Cronos Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1. of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report. Forward-Looking Statements This Quarterly Report, the documents incorporated into this Quarterly Report by reference, other reports we file with, or furnish to, the U.S. Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon our current internal expectations, estimates, projections, assumptions and beliefs. All information that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology, such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussion of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of historical fact. Forward-Looking Statements include, but are not limited to, statements with respect to: • the uncertainties associated with the COVID-19 pandemic, including our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic, the ability to continue our production, distribution and sale of our products, and demand for and the use of our products by consumers; • laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty regarding the application of United States (“U.S.”) state and federal law to U.S. hemp (including CBD) products and the scope of any regulations by the U.S. Food and Drug Administration (the “FDA”), the U.S. Drug Enforcement Administration (the “DEA”), the U.S. Federal Trade Commission (the “FTC”), the U.S. Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S. hemp (including CBD) products; • the laws and regulations and any amendments thereto relating to the U.S. hemp industry in the U.S., including the promulgation of regulations for the U.S. hemp industry by the U.S. Department of Agriculture (the “USDA”) and relevant state regulatory authorities; • expectations related to our announced realignment (the “Realignment”) and any progress, challenges and effects related thereto as well as changes in strategy, metrics, investments, reporting structure, costs, operating expenses, employee turnover and other changes with respect thereto; • the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof; • our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact; • our ability to successfully create and launch brands and further create, launch and scale U.S. hemp-derived consumer products and cannabis products; • the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids; • expectations regarding the implementation and effectiveness of key personnel changes; • the anticipated benefits and impact of Altria Group, Inc.’s investment in the Company (the “Altria Investment”), pursuant to a subscription agreement dated December 7, 2018; • the potential exercise of one warrant of the Company included as part of the Altria Investment, pre-emptive rights and/or top-up rights in connection with the Altria Investment, including proceeds to us that may result therefrom; • expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment; • the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized; • expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic alliances and equity investments, including the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”); • our ability to execute on our strategy and the anticipated benefits of such strategy; 36 Table of Contents • expectations of the amount or frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill; • the ongoing impact of the legalization of additional cannabis product types and forms for adult-use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets; • the future performance of our business and operations; • our competitive advantages and business strategies; • the competitive conditions of the industry; • the expected growth in the number of customers using our products; • our ability or plans to identify, develop, commercialize or expand our technology and research and development (“R&D”) initiatives in cannabinoids, or the success thereof; • expectations regarding acquisitions and dispositions and the anticipated benefits therefrom; • uncertainties as to our ability to exercise the PharmaCann Option (as defined herein) in the near term or the future in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S. and our ability to realize the anticipated benefits of the transaction with PharmaCann (as defined herein); • expectations regarding revenues, expenses and anticipated cash needs; • expectations regarding cash flow, liquidity and sources of funding; • expectations regarding capital expenditures; • the expansion of our production and manufacturing, the costs and timing associated therewith and the receipt of applicable production and sale licenses; • expectations regarding growth in our growing, production and supply chain capacities; • expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations; • expectations with respect to future production costs; • expectations with respect to future sales and distribution channels and networks; • the expected methods to be used to distribute and sell our products; • the anticipated future gross margins of our operations; • accounting standards and estimates; • our ability to timely and effectively remediate any material weaknesses in our internal control over financial reporting; and • expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third-party supply and manufacturing agreements. Certain of the Forward-Looking Statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below. 