the increase in impairment loss on goodwill and indefinite-lived intangible assets was primarily due to the $178.4 million impairment charge recorded on the goodwill in the U.S.

reporting unit and a $56.5 million impairment charge recorded on the Lord Jones ® brand in the U.S.

reporting unit compared to a $35.0 million impairment charge recorded on the U.S.

reporting unit and a $5.0 million impairment charge recorded on the Lord Jones ® brand in the U.S.

recorded in the first half of 2020.

Impairment loss on long-lived assets

For the three months ended September 30, 2021, impairment loss on long-lived assets was $1.8 million compared to no impairment loss on long-lived assets in the three months ended September 30, 2020.

For the nine months ended September 30, 2021, impairment loss on long-lived assets was $4.7 million, compared to no impairment loss on long-lived assets in the nine months ended September 30, 2020.

For the three month comparative periods, the increase was due to a $1.8 million impairment charge for the difference between the consideration paid Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property.

For the nine month comparative periods, the increase was due to impairment charges of $1.8 million related to the aforementioned Ginkgo exclusive license, an impairment loss of $1.7 million related to the leased premises in the U.S.

segment in the first quarter of 2021 as well as a $1.2 million impairment of property, plant and equipment in the U.S.

Other income (loss) & discontinued operations

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

Interest income, net $ 2,064 $ 3,781 $ (1,717) (45) % $ 6,686 $ 15,266 $ (8,580) (56) %

Gain (loss) on revaluation of derivative liabilities 115,248 (35,880) 151,128 421 % (1,626) 77,488 (79,114) (102) %

Impairment on long-lived assets — (40,000) 40,000 100 % (1,741) (40,000) 38,259 96 %

Gain on revaluation of derivative liabilities 132,916 105,307 27,609 26 % 131,290 182,795 (51,505) (28) %

Share of loss from equity accounted investments (1,414) (1,327) (87) (7) % (4,172) (3,293) (879) (27) %

Gain on disposal of other investments — 3,974 (3,974) N/A — 4,743 (4,743) N/A

Other, net 273 (641) 914 143 % 1,184 (625) 1,809 289 %

Total other income (loss) 133,839 111,094 22,745 20 % 134,988 198,886 (63,898) (32) %

Loss from discontinued operations (561) (46) (515) (1120) % (582) (46) (536) (1165) %

Income (loss) from discontinued operations 82 (473) 555 117 % (500) (519) 19 4 %

Net income (loss) $ 77,666 $ 68,464 $ 9,202 13 % $ (263,312) $ 36,442 $ (299,754) (823) %

Interest income

For the three months ended June 30, 2021, net interest income was $2.3 million, representing a decrease of $1.4 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, net interest income was $4.6 million, representing a decrease of $6.9 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the decrease in net interest income was primarily due to reduced interest rates on interest earning accounts as well as a decrease in interest earning assets during the three and six months ended June 30, 2021 compared to the same periods in 2020.

Gain/loss on revaluation of derivative liabilities

For the three months ended June 30, 2021, gain on revaluation on derivatives was $115.2 million, including an out-of-period adjustment of $11.3 million, representing an increase of $151.1 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, loss on revaluation on derivatives was $1.6 million, representing a decrease of $79.1 million from the six months ended June 30, 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 fluctuations in derivative valuations.

Interest income, net

For the three months ended September 30, 2021, interest income, net was $2.1 million, representing a decrease of $1.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, interest income, net was $6.7 million, representing a decrease of $8.6 million from the nine months ended September 30, 2020.

For the three months ended September 30, 2021, the decrease in net interest income was primarily due to a decrease in our interest-earning cash equivalents and short-term investment balances compared to the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the decrease in net interest income was due to a decrease in our average variable interest rate as well as a decrease in our cash equivalents and short-term investment balances compared to the nine months ended September 30, 2020.

