Cronos Group Inc. 10-Q

Item 1. Financial Statements Table of Contents Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 4 Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 (Unaudited) 5 Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2021 and 2020 (Unaudited) 6 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (Unaudited) 8 Notes to Condensed Consolidated Financial Statements (Unaudited) 9 3 Cronos Group Inc. Condensed Consolidated Balance Sheets (In thousands of U.S. dollars, except share amounts) Table of Contents As of September 30, 2021 As of December 31, 2020 Assets (Unaudited) (Audited) Current assets Cash and cash equivalents $ 842,567 $ 1,078,023 Short-term investments 197,161 211,766 Accounts receivable, net 14,669 8,928 Other receivables 1,723 10,033 Current portion of loans receivable, net 5,779 7,083 Prepaids and other current assets 10,196 11,161 Inventory, net 31,769 44,002 Held-for-sale assets — 1,176 Total current assets 1,103,864 1,372,172 Investments in equity accounted investees, net 19,094 19,235 Other investments 110,392 — Loan receivable, net 81,464 87,191 Property, plant and equipment, net 188,644 187,599 Right-of-use assets 9,386 9,776 Intangible assets, net 20,471 69,720 Goodwill 1,104 179,522 Other assets 780 467 Total assets $ 1,535,199 $ 1,925,682 Liabilities Current liabilities Accounts payable and other liabilities $ 32,115 $ 42,102 Current portion of lease obligation 2,959 1,322 Derivative liabilities 34,528 163,410 Total current liabilities 69,602 206,834 Due to non-controlling interests 1,829 2,188 Lease obligation 7,343 8,492 Total liabilities 78,774 217,514 Commitments and contingencies (see Note 10) Shareholders’ equity Share capital (Shares authorized for issuance as of September 30, 2021 and December 31, 2020: unlimited; Shares issued and outstanding as of September 30, 2021 and December 31, 2020: 373,302,861 and 360,253,332 , respectively) 586,878 569,260 Additional paid-in capital 30,373 34,596 Retained earnings 793,277 1,064,509 Accumulated other comprehensive income 48,926 42,999 Total equity attributable to shareholders of Cronos Group 1,459,454 1,711,364 Non-controlling interests ( 3,029 ) ( 3,196 ) Total shareholders’ equity 1,456,425 1,708,168 Total liabilities and shareholders’ equity $ 1,535,199 $ 1,925,682 See notes to condensed consolidated interim financial statements. 4 Cronos Group Inc. Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) (In thousands of U.S dollars, except share and per share amounts, unaudited) Table of Contents Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Net revenue, before excise taxes $ 24,590 $ 13,621 $ 58,092 $ 34,397 Excise taxes ( 4,183 ) ( 2,263 ) ( 9,452 ) ( 4,724 ) Net revenue 20,407 11,358 48,640 29,673 Cost of sales 21,137 12,895 56,156 29,584 Inventory write-down — — 11,961 11,024 Gross profit ( 730 ) ( 1,537 ) ( 19,477 ) ( 10,935 ) Operating expenses Sales and marketing 10,821 7,236 34,284 20,849 Research and development 6,473 4,734 16,774 12,955 General and administrative 32,546 18,860 76,869 61,048 Share-based payments 2,667 7,916 7,731 12,898 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 (expense) Interest income, net 2,064 3,781 6,686 15,266 Gain on revaluation of derivative liabilities 132,916 105,307 131,290 182,795 Share of loss from equity accounted investments ( 1,414 ) ( 1,327 ) ( 4,172 ) ( 3,293 ) Gain on disposal of other investments — 3,974 — 4,743 Other, net 273 ( 641 ) 1,184 ( 625 ) Total other income 133,839 111,094 134,988 198,886 Income (loss) before income taxes 77,425 69,925 ( 262,971 ) 37,949 Income tax expense (benefit) ( 159 ) 988 ( 159 ) 988 Income (loss) from continuing operations 77,584 68,937 ( 262,812 ) 36,961 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 interest ( 250 ) ( 569 ) ( 842 ) ( 1,654 ) Net income (loss) attributable to Cronos Group $ 77,916 $ 69,033 $ ( 262,470 ) $ 38,096 Other comprehensive income (loss) Net income (loss) $ 77,666 $ 68,464 $ ( 263,312 ) $ 36,442 Other comprehensive income (loss): Foreign exchange gain (loss) on translation ( 22,818 ) 26,167 6,936 ( 35,654 ) Total other comprehensive income (loss) ( 22,818 ) 26,167 6,936 ( 35,654 ) Comprehensive income (loss) 54,848 94,631 ( 256,376 ) 788 Less: comprehensive income (loss) attributable to non-controlling interests ( 265 ) ( 552 ) 167 ( 1,650 ) Comprehensive income (loss) attributable to Cronos Group $ 55,113 $ 95,183 $ ( 256,543 ) $ 2,438 Net income (loss) per share Basic - continuing operations $ 0.21 $ 0.20 $ ( 0.71 ) $ 0.11 Diluted - continuing operations 0.21 0.18 ( 0.71 ) 0.10 See notes to condensed consolidated interim financial statements. 5 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity For the three months ended September 30, 2021 and 2020 (In thousands of U.S. dollars, except share amounts, unaudited) Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance at July 1, 2021 371,805,547 $ 572,858 $ 32,368 $ 719,593 $ 71,729 $ ( 2,764 ) $ 1,393,784 Vesting of options — — 1,886 — — — 1,886 Options exercised 6,674 14 ( 10 ) — — — 4 Restricted share units settled 23,150 162 ( 162 ) — — — — Share issuance pursuant to research and development milestones 1,467,490 9,042 — — — — 9,042 Withholding taxes on share-based awards — — ( 31 ) ( 4,232 ) — — ( 4,263 ) Vesting of restricted share units — — 781 — — — 781 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — — 343 — — — 343 Accelerated restricted share units vesting out-of-period adjustment — 4,802 ( 4,802 ) — — — — Net income (loss) — — — 77,916 — ( 250 ) 77,666 Foreign exchange loss on translation — — — — ( 22,803 ) ( 15 ) ( 22,818 ) Balance at September 30, 2021 373,302,861 $ 586,878 $ 30,373 $ 793,277 $ 48,926 $ ( 3,029 ) $ 1,456,425 Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance at July 1, 2020 349,886,402 $ 565,211 $ 27,046 $ 1,106,709 $ ( 33,970 ) $ ( 1,951 ) $ 1,663,045 Warrants exercised 5,407,890 619 ( 619 ) — — — — Vesting of options — — 1,551 — — — 1,551 Options exercised 25,534 57 ( 53 ) — — — 4 Withholding taxes on share-based awards — — ( 2,148 ) — — — ( 2,148 ) Vesting of restricted share units 414,088 — 6,365 — — — 6,365 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — — 349 — — — 349 Top-up Rights exercised — 690 — — — — 690 Net income (loss) — — — 69,033 — ( 569 ) 68,464 Foreign exchange gain on translation — — — — 26,150 17 26,167 Balance at September 30, 2020 355,733,914 $ 566,577 $ 32,491 $ 1,175,742 $ ( 7,820 ) $ ( 2,503 ) $ 1,764,487 See notes to condensed consolidated interim financial statements. 6 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity For the nine months ended September 30, 2021 and 2020 (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income Non-controlling interests Total shareholders’ equity Balance as of January 1, 2021 360,253,332 $ 569,260 $ 34,596 $ 1,064,509 $ 42,999 $ ( 3,196 ) $ 1,708,168 Warrants exercised 7,842,859 1,165 ( 1,163 ) — — — 2 Vesting of options — — 5,814 — — — 5,814 Options exercised 3,657,676 3,329 ( 3,315 ) — — — 14 Restricted share units settled 81,504 507 ( 507 ) — — — — Share issuance pursuant to research and development milestones 1,467,490 9,042 — — — — 9,042 Withholding taxes on share-based awards — — ( 1,193 ) ( 11,989 ) — — ( 13,182 ) Vesting of restricted share units — — 1,917 — — — 1,917 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 ( 974 ) — — — 1,026 Accelerated restricted share units vesting out-of-period adjustment — 4,802 ( 4,802 ) — — — — Top-up rights out-of-period adjustment — ( 3,227 ) — 3,227 — — — Net loss — — — ( 262,470 ) — ( 842 ) ( 263,312 ) Foreign exchange gain on translation — — — — 5,927 1,009 6,936 Balance at September 30, 2021 373,302,861 $ 586,878 $ 30,373 $ 793,277 $ 48,926 $ ( 3,029 ) $ 1,456,425 Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2020 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 Warrants exercised 5,407,890 619 ( 619 ) — — — — Vesting of options — — 5,051 — — — 5,051 Options exercised 1,094,464 1,386 ( 1,381 ) — — — 5 Withholding taxes on share-based awards — — ( 2,148 ) — — — ( 2,148 ) Vesting of restricted share units 414,088 — 7,847 — — — 7,847 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 507 — — — 2,507 Top-up Rights exercised — 1,407 — — — — 1,407 Net income (loss) — — — 38,096 — ( 1,654 ) 36,442 Foreign exchange gain (loss) on translation — — — — ( 35,658 ) 4 ( 35,654 ) Balance at September 30, 2020 355,733,914 $ 566,577 $ 32,491 $ 1,175,742 $ ( 7,820 ) $ ( 2,503 ) $ 1,764,487 See notes to condensed consolidated interim financial statements. 7 Cronos Group Inc. Condensed Consolidated Statements of Cash Flows (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Nine months ended September 30, 2021 2020 Operating activities Net income (loss) $ ( 263,312 ) $ 36,442 Adjustments to reconcile net income (loss) to cash provided by operating activities: Share-based payments 7,731 12,898 Depreciation and amortization 8,911 5,095 Impairment loss on goodwill and indefinite-lived intangible assets 235,056 40,000 Impairment loss on long-lived assets 4,739 — Share of loss from investments in equity accounted investees 4,172 3,293 Gain on revaluation of derivative liabilities ( 131,290 ) ( 182,795 ) Gain on disposal of other investments — ( 4,743 ) Expected credit losses on long-term financial assets 13,162 1,573 Other non-cash operating activities, net ( 2,831 ) 105 Changes in operating assets and liabilities: Accounts receivable, net ( 5,747 ) 262 Other receivables 7,431 ( 3,707 ) Prepaids and other current assets 1,054 ( 1,338 ) Inventory 14,335 ( 14,961 ) Accounts payable and other liabilities ( 11,089 ) 1,333 Cash flows used in operating activities ( 117,678 ) ( 106,543 ) Investing activities Purchase of short-term investments ( 119,820 ) ( 125,562 ) Proceeds from short-term investments 135,801 220,058 Purchase of other investments ( 110,392 ) — Proceeds from sale of other investments — 4,743 Purchase of property, plant and equipment ( 10,651 ) ( 21,334 ) Purchase of intangible assets ( 1,044 ) ( 3,094 ) Proceeds from sale of held-for-sale assets 2,775 — Advances on loans receivable ( 6,905 ) ( 37,000 ) Cash flows provided by (used in) investing activities ( 110,236 ) 37,811 Financing activities Withholding taxes paid on share-based awards ( 13,182 ) ( 2,148 ) Other financing activities, net 18 ( 182 ) Cash flows 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 and cash equivalents ( 235,456 ) ( 101,847 ) Cash and cash equivalents, beginning of period 1,078,023 1,199,693 Cash and cash equivalents, end of period $ 842,567 $ 1,097,846 Supplemental cash flow information Interest paid $ — $ 156 Interest received 4,025 13,473 Income taxes paid 873 — See notes to condensed consolidated interim financial statements. 8 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 1. Background, Basis of Presentation and Accounting Policies (a) Background Cronos Group Inc. (“Cronos Group” or the “Company”) is incorporated in the Province of British Columbia and under the Business Corporations Act (British Columbia) with principal executive offices at 111 Peter Street, Suite 300, Toronto, Ontario, M5V 2H1. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.” Cronos Group is an innovative global cannabinoid company, with international production and distribution across four continents. The Company is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach ® , PEACE NATURALS ® , Lord Jones ® , Happy Dance ® and PEACE+™. Cronos Group has established strategic joint ventures in Canada, Israel, and Colombia. “Cronos Israel” consists of a cultivation company (Cronos Israel G.S. Cultivation Ltd.), a manufacturing company (Cronos Israel G.S. Manufacturing Ltd.), a distribution company (Cronos Israel G.S. Store Ltd.) and a pharmacy company (Cronos Israel G.S. Pharmacy Ltd.) and is consolidated for financial reporting purposes. As of September 30, 2021, the Company also held approximately 31% of the issued capital of Cronos Australia Limited (“Cronos Australia”) and accounted for its investment in Cronos Australia under the equity method of accounting. For additional discussion regarding the joint ventures and strategic investment, see Note 3. Investments. (b) Out-of-period adjustments During the three months ended March 31, 2021, the Company identified an error in the accounting related to the withholding taxes on the net exercise of stock options, which resulted in an understatement of accounts payable and other liabilities of $ 966 and overstatements of other receivables, retained earnings, and share capital of $ 3,202 , $ 3,838 and $ 330 , respectively, as of December 31, 2020. During the three months ended September 30, 2021, the Company identified an error in the accounting related to the withholding taxes on the net exercise of stock options, which resulted in overstatements of retained earnings, other comprehensive income and accumulated other comprehensive income of $ 4,167 , $ 34 , and $ 34 , respectively, and understatements of accounts payables and other liabilities and general and administrative expenses of $ 4,201 , and $ 268 , respectively, as of March 31, 2021, as well as overstatements of retained earnings, share capital, other comprehensive income, and accumulated other comprehensive income of $ 3,881 , $ 315 , $ 62 , and $ 96 , respectively, as well as an understatement of accounts payables and other liabilities of $ 4,258 , as of June 30, 2021. These errors were deemed immaterial, and thus the Company has recorded out-of-period adjustments to the condensed consolidated balance sheet and the condensed consolidated statement of changes in equity during the first and third quarters of 2021 to correct the errors. The impact of the out-of-period adjustments are included within the changes in operating assets and liabilities and withholding taxes paid on share-based awards lines in the Company’s condensed consolidated statement of cash flows. During the three months ended June 30, 2021, the Company identified an error in the accounting related to the exercise of Top-up Rights (as defined herein), which resulted in an overstatement of share capital and an understatement of gain on revaluation of derivative liabilities of $ 3,227 as of December 31, 2020, and overstatements of share capital and loss on revaluation of derivative liabilities and an understatement of retained earnings of $ 14,505 , $ 11,278 and $ 3,227 , respectively, as of March 31, 2021. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the condensed consolidated balance sheet, the condensed consolidated statement of net income (loss) and comprehensive income (loss) and the condensed consolidated statement of changes in equity during the second quarter of 2021 to correct the error. The impact of the out-of-period adjustments are included within the adjustments to net loss in the Company’s condensed consolidated statements of cash flows. During the three months ended September 30, 2021, the Company identified an error in the accounting related to shares issued pursuant to the accelerated vesting of RSUs in the third quarter of 2020, which resulted in an understatement of share capital of $ 4,802 and an overstatement of additional paid-in-capital of $ 4,802 , as of September 30, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the condensed consolidated balance sheet and the condensed consolidated statements of changes in equity during the third quarter of 2021 to correct the error. The impact of the out-of-period adjustments had no impact on the condensed consolidated statements of net income (loss) and comprehensive income (loss) or the condensed consolidated statements of cash flows. 9 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (c) Basis of presentation The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other reporting period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”). Certain prior year amounts have been reclassified to conform to the current year presentation of our condensed consolidated financial statements. These reclassifications had no effect on the reported results of operations and ending shareholders’ equity. (d) Adoption of new accounting pronouncements On January 1, 2021, the Company adopted ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU No. 2020-01”). ASU No. 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method as well as measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU No. 2020-01 did not have an impact on the Company’s interim condensed consolidated financial statements. On January 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application of U.S. GAAP-related changes in enacted tax laws or rates and employee stock option plans. The adoption of ASU No. 2019-12 did not have an impact on the Company’s interim condensed consolidated financial statements. (e) New accounting pronouncements not yet adopted In August 2020, the FASB issued ASU 2020-06, Debt –Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU No. 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of ASU No. 2020-06 to have a material impact on its condensed consolidated financial statements. 2. Inventory, net Inventory, net is comprised of the following items: As of September 30, 2021 As of December 31, 2020 Raw materials $ 6,588 $ 11,489 Work-in-progress 13,136 26,278 Finished goods 11,740 5,905 Supplies and consumables 305 330 Total $ 31,769 $ 44,002 Inventory is written down for any obsolescence such as slow-moving or non-marketable products, or when the net realizable value of inventory is less than the carrying amount. During the nine months ended September 30, 2021 and 2020, the Company recorded write-downs related to inventory of $ 11,961 and $ 11,024 , respectively. 10 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 3. Investments (a) Variable interest entities and investments in equity accounted investees, net The Company holds variable interests in Cronos Growing Company Inc. (“Cronos GrowCo”), Natuera S.à.r.l (“Natuera”), MedMen Canada Inc. (“MedMen Canada”) and Cannasoul Lab Services Ltd. (“CLS”). The Company’s investments in Cronos GrowCo, Natuera and MedMen Canada are exposed to economic variability from each entity’s performance; however, the Company does not consolidate the entities as it does not have the power to direct the activities that most significantly impact each entity’s economic performance. Thus, Cronos Group is not considered the primary beneficiary of each entity. These investments are accounted for as equity method investments classified as “Investments in equity accounted investees, net” in the consolidated balance sheets. Cronos GrowCo is a joint venture incorporated under the Canada Business Corporations Act (“CBCA”) on June 14, 2018 with the objective of cultivating and commercializing cannabis and cannabis products. Cronos GrowCo’s economic performance is driven by the day-to-day operations of Cronos GrowCo, which are controlled by 2645485 Ontario Inc. (“Mucci”), the Company’s joint venture partner. During the three months ended September 30, 2021, the Company concluded that lower than expected sales forecasts combined with the increase to the aggregate principal amount of the GrowCo Facility (as defined below) were indicators of impairment for the Company’s equity method investment in Cronos GrowCo. Accordingly, the Company performed an interim impairment assessment to compare the fair value of the investment in Cronos GrowCo to its carrying amount. The fair value was estimated using the discounted cash flow method. Significant inputs include discount rate, growth rates, and cash flow projections. As a result of this analysis, the Company concluded that as of September 30, 2021, the estimated fair value was higher than the carrying amount and no impairment charges were recorded. MedMen Canada is a joint venture incorporated under the CBCA on March 13, 2018, with the objective of the retail sale and marketing of cannabis products in Canada. MedMen Canada holds the exclusive license to the MedMen brand in Canada for a minimum term of 20 years. The Company holds variable interests in MedMen Canada through its ownership of 50 % of MedMen Canada’s common shares and other subordinated debt. MedMen Canada’s economic performance is driven by the quantity and strains of cannabis sold. Subject to applicable law, the joint venture partners mutually determine the quantity and strains of cannabis to be sold in MedMen Canada’s retail stores, if and when stores are opened. Natuera is a joint venture registered in Luxembourg with the objective of cultivating and commercializing hemp and cannabis products. The Company holds variable interests in Natuera through its ownership of 50 % of Natuera’s common shares. An affiliate of Agroidea owns the remaining 50 % of Natuera’s common shares (such affiliate, the “Natuera JV Partner”). Natuera’s economic performance is driven by the quantity and strains of cannabis grown, which is mutually determined by the joint venture partners. CLS is a wholly owned subsidiary of Cannasoul Analytics Ltd., incorporated with the purpose of establishing a commercial cannabis analytical testing laboratory located on the premises of Cronos Israel (the “Cannasoul Collaboration”). Cronos Israel agreed to advance up to ILS 8,297 ($ 2,488 ) by a non-recourse loan (the “Cannasoul Collaboration Loan”) to CLS over a period of two years from April 1, 2020 for the capital and operating expenditures of the laboratory. The loan bears interest at 3.5 % annually. Cronos Israel will receive 70 % of the profits of the laboratory until such time as it has recovered 150 % of the amounts advanced to CLS, after which time it will receive 50 % of the laboratory profits. As a result, the Company is exposed to economic variability from CLS’s performance. The Company does not consolidate CLS as it does not have the power to direct the activities that most significantly impact the entity’s economic performance; thus, the Company is not considered the primary beneficiary of the entity. The carrying amount of the non-recourse loan is recorded under loans receivable and the full loan amount, ILS 8,297 , represents the Company’s maximum potential exposure to losses through the Cannasoul Collaboration. See Note 4. Loans Receivable, net for further information regarding loans receivable. Cronos Australia Limited On September 14, 2021, Cronos Australia entered into a merger agreement to acquire 100 % of the issued shares of CDA Health Pty Ltd, an Australian medicinal cannabis company, subject to customary closing conditions, including shareholder approval (the “Cronos Australia Merger”). The Cronos Australia Merger closed on December 16, 2021. In connection with the closing of the Cronos Australia Merger, the Company converted all advances made under its A$ 1,500 unsecured loan to Cronos Australia, plus accrued interest and certain royalties payable, into ordinary shares of Cronos Australia. As a result of the closing of the Cronos Australia Merger, the Company’s ownership interest in Cronos Australia decreased to approximately 10 % and the Company’s number of Cronos Australia board seats has been reduced from two to one . This reduction in ownership interest and board seats constitutes a loss of significant influence and will result in a change on the condensed consolidated balance sheet from equity method to mark-to-market accounting commencing on December 16, 2021, with unrealized holding gains and losses to be included in net income (loss) on the condensed consolidated statements of net income (loss) and comprehensive income (loss). 