37 Table of Contents The Forward-Looking Statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including: (i) our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic and the ability to continue our production, distribution and sale of our products and customer demand for and use of our products; (ii) management’s perceptions of historical trends, current conditions and expected future developments; (iii) our ability to generate cash flow from operations; (iv) general economic, financial market, regulatory and political conditions in which we operate; (v) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments; (vi) consumer interest in our products; (vii) competition; (viii) anticipated and unanticipated costs; (ix) government regulation of our activities and products including, but not limited to, the areas of taxation and environmental protection; (x) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (xi) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xii) our ability to conduct operations in a safe, efficient and effective manner; (xiii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations; (xiv) our ability to realize the expected cost-savings, efficiencies and other benefits of our Realignment and employee turnover related thereto; (xv) our ability to complete planned dispositions and, if completed, obtain our anticipated sales price; (xvi) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann; and (xvii) other considerations that management believes to be appropriate in the circumstances. While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct. By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf. Such factors include, without limitation, the risk that the COVID-19 pandemic may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products; the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected; the risk that we will not complete planned dispositions or, if completed, obtain our anticipated sales price; the implementation and effectiveness of key personnel changes; the risks that our Realignment will not result in the expected cost-savings, efficiencies and other benefits or will result in greater than anticipated turnover in personnel; future levels of revenue; the implementation and effectiveness of key personnel changes; future levels of revenues; consumer demand for cannabis and U.S. hemp products; our ability to manage disruptions in credit markets or changes to our credit ratings; future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses; the success or timing of completion of ongoing or anticipated capital or maintenance projects; business strategies, growth opportunities and expected investment; the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all); the potential effects of judicial, regulatory or other proceedings, or threatened litigation or proceedings, on our business, financial condition, results of operations and cash flows; volatility in and/or degradation of general economic, market, industry or business conditions; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; the anticipated effects of actions of third parties such as competitors, activist investors or federal (including U.S. federal), state, provincial, territorial or local regulatory authorities or self-regulatory organizations; changes in regulatory requirements in relation to our business and products; legal or regulatory obstacles that could prevent us from being able to exercise the PharmaCann Option and thereby realizing the anticipated benefits of the transaction with PharmaCann; dilution of our fully-diluted ownership of PharmaCann and the loss of our rights as a result of that dilution; our remediation of material weaknesses in our internal control over financial reporting and the improvement of our control environment and our systems, processes and procedures; and the factors discussed under Part I, Item 1A, “Risk Factors” of the Annual Report. Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements. Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned not to place undue reliance on these Forward-Looking Statements because of their inherent uncertainty and to appreciate the limited purposes for which they are being used by management. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. Forward-Looking Statements are made as of the date they are made and are based on the beliefs, estimates, expectations and opinions of management on that date. We undertake no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements. The Forward-Looking Statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements. 38 Table of Contents Foreign currency exchange rates All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of September 30, 2021, September 30, 2020 and December 31, 2020. Transactions affecting the shareholders’ equity are translated at historical foreign exchange rates. The condensed consolidated statements of net income (loss) and comprehensive income (loss) and condensed consolidated statements of cash flows of the Company’s foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period using Bloomberg. The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below: (Exchange rates are shown as C$ per $) As of September 30, 2021 September 30, 2020 December 31, 2020 Average rate 1.2593 1.3323 1.3036 Spot rate 1.2680 1.3308 1.2751 Year-to-date average rate 1.2519 1.3539 1.3411 Business Overview Cronos Group is an innovative global cannabinoid company with international production and distribution across four continents. Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is building an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach ® , PEACE NATURALS ® , Lord Jones ® , Happy Dance ® and PEACE+™. The Company no longer produces or distributes products under the COVE ® brand. Strategy Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities: • growing a portfolio of iconic brands that responsibly elevate the consumer experience; • developing a diversified global sales and distribution network; • establishing an efficient global supply chain; and • creating and monetizing disruptive intellectual property. Business segments Cronos Group reports through two segments: “United States” (“U.S.”) and “Rest of World” (“ROW”). These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The United States segment manufactures, markets and distributes U.S. hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States under the brands Lord Jones ® , Happy Dance ® and PEACE+ ™ . The ROW segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. In Canada, Cronos Group operates two wholly owned license holders under the Cannabis Act (Canada), Peace Naturals Project Inc. (“Peace Naturals”), which has production facilities near Stayner, Ontario (the “Peace Naturals Campus”), and Cronos Fermentation, which has fermentation and manufacturing facilities in Winnipeg, Manitoba. In Israel, the Company operates under the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and cannabis oils in the Israeli medical market. Cronos Group has established strategic joint ventures in Canada, Israel and Colombia. As of September 30, 2021, Cronos Group additionally held approximately 31% of the issued capital of Cronos Australia Limited, which is listed on the Australian Securities Exchange under the trading symbol “CAU.” Cronos Group currently exports cannabis products to countries that permit the import of such products, such as Australia, Germany and Israel. Recent Developments COVID-19 update The COVID-19 pandemic continues to impact the global economy and, specifically, the U.S., Canada, Israel, and the other countries in which the Company or its affiliates operate (including Australia and Colombia). Cronos Group continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the health and safety of our employees remains one of our top priorities. 