Gain on revaluation of derivative liabilities

For the three months ended September 30, 2021, the gain on revaluation of derivative liabilities was $132.9 million, representing an increase of $27.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the gain on revaluation of derivative liabilities was $131.3 million, including an out-of-period adjustment of $11.3 million, representing a decrease of $51.5 million from the nine months ended September 30, 2020.

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

The Company expects continued fluctuations in the derivative valuations.

For further information, see Note 6.

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“Financial Statements” of this Quarterly Report.

Impairment loss on long-lived assets

For the three months ended June 30, 2021, there were no impairments on long lived assets.

For the six months ended June 30, 2021, impairment on long lived assets was $1.7 million, representing a decrease of $38.3 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the decrease in impairment loss on long-lived assets was due to $40.0 million in impairment charges recorded on the U.S.

reporting unit and the Lord Jones™ brand recorded in the first half of 2020.

Share of loss from equity accounted investments

For the three months ended June 30, 2021, share of loss from equity accounted investments was $1.1 million, representing an increase of $0.3 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, share of loss from equity accounted investments was $2.8 million, representing an increase of $0.8 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the change was due to recurring losses from the Company’s equity accounted investments.

For further information, see Note 3.

Investments to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

For the three months ended June 30, 2021, other income was $1.1 million, representing an increase of $1.1 million from the three months ended June 30, 2020.

This change was primarily due to a gain on held-for-sale assets in the three months ended June 30, 2021 compared with a small gain on disposal of other assets in the three months ended June 30, 2020.

For the six months ended June 30, 2021, other income was $0.9 million, essentially unchanged from the six months ended June 30, 2020.

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For the three months ended September 30, 2021, share of loss from equity accounted investments was $1.4 million, representing an increase in losses of $0.1 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, share of loss from equity accounted investments was $4.2 million, representing an increase in losses of $0.9 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was due to increased recurring losses from the Company’s equity accounted investments.

Gain on disposal of other investments

For both the three and nine months ended September 30, 2021, there was no gain on disposal of other investments.

For the three and nine months ended September 30, 2020, gain on disposal of other investments was $4.0 million and $4.7 million, respectively.

For both the three and nine month comparative periods, the gain on disposal of other investments related to the sale of common shares of Aurora Cannabis, Inc.

(“Aurora”), which were received in connection with the achievement of milestones related to Aurora’s acquisition of Whistler Medical Marijuana Corporation (“Whistler”).

For the three months ended September 30, 2021, other, net was $0.3 million, representing an increase of other, net income of $0.9 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, other, net was $1.2 million, representing an increase of $1.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was primarily due to the revaluation of held-for-sale assets related to the land and office building located in Winnipeg, Manitoba Canada in the second quarter of 2021 compared to the revaluation of held-for-sale assets related to substantially all of the assets of Original B.C.

Gain (loss) from discontinued operations

For the three months ended September 30, 2021, gain from discontinued operations was $0.1 million, representing an increase of $0.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, loss from discontinued operations was $0.5 million, essentially unchanged from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, gain (loss) from discontinued operations relates to the discontinuance of OGBC.

Results of Operations by Business Segment:

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Summary of select financial results – ROW

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

1 unchanged sentence

Cost of sales 17,735 11,922 5,813 49 % 49,906 25,930 23,976 92 %

Inventory write-down 11,961 3,062 8,899 291 % 11,961 11,024 937 8 %

Gross loss (16,428) (3,509) (12,919) 368 % (20,567) (11,067) (9,500) 86 %

Inventory write-down — — — N/A 11,961 11,024 937 8 %

Gross profit 572 (2,203) 2,775 126 % (19,995) (13,270) (6,725) (51) %

Gross margin 3 % (23) % N/A 26 pp (48) % (56) % N/A 8 pp

Net revenue – ROW

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

3 unchanged sentences

Net revenue $ 18,307 $ 9,719 $ 8,588 88 % $ 41,872 $ 23,684 $ 18,188 77 %

For the three months ended June 30, 2021, the ROW segment reported net revenue of $13.4 million, representing an increase of $5.7 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the ROW segment reported net revenue of $23.6 million, representing an increase of $9.6 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the change was primarily due to continued growth of the adult-use cannabis flower market in Canada and sales in the Israeli medical cannabis market.