11 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents A reconciliation of the carrying amount of the investments in associates and joint ventures is as follows: Ownership interest As of September 30, 2021 As of December 31, 2020 Cronos Australia (i) 31 % $ — $ — Cronos GrowCo 50 % 17,394 19,235 Natuera (ii) 50 % 1,700 — $ 19,094 $ 19,235 (i) The gross investment balance in Cronos Australia has been offset by the equity losses as of September 30, 2021 and December 31, 2020. (ii) On April 1, 2021, the Company and the Natuera JV Partner, converted all advances made to Natuera under the master loan agreement entered into with Natuera on September 27, 2019 (the “Natuera Series A Loan”), plus accrued interest, into equity of Natuera. Total aggregate gross advances to Natuera under the Natuera Series A Loan were $ 15,500 , of which the Company advanced 50 % and the Natuera JV Partner advanced the remaining 50 %, or $ 7,750 each. As a result, the Company transferred the carrying amount of the Natuera Series A Loan of approximately $ 2,013 plus accrued interest of $ 540 , for a total investment value of $ 2,553 , which approximates fair value, to investments in equity accounted investees in respect of Natuera. See Note 4. Loans Receivable, net. The Company’s share of net losses from equity investments accounted for under the equity method of accounting: For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 Cronos Australia $ — $ ( 57 ) $ — $ ( 292 ) Cronos GrowCo ( 1,214 ) ( 401 ) ( 1,972 ) ( 902 ) Natuera ( 200 ) ( 869 ) ( 2,200 ) ( 2,099 ) $ ( 1,414 ) $ ( 1,327 ) $ ( 4,172 ) $ ( 3,293 ) (b) Other investments Other investments consist of investments in options of companies in the cannabis industry. PharmaCann, Inc. On June 14, 2021, the Company purchased an option to acquire 473,787 shares of Class A Common Stock of PharmaCann, Inc. (“PharmaCann”), a vertically integrated cannabis company in the United States, at an exercise price of $ 0.0001 per share, representing approximately 10.5 % of PharmaCann’s issued and outstanding capital stock on a fully diluted basis, for an aggregate purchase price of approximately $ 110,392 . The option exercise will be based upon various factors, including the status of U.S. federal cannabis legalization, as well as regulatory approvals, including in the states where PharmaCann operates that may be required upon exercise. This option is classified as an equity security without a readily determinable fair value. The Company has elected to measure the fair value of the option at cost less impairment, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The option is reported as other investments on the condensed consolidated balance sheet for the period ended September 30, 2021. Whistler Medical Marijuana Corporation On March 4, 2019, the Company sold all 2,563 shares of Whistler Medical Marijuana Corporation (“Whistler”), representing approximately 19.0 % of Whistler’s issued and outstanding common shares, to Aurora Cannabis Inc. (“Aurora”), in connection with Aurora's acquisition of Whistler (the “Whistler Transaction”). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares. During the nine months ended September 30, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $ 19,259 recorded as a gain on disposal of other investments in other income (expense). No transactions occurred during the three months ended September 30, 2019. During the three months ended September 30, 2020, in connection with the achievement of the final milestone related to the Whistler Transaction, the Company received 402,561 shares of Aurora. The Company subsequently sold all 402,561 of the Aurora shares during the three months ended September 30, 2020 for gross proceeds of approximately $ 3,974 (C$ 5,354 ) recorded as a gain on disposal of other investments in other income (expense). During the nine months ended September 30, 2020, in connection with the achievement of certain milestones related to the Whistler Transaction, the Company received 980,662 shares of Aurora. The Company sold all 980,662 of the Aurora shares during the nine months ended September 30, 2020 for gross proceeds of approximately $ 4,743 (C$ 6,404 ) recorded as a gain on disposal of other investments in other income (expense). As of September 30, 2021 and December 31, 2020, the Company did not hold any additional other investments. 12 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 4. Loans Receivable, net As of September 30, 2021 As of December 31, 2020 Natuera Series A Loan (i) $ — $ 3,518 GrowCo Facility (ii) 2,366 3,137 Add: Accrued interest 3,413 428 Total current portion of loans receivable 5,779 7,083 GrowCo Facility (ii) 64,402 69,939 Mucci Promissory Note 13,965 13,324 Cannasoul Collaboration Loan (iii) 1,629 1,261 Add: Accrued interest 1,468 2,667 Total long-term portion of loans receivable 81,464 87,191 Total loans receivable, net $ 87,243 $ 94,274 (i) On April 1, 2021, the Company and the Natuera JV Partner converted all advances made to Natuera under the Series A Loan, plus accrued interest, into equity of Natuera (“the Natuera Debt Conversion”). Total aggregate gross advances to Natuera under the Natuera Series A Loan were $ 15,500 , of which the Company advanced 50 % and the Natuera JV Partner advanced the remaining 50 %, or $ 7,750 each. As a result, the Company transferred the carrying amount of the Natuera Series A Loan of approximately $ 2,013 plus accrued interest of $ 540 , for a total investment value of $ 2,553 , which approximates fair value, to investments in equity accounted investees in respect of Natuera. See Note 3. Investments. (ii) In August 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into a senior secured credit agreement for an aggregate principal amount of C$ 100,000 (the “GrowCo Facility”). In August 2021, the GrowCo Facility was amended to increase the aggregate principal amount available to C$ 105,000 . As a result of the increase in the aggregate principal amount of the GrowCo Facility and lower than expected sales forecasts from Cronos GrowCo, the Company revalued its allowance for credit loss on the GrowCo Facility resulting in an increase in the allowance of $ 13,074 , which was recorded in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) in both the three and nine months ended September 30, 2021. In conjunction with the aforementioned revaluation, the Company changed its expected credit loss valuation methodology from the historical credit loss method to the probability of default method. As of September 30, 2021 and December 31, 2020, Cronos GrowCo had drawn C$ 103,000 ($ 81,230 ) and C$ 95,150 ($ 74,626 ), respectively, from the GrowCo Facility. (iii) As of September 30, 2021 and December 31, 2020, CLS has received ILS 6,223 and ILS 4,148 , respectively (approximately $ 1,928 and $ 1,287 , respectively), from the Cannasoul Collaboration Loan. Expected credit loss allowances on the Company’s long-term financial assets for the three and nine months ended September 30, 2021 and 2020 were comprised of the following items: As of July 1, 2021 Increase (decrease) (i) Foreign exchange effect As of September 30, 2021 GrowCo Facility $ 1,590 $ 13,074 $ ( 202 ) $ 14,462 Mucci Promissory Note 278 ( 184 ) ( 4 ) 90 Cannasoul Collaboration Loan 39 272 ( 9 ) 302 $ 1,907 $ 13,162 $ ( 215 ) $ 14,854 As of July 1, 2020 Increase (decrease) (i) Foreign exchange effect As of September 30, 2020 GrowCo Facility $ 1,089 $ 211 $ 17 $ 1,317 Natuera Series A Loan — — — — Mucci Promissory Note 250 5 3 258 Cannasoul Collaboration Loan 24 — 1 25 $ 1,363 $ 216 $ 21 $ 1,600 As of January 1, 2021 Increase (decrease) (i) Foreign exchange effect As of September 30, 2021 GrowCo Facility $ 1,546 $ 13,074 $ ( 158 ) $ 14,462 Natuera Series A Loan 721 ( 737 ) 16 — Mucci Promissory Note 270 ( 184 ) 4 90 Cannasoul Collaboration Loan 26 272 4 302 $ 2,563 $ 12,425 $ ( 134 ) $ 14,854 13 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents As of January 1, 2020 Increase (decrease) (i) Foreign exchange effect As of September 30, 2020 GrowCo Facility $ — $ 1,295 $ 22 $ 1,317 Natuera Series A Loan — — — — Mucci Promissory Note — 254 4 258 Cannasoul Collaboration Loan — 24 1 25 $ — $ 1,573 $ 27 $ 1,600 (i) During the nine months ended September 30, 2021, $ 737 of expected credit losses on long-term financial assets was transferred to investments in equity method investees in relation to the Natuera Debt Conversion, as the carrying amount of the loan receivable, net, approximated fair value as of the date of transfer. During the three and nine months ended September 30, 2021, $ 13,162 and $ 13,162 , respectively, were recorded to general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses. During the three and nine months ended September 30, 2020, $ 216 and $ 1,573 , respectively, were recorded to general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses. 5. Goodwill and Intangible Assets, Net (a) Intangible assets, net Intangible assets, net are comprised of the following items: Useful life (in years) As of September 30, 2021 Cost Accumulated amortization Accumulated impairment charges Net Software 5 $ 5,696 $ ( 1,299 ) $ — $ 4,397 Health Canada licenses 17 8,627 ( 1,577 ) ( 1,059 ) 5,991 Ginkgo exclusive license (i) 10 9,143 ( 83 ) ( 1,762 ) 7,298 Israeli codes (ii) 20 319 ( 34 ) — 285 Total definite-lived intangible assets 23,785 ( 2,993 ) ( 2,821 ) 17,971 Lord Jones ® brand N/A 64,000 — ( 61,500 ) 2,500 Trademarks N/A 142 — ( 142 ) — Total intangible assets $ 87,927 $ ( 2,993 ) $ ( 64,463 ) $ 20,471 Useful life (in years) As of December 31, 2020 Cost Accumulated amortization Accumulated impairment charges Net Software 5 $ 4,565 $ ( 565 ) $ — $ 4,000 Health Canada licenses 17 8,579 ( 1,254 ) ( 1,053 ) 6,272 Israeli code (ii) 20 322 ( 22 ) — 300 Total definite-lived intangible assets 13,466 ( 1,841 ) ( 1,053 ) 10,572 Lord Jones ® brand N/A 64,000 — ( 5,000 ) 59,000 Trademarks N/A 148 — — 148 Total intangible assets $ 77,614 $ (1,841) $ (6,053) $ 69,720 (i) In August 2021, the Company announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”) under its collaboration and license agreement (the “Ginkgo Collaboration Agreement”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”). As a result of this achievement, on August 21, 2021, the Company issued 1,467,490 common shares at a share price of C$ 7.90 for total consideration given of C$ 11,593 ($ 9,042 ) to Ginkgo through its collaboration and license agreement (the “Ginkgo Collaboration Agreement”) for the achievement of commercialization and productivity milestones for CBGA. Pursuant to the terms of the Ginkgo Collaboration Agreement, the Company was and will be granted an exclusive right to use and commercialize certain key intellectual property for the use of the microorganisms developed for the production of up to eight different cannabinoids, including CBGA. The estimated fair value of the exclusive license for CBGA was $ 7,300 determined using a variation of the income approach called the relief from royalty method, which requires an estimate or forecast of the expected future cash flows. The definite lived intangible asset is being amortized using the straight-line method over its estimated useful life of ten years. The difference between the consideration paid Ginkgo and the fair value of the exclusive license intangible asset of $ 1,784 (including the effect of foreign currency of $ 42 ) was recognized as an impairment charge on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the three months ended September 30, 2021. (ii) The Israeli codes were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities as discussed in Part II, Item 8. Note 2(c) “Basis of consolidation” and Note 2(h) “Definite life intangible assets” of the Company’s Annual Report. 