39 Table of Contents In the U.S., numerous states have continued to remove their COVID-19 related restrictions as the rollout of vaccines continues. This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell the Company’s products. Any reinstatement of restrictions on the operations of retail outlets could negatively impact the Company’s short-term results of operations in the U.S. Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which the Company operates. Although we have not yet seen a significant impact from these challenges, we continue to monitor our supply chain closely. In Canada, COVID-19 related restrictions continued to be removed as the vaccination rate increased. All provinces have some form of cannabis retail open to consumers, whether it be restricted in-person shopping, curb-side pickup or delivery. The lockdown measures taken in the first six months of 2021 to slow infection rates negatively impacted the Company’s short-term revenue growth in Canada. However, we expect the reopening plans implemented in the third quarter of 2021 to partially mitigate this negative impact in the remainder of 2021. In Israel, most COVID-19 restrictions have been removed as vaccination rates have increased. Occupancy limitations in retail outlets have been removed, including those that sell the Company’s products. The Company does not expect the remaining COVID-19 restrictions to have a material impact on the Company’s short-term revenue growth in Israel. In both the U.S. and ROW segments, there were no material increases in the current expected credit loss in connection with COVID-19. The Company continues to closely monitor the effects of COVID-19 on its operating results. Collectively, the effects of the COVID-19 pandemic have adversely affected the Company’s results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect. At this time, neither the duration nor scope of the disruption can be predicted; therefore, the ultimate impact to the Company’s business cannot be reasonably estimated but such impact could materially adversely affect the Company’s business and financial results. Despite the impacts of the COVID-19 pandemic, the Company believes that its significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months. The impact of reduced interest rates has inhibited the Company’s ability to generate interest income, but this has not had, and is not expected to have, a material impact on the liquidity or capital resources of the Company. Strategic and Organizational Update As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, the Company has determined that now is the right time to implement the Realignment of its business around its brands. The organizational and cost initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time. The program will consist of the following: 1. Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs; 2. Evaluating the Company's global supply chain and performing product reviews, and pricing and distribution optimization in order to reduce fixed expenses and reduce complexity; and 3. Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry. Brand and Product Portfolio In the third quarter of 2021, the Company continued to build on the success of its dried flower portfolio with the introduction of new high potency cultivars, Atomic Sour Grapefruit and Cocoa Bomba, in select markets in Canada. These launches, in addition to the launch of Spinach ® GMO Cookies earlier in 2021, are further solidifying the Company’s strength in the dried flower category in the Canadian adult-use cannabis market. In October 2021, Cronos Group launched its first cultured cannabinoid product, SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy. The SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy builds on Cronos Group’s successful SOURZ by Spinach ® platform, utilizing the distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile. In addition, in January 2022, the Company launched a 1-gram vape featuring THC and CBG under the SPINACH FEELZ™ brand in the Canadian adult-use cannabis market. The Company, through the SPINACH FEELZ™ brand, plans to produce a variety of cannabis products that will prominently feature rare cannabinoids, designed to deliver unique and enhanced experiences made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids, like THC and CBD. Global Supply Chain In the third quarter of 2021, Cronos GrowCo, the Company’s joint venture in Canada, continued to build on success of its first harvest in the first quarter of 2021. With its processing license in hand, Cronos GrowCo has begun selling to Canadian license holders in the 40 Table of Contents wholesale market. In addition, the Company has begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of the Company’s Canadian cannabis supply chain. Intellectual property initiatives In August 2021, Cronos Group announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”) under the Ginkgo Strategic Partnership, which supports the launch of the Company’s SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy. In November 2021, Cronos Group achieved the final productivity target for a second cannabinoid, cannabigerovarinic acid (“CBGVA”), which is a crucial step to developing cultured tetrahydrocannabivarin (“THCV”), releasing the second equity milestone to Ginkgo. Appointments The Company appointed Jeff Jacobson Senior Vice President, Head of Growth (North America). Mr. Jacobson previously served as the Company's General Manager of Canada and Europe. Mr. Jacobson has been with Cronos Group since December 2016 and previous to that was a co-founder of Peace Naturals. Mr. Jacobson's expertise and experience in licensing and compliance, new business development, project management and resource management help Cronos Group lead in domestic and international markets. The Company appointed John Griese Senior Vice President, Head of Operations (North America). Mr. Griese joined Cronos Group in August 2021 as the Vice President of Operations. Mr. Griese has worked with several cannabis organizations and was most recently the Chief Operating Officer ("COO") for The Supreme Cannabis Company, Inc. ("Supreme"). Prior to Supreme, Mr. Griese garnered cannabis experience during California’s adult use implementation as COO for global cannabis company Creso Pharma Limited. Prior to that he spent the majority of his career in supply chain and operations with PepsiCo, Inc., Nestle and Sofina Foods Inc. Mr. Griese’s experience in building supply chains around the world will help the Company win in the markets we are in today, while staying nimble in order to move fast and pivot as the industry changes over time. Consolidated Results of Operations The tables below sets forth our condensed consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods . 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 133,839 111,094 134,988 198,886 Income tax benefit (expense) 159 (988) 159 (988) Income (loss) from discontinued operations 82 (473) (500) (519) Net income (loss) 77,666 68,464 (263,312) 36,442 Net loss attributable to non-controlling interest (250) (569) (842) (1,654) Net income (loss) attributable to Cronos Group $ 77,916 $ 69,033 $ (262,470) $ 38,096 41 Table of Contents Summary of select financial results Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Net revenue $ 20,407 $ 11,358 $ 9,049 80 % $ 48,640 $ 29,673 $ 18,967 64 % Cost of sales 21,137 12,895 8,242 64 % 56,156 29,584 26,572 90 % Inventory write-down — — — N/A 11,961 11,024 937 8 % Gross profit (730) (1,537) 807 53 % (19,477) (10,935) (8,542) (78) % Gross margin (4) % (14) % N/A 10 pp (40) % (37) % N/A (3) pp Net revenue For the three months ended September 30, 2021, we reported consolidated net revenue of $20.4 million, representing an increase of $9.0 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, we reported consolidated net revenue of $48.6 million, representing an increase of $19.0 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the increase was primarily due to the continued growth of the adult-use market in Canada, increased sales in the Israeli medical market, and increased sales of U.S. hemp-derived CBD products in the U.S. segment. Cost of sales For the three months ended September 30, 2021, we reported consolidated cost of sales of $21.1 million, representing an increase of approximately $8.2 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, we reported consolidated cost of sales of $56.2 million, representing an increase of approximately $26.6 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the increase was primarily due to increased sales volume noted above as well as start-up costs associated with new product development in the ROW segment, increased inventory valuation adjustments, and increased production costs on new product launches in the U.S. segment. Inventory write-downs For the three months ended September 30, 2021 and September 30, 2020, we reported no inventory write-downs. For the nine months ended September 30, 2021, we reported consolidated inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020. For the nine month comparative period, the increase in inventory-write downs was primarily related to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada. Gross profit For the three months ended September 30, 2021, we reported consolidated gross profit of $(0.7) million, representing an increase in gross profit of $0.8 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, we reported gross profit of $(19.5) million, representing a decrease in gross profit of $8.5 million from the nine months ended September 30, 2020. For the three month comparative period, the changes in gross profit and gross margin were primarily due to increased sales of cannabis extracts in the Canadian market in the third quarter of 2021, which carries a higher gross profit and gross margin than other product categories. For the nine month comparative periods, the changes in gross profit and gross margin were primarily due to inventory write-downs in the ROW segment during the second quarter of 2021, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 as well as start-up costs associated with new product development in the ROW segment. 42 Table of Contents Operating expenses Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Sales and marketing $ 10,821 $ 7,236 $ 3,585 50 % $ 34,284 $ 20,849 $ 13,435 64 % Research and development 6,473 4,734 1,739 37 % 16,774 12,955 3,819 29 % General and administrative 32,546 18,860 13,686 73 % 76,869 61,048 15,821 26 % Share-based payments 2,667 7,916 (5,249) (66) % 7,731 12,898 (5,167) (40) % Depreciation and amortization 1,251 886 365 41 % 3,029 2,252 777 35 % Impairment loss on goodwill and indefinite-lived intangible assets 142 — 142 N/A 235,056 40,000 195,056 488 % Impairment loss on long-lived assets 1,784 — 1,784 N/A 4,739 — 4,739 N/A Total operating expenses $ 55,684 $ 39,632 $ 16,052 41 % $ 378,482 $ 150,002 $ 228,480 152 % Sales and marketing For the three months ended September 30, 2021, sales and marketing expenses were $10.8 million, representing an increase of $3.6 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, sales and marketing expenses were $34.3 million, representing an increase of $13.4 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the increase was primarily due to an increase in advertising and marketing campaigns related to our brands in the