For the three months ended September 30, 2021, the ROW segment reported net revenue of $18.3 million, representing an increase of $8.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported net revenue of $41.9 million, representing an increase of $18.2 million from the nine months ended September 30, 2020.

For the three month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower and extracts markets in Canada and sales in the Israeli medical cannabis market.

For the nine month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower market in Canada and sales in the Israeli medical cannabis market.

Cost of sales – ROW

For the three months ended June 30, 2021, the ROW segment reported cost of sales of $17.9 million, representing an increase of $9.7 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the ROW segment reported cost of sales of $32.2 million, representing an increase of $18.2 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increase was primarily due to an increase in sales volume as well as start-up costs associated with new product development in Canada.

For the three months ended September 30, 2021, the ROW segment reported cost of sales of $17.7 million, representing an increase of $5.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported cost of sales of $49.9 million, representing an increase of $24.0 million from the nine months ended September 30, 2020.

For the three month comparative period, the increase was primarily due to an increase in sales volumes.

For the nine month comparative period, the increase was primarily due to an increase in sales volume as well as start-up costs associated with new product development in Canada.

Inventory write-downs – ROW

For the three months ended June 30, 2021, the ROW segment reported inventory write-downs of $12.0 million, representing an increase of approximately $8.9 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the ROW segment reported inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the six months ended June 30, 2020.

For both the three and six month comparative periods, the increase in inventory-write downs primarily relates to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

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Gross loss – ROW

For the three months ended June 30, 2021, the ROW segment reported a gross loss of $16.4 million, representing an increase in losses of $12.9 million from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the ROW segment reported a gross loss of $20.6 million, representing an increase in losses of $9.5 million from the six months ended June 30, 2020.

For the three month comparative periods, the changes in gross loss and gross margin percentage were primarily due to inventory write-downs, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020, as well as start-up costs associated with new product development.

For the six month comparative periods, the changes in gross loss and gross margin percentage were primarily due to the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020, as well as start-up costs associated with new product development.

For the three months ended September 30, 2021 and 2020, the ROW segment reported no inventory write-downs.

For the nine months ended September 30, 2021, the ROW segment reported inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020.

For the nine month comparative period, the increase in inventory-write downs primarily relates to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

Gross profit – ROW

For the three months ended September 30, 2021, the ROW segment reported gross profit of $0.6 million, representing an increase in gross profit of $2.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported gross profit of $(20.0) million, representing a decrease in gross profit of $6.7 million from the nine months ended September 30, 2020.

For the three month comparative period, the change from negative gross profit in 2020 to positive gross profit in 2021 was primarily driven by increased sales of cannabis extracts in the third quarter of 2021, which carry higher gross profit and gross margin than other product categories.

For the nine month comparative period, the decrease in gross profit was primarily due to inventory write-downs, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020, as well as start-up costs associated with new product development.

Summary of select financial results – U.S.

For the three months ended June 30, Change For the six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2021 2020 $ % 2021 2020 $ %

4 unchanged sentences

Net revenue – U.S.

For the three months ended June 30, 2021, the U.S.

segment reported net revenue of $2.2 million, essentially unchanged from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the U.S.

segment reported net revenue of $4.7 million, representing an increase of $0.3 million from the six months ended June 30, 2020.

For the six month comparative period, the increase was primarily driven by sales of U.S.

For the three months ended September 30, 2021, the U.S.

segment reported net revenue of $2.1 million, representing an increase of $0.5 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported net revenue of $6.8 million, representing an increase of $0.8 million from the nine months ended September 30, 2020.

For the three and nine month comparative periods, the increase was primarily driven by sales of U.S.

hemp-derived CBD products introduced in the second half of 2020.

Cost of sales – U.S.