14 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Accumulated impairment charges on intangible assets for the three and nine months ended September 30, 2021 and 2020 consist of: As of July 1, 2021 Impairment charges Foreign exchange effect As of September 30, 2021 Health Canada licenses $ ( 1,083 ) $ — $ 24 $ ( 1,059 ) Ginkgo exclusive license — ( 1,784 ) 22 ( 1,762 ) Lord Jones ® brand ( 61,500 ) — — ( 61,500 ) Trademarks — ( 142 ) — ( 142 ) $ ( 62,583 ) $ ( 1,926 ) $ 46 $ ( 64,463 ) As of July 1, 2020 Impairment charges (i) Foreign exchange effect As of September 30, 2020 Health Canada licenses $ — $ ( 113 ) $ — $ ( 113 ) Lord Jones ® brand ( 5,000 ) — — ( 5,000 ) $ ( 5,000 ) $ ( 113 ) $ — $ ( 5,113 ) As of January 1, 2021 Impairment charges Foreign exchange effect As of September 30, 2021 Health Canada licenses $ ( 1,053 ) $ — $ ( 6 ) $ ( 1,059 ) Ginkgo exclusive license — ( 1,784 ) 22 ( 1,762 ) Lord Jones ® brand ( 5,000 ) ( 56,500 ) — ( 61,500 ) Trademarks — ( 142 ) — ( 142 ) $ ( 6,053 ) $ ( 58,426 ) $ 16 $ ( 64,463 ) As of January 1, 2020 Impairment charges (i) Foreign exchange effect As of September 30, 2020 Health Canada licenses $ — $ ( 113 ) $ — $ ( 113 ) Lord Jones ® brand — ( 5,000 ) — ( 5,000 ) $ — $ ( 5,113 ) $ — $ ( 5,113 ) (i) Impairment charges to Health Canada licenses are related to the discontinuation of Original B.C. Ltd. (“OGBC”) and were included in other, net on the condensed consolidated statement of net income (loss) and comprehensive income (loss) for the three and nine months ended September 30, 2020. Amortization expense was $ 641 and $ 224 for the three months ended September 30, 2021 and 2020, respectively, and $ 1,084 and $ 570 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the estimated future amortization of definite-lived intangible assets is as follows: As of September 30, 2021 Remainder of 2021 (3 months) $ 583 2022 2,291 2023 2,256 2024 2,222 2025 1,907 2026 1,304 Thereafter 7,408 $ 17,971 Definite-lived intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment charges are recognized when the carrying amount of a definite-lived intangible asset is not recoverable and its carrying amount exceeds its fair value. For definite-lived intangible assets, the Company assessed the factors and circumstances present as of September 30, 2021. As a result of this assessment, the Company performed an interim impairment test on the Ginkgo exclusive license intangible asset. The fair value of the Ginkgo exclusive license was determined using a variation of the income approach called the relief from royalty method, which requires an estimate or forecast of the expected future cash flows and resulted in a difference between the consideration paid to Ginkgo and the fair value of the exclusive license intangible asset of $ 1,784 , which was recognized as an impairment charge on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the three and nine months ended September 30, 2021. 15 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Indefinite-lived intangible assets are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Indefinite-lived intangible assets are subject to a qualitative assessment, which requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows as potential indicators when determining the need for a quantitative assessment of impairment. The Company has reassessed the existence of impairment indicators on goodwill associated with the U.S. reporting unit derived from the acquisition of four Redwood Holding Group, LLC subsidiaries (collectively, “Redwood”) and the Lord Jones ® brand indefinite-lived intangible asset as of June 30, 2021, and determined that quantitative impairment analyses were required as of June 30, 2021 due to slower actual revenue growth as compared to previous revenue growth forecasts and significant pricing pressures brought about by increased competition and aggressive discounting in the U.S. reporting unit and associated with the Lord Jones ® brand indefinite-lived intangible asset. As such, the Company reassessed its estimates and forecasts as of June 30, 2021, to determine the fair values of the reporting unit and intangible asset using a discounted cash flow method on the reporting unit and the relief-from-royalty method on the Lord Jones ® brand. Significant inputs include discount rate, growth rates, and cash flow projections, and, for the Lord Jones ® brand, royalty rates. These valuation inputs would be considered Level 3 inputs as defined by ASC 820 Fair Value Measurement . As a result of the analysis as of June 30, 2021, the Company concluded the carrying amount of the Lord Jones ® brand exceeded its fair value, which resulted in impairment charges of $ 56,500 on its Lord Jones ® brand on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the nine months ended September 30, 2021. In June 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the quarter, represented indicators of impairment for the U.S. reporting unit’s Lord Jones ® brand. Accordingly, the Company performed an interim impairment analysis, which concluded the carrying amount of the brand exceeded its fair value. As a result of the analysis, the Company recorded an impairment charge of $ 5,000 on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the nine months ended September 30, 2020. (b) Goodwill Goodwill assets are comprised of the following items as of September 30, 2021 and December 31, 2020: As of September 30, 2021 Cost Accumulated impairment charges Net OGBC $ 309 $ ( 309 ) $ — Peace Naturals Project Inc. (“Peace Naturals”) 1,104 — 1,104 Redwood 213,414 ( 213,414 ) — $ 214,827 $ ( 213,723 ) $ 1,104 As of December 31, 2020 Cost Accumulated impairment charges Net OGBC $ 307 $ ( 307 ) $ — Peace Naturals 1,108 — 1,108 Redwood 213,414 ( 35,000 ) 178,414 $ 214,829 $ ( 35,307 ) $ 179,522 Accumulated impairment charges on goodwill for three and nine months ended September 30, 2021 and 2020, consist of: As of July 1, 2021 Impairment charges Foreign exchange effect As of September 30, 2021 OGBC $ ( 312 ) $ — $ 3 $ ( 309 ) Redwood ( 213,414 ) — — ( 213,414 ) $ ( 213,726 ) $ — $ 3 $ ( 213,723 ) As of July 1, 2020 Impairment charges (i) Foreign exchange effect As of September 30, 2020 OGBC $ — $ ( 290 ) $ ( 5 ) $ ( 295 ) Redwood ( 35,000 ) — — ( 35,000 ) $ ( 35,000 ) $ ( 290 ) $ ( 5 ) $ ( 35,295 ) 16 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents As of January 1, 2021 Impairment charges Foreign exchange effect As of September 30, 2021 OGBC $ ( 307 ) $ — $ ( 2 ) $ ( 309 ) Redwood ( 35,000 ) ( 178,414 ) — ( 213,414 ) $ ( 35,307 ) $ ( 178,414 ) $ ( 2 ) $ ( 213,723 ) As of January 1, 2020 Impairment charges (i) Foreign exchange effect As of September 30, 2020 OGBC $ — $ ( 290 ) $ ( 5 ) $ ( 295 ) Redwood — ( 35,000 ) — ( 35,000 ) $ — $ ( 35,290 ) $ ( 5 ) $ ( 35,295 ) (i) Impairment charges to OGBC goodwill were related to the discontinuation of OGBC and included in other, net on the condensed consolidated statement of net income (loss) and comprehensive income (loss) for the three and nine months ended September 30, 2020. The Company is required to perform a quantitative analysis of goodwill to test for impairment on an annual basis or more frequently when events or changes in circumstances indicate that fair value of the reporting unit may be less than its carrying amount. Under ASC 350, Intangibles - Goodwill and Other , the qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows or planned revenue or earnings of the reporting unit as indicators when determining the need for a quantitative assessment of impairment. As a result of the reassessment of impairment indicators and interim impairment analysis as of June 30, 2021, as described above, the Company concluded that the carrying amount of the U.S. reporting unit exceeded its fair value, which resulted in an impairment charge of $ 178,414 on goodwill associated with the U.S. reporting unit on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the nine months ended September 30, 2021. In June 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the quarter, represented indicators of impairment for the Company’s U.S. reporting unit. Accordingly, the Company performed an interim impairment analysis, which revealed the carrying amount of the reporting unit exceeded its fair value. As a result, the Company recorded an impairment charge of $ 35,000 on goodwill associated with its U.S. reporting unit for the nine months ended September 30, 2020. 6. Derivative Liabilities On March 8, 2019, the Company closed the previously announced investment in the Company (the “Altria Investment”) by Altria Group, Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. As of the closing date of the Altria Investment, the Altria Investment consisted of 149,831,154 common shares of the Company and one warrant of the Company (the “Altria Warrant”), all of which were issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximate 45 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 55 % (calculated on a non-diluted basis). As of September 30, 2021, Altria beneficially held an approximate 42 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 53 % (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note. 17 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable. a. The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional approximate 10 % of the common shares of Cronos (approximately 83 million common shares at September 30, 2021) at a per share exercise price of C$ 19.00 , which expires on March 8, 2023. b. The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the research and development (“R&D”) partnership with Ginkgo (the “Ginkgo Strategic Partnership”)), the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance. The price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Strategic Partnership will be C$ 16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. c. In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10 -day volume-weighted average price of the common shares of the Company on the TSX for the ten full days preceding such exercise by Altria, provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$ 16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities. A reconciliation of the carrying amounts of the derivative liability for the three months ended September 30, 2021 and 2020: As of July 1, 2021 Revaluation gain Exercise of rights Foreign exchange effect As of September 30, 2021 (a) Altria Warrant $ 150,083 $ ( 116,285 ) $ — $ ( 1,736 ) $ 32,062 (b) Pre-emptive Rights 13,926 ( 12,430 ) — ( 148 ) 1,348 (c) Top-up Rights 5,554 ( 4,201 ) — ( 235 ) 1,118 $ 169,563 $ ( 132,916 ) $ — $ ( 2,119 ) $ 34,528 As of July 1, 2020 Revaluation gain Exercise of rights Foreign exchange effect As of September 30, 2020 (a) Altria Warrant $ 165,958 $ ( 82,495 ) $ — $ 2,374 $ 85,837 (b) Pre-emptive Rights 16,180 ( 8,702 ) — 143 7,621 (c) Top-up Rights 23,576 ( 14,110 ) ( 690 ) 421 9,197 $ 205,714 $ ( 105,307 ) $ ( 690 ) $ 2,938 $ 102,655 18 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents A reconciliation of the carrying amounts of the derivative liability for the nine months ended September 30, 2021 and 2020: As of January 1, 2021 Revaluation gain Exercise of rights Foreign exchange effect As of September 30, 2021 (a) Altria Warrant $ 138,858 $ ( 109,099 ) $ — $ 2,303 $ 32,062 (b) Pre-emptive Rights 12,095 ( 10,957 ) — 210 1,348 (c) Top-up Rights 12,457 ( 11,234 ) — ( 105 ) 1,118 $ 163,410 $ ( 131,290 ) $ — $ 2,408 $ 34,528 As of January 1, 2020 Revaluation gain Exercise of rights Foreign exchange effect As of September 30, 2020 (a) Altria Warrant $ 234,428 $ ( 140,547 ) $ — $ ( 8,044 ) $ 85,837 (b) Pre-emptive Rights 12,787 ( 4,777 ) — ( 389 ) 7,621 (c) Top-up Rights 49,945 ( 37,471 ) ( 1,407 ) ( 1,870 ) 9,197 $ 297,160 $ ( 182,795 ) $ ( 1,407 ) $ ( 10,303 ) $ 102,655 Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments. During the three and nine months ended September 30, 2021, the Company’s share price decreased, resulting in a gain on revaluation of $ 132,916 and $ 131,290 , respectively. The fair values of the derivative liabilities were determined using the Black-Scholes pricing model as of September 30, 2021 and December 31, 2020, applying the following inputs: As of September 30, 2021 As of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Altria Warrant Pre-emptive Rights Top-up Rights Share price at valuation date (i) $ 7.15 $ 7.15 $ 7.15 $ 8.84 $ 8.84 $ 8.84 Subscription price (i) $ 19.00 $ 16.25 $ 16.25 $ 19.00 $ 16.25 $ 16.25 Weighted-average risk-free interest rate (ii) 0.39 % 0.21 % 0.29 % 0.21 % 0.17 % 0.13 % Weighted-average expected life (iii) 1.43 0.69 1.01 2.18 1.50 0.98 Expected annualized volatility (iv) 67 % 67 % 67 % 81 % 81 % 81 % Expected dividend yield — % — % — % — % — % — % (i) Per share in C$. (ii) The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. As of September 30, 2021 and December 31, 2020, the risk-free interest rate uses a range of approximately 0.12 % to 0.89 % and 0.10 % to 0.39 %, respectively, for the Pre-emptive Rights and Top-up Rights. (iii) The expected life represents the period of time, in years, that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. As of September 30, 2021 and December 31, 2020, the expected life uses a range of approximately 0.25 year to 4.00 years and 0.50 year to 5.00 years, respectively. (iv) Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of September 30, 2021. As of December 31, 2020, volatility was based on the blended historical volatility levels of the Company and peer companies. The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. While a decrease in the inputs noted below would cause a decrease in the carrying amount of the derivative liability, there would also be an equal but opposite impact on net income (loss). Decrease as of September 30, 2021 Decrease as of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Altria Warrant Pre-emptive Rights Top-up Rights Share price $ 9,013 $ 503 $ 308 $ 25,819 $ 2,527 $ 2,989 Weighted-average expected life 5,421 813 230 13,541 1,988 2,121 Expected annualized volatility 10,115 600 348 26,183 2,269 2,602 These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several factors outside of the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods. 19 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 7. Share-based Payments (a) Share-based award plans The Company has granted stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees and non-employee directors under the Stock Option Plan dated May 26, 2015 (the “2015 Stock Option Plan”), the 2018 Stock Option Plan dated June 28, 2018 (the “2018 Stock Option Plan” and, together with the 2015 Stock Option Plan, the “Prior Option Plans”), the 2020 Omnibus Equity Incentive Plan dated March 29, 2020 (the “2020 Omnibus Plan”) and the DSU plan dated August 10, 2019 (the “DSU Plan”). The Company can no longer make grants under the Prior Option Plans. The following table summarizes the total share-based payments associated with the Company’s stock options and RSUs for the three and nine months ended September 30, 2021 and 2020: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Stock options $ 1,886 $ 1,551 $ 5,814 $ 5,051 RSUs 781 6,365 1,917 7,847 Total share-based payments $ 2,667 $ 7,916 $ 7,731 $ 12,898 (b) Stock options Vesting conditions for grants of options are determined by the Compensation Committee of the Company’s Board of Directors. The typical vesting for stock option grants made under the 2020 Omnibus Plan is annual vesting over three to five years with a maximum term of ten years . The typical vesting for stock option grants made under the Prior Option Plans is quarterly vesting over three to five years with a maximum term of seven years . The Prior Option Plans did not, and the 2020 Omnibus Plan does not, authorize grants of options with an exercise price below fair market value. The following is a summary of the changes in stock options during the nine months ended September 30, 2021 and 2020: Weighted-average exercise price (C$) (i) Number of options Weighted-average remaining contractual term (years) Balance as of January 1, 2021 $ 5.40 13,755,148 2.30 Issuance of options 9.19 900,000 Exercise of options 2.14 ( 5,360,050 ) Cancellation, forfeiture and expiry of options 10.73 ( 90,274 ) Balance as of September 30, 2021 $ 7.62 9,204,824 3.15 Exercisable as of September 30, 2021 $ 6.25 5,844,094 1.46 Weighted-average exercise price (C$) (i) Number of options Weighted-average remaining contractual term (years) Balance as of January 1, 2020 $ 4.84 14,149,502 2.56 Issuance of options 6.96 2,000,000 Exercise of options 2.04 ( 1,841,863 ) Cancellation, forfeiture and expiry of options 15.06 ( 222,433 ) Balance as of September 30, 2020 $ 5.34 14,085,206 2.54 Exercisable as of September 30, 2020 $ 3.56 9,381,601 1.57 (i) The weighted-average exercise price reflects the conversion of foreign currency-denominated stock options translated into C$ using the average foreign exchange rate as of the date of issuance. During the nine months ended September 30, 2021 and 2020, the fair value per share at grant date of options was C$ 6.39 and C$ 4.84 , respectively. The fair value of the options issued was determined using the Black-Scholes option pricing model, using the following inputs: 20 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents September 30, 2021 September 30, 2020 Share price at grant date (per share) C$ 9.19 C$ 6.96 Exercise price (per option) C$ 9.19 C$ 6.96 Risk-free interest rate 1.39 % 0.43 % Expected life of options (in years) (i) 7 5 Expected annualized volatility 75 % 91 % Expected dividend yield — % — % Black-Scholes value at grant date (per option) C$ 6.39 C$ 4.84 Forfeiture rate — % — % (i) The expected life of the awards represents the period of time stock options are expected to be outstanding and is estimated considering vesting terms and employees’ and non-employees’ historical exercise and post-vesting employment termination behavior. Volatility was based on an equally weighted blended historical volatility level of the underlying equity securities of the Company and peer companies. The risk-free interest rate was based on the Bank of Canada government bonds with a remaining term equal to the expected life of the options at the grant date. The following table summarizes stock options outstanding for the 2020 Omnibus Plan, the 2018 Stock Option Plan, and the 2015 Stock Option Plan: As of September 30, 2021 As of December 31, 2020 2020 Omnibus Plan 2,900,000 2,000,000 2018 Stock Option Plan 1,576,923 1,627,715 2015 Stock Option Plan 4,727,901 10,127,433 Total stock options outstanding 9,204,824 13,755,148 (c) Restricted share units The following is a summary of the changes in RSUs for the nine months ended September 30, 2021 and 2020: Weighted-average grant date fair value (C$) (i) Number of RSUs Balance as of January 1, 2021 $ 7.66 948,357 Granted (i) 11.06 576,718 Vested and issued 7.11 ( 115,500 ) Cancellation and forfeitures 8.04 ( 36,971 ) Balance as of September 30, 2021 $ 9.12 1,372,604 Weighted-average grant date fair value (C$) (ii) Number of RSUs Balance as of January 1, 2020 $ 15.34 732,972 Granted (i) 7.32 814,874 Vested and issued 15.34 ( 732,972 ) Cancellation and forfeitures 7.52 ( 9,497 ) Balance as of September 30, 2020 $ 7.32 805,377 (i) RSUs granted in the period vest annually in equal installments over a three-year period from either the grant date or after a five year “cliff-period.” All RSUs are subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria. (ii) The weighted-average grant date fair value reflects the conversion of foreign currency-denominated RSUs translated into C$ using the foreign exchange rate as of the date of issuance. 21 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (d) Deferred share units The following is a summary of the changes in DSUs during the nine months ended September 30, 2021 and 2020: Number of DSUs Financial liability Balance as of January 1, 2021 83,293 $ 577 Granting and vesting of DSUs 48,913 354 DSU liabilities settled ( 27,764 ) ( 203 ) Gain on revaluation — ( 139 ) Balance as of September 30, 2021 104,442 $ 589 Number of DSUs Financial liability Balance as of January 1, 2020 33,397 $ 255 Granting and vesting of DSUs 58,380 338 DSU liabilities settled ( 8,484 ) ( 46 ) Gain on revaluation — ( 128 ) Balance as of September 30, 2020 83,293 $ 419 (e) Warrants The following is a summary of the changes in warrants during the nine months ended September 30, 2021 and 2020: Weighted-average exercise price (C$) Number of warrants Balance as of January 1, 2021 $ 0.25 7,987,349 Exercise of warrants 0.25 ( 7,987,349 ) Balance as of September 30, 2021 $ — — Weighted-average exercise price (C$) Number of warrants Balance as of January 1, 2020 $ 0.26 18,066,662 Exercise of warrants 0.27 ( 5,626,410 ) Balance as of September 30, 2020 $ 0.25 12,440,252 As of September 30, 2021, there are no warrants outstanding other than the Altria Warrant. See Note 6. Derivative Liabilities for further description of the Altria Warrant. 