U.S. segment, which began in the second half of 2020 as well as increased headcount and related costs tied to these marketing efforts. During the nine months ended September 30, 2020, new hiring and spending on sales and marketing were delayed in the U.S. segment due to the impact of COVID-19. Research and development For the three months ended September 30, 2021, research and development expenses were $6.5 million, representing an increase of $1.7 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, research and development expenses were $16.8 million, representing an increase of $3.8 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, this increase was primarily driven by increased spending on product development and developing cannabinoid intellectual property in the ROW segment. General and administrative For the three months ended September 30, 2021, general and administrative expenses were $32.5 million, representing an increase of $13.7 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, general and administrative expenses were $76.9 million, representing an increase of $15.8 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the increase was primarily due to an increase in the allowance for expected credit losses of $13.2 million on our loan receivables with equity method investees in the ROW segment as well as increased headcount in both the ROW and U.S. segments. The increase was offset by a decrease in share based payments related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S. segment in the third quarter of 2020. Depreciation and amortization For the three months ended September 30, 2021, depreciation and amortization expenses were $1.3 million, representing an increase of $0.4 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, depreciation and amortization expenses were $3.0 million, representing an increase of $0.8 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the change was primarily due to the increased capital expenditures in the ROW segment since December 31, 2020. Impairment loss on goodwill and indefinite-lived intangible assets For the nine months ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets was $235.1 million, representing an increase of $195.1 million from the nine months ended September 30, 2020. For the nine month comparative periods, the increase in impairment loss on goodwill and indefinite-lived intangible assets was primarily due to the $178.4 million impairment charge recorded on the goodwill in the U.S. reporting unit and a $56.5 million impairment charge recorded on the Lord Jones ® brand in the U.S. reporting unit compared to a $35.0 million impairment charge recorded on the U.S. reporting unit and a $5.0 million impairment charge recorded on the Lord Jones ® brand in the U.S. recorded in the first half of 2020. 43 Table of Contents Impairment loss on long-lived assets For the three months ended September 30, 2021, impairment loss on long-lived assets was $1.8 million compared to no impairment loss on long-lived assets in the three months ended September 30, 2020. For the nine months ended September 30, 2021, impairment loss on long-lived assets was $4.7 million, compared to no impairment loss on long-lived assets in the nine months ended September 30, 2020. For the three month comparative periods, the increase was due to a $1.8 million impairment charge for the difference between the consideration paid Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property. For the nine month comparative periods, the increase was due to impairment charges of $1.8 million related to the aforementioned Ginkgo exclusive license, an impairment loss of $1.7 million related to the leased premises in the U.S. segment in the first quarter of 2021 as well as a $1.2 million impairment of property, plant and equipment in the U.S. segment. Other income (loss) & discontinued operations Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Interest income, net $ 2,064 $ 3,781 $ (1,717) (45) % $ 6,686 $ 15,266 $ (8,580) (56) % Gain on revaluation of derivative liabilities 132,916 105,307 27,609 26 % 131,290 182,795 (51,505) (28) % Share of loss from equity accounted investments (1,414) (1,327) (87) (7) % (4,172) (3,293) (879) (27) % Gain on disposal of other investments — 3,974 (3,974) N/A — 4,743 (4,743) N/A Other, net 273 (641) 914 143 % 1,184 (625) 1,809 289 % Total other income (loss) 133,839 111,094 22,745 20 % 134,988 198,886 (63,898) (32) % Income (loss) from discontinued operations 82 (473) 555 117 % (500) (519) 19 4 % Net income (loss) $ 77,666 $ 68,464 $ 9,202 13 % $ (263,312) $ 36,442 $ (299,754) (823) % Interest income, net For the three months ended September 30, 2021, interest income, net was $2.1 million, representing a decrease of $1.7 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, interest income, net was $6.7 million, representing a decrease of $8.6 million from the nine months ended September 30, 2020. For the three months ended September 30, 2021, the decrease in net interest income was primarily due to a decrease in our interest-earning cash equivalents and short-term investment balances compared to the three months ended September 30, 2020. For the nine months ended September 30, 2021, the decrease in net interest income was due to a decrease in our average variable interest rate as well as a decrease in our cash equivalents and short-term investment balances compared to the nine months ended September 30, 2020. Gain on revaluation of derivative liabilities For the three months ended September 30, 2021, the gain on revaluation of derivative liabilities was $132.9 million, representing an increase of $27.6 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the gain on revaluation of derivative liabilities was $131.3 million, including an out-of-period adjustment of $11.3 million, representing a decrease of $51.5 million from the nine months ended September 30, 2020. The valuation of derivative liabilities is based on inputs such as the Company’s share price and volatility, expected remaining term and expected risk-free interest rate which have in the past, and may in the future, fluctuate significantly from period to period. The Company expects continued fluctuations in the derivative valuations. For further information, see Note 6. Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1. “Financial Statements” of this Quarterly Report. Share of loss from equity accounted investments For the three months ended September 30, 2021, share of loss from equity accounted investments was $1.4 million, representing an increase in losses of $0.1 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, share of loss from equity accounted investments was $4.2 million, representing an increase in losses of $0.9 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the change was due to increased recurring losses from the Company’s equity accounted investments. 44 Table of Contents Gain on disposal of other investments For both the three and nine months ended September 30, 2021, there was no gain on disposal of other investments. For the three and nine months ended September 30, 2020, gain on disposal of other investments was $4.0 million and $4.7 million, respectively. For both the three and nine month comparative periods, the gain on disposal of other investments related to the sale of common shares of Aurora Cannabis, Inc. (“Aurora”), which were received in connection with the achievement of milestones related to Aurora’s acquisition of Whistler Medical Marijuana Corporation (“Whistler”). Other, net For the three months ended September 30, 2021, other, net was $0.3 million, representing an increase of other, net income of $0.9 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, other, net was $1.2 million, representing an increase of $1.8 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the change was primarily due to the revaluation of held-for-sale assets related to the land and office building located in Winnipeg, Manitoba Canada in the second quarter of 2021 compared to the revaluation of held-for-sale assets related to substantially all of the assets of Original B.C. Ltd. (“OGBC”). Gain (loss) from discontinued operations For the three months ended September 30, 2021, gain from discontinued operations was $0.1 million, representing an increase of $0.6 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, loss from discontinued operations was $0.5 million, essentially unchanged from the nine months ended September 30, 2020. For both the three and nine month comparative periods, gain (loss) from discontinued operations relates to the discontinuance of OGBC. 45 Table of Contents Results of Operations by Business Segment: The tables below sets forth our condensed consolidated results of operations by our two business segments: ROW and U.S., expressed in U.S. dollars and in thousands for the periods presented. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods. Certain totals in the tables below will not sum to exactly 100% due to rounding . Summary of select financial results – ROW Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Net revenue $ 18,307 $ 9,719 $ 8,588 88 % $ 41,872 $ 23,684 $ 18,188 77 % Cost of sales 17,735 11,922 5,813 49 % 49,906 25,930 23,976 92 % Inventory write-down — — — N/A 11,961 11,024 937 8 % Gross profit 572 (2,203) 2,775 126 % (19,995) (13,270) (6,725) (51) % Gross margin 3 % (23) % N/A 26 pp (48) % (56) % N/A 8 pp Net revenue – ROW Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Cannabis flower $ 15,306 $ 7,958 $ 7,348 92 % $ 36,337 $ 16,373 $ 19,964 122 % Cannabis extracts 2,786 1,504 1,282 85 % 5,020 6,821 (1,801) (26) % Other 215 257 (42) (16) % 515 490 25 5 % Net revenue $ 18,307 $ 9,719 $ 8,588 88 % $ 41,872 $ 23,684 $ 18,188 77 % For the three months ended September 30, 2021, the ROW segment reported net revenue of $18.3 million, representing an increase of $8.6 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the ROW segment reported net revenue of $41.9 million, representing an increase of $18.2 million from the nine months ended September 30, 2020. For the three month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower and extracts markets in Canada and sales in the Israeli medical cannabis market. For the nine month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower market in Canada and sales in the Israeli medical cannabis market. Cost of sales – ROW For the three months ended September 30, 2021, the ROW segment reported cost of sales of $17.7 million, representing an increase of $5.8 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the ROW segment reported cost of sales of $49.9 million, representing an increase of $24.0 million from the nine months ended September 30, 2020. For the three month comparative period, the increase was primarily due to an increase in sales volumes. For the nine month comparative period, the increase was primarily due to an increase in sales volume as well as start-up costs associated with new product development in Canada. Inventory write-downs – ROW For the three months ended September 30, 2021 and 2020, the ROW segment reported no inventory write-downs. For the nine months ended September 30, 2021, the ROW segment reported inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020. For the nine month comparative period, the increase in inventory-write downs primarily relates to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada. Gross profit – ROW For the three months ended September 30, 2021, the ROW segment reported gross profit of $0.6 million, representing an increase in gross profit of $2.8 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the ROW segment reported gross profit of $(20.0) million, representing a decrease in gross profit of $6.7 million from the nine months ended September 30, 2020. For the three month comparative period, the change from negative gross profit in 2020 to positive gross profit in 2021 was primarily driven by increased sales of cannabis extracts in the third quarter of 2021, which carry higher gross profit and gross margin than other product categories. For the nine month comparative period, the decrease in gross profit was primarily due to inventory write-downs, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020, as well as start-up costs associated with new product development. 