For the three months ended June 30, 2021, the U.S.

segment reported cost of sales of $1.6 million, essentially unchanged from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the U.S.

segment reported cost of sales of $2.8 million, representing an increase of $0.2 million from the six months ended June 30, 2020.

For the six months ended June 30, 2021, the increase was primarily due to an increase in sales volumes.

For the three months ended September 30, 2021, the U.S.

segment reported cost of sales of $3.4 million, representing an increase of $2.4 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported cost of sales of $6.3 million, representing an increase of $2.6 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to increased inventory valuation adjustments, increased revenue and increased production costs related to new product introductions launched in the fourth quarter of 2020.

Gross profit – U.S.

For the three months ended June 30, 2021, the U.S.

segment reported gross profit of $0.6 million, essentially unchanged from the three months ended June 30, 2020.

For the six months ended June 30, 2021, the U.S.

segment reported gross profits of $1.8 million, representing a $0.2 million increase from the six months ended June 30, 2020.

For the six month comparative period, the increase was primarily due to the increase in net revenue, partially offset by higher cost of sales as stated above.

For the three months ended September 30, 2021, the U.S.

segment reported gross profit of $(1.3) million, compared with gross profit of $0.7 million during the three months ended September 30, 2020, representing a decrease of $2.0 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported gross profit of $0.5 million, representing a decrease of $1.8 million from the nine months ended September 30, 2020.

For the three month comparative period, the decrease was primarily due to the increase in cost of sales as stated above.

For the nine month comparative period, the decrease was primarily due to the cost of sales as stated above.

Non-GAAP Measures

11 unchanged sentences

GAAP measures are provided below.

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Adjusted EBITDA

1 unchanged sentence

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

share of loss from equity accounted investments, impairment loss on long-lived assets, loss (gain) on revaluation of derivative liabilities, transaction costs related to strategic projects, other, net, 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).

share of loss from equity accounted investments;

impairment loss on goodwill and indefinite-lived assets:

impairment loss on long-lived assets;

gain on revaluation of derivative liabilities;

transaction costs related to strategic projects;

loss from discontinued operations;

share-based payments;

and review costs related to the restatements of the Company’s 2019 interim financial statements and 2021 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 2019 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 and 2021 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.

The following table sets forth a reconciliation of net loss as determined in accordance with GAAP to Adjusted EBITDA for the periods indicated (dollars in thousands):

Three months ended June 30, 2021

United States Rest of World Corporate

Expenses Total

The following tables set forth reconciliations of net income (loss) as determined in accordance with U.S.

GAAP to Adjusted EBITDA for the periods indicated (dollars in thousands):

Three months ended September 30, 2021

United States Rest of World Corporate Total

Net income (loss) $ (13,499) $ 97,198 $ (6,033) $ 77,666

Interest income, net (4) (2,060) — (2,064)

Income tax benefit — (159) — (159)

Share of loss from equity accounted investments — 1,414 — 1,414

Gain on revaluation of derivative liabilities (ii)

Impairment loss on goodwill and indefinite-lived intangible assets (i)

Impairment loss on long-lived assets (ii)

— 1,784 — 1,784

Transaction costs (iii)

Gain on revaluation of derivative liabilities (iii)

— (132,916) — (132,916)

Other, net (iv)

Transaction costs (iv)

Other, net (vi)

— (273) — (273)

Loss from discontinued operations (v)

Share-based payments (vi)

Income from discontinued operations (vii)

— (82) — (82)

Review costs related to restatement of 2019 interim financial statements (vii)

Share-based payments (viii)

967 1,700 — 2,667

Financial statement review costs (ix)

Depreciation and amortization 231 3,597 — 3,828

Adjusted EBITDA $ (12,200) $ (29,760) $ (4,813) $ (46,773)

Three months ended June 30, 2020

United States Rest of World Corporate

Expenses Total

Net loss $ (45,566) $ (55,095) $ (7,042) $ (107,703)

Three months ended September 30, 2020

United States Rest of World Corporate Total

Net income (loss) $ (12,425) $ 91,868 $ (10,979) $ 68,464

Interest income, net 30 (3,811) — (3,781)