8. Earnings (Loss) per Share Basic and diluted earnings (loss) per share from continuing and discontinued operations are calculated as follows (in thousands, except share and per share amounts): Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Basic earnings (loss) per share computation Net income (loss) from continuing operations attributable to the shareholders of Cronos Group $ 77,834 $ 69,506 $ ( 261,970 ) $ 38,615 Weighted-average number of common shares outstanding 372,456,354 350,288,783 369,097,920 349,397,156 Basic earnings (loss) from continuing operations per share $ 0.21 $ 0.20 $ ( 0.71 ) $ 0.11 Loss from discontinued operations attributable to the shareholders of Cronos Group $ 82 $ ( 473 ) $ ( 500 ) $ ( 519 ) Weighted-average number of common shares outstanding 372,456,354 350,288,783 369,097,920 349,397,156 Basic loss from discontinued operations per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 22 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Diluted earnings (loss) per share computation Net income (loss) used in the computation of basic earnings (loss) from continuing operations per share $ 77,834 $ 69,506 $ ( 261,970 ) $ 38,615 Adjustment for exercise of rights on derivative liabilities — ( 690 ) — ( 1,407 ) Net income (loss) used in the computation of diluted earnings (loss) from continuing operations per share $ 77,834 $ 68,816 $ ( 261,970 ) $ 37,208 Weighted-average number of common shares outstanding used in the computation of basic earnings (loss) per share 372,456,354 350,288,783 369,097,920 349,397,156 Dilutive effect of warrants — 16,965,763 — 17,346,039 Dilutive effect of stock options 2,507,471 6,331,545 — 7,276,194 Dilutive effect of RSUs 581,481 195,750 — 72,099 Dilutive effect of Top-up Rights – market price 107,942 81,573 — 30,069 Weighted-average number of common shares for computation of diluted earnings (loss) from continuing operations per share (i) 375,653,248 373,863,414 369,097,920 374,121,557 Diluted earnings (loss) per share from continuing operations $ 0.21 $ 0.18 $ ( 0.71 ) $ 0.10 Income (loss) from discontinued operations attributable to the shareholders of Cronos Group $ 82 $ ( 473 ) $ ( 500 ) $ ( 519 ) Weighted-average number of common shares for computation of diluted earnings (loss) from discontinued operations per share 375,653,248 373,863,414 369,097,920 374,121,557 Diluted loss from discontinued operations per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 (i) In computing diluted earnings per share, incremental common shares are not considered in periods in which a net loss is reported as the inclusion of the common share equivalents would be anti-dilutive. The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive or because conditions for contingently issuable shares were not satisfied at the end of the reporting periods. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Ginkgo equity milestones 13,207,414 14,674,904 14,185,741 14,674,904 Pre-emptive Rights 10,668,647 12,006,740 10,878,993 12,006,740 Top-up Rights – fixed price 3,601,810 23,502,403 7,318,628 24,355,967 Top-up Rights – market price 3,036,327 1,507,739 2,627,890 1,458,569 Altria Warrant 82,956,191 79,051,981 82,723,333 78,106,502 Stock options 4,489,391 3,648,232 6,775,634 3,413,211 Warrants — — 1,856,251 — Restricted share units 295,897 — 770,544 488,648 Total anti-dilutive securities 118,255,677 134,391,999 127,137,014 134,504,541 23 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 9. Segment Information Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manage the business, make operating decisions and assess the Company’s performance. The Company determined that it has the following two reportable segments: United States and Rest of World. The United States operating segment consists of the manufacture and distribution of U.S. hemp-derived CBD infused products. The Rest of World operating segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets . These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions regarding the allocation of resources. The CODMs review adjusted earnings (loss) before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as the measure of segment profit or loss to evaluate performance of and allocate resources for its reportable segments. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, non-cash items and items that do not reflect management’s assessment of on-going business performance. The tables below set forth our condensed consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. The Company’s condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that the Company will achieve in future periods . Segment data was as follows for the three and nine months ended September 30, 2021 and 2020: Three months ended September 30, 2021 United States Rest of World Corporate Total Cannabis flower $ — $ 15,306 $ — $ 15,306 Cannabis extracts 2,100 2,786 — 4,886 Other — 215 — 215 Net revenue $ 2,100 $ 18,307 $ — $ 20,407 Share of loss from equity accounted investments $ — $ 1,414 $ — $ 1,414 Interest income 4 2,067 — 2,071 Interest expense — ( 7 ) — ( 7 ) Interest income, net $ 4 $ 2,060 $ — $ 2,064 Depreciation and amortization $ 70 $ 1,181 $ — $ 1,251 Impairment loss on goodwill and indefinite-lived assets 105 37 — 142 Impairment loss on long-lived assets — 1,784 — 1,784 Gain from discontinued operations — ( 82 ) — ( 82 ) Adjusted EBITDA ( 12,200 ) ( 29,760 ) ( 4,813 ) ( 46,773 ) Purchase of property, plant and equipment, net 101 2,203 — 2,304 24 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Three months ended September 30, 2020 United States Rest of World Corporate Total Cannabis flower $ — $ 7,958 $ — $ 7,958 Cannabis extracts 1,639 1,504 — 3,143 Other — 257 — 257 Net revenue $ 1,639 $ 9,719 $ — $ 11,358 Share of loss from equity accounted investments $ — $ 1,327 $ — $ 1,327 Interest income — 3,907 — 3,907 Interest expense ( 30 ) ( 96 ) — ( 126 ) Interest income, net $ ( 30 ) $ 3,811 $ — $ 3,781 Depreciation and amortization $ 35 $ 851 $ — $ 886 Adjusted EBITDA ( 5,687 ) ( 14,371 ) ( 10,021 ) ( 30,079 ) Purchase of property, plant and equipment, net 75 7,915 — 7,990 Nine months ended September 30, 2021 United States Rest of World Corporate Total Cannabis flower $ — $ 36,337 $ — $ 36,337 Cannabis extracts 6,768 5,020 — 11,788 Other — 515 — 515 Net revenue $ 6,768 $ 41,872 $ — $ 48,640 Share of loss from equity accounted investments $ — $ 4,172 $ — $ 4,172 Interest income 27 6,679 — 6,706 Interest expense — ( 20 ) — ( 20 ) Interest income, net $ 27 $ 6,659 $ — $ 6,686 Total assets $ 474,915 $ 376,569 $ 683,715 $ 1,535,199 Depreciation and amortization 209 2,820 — 3,029 Impairment loss on goodwill and indefinite-lived intangible assets 235,019 37 — 235,056 Impairment loss on long-lived assets 2,955 1,784 — 4,739 Loss from discontinued operations — 500 — 500 Adjusted EBITDA ( 32,421 ) ( 84,549 ) ( 16,136 ) ( 133,106 ) Purchase of property, plant and equipment, net 420 10,231 — 10,651 25 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Nine months ended September 30, 2020 United States Rest of World Corporate Total Cannabis flower $ — $ 16,373 $ — $ 16,373 Cannabis extracts 5,989 6,821 — 12,810 Other — 490 — 490 Net revenue $ 5,989 $ 23,684 $ — $ 29,673 Share of loss from equity accounted investments $ — $ 3,293 $ — $ 3,293 Interest income 16 15,466 — 15,482 Interest expense ( 30 ) ( 186 ) — ( 216 ) Interest income, net $ ( 14 ) $ 15,280 $ — $ 15,266 Total assets $ 251,835 $ 369,621 $ 1,297,473 $ 1,918,929 Depreciation and amortization 104 2,148 — 2,252 Impairment loss on goodwill and indefinite-lived intangible assets 40,000 — — 40,000 Income tax expense 143 845 — 988 Adjusted EBITDA ( 16,254 ) ( 61,999 ) ( 15,867 ) ( 94,120 ) Purchase of property, plant and equipment, net 294 21,040 — 21,334 The following tables set forth a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated: 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 Impairment loss on goodwill and indefinite-lived intangible assets (i) 105 37 — 142 Impairment loss on long-lived assets (ii) — 1,784 — 1,784 Gain on revaluation of derivative liabilities (iii) — ( 132,916 ) — ( 132,916 ) Transaction costs (iv) — — 542 542 Other, net (vi) — ( 273 ) — ( 273 ) Income from discontinued operations (vii) — ( 82 ) — ( 82 ) Share-based payments (viii) 967 1,700 — 2,667 Financial statement review costs (ix) — — 678 678 Depreciation and amortization 231 3,597 — 3,828 Adjusted EBITDA $ ( 12,200 ) $ ( 29,760 ) $ ( 4,813 ) $ ( 46,773 ) 26 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 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 Gain on revaluation of derivative liabilities (iii) — ( 105,307 ) — ( 105,307 ) Gain on disposal of other investments (v) — ( 3,974 ) — ( 3,974 ) Other, net (vi) 61 580 — 641 Loss from discontinued operations (vii) — 473 — 473 Share-based payments (viii) 6,469 1,447 — 7,916 Financial statement review costs (ix) — — 958 958 Depreciation and amortization 35 2,181 — 2,216 Adjusted EBITDA $ ( 5,687 ) $ ( 14,371 ) $ ( 10,021 ) $ ( 30,079 ) 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 goodwill and indefinite-lived intangible assets (i) 235,019 37 — 235,056 Impairment loss on long-lived assets (ii) 2,955 1,784 — 4,739 Gain on revaluation of derivative liabilities (iii) — ( 131,290 ) — ( 131,290 ) Transaction costs (iv) — — 3,801 3,801 Other, net (vi) — ( 1,184 ) — ( 1,184 ) Loss from discontinued operations (vii) — 500 — 500 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 ) 27 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 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 goodwill and indefinite-lived intangible assets (i) 40,000 — — 40,000 Gain on revaluation of derivative liabilities (iii) — ( 182,795 ) — ( 182,795 ) Gain on disposal of other investments (v) — ( 4,743 ) — ( 4,743 ) Other, net (vi) 61 564 — 625 Loss from discontinued operations (vii) — 519 — 519 Share-based payments (viii) 7,931 4,967 — 12,898 Financial statement review costs (ix) — — 8,824 8,824 Depreciation and amortization 104 4,991 — 5,095 Adjusted EBITDA $ ( 16,254 ) $ ( 61,999 ) $ ( 15,867 ) $ ( 94,120 ) (i) For the nine months ended September 30, 2021, and three and nine months ended September 30, 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to the Company’s U.S. segment. 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 the Company’s U.S. segment and impairment on an indefinite-lived trademark related to the Company’s ROW segment. See Note 5. Goodwill and Intangible Assets, net. (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. See Note 13. Impairment Loss on Long-lived Assets and Note 5. Goodwill and Intangible Assets, net. (iii) For the three and nine months ended September 30, 2021 and 2020, gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 6. Derivative Liabilities. (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). There were no transaction costs during the three and nine months ended September 30, 2020. (v) For the three and nine months ended September 30, 2020, gain on disposal of other investments 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. See Note 3. Investments. (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. See Note 12. Held-For-Sale Assets and Discontinued Operations. (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. (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. Net revenue attributed to a geographic region based on the location of the customer were as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Canada $ 14,186 $ 9,205 $ 32,432 $ 22,712 Israel 3,752 514 8,580 807 United States 2,100 1,639 6,768 5,989 Other countries 369 — 860 165 Net revenue $ 20,407 $ 11,358 $ 48,640 $ 29,673 28 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents Property, plant and equipment, net were physically located in the following geographic regions: As of September 30, 2021 As of December 31, 2020 Canada $ 164,490 $ 162,163 Israel 23,834 23,143 United States 320 2,293 Total $ 188,644 $ 187,599 The Company sells products through a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenues. United States During the three and nine months ended September 30, 2021 and 2020, the U.S. segment had no major customers. As of September 30, 2021 and December 31, 2020, the Company had $ 106 and $ 65 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers. There was no loss from discontinued operations from the U.S. segment for the three and nine months ended September 30, 2021 and 2020. Rest of World During the three months ended September 30, 2021, the Rest of World segment earned a total net revenue before excise taxes of $ 12,256 from three major customers, Ontario Cannabis Retail Corporation, Société Québécoise du Cannabis, and Alberta Gaming, Liquor and Cannabis Commission accounting for 31 %, 16 %, and 13 % respectively, of the Company’s total net revenue before excise taxes. During the three months ended September 30, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 9,790 from four major customers, together accounting for 82 % of the Company’s total net revenues before excise taxes. During the nine months ended September 30, 2021, the Rest of World segment earned a total net revenue before excise taxes of $ 25,667 from three major customers, Ontario Cannabis Retail Corporation, Société Québécoise du Cannabis and Alberta Gaming, Liquor and Cannabis Commission, accounting for 24 %, 16 %, and 13 % respectively, of the Company’s total net revenue before excise taxes. During the nine months ended September 30, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 22,142 from four major customers, together accounting for 74 % of the Company’s total net revenues before excise taxes. As of September 30, 2021 and December 31, 2020, the Company had $ 158 and $ 9 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers. The Company recorded income from discontinued operations of $ 82 from the Rest of World segment for the three months ended September 30, 2021 and a loss from discontinued operations of $ 473 for the three months ended September 30, 2020. The loss from discontinued operations from the Rest of World segment for the nine months ended September 30, 2021 and 2020 was $ 500 and $ 519 , respectively. 