46 Table of Contents Summary of select financial results – U.S. Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Net revenue $ 2,100 $ 1,639 $ 461 28 % $ 6,768 $ 5,989 $ 779 13 % Cost of sales 3,402 973 2,429 250 % 6,250 3,654 2,596 71 % Gross profit (1,302) 666 (1,968) (295) % 518 2,335 (1,817) (78) % Gross margin (62) % 41 % N/A (103) pp 8 % 39 % N/A (31) pp Net revenue – U.S. For the three months ended September 30, 2021, the U.S. segment reported net revenue of $2.1 million, representing an increase of $0.5 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the U.S. segment reported net revenue of $6.8 million, representing an increase of $0.8 million from the nine months ended September 30, 2020. For the three and nine month comparative periods, the increase was primarily driven by sales of U.S. hemp-derived CBD products introduced in the second half of 2020. Cost of sales – U.S. For the three months ended September 30, 2021, the U.S. segment reported cost of sales of $3.4 million, representing an increase of $2.4 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the U.S. segment reported cost of sales of $6.3 million, representing an increase of $2.6 million from the nine months ended September 30, 2020. For both the three and nine month comparative periods, the increase was primarily due to increased inventory valuation adjustments, increased revenue and increased production costs related to new product introductions launched in the fourth quarter of 2020. Gross profit – U.S. For the three months ended September 30, 2021, the U.S. segment reported gross profit of $(1.3) million, compared with gross profit of $0.7 million during the three months ended September 30, 2020, representing a decrease of $2.0 million from the three months ended September 30, 2020. For the nine months ended September 30, 2021, the U.S. segment reported gross profit of $0.5 million, representing a decrease of $1.8 million from the nine months ended September 30, 2020. For the three month comparative period, the decrease was primarily due to the increase in cost of sales as stated above. For the nine month comparative period, the decrease was primarily due to the cost of sales as stated above. Non-GAAP Measures Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This Quarterly Report refers to measures not recognized under U.S. GAAP (“non-GAAP measures”). These non-GAAP measures do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these non-GAAP measures are provided as a supplement to corresponding U.S. GAAP measures to provide additional information regarding the results of operations from management’s perspective. Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. All non-GAAP measures presented in this Quarterly Report are reconciled to their closest reported U.S. GAAP measure. Reconciliations of historical adjusted financial measures to corresponding U.S. GAAP measures are provided below. Adjusted EBITDA Management reviews Adjusted EBITDA, a non-GAAP measure, which excludes non-cash items and items that do not reflect management’s assessment of on-going business performance of our operating segments. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and indefinite-lived assets: impairment loss on long-lived assets; gain on revaluation of derivative liabilities; transaction costs related to strategic projects; other, net; loss from discontinued operations; share-based payments; and review costs related to the restatements of the Company’s 2019 interim financial statements and 2021 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement (see Part II, Item 1. “Legal Proceedings” of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 and 2021 interim financial statements). 47 Table of Contents Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of period-over-period results. Management uses Adjusted EBITDA for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. The following tables set forth reconciliations of net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated (dollars in thousands): Three months ended September 30, 2021 United States Rest of World Corporate Total Net income (loss) $ (13,499) $ 97,198 $ (6,033) $ 77,666 Interest income, net (4) (2,060) — (2,064) Income tax benefit — (159) — (159) Share of loss from equity accounted investments — 1,414 — 1,414 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) 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) 48 Table of Contents 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) 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 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our 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 our U.S. segment and impairment on an indefinite-lived trademark related to our ROW segment. See Note 5. Goodwill and Intangible Assets, Net to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (ii) For the three months ended September 30, 2021, impairment loss on long-lived assets relates to impairment charges for the difference between the consideration paid to Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property . For the nine months ended September 30, 2021, impairment loss on long-lived assets relates to an impairment on leased premises in the U.S. segment, impairment on property, plant and equipment in the U.S. segment and the aforementioned impairment of the Ginkgo intellectual property. For the three and nine months ended September 30, 2020, there was no impairment loss on long-lived assets. See Note 13. Impairment Loss on Long-lived Assets and Note 5. Goodwill and Intangible Assets, net to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (iii) For the three and nine months ended September 30, 2021 and 2020, the gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 6. Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (iv) For the three and nine months ended September 30, 2021, transaction costs represents legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss). (v) For the three and nine months ended September 30, 2020, gain on disposal of other investments net is primarily comprised of the gain recorded related to the sale of common shares of Aurora, which were received in connection with the achievement of a milestone related to Aurora’s acquisition of Whistler. There were no disposals of investments during the three and nine months ended September 30, 2021. See Note 3. Investments to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (vi) For the three and nine months ended September 30, 2021 and 2020, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets, (gain) loss recognized on the revaluation of financial liabilities and (gain) loss on disposal of assets. 49 Table of Contents (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 to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (viii) For the three and nine months ended September 30, 2021 and 2020, share-based payments relates to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7. Share-based Payments to the Company’s condensed consolidated financial statements under Item 1. of this Quarterly Report. (ix) For the three and nine months ended September 30, 2021 and 2020, financial statement review costs include costs related to the restatements of the Company’s 2019 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement. Liquidity and Capital Resources As of September 30, 2021, we had $842.6 million in cash and cash equivalents and $197.2 million in short-term investments, which comprise the majority of the Company’s cash position. Cronos Group believes that the existing cash and cash equivalents and the short-term investments will be sufficient to fund the business operations and capital expenditures over the next twelve months. The following table summarizes the cash flows from operating, investing and financing activities in thousands of U.S. dollars: Nine months ended September 30, 2021 2020 Cash flows used in operating activities $ (117,678) $ (106,543) Cash provided by (used in) investing activities (110,236) 37,811 Cash used in financing activities (13,164) (2,330) Effect of foreign currency translation on cash and cash equivalents 5,622 (30,785) Net change in cash $ (235,456) $ (101,847) Comparison of cash flows between the nine months ended September 30, 2021 and the nine months ended September 30, 2020 Operating activities During the nine months ended September 30, 2021, we used $117.7 million of cash in operating activities as compared to cash used of $106.5 million in the nine months ended September 30, 2020, representing an increase in cash used of $11.1 million. This change is primarily driven by a $35.5 million decrease in net income after adjusting for non-cash items, partially offset by an increase of $53.7 million in changes in operating assets and liabilities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Investing activities During the nine months ended September 30, 2021, we used $110.2 million of cash in investing activities, compared to $37.8 million of cash provided by investing activities during the nine months ended September 30, 2020, representing an increase of $148.0 million in cash used by investing activities. This change is primarily driven by the Company’s investment in PharmaCann of approximately $110.4 million, and a $78.5 million; net decrease in proceeds from short-term investments, partially offset by a $30.1 million decrease in loans receivables to joint ventures and a $12.7 million decrease in capital expenditures compared to the nine months ended September 30, 2020. The decrease in capital expenditures is primarily due to a reduction in construction costs in the ROW segment and a decrease in costs related to the implementation of the Company’s enterprise resource planning system compared to the nine months ended September 30, 2020. Financing activities During the nine months ended September 30, 2021, cash used in financing activities was $13.2 million, compared to 2.3 million of cash used in financing activities during the nine months ended September 30, 2020, representing an increase of $10.8 million in cash used in financing activities. This change is primarily driven by an increase of $11.0 million in withholding taxes paid on share-based awards during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. 50 Table of Contents Critical Accounting Policies and Estimates The Company’s critical accounting policies and estimates are discussed in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Loans Receivable, net. Loans receivable are presented net of an allowance for credit losses. In the third quarter of 2021, the Company changed methodologies for estimating the allowance for credit loss on loans receivable from the historical credit loss method to the probability of default method. The probability of default rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary. The Company may also record a specific reserve for individual accounts when it becomes aware of specific borrower circumstances, such as in the case of a bankruptcy filing or deterioration in the borrower’s operating results or financial position. The allowance for credit loss accrual balance was $14.9 million and $2.6 million as of September 30, 2021 and December 31, 2020, respectively. Valuation of Derivative Liabilities. Derivative liabilities consist of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights. The Company measures derivative liabilities at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in net income (loss) and comprehensive income (loss). The Company calculates fair value of derivative liabilities using the Black-Scholes model. Significant assumptions are used in the valuation of derivative liabilities, including the volatility of the Company’s stock price, expected dividend yield, expected term and expected risk-free interest rate. Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of September 30, 2021. As of December 31, 2020, volatility was based on the blended historical volatility levels of the Company and peer companies. The assumptions used in computing the fair value of derivative liabilities reflect the Company’s best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Other than the changes in accounting estimates above, there have been no material changes to these critical accounting policies and estimates.