Income tax expense 143 845 — 988

Share of loss from equity accounted investments — 1,327 — 1,327

Impairment loss on long-lived assets (i)

40,000 — — 40,000

Loss on revaluation of derivative liabilities (ii)

Gain on revaluation of derivative liabilities (iii)

— (105,307) — (105,307)

Other, net (iv)

Loss from discontinued operations (v)

Share-based payments (vi)

Gain on disposal of other investments (v)

— (3,974) — (3,974)

Review costs related to restatement of 2019 interim financial statements (vii)

Other, net (vi)

Loss from discontinued operations (vii)

Share-based payments (viii)

6,469 1,447 — 7,916

Financial statement review costs (ix)

Depreciation and amortization 35 2,181 — 2,216

Adjusted EBITDA $ (5,687) $ (14,371) $ (10,021) $ (30,079)

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Six months ended June 30, 2021

United States Rest of World Corporate

Expenses Total

Net loss $ (23,811) $ (62,520) $ (18,519) $ (104,850)

Nine months ended September 30, 2021

United States Rest of World Corporate Total

Net income (loss) $ (273,438) $ 34,678 $ (24,552) $ (263,312)

Interest income, net (27) (6,659) — (6,686)

Income tax benefit — (159) — (159)

Share of loss from equity accounted investments — 4,172 — 4,172

Impairment loss on long-lived assets (i)

Impairment loss on goodwill and indefinite-lived intangible assets (i)

235,019 37 — 235,056

Loss on revaluation of derivative liabilities (ii)

Impairment loss on long-lived assets (ii)

2,955 1,784 — 4,739

Transaction costs (iii)

Gain on revaluation of derivative liabilities (iii)

— (131,290) — (131,290)

Other, net (iv)

Transaction costs (iv)

— — 3,801 3,801

Loss from discontinued operations (v)

Share-based payments (vi)

Other, net (vi)

— (1,184) — (1,184)

Review costs related to restatement of 2019 interim financial statements (vii)

Loss from discontinued operations (vii)

Share-based payments (viii)

2,534 5,197 — 7,731

Financial statement review costs (ix)

— — 4,615 4,615

Depreciation and amortization 536 8,375 — 8,911

Adjusted EBITDA $ (32,421) $ (84,549) $ (16,136) $ (133,106)

Six months ended June 30, 2020

United States Rest of World Corporate

Expenses Total

Nine months ended September 30, 2020

United States Rest of World Corporate Total

Net income (loss) $ (64,507) $ 125,640 $ (24,691) $ 36,442

Interest income, net 14 (15,280) — (15,266)

Income tax expense 143 845 — 988

Share of loss from equity accounted investments — 3,293 — 3,293

Impairment loss on long-lived assets (i)

Impairment loss on goodwill and indefinite-lived intangible assets (i)

40,000 — — 40,000

Gain on revaluation of derivative liabilities (ii)

Gain on revaluation of derivative liabilities (iii)

— (182,795) — (182,795)

Other, net (iv)

Gain on disposal of other investments (v)

— (4,743) — (4,743)

Loss from discontinued operations (v)

Share-based payments (vi)

Other, net (vi)

Loss from discontinued operations (vii)

Share-based payments (viii)

7,931 4,967 — 12,898

Review costs related to restatement of 2019 interim financial statements (vii)

Financial statement review costs (ix)

— — 8,824 8,824

1 unchanged sentence

Adjusted EBITDA $ (16,254) $ (61,999) $ (15,867) $ (94,120)

(i) For the six months ended June 30, 2021, impairment loss on long-lived assets relates to impairment on a leased premise in the U.S.

segment, and for the three and six months ended June 30, 2020, impairment loss on long-lived assets relates to impairment on goodwill and intangibles related to our U.S.

segment in 2020.

Impairment Loss on Long-Lived Assets to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

(ii) For the three and six months ended June 30, 2021 and 2020, gain/loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.