10. Commitments and Contingencies (a) Commitments There have been no material changes in the information regarding commitments as disclosed in the Company’s Annual Report. 29 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (b) Contingencies The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution and sale of its products. Many of these legal proceedings are in the early stages of litigation and seek damages that are unspecified or not quantified. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe these legal proceedings, individually or in the aggregate, will have a material adverse effect on its financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results for that quarter. (i) Class action complaints relating to restatement of 2019 interim financial statements On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in the U.S. District Court for the Eastern District of New York against the Company and its former Chief Executive Officer (now Executive Chairman) and now former Chief Financial Officer. The court has consolidated the cases, and the consolidated amended complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The consolidated amended complaint generally alleges that certain of the Company’s prior public statements about revenues and internal controls were incorrect based on the Company’s disclosures relating to the Audit Committee of the Board of Directors’ review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel. The consolidated amended complaint does not quantify a damage request. Defendants moved to dismiss on February 8, 2021. On June 3, 2020, an alleged shareholder filed a Statement of Claim, as amended on August 12, 2020, in the Ontario Superior Court of Justice in Toronto, Ontario, Canada, seeking, among other things, an order certifying the action as a class action on behalf of a putative class of shareholders and damages of an unspecified amount. The Amended Statement of Claim names (i) the Company, (ii) its former Chief Executive Officer (now Executive Chairman), (iii) now former Chief Financial Officer, (iv) former Chief Financial Officer and Chief Commercial Officer, and (v) current and former members of the Board of Directors as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Amended Statement of Claim generally alleges that certain of the Company’s prior public statements about revenues and internal controls were misrepresentations based on the Company’s March 2, 2020 disclosure that the Audit Committee of the Board of Directors was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Amended Statement of Claim does not quantify a damage request. On June 28, 2021, the Ontario Court dismissed motions brought by the plaintiff for leave to commence a claim for misrepresentation under the Ontario Securities Act and for certification of the action as a class action. The plaintiff has appealed the Court’s dismissal of the motions only with respect to the Company, the former Chief Executive Officer (now Executive Chairman), and the now former Chief Financial Officer; the remaining defendants were dismissed from the matter with prejudice and the Company and all individual defendants agreed not to seek costs from plaintiff in connection with the dismissal of the motions. (ii) Regulatory reviews relating to restatement The Company has been responding to requests for information from various regulatory authorities relating to its previously disclosed restatement of its financial statements for the first three quarters of 2019 as well as the previously disclosed restatement of the second quarter of 2021 interim financial statements. The Company is responding to all such requests for information and cooperating with all regulatory authorities. The Company cannot predict the outcome of any such regulatory review or investigation and it is possible that additional investigations or one or more formal proceedings may be commenced against the Company and its current and former officers and directors in connection with these regulatory reviews and investigations. 30 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (iii) Litigation relating to marketing, distribution and sale of products On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. On December 4, 2020, a Third Amended Statement of Claim was filed, which added a second alleged consumer. The Third Amended Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Third Amended Statement of Claim seeks a total of C$ 500 million for breach of contract, compensatory damages, and unjust enrichment or such other amount as may be proven in trial and C$ 5 million in punitive damages against each defendant, including the Company. The Third Amended Statement of Claim also seeks interest and costs associated with the action. The Company has not responded to the Third Amended Statement of Claim. On January 31, 2022, upon consent of the Company and the plaintiffs, the court dismissed the case in its entirety as to the Company. A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business alleging, among other things, violations of state consumer protection, health and advertising laws. On April 8, 2020, a putative class action complaint was filed in the U.S. District Court for the Central District of California against Redwood Holding Group, LLC (“Redwood”), alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and breaches of the California Commercial Code for breach of express warranties and implied warranty of merchantability with respect to Redwood’s marketing and sale of U.S. hemp products. The complaint did not quantify a damage request. On April 10, 2020, the class action complaint was dismissed for certain pleading deficiencies and the plaintiff was granted leave until April 24, 2020 to amend the complaint to establish federal subject matter jurisdiction. On April 28, 2020, the action was dismissed without prejudice for failure to prosecute and for failure to comply with a court order. As of the date of this Quarterly Report, the plaintiff has not refiled the complaint. The Company expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase. 11. Financial Instruments (a) Fair value measurement The Company complies with ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values are determined by: • Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. • Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. September 30, 2021 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 842,567 $ — $ — $ 842,567 Short-term investments 197,161 — — 197,161 Derivative liabilities — — 34,528 34,528 December 31, 2020 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,078,023 $ — $ — $ 1,078,023 Short-term investments 211,766 — — 211,766 Derivative liabilities — — 163,410 163,410 There were no transfers between fair value categories during the periods presented. 31 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (b) Financial risks The Company’s activities expose it to a variety of financial risks, including credit risk, market risk, interest rate risk, liquidity risk, and foreign currency rate risk. (i) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short-term investments, loans receivable, and advances to joint ventures. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $ 1,144,143 and $ 1,403,491 as of September 30, 2021 and December 31, 2020, respectively. (a) C ash and cash equivalents, short-term investments, and other receivables The Company held cash and cash equivalents and short-term investments and related interest receivable. Short-term investments and related interest receivable represents short-term investments with a maturity of less than a year and accrued interest as of period end. The cash and cash equivalents and short-term investments, including guaranteed investment certificates and bankers’ acceptances, are held with central banks and financial institutions that are highly rated. In addition to interest receivable, other receivables include sales taxes receivable from the government. As such, the Company has assessed an insignificant loss allowance on these financial instruments. (b) Accounts receivable An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, among others, the failure of a debtor to engage in a repayment plan and a failure to make contractual payments for a period of greater than 120 days past due. As of September 30, 2021 and December 31, 2020, the Company had an allowance for credit losses of $ 202 and $ 74 , respectively. As of September 30, 2021, the Company has assessed that there is a concentration of credit risk, as 84 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. As of December 31, 2020, 78 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. (ii) Market risk Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, market and economic conditions, and equity and commodity prices. The Company is exposed to market risk in divesting its investments, such that unfavorable market conditions could result in dispositions of investments at less than their carrying amounts. Further, the revaluation of securities classified as fair value through net income could result in significant write-downs of the Company’s investments, which would have an adverse impact on the Company’s financial position, unless these would flow through other comprehensive income. The Company manages market risk by having a portfolio of securities from multiple issuers so that the Company is not materially exposed to any one issuer. (iii) Interest rate risk Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of income and expense recorded on the cash equivalents and short-term investments, and the market value of all interest-earning assets, other than those which possess a short-term to maturity. A 10% change in the interest rate in effect on September 30, 2021 and December 31, 2020 would not have a material effect on (i) fair value of the cash equivalents and short-term investments as the majority of the portfolio has a maturity date of three months or less or (ii) interest income. Management continues to monitor external interest rates and revise the Company’s investment strategy as a result. During the three months ended September 30, 2021 and 2020, the Company recorded net interest income of $ 2,064 and $ 3,781 , respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded net interest income of $ 6,686 and $ 15,266 , respectively. 