(i) For the nine months ended September 30, 2021 and 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S.

For the three months ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S.

segment and impairment on an indefinite-lived trademark related to our ROW segment.

Goodwill and Intangible Assets, Net to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(ii) For the three months ended September 30, 2021, impairment loss on long-lived assets relates to impairment charges for the difference between the consideration paid to Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property .

For the nine months ended September 30, 2021, impairment loss on long-lived assets relates to an impairment on leased premises in the U.S.

segment, impairment on property, plant and equipment in the U.S.

segment and the aforementioned impairment of the Ginkgo intellectual property.

For the three and nine months ended September 30, 2020, there was no impairment loss on long-lived assets.

Impairment Loss on Long-lived Assets and Note 5.

Goodwill and Intangible Assets, net to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(iii) For the three and nine months ended September 30, 2021 and 2020, the gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.

Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

(iii) For the three and six months ended June 30, 2021, transaction costs represents legal, financial and other advisory fees and expenses incurred in connection with various strategic investments.

These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) under Item 1.

“Financial Statements” of this Quarterly Report.

(iv) For the three and six months ended June 30, 2021, other, net, primarily related to gain recorded on sale of the Company’s Winnipeg facility previously designated as held-for-sale in the first quarter of 2021, For the three and six months ended June 30, 2020, other, net is primarily comprised of the gain recorded related to the sale of common shares of Aurora Cannabis Inc.

(“Aurora”), which were received in connection with the achievement of a milestone related to Aurora’s acquisition of Whistler Medical Marijuana Corporation.

(v) For the three and six months ended June 30, 2020, loss from discontinued operations relates to the discontinuance of OGBC.

of this Quarterly Report.

(iv) For the three and nine months ended September 30, 2021, transaction costs represents legal, financial and other advisory fees and expenses incurred in connection with various strategic investments.

These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss).

(v) For the three and nine months ended September 30, 2020, gain on disposal of other investments net is primarily comprised of the gain recorded related to the sale of common shares of Aurora, which were received in connection with the achievement of a milestone related to Aurora’s acquisition of Whistler.

There were no disposals of investments during the three and nine months ended September 30, 2021.

Investments to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(vi) For the three and nine months ended September 30, 2021 and 2020, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets, (gain) loss recognized on the revaluation of financial liabilities and (gain) loss on disposal of assets.

(vii) For the three and nine months ended September 30, 2021 and 2020, loss (income) from discontinued operations relates to the discontinuance of OGBC.

Held-For-Sale Assets and Discontinued Operations to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

(vi) For the three and six months ended June 30, 2021 and 2020, share-based payments relates to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 6.

of this Quarterly Report.

(viii) For the three and nine months ended September 30, 2021 and 2020, share-based payments relates to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7.

Share-based Payments to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

(vii) For the three and six months ended June 30, 2021 and 2020, the 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.

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of this Quarterly Report.

(ix) For the three and nine months ended September 30, 2021 and 2020, financial statement review costs include costs related to the restatements 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.

Liquidity and Capital Resources

As of June 30, 2021, we had $895.2 million in cash and cash equivalents and $201.7 million in short-term investments, which comprise the majority of the Company’s cash position.

As of September 30, 2021, we had $842.6 million in cash and cash equivalents and $197.2 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.

The following table summarizes the cash flows from operating, investing and financing activities (dollars in thousands):

For the six months ended June 30,

Cash used in operating activities $ (86,197) $ (78,377)

Cash provided/(used) in investing activities (106,563) 39,799

Cash provided/(used) in financing activities (8,907) 1

The following table summarizes the cash flows from operating, investing and financing activities in thousands of U.S.

Nine months ended September 30,

Cash flows used in operating activities $ (117,678) $ (106,543)

Cash provided by (used in) investing activities (110,236) 37,811

Cash used in financing activities (13,164) (2,330)

Effect of foreign currency translation on cash and cash equivalents 5,622 (30,785)

Net change in cash $ (235,456) $ (101,847)

Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020

Comparison of cash flows between the nine months ended September 30, 2021 and the nine months ended September 30, 2020

Operating activities

During the six months ended June 30, 2021, we used $86.2 million of cash in operating activities as compared to cash used of $78.4 million in the six months ended June 30, 2020, representing an increase in cash used of $7.8 million.