32 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (iv) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and arises principally from the Company’s accounts payable and other liabilities. The Company’s policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations as they become due. Further, the Company’s management is responsible for ensuring funds exist and are readily accessible to support business opportunities as they arise. The Company’s funding was primarily provided in the form of capital raised through the issuance of common shares and warrants. As of September 30, 2021, the Company had assessed a concentration risk of vendors as 21 % of accounts payables were due to two vendors. As of December 31, 2020, the Company had assessed a concentration risk of vendors as 64 % due to four vendors. (v) Foreign currency risk Currency rate risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on investments in equity investees denominated in dollars, A$ and C$, and other assets and liabilities denominated in A$ and C$. The Company is further exposed to this risk through subsidiaries operating in Israel and the U.S. as the Company’s functional currency is in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure to currency rate risk. As such, the Company’s financial position and financial results may be adversely affected by the unfavorable fluctuations in currency exchange rates. During the three months ended September 30, 2021 and 2020, the Company had foreign currency gain (loss) on translation of $( 22,818 ) and $ 26,167 , respectively. During the nine months ended September 30, 2021 and 2020, the Company had foreign currency gain (loss) on translation of $ 6,936 and $( 35,654 ), respectively. A 10% change in the exchange rates for the U.S. dollar would affect the carrying amount of net assets by approximately $ 99,056 and $ 97,237 as of September 30, 2021 and December 31, 2020, respectively. 12. Held-For-Sale Assets and Discontinued Operations During the year ended December 31, 2020, the Company advanced its plans for the sale and disposal of substantially all of the assets of OGBC and as a result, OGBC’s results of operations were reclassified as discontinued operations in the accompanying condensed consolidated financial statements. During the quarter ended June 30, 2021, the Company determined that the fair value of OGBC was lower than the carrying amount of the assets. As such, a write-down to these held-for-sale assets of $ 561 was recorded in the second quarter of 2021. On September 10, 2021, OGBC was sold for $ 727 , net of costs to sell. As a result, the Company recorded $ 82 in income (loss) on discontinued operations in its condensed consolidated income statement for the three and nine months ended September 30, 2021. On June 10, 2021, the land and office building located in Winnipeg, Manitoba Canada, previously designated as held-for-sale in the first quarter of 2021, was sold for $ 2,059 , net of costs to sell. As a result, the Company recorded a gain on the sale of $ 1,279 in other, net in its condensed consolidated income statement for the nine months ended September 30, 2021. The following table summarizes the financial information for discontinued operations: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Income (loss) from discontinued operations, net of income taxes $ 82 $ ( 473 ) $ ( 500 ) $ ( 519 ) As of September 30, 2021 As of December 31, 2020 OGBC assets classified as held-for-sale $ — $ 1,176 33 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents 13. Impairment Loss on Long-lived Assets (a) Right-of-use assets and property, plant, and equipment, net During the nine months ended September 30, 2021, the Company recognized an impairment charge of $ 1,039 related to leasehold improvements located within leased premises, encompassing approximately 6,000 square feet, in Los Angeles, California, which the Company determined it no longer had plans to use. The significant change in the extent and manner in which the leasehold improvements are being used and the expectation that, more likely than not, the leasehold improvements will be disposed of before the end of their useful life triggered an impairment. The right-of-use lease asset associated with the leasehold improvements was also written down as a result of the Company’s decision to no longer use the leased premises. The Company recognized an impairment charge on the de-recognition of the right-of-use asset of $ 702 during the nine months ended September 30, 2021. Both of the impairment charges described above are recognized on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as impairment loss on long-lived assets. Additionally, during the nine months ended September 30, 2021, the Company reassessed the existence of impairment indicators on property, plant and equipment associated with sales channels in the U.S. segment. The Company determined that slower actual revenue growth as compared to previous revenue growth forecasts and significant pricing pressures brought about by increased competition and aggressive discounting in sales channels in the U.S. segment represented indicators of impairment. As a result, a quantitative impairment analysis was required as of June 30, 2021. As such, the Company reassessed its estimates and forecasts as of June 30, 2021, to determine the fair values of the property, plant and equipment using an undiscounted cash flow methodology. Significant inputs include growth rates and cash flow projections. As a result of the analysis as of June 30, 2021, the Company concluded the carrying amount of the property, plant and equipment associated with sales channels in the U.S. segment exceeded its fair value, which resulted in impairment charges of $ 1,214 on the condensed consolidated statements of net income (loss) and comprehensive income (loss) for the nine months ended September 30, 2021. No impairment charges were recorded during the three months ended September 30, 2021 and the three and nine months ended September 30, 2020 on property, plant and equipment and right-of-use assets. (b) Intangible assets, net During the three and nine months ended September 30, 2021, the Company recognized an impairment charge of $ 1,784 on definite-lived intangible assets 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 . See Note 5. Goodwill and Intangible Assets, Net. The impairment charge is recognized on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as impairment loss on long-lived assets. No impairment charges were recorded during the three and nine months ended September 30, 2020 on definite-lived intangible assets. 14. Subsequent Events (a) PharmaCann On October 12, 2021, PharmaCann announced that it had entered into a definitive merger agreement pursuant to which PharmaCann will acquire LivWell Holdings, Inc. (“LivWell”). LivWell is a multi-state cannabis cultivation and retail leader based in Colorado. Based upon the terms of the proposed merger, upon the closing of the proposed merger, the Company’s best estimate is that its ownership percentage in PharmaCann on a fully-diluted basis would decrease to approximately 6.7 %. Under the terms of the Company’s investment in PharmaCann, the Company’s rights to nominate an observer or a director to the PharmaCann board of directors could be lost if the Company’s ownership drops below 6.0 % on a fully diluted basis and it sells or transfers all or any portion of the option (subject to certain exceptions). Further dilution, therefore, could adversely affect the Company’s rights under the PharmaCann option. As a result of the merger, the value of the Company’s option in PharmaCann could be materially impacted. (b) Ginkgo Collaboration Agreement On November 12, 2021, the Company announced the achievement of the final productivity target in respect of cannabigerovarinic acid (“CBGVA”) under the Ginkgo Collaboration Agreement with Ginkgo. As a result of this achievement on November 12, 2021, the Company issued 1,467,490 common shares at a share price of C$ 7.12 for total consideration given of C$ 10,449 ($ 8,150 ) to Ginkgo. Pursuant to the terms of the Ginkgo Collaboration Agreement, the Company was and will be granted an exclusive right to use and commercialize certain key intellectual property for the use of the microorganisms developed for the production of up to eight different cannabinoids, including CBGVA. The estimated fair value of the exclusive license for CBGVA is still being evaluated. The definite-lived intangible asset will be amortized using the straight-line method over its estimated useful life of ten years . 34 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of $, except share amounts) Table of Contents (c) Cronos Australia The Cronos Australia Merger closed on December 16, 2021. In connection with the closing of the Cronos Australia Merger, all advances made under the Company’s A$ 1,500 unsecured loan to Cronos Australia, plus accrued interest and certain royalties payable, were converted into ordinary shares of Cronos Australia. In addition, the Company’s ownership interest in Cronos Australia decreased to approximately 10 % and the Company’s number of Cronos Australia board seats was reduced from two to one . The reduction in ownership interest and board seats constitutes a loss of significant influence and will result in a change beginning in the fourth quarter of 2021 on the condensed consolidated balance sheet from equity method to mark-to-market accounting, with unrealized holding gains and losses included in net income (loss) on the condensed consolidated statements of net income (loss) and comprehensive income (loss). The fair value of the Company’s investment in Cronos Australia was valued at approximately $ 8,300 as of December 16, 2021. (d) MedMen Enterprises, Inc. On December 31, 2021, the Company and MedMen Enterprises, Inc., the joint venture partner (“the MedMen JV partner”), agreed to fully dissolve MedMen Canada (“the MedMen dissolution agreement”) due to its prolonged inactivity and a lack of business operations. In accordance with the MedMen dissolution agreement, cash of $ 256 and $ 220 was distributed to the Company and the MedMen JV partner, respectively. The remaining $ 118 of cash held by MedMen Canada will be used to settle any remaining legal fees and related charges. Any remaining funds will then be distributed 50/50 between the Company and the MedMen JV partner. (e) Realignment In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). The organizational and cost initiatives being undertaken are intended to position the Company to drive profitable and sustainable growth over time. The Company expects to incur charges associated with the Realignment over a one-year period of approximately $1,219, the majority of which are expected to be incurred in the first half of 2022, relating to one-time severance charges. 35 Table of Contents