This change is primarily driven by a $32.0 million decrease in net income after adjusting for non-cash items, partially offset by an increase of $24.2 million in operating assets and liabilities during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

During the nine months ended September 30, 2021, we used $117.7 million of cash in operating activities as compared to cash used of $106.5 million in the nine months ended September 30, 2020, representing an increase in cash used of $11.1 million.

This change is primarily driven by a $35.5 million decrease in net income after adjusting for non-cash items, partially offset by an increase of $53.7 million in changes in operating assets and liabilities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Investing activities

During the six months ended June 30, 2021, we used $106.6 million of cash in investing activities, compared to $39.8 million of cash provided by investing activities during the six months ended June 30, 2020, representing an increase of $146.4 million in cash used by investing activities.

This change is primarily driven by the Company’s investment in PharmaCann of approximately $110.4 million, a $63.1 million, net, decrease in proceeds from short-term investments and a $1.3 million increase in proceeds from the sale of other assets, partially offset by a $18.9 million decrease in loans receivables from joint ventures and a $6.9 million decrease in capital expenditures compared to the six months ended June 30, 2020.

The decrease in capital expenditures is primarily due to a reduction in construction costs in the ROW segment and a decrease in costs related to the implementation of the Company’s enterprise resource planning system compared to the six months ended June 30, 2020.

During the nine months ended September 30, 2021, we used $110.2 million of cash in investing activities, compared to $37.8 million of cash provided by investing activities during the nine months ended September 30, 2020, representing an increase of $148.0 million in cash used by investing activities.

This change is primarily driven by the Company’s investment in PharmaCann of approximately $110.4 million, and a $78.5 million;

net decrease in proceeds from short-term investments, partially offset by a $30.1 million decrease in loans receivables to joint ventures and a $12.7 million decrease in capital expenditures compared to the nine months ended September 30, 2020.

Financing activities

During the six months ended June 30, 2021, cash used in financing activities was $8.9 million higher than six months ended June 30, 2020.

This change is primarily driven by an increase of $8.9 million in withholding taxes paid on share-based awards during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

During the nine months ended September 30, 2021, cash used in financing activities was $13.2 million, compared to 2.3 million of cash used in financing activities during the nine months ended September 30, 2020, representing an increase of $10.8 million in cash used in financing activities.

This change is primarily driven by an increase of $11.0 million in withholding taxes paid on share-based awards during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

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.

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The Company’s critical accounting policies and estimates are discussed in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Loans Receivable, net.

Loans receivable are presented net of an allowance for credit losses.

In the third quarter of 2021, the Company changed methodologies for estimating the allowance for credit loss on loans receivable from the historical credit loss method to the probability of default method.

The probability of default rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary.

The Company may also record a specific reserve for individual accounts when it becomes aware of specific borrower circumstances, such as in the case of a bankruptcy filing or deterioration in the borrower’s operating results or financial position.

The allowance for credit loss accrual balance was $14.9 million and $2.6 million as of September 30, 2021 and December 31, 2020, respectively.

Valuation of Derivative Liabilities.

Derivative liabilities consist of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights.

The Company measures derivative liabilities at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in net income (loss) and comprehensive income (loss).

The Company calculates fair value of derivative liabilities using the Black-Scholes model.

Significant assumptions are used in the valuation of derivative liabilities, including the volatility of the Company’s stock price, expected dividend yield, expected term and expected risk-free interest rate.

Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of September 30, 2021.

As of December 31, 2020, volatility was based on the blended historical volatility levels of the Company and peer companies.

The assumptions used in computing the fair value of derivative liabilities reflect the Company’s best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control.

Other than the changes in accounting estimates above, there have been no material changes to these critical accounting policies and estimates.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis