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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-26 · 478 added, 388 removed, 121 unchanged (88% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our consolidated financial statements and the related notes to those statements, which are included in Item 8 of this Annual Report.

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and related notes, which are included in Item 8 of this Annual Report, to enhance the understanding of our operations and our present business environment.

This discussion contains Forward-Looking Statements that involve risks and uncertainties.

As a result of many factors, such as those set forth in Item 1A “Risk Factors,” of this Annual Report and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these Forward-Looking Statements.

For more information about our operations and the risks facing our business, see Item 1 “ Business ” and Item 1A “ Risk Factors ”, respectively, of this Annual Report.

Business Overview

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

We are committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build an iconic brand portfolio.

Cronos Group’s brand portfolio includes PEACE NATURALS™, a global wellness platform;

two adult-use brands, COVE™ and Spinach™;

and three U.S.

hemp-derived consumer products brands, Lord Jones™, Happy Dance™ and PEACE+™.

Cronos Group Inc.

is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build an iconic brand portfolio.

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

Unless otherwise noted or the context indicates otherwise, references in this Annual Report on Form 10-K (this “Annual Report”) to the “Company”, “Cronos Group”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect wholly owned subsidiaries and, if applicable, its joint ventures and investments accounted for by the equity method;

the term “cannabis” means the plant of any species or subspecies of genus Cannabis and any part of that plant, including all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers;

the term “U.S.

hemp” has the meaning given to term “hemp” in the U.S.

Agricultural Improvement Act of 2018, including hemp-derived cannabidiol (“CBD”).

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

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Business Segments

Cronos Group reports through two segments:

“United States” and “Rest of World.” These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region.

On September 5, 2019, as a result of the Redwood Acquisition, the Company established the United States segment, which includes only the results of Redwood since the date of acquisition.

Redwood manufactures, markets and distributes U.S.

hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States (“U.S.”) under the brands Lord Jones™ and Happy Dance™.

We report through two segments:

“United States” (the “U.S.

segment”) and “Rest of World” (the “ROW segment”).

These two segments represent the geographic regions in which we operate and the different product offerings within each geographic region.

Recent Developments

In December 2019, an outbreak of a novel strain of coronavirus, COVID-19, was identified in Wuhan, China.

Since then, COVID-19 has spread across the globe, including the U.S., Canada and Israel, and other countries in which the Company or its affiliates operate (including Australia and Colombia) and was recognized as a pandemic by the World Health Organization.

The COVID-19 pandemic has resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets.

In response to the pandemic, the governments of many countries, provinces, states, cities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures.

Such measures were eased or lifted in varying degrees by different governments of various countries, states and cities throughout 2020, but the continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway and re-impose quarantines, border closures, closure of certain businesses and stay-at-home orders.

It is possible that jurisdictions in which the Company or its affiliates operate may reintroduce more stringent preventative or protective actions which could result in further closures of businesses.

Governments in certain countries such as the U.S., Canada, and those in Europe have responded to the acute economic and market consequences with certain monetary and fiscal policy actions.

Impact on operating results

During the second quarter of 2020, the effects of the COVID-19 pandemic on retail stores and the increase of costs in production and sales in the U.S.

had a material impact on the rate of growth of revenue in the U.S.

segment, with revenue for the segment remaining flat from the first quarter of 2020.

As a result of these impacts and the expectation of future impacts, for the three months ended June 30, 2020, the Company recorded $35 million of impairment charges on its U.S.

reporting unit and $5 million on the Lord Jones™ brand (refer to Note 11 of the Company’s consolidated financial statements for more information regarding intangibles assets and goodwill).

The continued negative impact on the Company’s results has been as expected during the three months ended December 31, 2020 and no further impairment charges were recorded to the U.S.

reporting unit or brands as a result.

The Company expects revenue growth and operating results in the U.S.

segment to continue to be negatively impacted as retail closures are expected to continue as a result of the pandemic.

Revenue and the growth in revenue in the Rest of World segment was not materially impacted by the effects of COVID-19 during the year ended December 31, 2020.

However, prolonged closures of retail stores due to government mandated lockdowns as well as the changes in consumer purchasing behavior in Canada during the COVID-19 pandemic are expected to have a negative impact on the Company’s short-term revenue growth in Can ada.

In both 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.

Production and supply chain

The Company’s global production facilities currently remain operational.

To comply with governmental orders or other health and safety requirements, the Company has:

(i) reduced the number of personnel working on-site at its production facilities to only the roles that are necessary to be performed on-site, (ii) implemented work-from-home policies for other employees whose work can be performed off-site, and (iii) implemented other additional health and safety measures such as, among other things, enhanced hygiene and sanitation procedures, modified work schedules and social distancing protocols at its production facilities.

Further, as recommended by certain jurisdictions in which it operates, the Company has implemented a documented COVID-19 prevention plan in these locations.

The Company has and will continue to act in accordance with guidance from local, federal, and international health and governmental authorities, such as any government-mandated requirements for people to wear facemasks in all indoor communal spaces or at businesses, and is prepared to make additional operational adjustments, as necessary.

Although the Company’s production facilities currently remain operational, governmental requirements, guidance and health and safety requirements continue to evolve as governmental and health authorities respond to the spread of the virus.

Reopening plans in certain jurisdictions have been and may be further reversed, suspended or delayed and quarantines may be re-imposed.

The Company’s production facilities may experience further temporary closures or quarantines if governmental or health authorities make changes to the businesses and workforces allowed to remain operational, which would result in reduced production or suspension of production if such closures or quarantines are mandated.

In addition, to the extent the Company’s employees contract the virus, depending on the employee’s job duties and access to facilities, the Company’s ability to keep production and manufacturing facilities open may be impacted for health and safety reasons.

The impacts of certain closures or other restrictions on the conduct of business operations at the facilities of third-party manufacturers, suppliers and other vendors in the Company’s supply chain have not been significant to date but remain uncertain.

Earlier closures at manufacturers in China in 2020 had resulted in delays of deliveries of batteries and cartridges for cannabis vaporizers and personal protective equipment, such as masks and gowns used in Cronos Group’s manufacturing facilities certified in accordance with Good Manufacturing Practices (“GMP”), from such manufacturers in China.

Most delays have been ameliorated as manufacturers are now operational in China but other vendors or suppliers in the Company’s supply chain have been, and in the future could potentially be, impacted.

Closures or other restrictions on the conduct of business operations on third-party manufacturers, suppliers or vendors may cause disruption in Cronos Group’s supply chain.

As a result of a rise in infection rates late in the fourth quarter of 2020 and in the first quarter of 2021 in the U.S., certain contract manufacturers that manufacture U.S.

hemp finished products for our U.S.

business have experienced temporary closures or reductions in their operations leading to shortages of finished product available via the e-commerce channel.

We expect these closures or reductions to ease and product shortages to be ameliorated as the spread of COVID-19 and infection rates decline.

The Company has experienced delays in shipping and expects that the increased global demand on shipping and transport services, which has created challenges to container availability and port capacities, in addition to customs and border control policies put in place in response to the COVID-19 pandemic that require shipments to undergo a quarantine period, may cause the Company to experience further delays in the future which could impact the Company’s ability to obtain materials or deliver products in a timely and cost efficient manner.

In addition, work-from-home policies for certain employees and the effects of the Company’s work-from-home policies may negatively impact productivity, disrupt access to books and records and disrupt the Company’s business.

Even if the Company’s production facilities continue to remain open, mandatory or voluntary self-quarantines and travel restrictions may limit the Company’s employees’ ability to access facilities, and this, together with impacts on the Company’s supply chain and the uncertainty produced by the rapidly evolving nature of the COVID-19 pandemic, may result in reduced or suspended production.

Retailers in the U.S.

and Canada have been required to close at times or have curtailed their operations (such as reduced opening hours, reduced staff, limiting brand partner visits, and reduced traffic in stores) due to the implementation of health and safety measures.

The slowdown or disruption faced by retailers, in addition to quarantine measures and travel restrictions, impacts the ability of customers to be able to access the Company’s products.

These restrictions on retail stores are mandated by, and differ across, each state, province or territory and continue to change and evolve, which creates uncertainty in forecasting customer demand and sales velocity.

In the U.S., while online sales have continued despite facing pressure, certain beauty and other retailers have temporarily closed physical boutiques.

State specific limitations on retail capacity has also reduced the ability of larger retailers to offer in-store brand education for the Company’s products.

In Canada, retailers have implemented a combination of measures from closing stores, offering curbside delivery (to the extent permitted by a province) and online sales only, reduced store opening hours and a reduction in the number of customers permitted in stores in light of social distancing measures.

Suspensions of the ability of private retailers to offer click-and-collect or curbside delivery in certain provinces in Canada may further impact customer demand for products.

Provincial purchasers have also similarly, among other things, reduced staff on-site leading to a decrease in delivery time slots for producers to deliver products or reduced frequency or size of their purchase orders.

While various provinces in Canada have continued to increase the number of retail stores during the COVID-19 pandemic, we expect that the expansion of retail stores in various provinces in Canada will be delayed or slowed down in light of continued increases in COVID-19 cases.

We anticipate that uncertainty created by these measures on forecasting customer demand and sales will continue as long as such measures are in place.

Demand for the Company’s products could also be negatively impacted should the effects of COVID-19 lead to changes in consumer behavior, including as a result of a potential decline in the level of demand for vaporizer products or in discretionary spending as result of a general economic slowdown.

Macroeconomic impacts

The impacts of these current restrictions and measures on certain strategic projects continue to be uncertain.

While facility design and expansion projects and product development initiatives are currently expected to proceed as planned, requirements and restrictions on the operation of businesses and workforces continue to evolve as governmental and health authorities respond to the spread of the virus and changes may result in delays or suspensions if authorities require such activities to be suspended.

In addition, a recession or market correction resulting from the spread of COVID-19 would likely materially affect the Company’s business and the value of its common shares.

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.

Since then, COVID-19 has spread across the globe, including the U.S., Canada and Israel, and other countries in which Cronos Group or its affiliates operate (including Australia and Colombia) and was recognized as a pandemic by the World Health Organization.

The COVID-19 pandemic resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets.

In response to the pandemic, the governments of many countries, provinces, states, municipalities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures.

Such measures were eased or lifted in varying degrees by different governments of various countries, states and municipalities throughout 2020 and 2021, but the continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway and re-impose quarantines, border closures, closure of certain businesses and stay-at-home orders.

The COVID-19 pandemic continues to impact the global economy and, specifically, the U.S., Canada, Israel, and the other countries in which Cronos Group or its affiliates operate (including Australia and Colombia).

We continue to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic.

As the global situation continues to change rapidly, ensuring the health and safety of our employees remains one of our top priorities.

In the U.S., 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 our products.

Any reinstatement of restrictions on the operations of retail outlets could negatively impact our 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 we operate.

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

Table of Con tents

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

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

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

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

Some provinces have imposed requirements that retail shoppers show proof of vaccination before entering retail stores, which we expect will impact sales of our products in those outlets.

Although most COVID-19 restrictions except some capacity limitations were lifted in most provinces during the third and fourth quarters of 2021, the increase in cases related to the Omicron variant beginning in late December has caused the reinstatement of restrictions on non-essential retail stores in some provinces, including Quebec, in January 2022, which we expect will negatively impact our results of operations.

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 our products.

We do not expect the remaining COVID-19 restrictions to have a material impact on our short-term revenue growth in Israel.

Collectively, the effects of the COVID-19 pandemic have adversely affected our 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 or supply chains continue to be challenged.

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.

Liquidity and capital resource impact

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 in the short-term, but this has not, and is not expected to have, a material impact on the liquidity or capital resources of the Company.

therefore, the ultimate impact to the our business cannot be reasonably estimated, but such impact could materially adversely affect our business, financial condition and results of operations.

Despite the impacts of the COVID-19 pandemic, we believe that our 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 our ability to generate interest income, but this has not had, and is not expected to have, a material impact on our liquidity or capital resources.

2021 Business Highlights

Cronos Fermentation

In the second quarter of 2020, Cronos Fermentation successfully fermented CBGA, one of the Company’s target cannabinoids under the Ginkgo Strategic Partnership, at research scale.

Cronos Fermentation has and will continue to optimize downstream processing and scale up procedures in advance of receiving the final strains and commercial processing license, both of which are required for commercialization.

Management Appointments

On September 9, 2020, Cronos Group expanded its leadership structure to drive its next phase of growth by appointing Kurt Schmidt as President and Chief Executive Officer.

This move coincided with Mike Gorenstein’s appointment to Executive Chairman.

Schmidt brings deep experience in consumer products with decades of leadership experience in the U.S.

and overseas.

On August 31, 2020, the Company added Shannon Buggy as Senior Vice President, Global Head of People.

With over 25 years of experience, Ms.

Buggy has a proven track record of leading and managing global human resources teams and driving excellence in talent acquisition, development, retention, employee relations, compensation, benefits, talent management and labor relations.

On July 20, 2020, Summer Frein was named General Manager USA.

Frein joined Cronos Group in January of 2020;

however, she has worked with Cronos Group in various capacities since 2018.

Frein’s leadership, the Company plans to further expand

hemp-derived business, including introducing new product formats under both Lord Jones™ and Happy Dance™, that will target different retail channels and consumers.

Cronos Research Labs

In the third quarter of 2020, Cronos Device Labs expanded its scope for cannabinoid research and the R&D center was renamed to Cronos Research Labs.

Cronos Group engages in both understanding the fundamental science behind the interactions of cannabinoids with each other and how those interactions can be leveraged to best deliver on the consumer’s needs.

Additionally, the Company partners with leading scientific institutions engaged in fundamental cannabis science to augment and accelerate its internal efforts.

Cronos Group’s work spans many aspects of cannabis research from strain development to growing conditions to extraction technology to biosynthesis to product development, all supported by advances in analytical sciences.

Recent Developments

Happy Dance™ continues its expansion by securing its first major U.S.

retailer, ULTA Beauty™.

The full collection of Happy Dance™ products is expected to launch online at ULTA.com and in-store at over 550 ULTA Beauty™ locations across the U.S.

in the coming weeks.

Happy Dance™ was co-founded by actress and New York Times best-selling author Kristen Bell and features an easy-to-use line of clean, vegan and cruelty-free U.S.

hemp-derived CBD bath and body products including an All-Over Whipped Body Butter + CBD, Head-to-Toe Coconut Melt + CBD and Stress Away Bath Bomb + CBD.

Cronos Israel

During 2020, Cronos Israel received all certifications and licenses required for the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel and currently has PEACE NATURALS™ dried flower and oils in market.

On January 11, 2021, the PEACE NATURALS™ brand was recognized by the Israeli Marketing Association and was given the 2020 Innovation Award for its successful marketing strategy in 2020, which led to increased brand exposure.

The marketing campaign gained this accolade for standing out amongst its peers by focusing on the high-quality nature of PEACE NATURALS™ products.

In February 2021, Cronos Israel signed a distribution agreement with the largest pharmacy chain in Israel, Super-Pharm, which has over 250 branches in Israel.

Cronos Israel continues to build distribution and brand awareness through a growing network of pharmacies.

Throughout 2020, Natuera, the Company’s joint venture in Latin America, a fully licensed operation in Colombia for hemp and cannabis derived bulk, consumer, and medicinal cannabinoid products, continued to achieve significant operational milestones.

In addition to completing a number of test exports of hemp-derived CBD extract to both the U.S.

and the United Kingdom for business development and R&D purposes over the course of 2020, during the fourth quarter of 2020, Natuera completed its first export of hemp-derived CBD extract to the U.S.

for commercial purposes.

PharmaCann Strategic Investment

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

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

cannabis company.

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

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

and has built an efficient, effective and scalable operating model operating under the Verilife™ brand.

The PharmaCann 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.

Following the exercise of the PharmaCann Option, Cronos Group and PharmaCann will enter into commercial agreements that would permit each party to offer its products through either party’s distribution channels.

On October 12, 2021, PharmaCann announced that it had entered into a definitive merger agreement with LivWell Holdings, Inc.

(“LivWell”) pursuant to which PharmaCann will acquire LivWell (the “LivWell Transaction”).

LivWell is a multi-state cannabis cultivation and retail leader based in Colorado.

On February 28, 2022, PharmaCann closed the LivWell Transaction.

Based upon the terms of the definitive merger agreement, our best estimate is that our ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.7%.

Under the terms of our investment in PharmaCann, our rights to nominate an observer or a director to the PharmaCann board of directors could be lost if our ownership drops below 6% on a fully-diluted basis and it sells or transfer all or any portion of the option (subject to certain exceptions).

As a result, further dilution could adversely affect our rights under the PharmaCann Option.

Spinach ® Branded Product Portfolio Expansion

Throughout 2021, we brought premium high-THC strains to market in the dried flower category under the Spinach ® brand, including, GMO Cookies, Atomic Sour Grapefruit and Cocoa Bomba.

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

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

In October 2021, we launched our first cultured cannabinoid product, the SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy.

We, through the Spinach ® brand’s new platform and sub-brand, SPINACH FEELZ™, plan 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.

Table of Con tents

Cronos GrowCo

In 2020, Cronos GrowCo, the Company’s joint venture in Canada, fully completed construction of its production facility, including all fixtures within the greenhouse and all post-harvest activity areas.

In November 2020, Cronos GrowCo obtained a cultivation license for the operations contemplated by the first phase of the project.

The Company expects the facility to become operational in phases beginning in the first half of 2021.

2019 Financial Results Compared to 2018

For a discussion of our 2019 financial results compared to 2018, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10K/A for the year ended December 31, 2019.

In the third quarter of 2021, Cronos GrowCo, our joint venture in Canada, began selling to Canadian license holders in the wholesale market.

In addition, we have begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of our Canadian cannabis supply chain.

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

Jacobson previously served as our General Manager of Canada and Europe.

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

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

We have also appointed John Griese Senior Vice President, Head of Operations (North America).

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

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

Prior to Supreme, Mr.

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

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

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

Bob Madore joined Cronos Group as Chief Financial Officer, effective August 9, 2021.

Madore recently served as Chief Financial Officer of American Eagle Outfitters Inc.

from 2016 to 2020.

Prior to that, Mr.

Madore served in a number of key financial and operational roles at Ralph Lauren Corporation beginning in 2004 through 2016, most recently as Chief Financial Officer from April 2015 to September 2016.

Before joining Ralph Lauren, Mr.

Madore was Chief Financial Officer for New York & Company from 2003 to 2004, and served as Chief Operating Officer and Chief Financial Officer of FutureBrand, a division of McCann Erickson, from 2001 to 2003.

Before that, Mr.

Madore held various executive management positions at Nine West Group, Inc.

from 1995 through 2000.

Madore began his career in 1987 at Deloitte & Touche in audit services and worked in the firm’s mergers and acquisitions practice from 1993 until 1995.

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

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

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

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

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

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

Strategic and Organizational Update

Following the evaluation of our global supply chain, we announced the planned exit of our Peace Naturals Campus in Stayner, Ontario, Canada (the “Stayner Facility”).

We will continue to operate the Peace Naturals Campus with a phased reduction and transition of activities with a planned exit from the Stayner Facility by the end of 2022.

Various research and development initiatives, inclusive of cannabinoid formulation, product development, tissue culture and micropropagation, will continue across multiple facilities available to us.

We have focused on building joint ventures and partnerships around the world, such as with Cronos GrowCo.

As Cronos GrowCo has developed its capabilities, it has become an important component of our biomass supply.

We intend to obtain a sales license from Health Canada at Cronos GrowCo’s facility to maintain our customer relationships and ability to continue supplying the Canadian market.

In addition to further leveraging our joint venture with Cronos GrowCo, we will continue to maintain a network of third-party licensed producers to supplement cultivation and manufacturing needs.

As a result of our planned exit from the Stayner Facility, we have incurred a $119.9 million non-cash impairment charge on long-lived assets in the fourth quarter of 2021.

In addition, we expect to incur charges of approximately $4.5 million in connection with the planned exit, all of which impact the ROW segment.

These charges include employee-related costs, such as severance, relocation and other termination benefits, as well as contract termination and other related costs, which are expected to be incurred primarily in the second half of 2022.

In addition, we anticipate capital expenditures of approximately $2.5 million to modernize information technology systems and build distribution capabilities.

These anticipated charges and capital expenditures are subject to a number of assumptions, including product costs, the timing of certain events, market factors and others.

As a result of these assumptions, actual results may differ materially.

Table of Con tents

Canadian Medical Market.

We exited the direct-to-client medical cannabis market in Canada in the fourth quarter of 2021.

Beginning in the first quarter of 2022, our PEACE NATURALS ® medical cannabis products will be sold in Canada through the Medical Cannabis by Shoppers Drug Mart™ platform.

2020 Compared to 2019

Results of Operations

For a discussion of our 2020 results of operations compared to 2019, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020.

For a discussion of our 2020 cash flows compared to 2019, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Foreign currency exchange rates

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

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2020, December 31, 2019 and December 31, 2018, as reported on Bloomberg.

The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2021 and December 31, 2020, as reported on Bloomberg.

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

The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated statements of cash flows of the Company’s foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period, as reported on Bloomberg.

The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below:

The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated statements of cash flows of our foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the years ended December 31, 2021, December 31, 2020 and December 31, 2019, as reported on Bloomberg.

The exchange rates used to translate from Canadian dollars (“C$”) to dollars are shown below:

(Exchange rates are shown as C$ per $) Year ended December 31,

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Spot rate 1.2746 1.2751 1.2990

Table of Con tents

Consolidated Results of Operations

FY 2020 compared with FY 2019

Summary of financial results - consolidated

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Net revenue $ 46,719 $ 23,750 $ 22,969 97 %

Gross profit (loss) (25,833) (17,597) (8,236) 47 %

Gross margin (55) % (74) % N/A 19 pp

Adjusted EBITDA (i)

$ (147,253) $ (98,308) $ (48,945) 50 %

(i) See “ Non-GAAP Measures ” for information related to Non-GAAP measure.

Net revenue - consolidated

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Net revenue, before excise taxes (i)

$ 54,353 $ 25,639 $ 28,714 112 %

The tables below sets forth our consolidated results of operations, expressed in thousands of U.S.

dollars for the periods presented.

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

Year ended December 31,

Net revenue before excise taxes $ 89,486 $ 54,353

Excise taxes (15,051) (7,634)

Net revenue 74,435 46,719

(i) Net revenue, before excise taxes, is calculated net of sales returns and discounts as described under Note 4 to the consolidated financial statements.

For the fiscal year 2020 (“FY 2020”), we reported net revenue of $46.7 million, representing an increase of $23.0 million from the fiscal year 2019 (“FY 2019”).

This change was primarily due to:

• An increase in sales in the Rest of World (“ROW”) segment in FY 2020 compared to FY 2019, due to the continued growth of the adult-use market in Canada and sales in the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in FY 2019 and strategic price reductions on various adult-use cannabis products in Canada in FY 2020.

• An increase in net revenue in the U.S.

segment of $6.1 million in FY 2020 compared to FY 2019 due to FY 2020 results including a full year of the Redwood business as opposed to 117 days in FY 2019.

Cost of sales and gross profit (loss) – consolidated

(In thousands of U.S.

dollars) Year ended December 31, Change

Cost of sales 80,008 46,497

Inventory write-down 11,961 26,055

Gross profit (17,534) (25,833)

Operating expenses:

Sales and marketing 44,937 34,386

Research and development 23,331 20,366

General and administrative 96,482 80,569

Share-based payments 10,151 15,361

Depreciation and amortization 4,484 2,872

Impairment loss on goodwill and indefinite-lived intangible assets 236,056 40,000

Impairment loss on long-lived assets 127,619 —

Total operating expenses 543,060 193,554

Operating loss (560,594) (219,387)

Other income 163,459 146,114

Income tax benefit (expense) 431 (1,347)

Loss from discontinued operations (500) (650)

Net loss (397,204) (75,270)

Net loss attributable to non-controlling interest (1,097) (2,133)

Net loss attributable to Cronos Group $ (396,107) $ (73,137)

Summary of select financial results

Year ended December 31, Change

2021 2020 $ %

Net revenue $ 74,435 $ 46,719 $ 27,716 59 %

Cost of sales 80,008 46,497 33,511 72 %

Inventory write-down 11,961 26,055 (14,094) (54) %

Gross profit (loss) (25,833) (17,597) (8,236) 47 %

Gross margin (55) % (74) % N/A 19 pp

For FY 2020, we reported gross loss of $25.8 million, representing an increase in losses of $8.2 million from FY 2019.

This change was primarily due to:

• An increase in ROW cost of sales primarily driven by third party purchased flower associated with adult-use products in Canada and a decline in wholesale sales in FY 2020 versus FY 2019.

• Partially offset by increased gross profit in the U.S.

segment in FY 2020 compared to FY 2019, primarily due to a full year of gross profit in FY 2020 versus 117 days in FY 2019 and a decrease in inventory write-downs in the ROW segment.

We may incur further inventory write-downs due to pricing pressures in the marketplace.

Adjusted EBITDA – consolidated

(In thousands of U.S.

dollars) Year ended December 31, Change

Gross profit (17,534) (25,833) 8,299 32 %

Gross margin (i)

(24) % (55) % N/A 31 pp

(i) Gross margin is defined as gross profit divided by net revenue.

For the fiscal year 2021 (“FY 2021”), we reported consolidated net revenue of $74.4 million, representing an increase of $27.7 million from the fiscal year 2020 (“FY 2020”).

This change was primarily due to an increase in sales in the Rest of World (“ROW”) segment in FY 2021 compared to FY 2020, driven by the continued growth of the adult-use market in Canada and higher sales in the Israeli medical market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in FY 2021.

Cost of sales

For FY 2021, we reported consolidated cost of sales of $80.0 million, representing an increase of $33.5 million from FY 2020.

This change was primarily due to increased sales volumes, inventory adjustments to reflect net realizable value, and increased production costs on new products launched in the ROW and U.S.

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Inventory write-downs

For FY 2021, we reported consolidated inventory write-downs of $12.0 million, representing a decrease of $14.1 million from FY 2020.

The decrease was primarily due to higher inventory write-downs in FY 2020 related to the increasing pricing pressures in the Canadian market, which resulted in reducing carrying amounts to net realizable value.

During FY 2021, write-downs related to adjustments for obsolete inventory in Canada, and write-downs for cannabis strains and products with potency levels that are no longer in-line with consumer preferences in the Canadian market.

For FY 2021, we reported consolidated gross profit of $(17.5) million, representing an improvement of $8.3 million from FY 2020.

The increase in gross profit is primarily due to lower inventory write-downs in FY 2021 and a favorable sales mix of our cannabis extract products in the ROW segment.

Operating expenses

Year ended December 31, Change

2021 2020 $ %

Adjusted EBITDA (i)

Sales and marketing $ 44,937 $ 34,386 $ 10,551 31 %

Research and development 23,331 20,366 2,965 15 %

General and administrative 96,482 80,569 15,913 20 %

Share-based payments 10,151 15,361 (5,210) (34) %

Depreciation and amortization 4,484 2,872 1,612 56 %

Impairment loss on goodwill and indefinite-lived intangible assets 236,056 40,000 196,056 490 %

Impairment loss on long-lived assets 127,619 — 127,619 N/A

Operating expenses $ 543,060 $ 193,554 $ 349,506 181 %

Sales and marketing

For FY 2021, we reported sales and marketing expenses of $44.9 million, representing an increase of $10.6 million from FY 2020.

The increase was primarily due to efforts to expand our advertising and marketing campaigns related to our brands in the U.S.

and ROW segments, as well as the increased headcount and other costs related to these efforts.

Research and development

For FY 2021, we reported research and development expenses of $23.3 million, representing an increase of $3.0 million from FY 2020.

This increase was primarily due to additional spending on product development and developing cannabinoid intellectual property in the ROW segment.

General and administrative

For FY 2021, we reported general and administrative expenses of $96.5 million, representing an increase of $15.9 million from FY 2020.

The increase was primarily due to recognizing additional allowances for expected credit losses of $12.0 million on our loans receivable in the ROW segment, as well as increased headcount in both the ROW and U.S.

Share-based payments

For FY 2021, we reported share-based payment expenses of $10.2 million, representing a decrease of $5.2 million from FY 2020.

The decrease was primarily due to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

segment during FY 2020.

Depreciation and amortization

For FY 2021, depreciation and amortization expenses were $4.5 million, representing an increase of $1.6 million from FY 2020.

The change was primarily due to in-progress assets placed into service in 2021 and additional capital expenditures in the ROW segment in FY 2021.

Impairment loss on goodwill and indefinite-lived intangible assets

For FY 2021, we reported an impairment loss on goodwill and intangible assets of $236.1 million, representing an increase of $196.1 million from FY 2020.

The change was primarily due to a $178.4 million impairment charge on the U.S.

reporting unit and a $57.5 million impairment charge on the Lord Jones ® brand during the year ended December 31, 2021.

For further information, see Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report.

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Impairment loss on long-lived assets

For FY 2021, we reported an impairment loss on long-lived assets of $127.6 million, compared to no impairment loss on long-lived assets for FY 2020.

For FY 2021, we recorded an impairment charge of $119.9 million on long-lived assets related to the planned exit from the Stayner Facility.

Additionally, we recorded impairment charges of $4.8 million in the aggregate related to our exclusive licenses for cannabigerolic acid (“CBGA”) and cannabigerovarinic acid (“CBGVA”) for the difference between the fair value of the licenses and the consideration paid.

Furthermore, our U.S.

segment recorded an impairment loss of $1.2 million on property, plant, and equipment where the carrying value of those assets was not recoverable and a $1.7 million impairment loss related to ceasing use of certain leased premise and the derecognition of the associated right-of-use asset.

See Note 5 “ Property, Plant and Equipment, net ” Note 6, “ Goodwill & Intangible Assets, n et” and Note 7 “ Leases ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Total other income, income tax benefit (expense) & loss from discontinued operations

Year ended December 31, Change (i)

2021 2020 $ %

(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.

For FY 2020, we reported an adjusted earnings (loss) before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of $(147.3) million, representing a decrease in Adjusted EBITDA of $48.9 million from FY 2019.

This change was primarily due to:

• An increase in gross loss as described above.

• An increase in general and administrative costs driven primarily by an increase in salaries and wages as a result of increased headcount in order to support the Company’s growth strategy, increased office and general expenses and increased costs due to a full year of U.S.

segment results versus 117 days in 2019.

• An increase in sales and marketing costs, primarily related to brand development as well as increased costs due to a full year of U.S.

segment results versus 117 days in the same period in 2019.

• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and increased spending on product development and developing cannabinoid intellectual property.

Other items affecting the comparability of net income (loss) during FY 2020 and FY 2019 – consolidated

Review costs related to restatement of 2019 interim financial statements

For FY 2020, we reported review costs related to the restatement of 2019 interim financial statements of $9.7 million within the general and administrative line in the consolidated statements of net income (loss).

These financial statement review costs include costs related to the restatement of the Company’s 2019 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement.

There were no costs related to the restatement of the Company’s 2019 interim financial statements incurred during FY 2019.

Repurposing charges

For FY 2019, we reported pre-tax charges of $7.3 million related to the Company’s decision to redesign its efforts at the Peace Naturals Campus, which includes impairment costs, inventory write-down, and employee termination benefits.

There were no repurposing costs incurred during FY 2020.

Interest income, net $ 9,071 $ 18,415 $ (9,344) (51) %

For FY 2020, we reported interest income, net of $18.4 million representing a decrease of $9.6 million from FY 2019 primarily due to the impact of a decrease in interest rates on cash and cash equivalents and short-term investments during FY 2020 compared to FY 2019.

Gain on revaluation of derivative liabilities 151,360 129,254 22,106 17 %

For FY 2020, we reported a gain on revaluation of derivative liabilities of $129.3 million representing a decrease of $1,147.6 million from FY 2019 primarily driven by a decrease in our share price since December 31, 2019.

The Company expects continued changes in derivative valuations as the Company’s share price fluctuates period-to-period.

For further information, see Note 14 to the consolidated financial statements in Item 8 of this Annual Report.

Impairment loss on goodwill and intangible assets

For FY 2020, we reported an impairment loss on goodwill and intangible assets of $40.0 million representing an increase of $40.0 million from FY 2019 primarily driven by a $35.0 million impairment charge on the U.S.

reporting unit and a $5.0 million impairment charge on the Lord Jones™ brand during the year ended December 31, 2020.

For further information, see Note 11 to the consolidated financial statements in Item 8 of this Annual Report.

Gain on disposal of other investments — 4,789 (4,789) (100) %

For FY 2020, we reported a gain on disposal of other investments of $4.8 million representing a decrease of $11.5 million from FY 2019 primarily driven by a decrease in the sale of shares associated with the Whistler Transaction (as defined below) during FY 2020 compared to FY 2019.

For further information, see Note 7 to the consolidated financial statements in Item 8 of this Annual Report.

Financing and transaction costs

For FY 2020, we reported financing and transaction costs of $0.04 million representing a decrease of $32.2 million from FY 2019 primarily driven by the increased financing and transaction costs incurred in FY 2019 compared to FY 2020 as a result of the Altria Investment and the Redwood Acquisition.

For further information see Note 27 and Note 14 to the consolidated financial statements in Item 8 of this Annual Report.

Income tax expense

For FY 2020, we reported an income tax expense of $1.3 million representing an increase of $1.3 million from FY 2019 primarily driven by changes in valuation allowance, partially offset by a decrease in the fair value gain on financial liabilities.

Share of loss from equity accounted investments (6,313) (4,510) (1,803) 40 %

Gain (loss) on revaluation of financial instruments 8,611 (9) 8,620 N/M

Other, net 730 (1,825) 2,555 N/M

Total other income 163,459 146,114 17,345 12 %

Income tax benefit (expense) 431 (1,347) 1,778 N/M

Loss from discontinued operations (500) (650) 150 (23) %

Net loss $ (397,204) $ (75,270) $ (321,934) (428) %

(i) “N/M” is defined as not meaningful.

Interest income, net

For FY 2021, we reported interest income, net of $9.1 million, representing a decrease of $9.3 million from FY 2020 primarily due to the impact of lower interest rates and lower short-term investment balances during FY 2021 compared to FY 2020.

Gain (loss) on revaluation of derivative liabilities

For FY 2021, we reported a gain on revaluation of derivative liabilities of $151.4 million, representing an increase of $22.1 million from FY 2020 primarily due to a decrease in our share price since December 31, 2020.

We expect continued changes in derivative valuations as our share price fluctuates period to period.

See Note 8 “ Derivative Liabilities ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Gain on disposal of other investments

For FY 2020, we reported a gain on disposal of other investments of $4.8 million as a result of the sale of shares associated with the Whistler Transaction, as defined below.

There were no such transactions in FY 2021.

See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Share of loss from equity accounted investments

For FY 2021, we reported share of loss from equity accounted investments of $6.3 million, representing an increase in losses of $1.8 million from FY 2020.

The change was due to increased recurring losses from our equity accounted investments.

See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Gain (loss) on revaluation of financial instruments

For FY 2021, we reported a gain on revaluation of financial instruments of $8.6 million, related to our investment in Cronos Australia.

See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

The reported loss in FY 2020 was negligible.

For FY 2021, we reported other income, net of $0.7 million, compared to other expenses, net of $1.8 million for FY 2020 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.

(“OGBC”) in FY 2020.

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Income tax benefit (expense)

For FY 2021, we reported an income tax benefit of $0.4 million, representing a change of $1.8 million from the FY 2020 income tax expense primarily due to the recognition of current year losses incurred to be carried back against prior period taxable income.

See Note 11 “ Income Taxes ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Loss from discontinued operations

For FY 2021, we reported loss from discontinued operations of $0.5 million, representing a decrease in losses of $0.2 million from FY 2020 primarily due to a $0.1 million gain from the sale of OGBC’s property, plant and equipment in FY 2021.

See Note 16 “ Discontinued Operations and Held-for-sale Assets ” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Results of Operations by Business Segment:

FY 2021 compared with FY 2020

The tables below sets forth our consolidated results of operations by our two business segments:

the ROW segment and the U.S.

segment, expressed in U.S.

dollars and in thousands for the periods presented.

Our 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 financial results – ROW

(In thousands of U.S.

dollars) Year ended December 31, Change

Year ended December 31, Change

2021 2020 $ %

Net revenue $ 64,561 $ 37,224 $ 27,337 73 %

Gross profit (loss) (29,993) (19,470) (10,523) 54 %

Cost of sales 70,193 41,162 29,031 71 %

Inventory write-down 11,961 26,055 (14,094) (54) %

Gross profit (17,593) (29,993) 12,400 41 %

Gross margin (27) % (81) % N/A 54 pp

Adjusted EBITDA (i)

$ (98,349) $ (84,826) $ (13,523) 16 %

(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.

Net revenue – ROW

(In thousands of U.S.

dollars) Year ended December 31, Change

Year ended December 31, Change

2021 2020 $ %

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Net revenue $ 64,561 $ 37,224 $ 27,337 73 %

For FY 2020, we reported net revenue of $37.2 million, representing an increase of $16.8 million from FY 2019.

This change was primarily due to:

• An increase in sales due to the continued growth of the adult-use market in Canada and sales in the Israeli medical market, partially offset by non-recurring wholesale revenue in the Canadian market in FY 2019 and strategic price reductions on various adult-use cannabis products in Canada in FY 2020.

Cost of sales and gross profit (loss) – ROW

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Cost of sales $ 41,162 $ 10,683 $ 30,479 285 %

Inventory write-down 26,055 29,173 (3,118) (11) %

Gross profit (loss) (29,993) (19,470) (10,523) 54 %

Gross margin (81) % (96) % N/A 15 pp

For FY 2020, we reported gross loss of $30.0 million, representing an increase in losses of $10.5 million from FY 2019.

This change was primarily due to:

• An increase in cost of sales primarily driven by third-party purchased flower associated with adult-use products in Canada and a decline in wholesale sales in FY 2020.

The Company anticipates that gross margin will continue to fluctuate as price and mix change from quarter-to-quarter.

• Partially offset by an increase in net revenue from FY 2019, as described above and a decrease in inventory write-downs.

We may incur further inventory write-downs due to pricing pressures in the marketplace.

Adjusted EBITDA – ROW

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Adjusted EBITDA $ (98,349) $ (84,826) $ (13,523) 16 %

(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.

For FY 2020, we reported Adjusted EBITDA of $(98.3) million, representing a decrease in Adjusted EBITDA of $13.5 million from FY 2019.

This change was primarily due to:

• An increase in ROW gross loss from FY 2019, as described above.

• An increase in R&D costs primarily related to the Ginkgo Strategic Partnership and costs related to increased spending on product development and cannabinoid intellectual property.

• An increase in general and administrative costs from FY 2019 driven by an increase in salaries and wages as a result of increased headcount to support the Company’s growth strategy and increased office and general expenses.

• An increase in sales and marketing costs primarily related to building and developing our brands and products in the Canadian adult-use market.

For FY 2021, the ROW segment reported net revenue of $64.6 million, representing an increase of $27.3 million from FY 2020.

This increase was primarily due to the continued growth in the adult-use market in Canada attributable to increasing demand for flower and increased sales in the Israeli medical market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in FY 2021.

Cost of sales - ROW

For FY 2021, the ROW segment reported cost of sales of $70.2 million, representing an increase of $29.0 million from FY 2020.

This change was primarily due to increased sales volume, inventory adjustments to reflect net realizable value and start-up costs associated with new product development.

Inventory write-downs - ROW

For FY 2021, the ROW segment reported inventory write-downs of $12.0 million, representing a decrease of $14.1 million from FY 2020.

The decrease was primarily due to higher inventory write-downs in FY 2020 related to increasing pricing pressures in the Canadian market, which resulted in reducing carrying amounts to net realizable value.

This change is primarily due to operational improvements and efficiencies with the cultivation and manufacturing processes which led to more successful products being produced for the Canadian adult-use market that required less adjustments for obsolete inventory, offset by continued write-downs related to obsolete inventory related to the COVE ® brand.

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Gross profit - ROW

For FY 2021, the ROW segment reported gross profit of $(17.6) million, representing an increase in gross profit of $12.4 million from FY 2020.

The increase in gross profit is primarily due to lower inventory write-downs in FY 2021 and a favorable sales mix of our cannabis extract products.

Summary of financial results – U.S.

(In thousands of U.S.

dollars) Year ended December 31, Change

Year ended December 31, Change

2021 2020 $ %

Net revenue $ 9,874 $ 9,495 $ 379 4 %

Cost of sales 9,815 5,335 4,480 84 %

Gross profit $ 59 $ 4,160 $ (4,101) (99) %

Gross margin 1 % 44 % N/A (43) pp

Adjusted EBITDA (i)

$ (28,019) $ (1,703) $ (26,316) 1,545 %

(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.

Net revenue – U.S.

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Net revenue $ 9,495 $ 3,364 $ 6,131 182 %

For FY 2021, the U.S.

segment reported net revenue of $9.9 million, representing an increase of $0.4 million from FY 2020.

The increase was primarily due to:

• An increase in sales due to a full year of U.S.

segment results in FY 2020 as opposed to 117 days in FY 2019.

• The growth in existing product lines and introductions of new U.S.

hemp-derived CBD products during FY 2020.

A significant amount of the U.S.

segment’s FY 2020 revenue was earned during the fourth quarter as a result of increased sales in the direct-to-consumer channel driven by holiday sales.

Cost of sales and gross profit – U.S.

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Cost of sales $ 5,335 $ 1,491 $ 3,844 258 %

Gross profit (loss) 4,160 1,873 2,287 122 %

Gross profit margin 44 % 56 % N/A (12) pp

For FY 2020, the U.S.

segment reported gross profit of $4.2 million representing an increase in gross profit of $2.3 million from FY 2019.

This was primarily due to:

• The increase in net revenue, as described above.

• Partially offset by an increase in cost of sales primarily driven by a full year of U.S.

segment results in FY 2020 as opposed to 117 days in the same period in 2019.

Adjusted EBITDA – U.S.

(In thousands of U.S.

dollars) Year ended December 31, Change

2020 2019 $ %

Adjusted EBITDA

$ (28,019) $ (1,703) $ (26,316) 1,545 %

(i) See “ Non-GAAP Measures ” for information related to non-GAAP measures.

For FY 2020, we reported an Adjusted EBITDA of $(28.0) million, representing a decrease in Adjusted EBITDA of $26.3 million from FY 2019.

This change was primarily due to:

• Sales and marketing costs incurred in relation to the introduction of new U.S.

The increase primarily due to the introduction of new U.S.

hemp-derived CBD products.

• Increased general and administrative costs driven by increased headcount to support the Company’s growth strategy across a variety of functions.

• Partially offset by an increase in gross profit from FY 2019, as described above.

Liquidity and Capital Resources

Cost of sales – U.S.

For FY 2021, the U.S.

segment reported cost of sales of $9.8 million, representing an increase of $4.5 million from FY 2020.

This increase was primarily due to the costs associated with the introduction of new U.S.

hemp-derived CBD products, inventory valuation adjustments to reflect net realizable value, and increased headcount.

Gross profit – U.S.

For FY 2021, the U.S.

segment reported gross profit of $0.1 million, representing a decrease in gross profit of $4.1 million from FY 2020.

This decrease was primarily due to the increase in cost of sales, as described above.

We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our business operations and capital expenditures over the next twelve months.

2 unchanged sentences

Historically, we have primarily funded our operations through equity financing.

In March 2019, Altria closed a C$2.4 billion (approximately $1.8 billion) investment in us, pursuant to which we issued to certain wholly owned subsidiaries of Altria 149,831,154 of our common shares and one warrant, as further discussed under “ Altria Strategic Investment ” herein.

As of February 23, 2021, we had a cash and cash equivalents balance of $1.1 billion and $0.2 billion in short term investments to fund operations and capital expenditures.

Capital resources

As of December 31, 2020, we had $1.1 billion in cash and cash equivalents and $0.2 billion in short term investments.

As of December 31, 2020, the Company had no external financing.

Contractual obligations

As of December 31, 2020, the Company had the following contractual obligations:

(In thousands of U.S.

dollars) Payments Due by Period

Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years

Long-term debt obligations $ — $ — $ — $ — $ —

Capital (finance) lease obligations 59 39 20 — —

Operating lease obligations 12,017 2,381 6,214 2,261 1,161

Purchase obligations 18,942 14,489 3,341 1,112 —

Other long-term liabilities 8,962 8,962 — — —

Total contractual obligations $ 39,980 $ 25,871 $ 9,575 $ 3,373 $ 1,161

Finance lease obligations relate to equipment leases maturing in June 2022.

Operating lease obligations relate to land, buildings, vehicles, and office space in Canada, the U.S.

Purchase obligations include commitments for capital expenditure, information technology services, and other professional services.

Other long-term liabilities relate to commitments for research and development such as Ginkgo foundry access fees, as well as undrawn but committed loans to our joint ventures.

Summary of cash flows

(In thousands of U.S.

1 unchanged sentence

2021 2020 2019

Net cash provided by (used in) operating activities $ (142,457) $ (130,274) $ (7,517)

Net cash used in operating activities $ (153,616) $ (144,871) $ (131,193)

Net cash provided by (used in) investing activities (28,898) 20,150 (603,272)

5 unchanged sentences

During FY 2021, we used $153.6 million of cash in operating activities as compared to $144.9 million in FY 2020, representing an increase of $8.7 million in cash used.

This change is primarily driven by an increase in operating expenses in FY 2020 partially offset by increased revenues in FY 2020.

This change is primarily driven by a $17.8 million increase in net loss after adjusting for non-cash items, partially offset by a $9.0 million increase in changes in operating assets and liabilities in FY 2021.

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Investing activities

During FY 2020, we received $20.2 million of cash in investing activities, as compared to $603.3 million of cash used during FY 2019, representing an increase of $623.5 million in net cash provided.

This change is primarily driven by the Redwood Acquisition in FY 2019 for cash consideration of $224.3 million, as well as a $395.3 million increase from FY 2019 from the net effect of the purchase of and proceeds from maturity short-term investments.

During FY 2021, we used $28.9 million of cash in investing activities, as compared to $20.2 million of cash provided by investing activities during FY 2020, representing an increase of $49.0 million in net cash used.

This change is primarily driven by the investment in PharmaCann in FY 2021, partially offset by a decrease in cash disbursements related to loans receivable from related parties, primarily Cronos GrowCo, in FY 2021 compared to FY 2020.

Financing activities

During FY 2020, cash used in financing activities was $5.5 million, as compared to $1,856.9 million of cash provided by financing activities in FY 2019, representing a net increase of $1,862.4 million.

This change is primarily driven by proceeds from the strategic investment from Altria of $1,809.6 million as well as the proceeds from exercises Top-up Rights of $67.1 million by Altria partially offset by the $16.0 million repayment of the construction loan payable.

During FY 2021, cash used in financing activities was $13.4 million, as compared to $3.1 million of cash used in financing activities in FY 2020, representing an increase of $10.4 million.

This change is primarily driven by withholding taxes paid on equity awards in FY 2021 compared to FY 2020, partially offset by amounts advances to non-controlling interests in FY 2020.

Capital resources

As of December 31, 2021, we had $887.0 million in cash and cash equivalents and $117.7 million in short term investments.

As of December 31, 2021, we had no external financing.

Cash requirements

In the near-term, we expect to use our available cash and investments to operate our core business and develop new ways to serve our customers as well as invest in our various strategic partnerships and in our investees.

We have maintained adequate liquidity to meet working capital requirements.

Our material cash requirements include the following contractual and other obligations as of December 31, 2021:

We have operating leases for buildings and office space, vehicles and land, and a finance lease relating to equipment.

As of December 31, 2021, the future minimum payments required under these leases totaled $10.7 million, with $2.8 million payable within 12 months.

Refer to Note 7 “ Leases ” to the consolidated financial statements in Item 8 of this Annual Report for further information.

Loans receivable with related parties

We have entered into three loan agreements with affiliates.

As of December 31, 2021, Cronos GrowCo had approximately $0.8 million undrawn on its loan receivable, with $0.8 million expected to be drawn within 12 months.

All other loans receivable have been fully drawn.

Refer to Note 4 “ Loans Receivable, net ” to the consolidated financial statement in Item 8 of this Annual Report for further information.

Purchase obligations

Our purchase obligations primarily consist of contractual obligations to maintain the ordinary course of business through information technology and capital expenditures related to computer software, agricultural supply services, and data analytics.

As of December 31, 2021, we had purchase obligations of $17.7 million, with $15.5 million payable within 12 months.

Other purchase obligations consist primarily of noncancelable obligations related to maintenance, internet, and telecommunication services.

As of December 31, 2021, we had other purchase obligations of $3.3 million, with $1.0 million payable within 12 months.

Research and development obligations

We have entered into multiple R&D contracts with partners such as Ginkgo Bioworks Holdings, Inc.

(“Ginkgo”) and Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”), as well as maintained internal cash requirements related to R&D activities, to continue to improve processes and gain knowledge on the cannabinoid industry.

As of December 31, 2021, we had approximately $30.2 million in cash requirements related to R&D, with $20.2 million payable within 12 months.

Refer to Note 9 “ Commitments and Contingencies ” to the consolidated financial statements in Item 8 of this Annual Report for further information.

Non-GAAP Measures

Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”).

This Annual Report refers to measures not recognized under US GAAP (“non-GAAP measures”).

These non-GAAP measures do not have a standardized meaning prescribed by US 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 US GAAP measures to provide additional information regarding our 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 US GAAP.

Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S.

This Annual 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 our 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.

All non-GAAP measures presented in this Annual Report are reconciled to their closest reported GAAP measure.

Reconciliations of historical adjusted financial measures to corresponding US GAAP measures are provided below.

Reconciliations of historical adjusted financial measures to corresponding U.S.

GAAP measures are provided below.

Table of Con tents

Adjusted EBITDA

Management reviews Adjusted EBITDA, a non-GAAP measure which excludes non-cash items or items that do not reflect management’s assessment of on-going business performance.

Management reviews Adjusted EBITDA, a non-GAAP measure which excludes non-cash items or items that do not reflect management’s assessment of ongoing business performance of our operating segments.

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

impairment loss on goodwill and intangible assets, repurposing charges, financing and transaction costs, loss (gain) on revaluation of derivative liabilities, loss (gain) on disposal of investments, share of loss (income) from equity accounted investees, loss from discontinued operations, other loss (income), review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings, of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements), and share-based payments.

share of loss from equity accounted investments;

impairment loss on goodwill and intangible assets;

impairment loss on long-lived assets;

gain on revaluation of derivative liabilities;

gain on revaluation of financial instruments;

transaction costs related to strategic projects;

loss from discontinued operations;

share-based payments;

and review and investigation costs related to the restatements of our 2019 and 2021 interim financial statements, including costs related to our responses to the reviews of such financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement (see Part I, Item 3, Legal Proceedings, of this Annual Report for a discussion of the regulatory reviews relating to the restatements of the 2019 and 2021 interim financial statements and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of year-over-year 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.

As a result of the appointment of Mr.

Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, Adjusted EBITDA is now the primary metric upon which management views the consolidated business performance and results year-over-year.

Adjusted EBITDA by segment

Management also reviews adjusted earnings (loss) before interest, tax, depreciation and amortization by segment (“Adjusted EBITDA by segment”), a non-GAAP measure which excludes non-cash items or items that do not reflect management’s assessment of on-going business performance.

Corporate expenses are removed from Adjusted EBITDA by segment.

Corporate expenses are expenses that relate to the consolidated business.

The Company’s method of allocating corporate expenses is refined periodically.

Management defines Adjusted EBITDA by segment as net income (loss) by segment before interest, tax expense, depreciation and amortization adjusted for the same items that are adjusted in consolidated Adjusted EBITDA.

Management believes that Adjusted EBITDA by segment provides useful insight into underlying segment trends and results and provides a more meaningful comparison of year-over-year segment results.

Management uses Adjusted EBITDA by segment for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

As a result of the appointment of Mr.

Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business by segment, Adjusted EBITDA by segment is now the primary metric upon which management views the segment performance and results year-over-year.

Adjusted EBITDA and Adjusted EBITDA by segment is reconciled to net income (loss) as follows for the years ended December 31, 2020 and 2019:

Adjusted EBITDA is reconciled to net income (loss) as follows:

(in thousands of U.S.

dollars) Year ended December 31, 2021

US ROW Corporate

Expenses Total

US ROW Corporate Total

Net income (loss) $ (283,883) $ (81,811) $ (31,510) $ (397,204)

Interest income, net (40) (9,031) — (9,071)

Income tax benefit (89) (342) — (431)

Share of loss from equity accounted investments — 6,313 — 6,313

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

236,019 37 — 236,056

Impairment loss on long-lived assets (ii)

2,955 124,664 — 127,619

Gain on revaluation of derivative liabilities (iii)

— (151,360) — (151,360)

Gain on revaluation of financial instruments (iv)

— (8,611) — (8,611)

Transaction costs (v)

— — 3,801 3,801

Other, net (vii)

3 (733) — (730)

Loss from discontinued operations (viii)

Share-based payments (ix)

3,401 6,750 — 10,151

Financial statement review costs (x)

— — 7,102 7,102

Depreciation and amortization 917 14,485 — 15,402

Adjusted EBITDA $ (40,717) $ (99,139) $ (20,607) $ (160,463)

(in thousands of U.S.

dollars) Year ended December 31, 2020

US ROW Corporate Total

Net income (loss) $ (77,368) $ 32,671 $ (30,573) $ (75,270)

Interest expense (income), net 18 (18,433) — (18,415)

Income tax expense 323 1,024 — 1,347

Impairment loss on goodwill and intangible assets 40,000 — — 40,000

Financing and transaction costs 40 — — 40

Gain on revaluation of derivative liabilities — (129,254) — (129,254)

Gain on disposal of other investments — (4,789) — (4,789)

Share of loss from equity accounted investees — 4,510 — 4,510

Loss from discontinued operations — 650 — 650

Other loss (income) 20 1,814 — 1,834

Review costs related to restatement of 2019 interim financial statements — — 9,688 9,688

Share-based payments 8,714 6,647 — 15,361

Adjusted EBIT (28,253) (105,160) (20,885) (154,298)

Share of loss from equity accounted investments — 4,510 — 4,510

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

40,000 — — 40,000

Gain on revaluation of derivative liabilities (iii)

— (129,254) — (129,254)

Loss on revaluation of financial instruments (iv)

Transaction costs (v)

Gain on disposal of investments (vi)

— (4,789) — (4,789)

Other, net (vii)

20 1,805 — 1,825

Loss from discontinued operations (viii)

Share-based payments (ix)

8,714 6,647 — 15,361

Financial statement review costs (x)

— — 9,688 9,688

Depreciation and amortization 234 6,811 — 7,045

Adjusted EBITDA $ (28,019) $ (98,349) $ (20,885) $ (147,253)

Table of Con tents

(in thousands of U.S.

dollars) Year ended December 31, 2019

US ROW Corporate

Expenses Total

US ROW Corporate Total

Net income (loss) $ (2,888) $ 1,180,241 $ (11,779) $ 1,165,574

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Repurposing charges — 7,268 — 7,268

Financing and transaction costs 117 32,091 — 32,208

Gain on revaluation of derivative liabilities — (1,276,819) — (1,276,819)

Gain on disposal of other investments — (16,277) — (16,277)

Share of loss from equity accounted investees — 2,009 — 2,009

Loss from discontinued operations — 363 — 363

Other loss (income) 182 (197) (182) (197)

Share-based payments 900 10,719 — 11,619

Adjusted EBIT (1,877) (88,565) (11,779) (102,221)

Share of loss from equity accounted investments — 2,009 — 2,009

Gain on revaluation of derivative liabilities (iii)

— (1,276,819) — (1,276,819)

Gain on revaluation of financial instruments (iv)

— (197) — (197)

Transaction costs (v)

117 32,091 32,091 — 32,208

Gain on disposal of investments (vi)

— (16,277) — (16,277)

Loss from discontinued operations (viii)

Share-based payments (ix)

900 10,719 — 11,619

Depreciation and amortization 174 3,739 — 3,913

Adjusted EBITDA $ (1,703) $ (84,826) $ (11,779) $ (98,308)

Adjusted operating loss

Management previously reviewed operating loss on an adjusted basis, which excluded certain income and expense items that management believed were not part of underlying operations.

These items typically included repurposing charges and non-recurring charges such as the review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings , of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management did not view these items to be part of underlying results as they may have been highly variable, unusual or infrequent, were difficult to predict or could distort underlying business trends and results.

Management believed that adjusted operating loss provided useful insight into underlying business trends and results and provided a more meaningful comparison of year-over-year results.

Management used to use adjusted operating loss for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets.

As a result of the appointment of Mr.

Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, adjusted operating loss is no longer a primary metric upon which management views the consolidated business performance and results year-over-year.

(In thousands of U.S.

dollars) Year ended December 31,

Reported operating loss $ (179,347) $ (121,108)

Review costs related to restatement of 2019 interim financial statements 9,688 —

Repurposing charges — 7,268

Adjusted operating loss $ (169,659) $ (113,840)

Adjusted operating loss by segment

Management previously reviewed operating loss by segment, which excluded corporate expenses, and adjusted operating loss by segment, which further excluded certain income and expense items that management believed were not part of the underlying segment’s operations.

Corporate expenses were expenses that relate to the consolidated business and not to an individual operating segment while the income and expense items typically included non-recurring charges such as repurposing charges and review costs related to the restatement of the Company’s 2019 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement (see Part I, Item 3, Legal Proceedings , of this Annual Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements).

Management did not view the income and expense items above to be part of underlying results of the segment as they may have been highly variable, unusual or infrequent, were difficult to predict and could distort underlying business trends and results.

As a result of the appointment of Mr.

Schmidt as President and Chief Executive Officer in September 2020 and a review of how management looks at the business, adjusted operating loss by segment is no longer the primary metric upon which management views the segment performance and results year-over-year.

(In thousands of U.S.

dollars) Year ended December 31, 2020

US ROW Total Segments Corporate Expenses Total

Reported operating loss $ (36,967) $ (111,807) $ (148,774) $ (30,573) $ (179,347)

Review costs related to restatement of 2019 interim financial statements — — — 9,688 9,688

Adjusted operating loss $ (36,967) $ (111,807) $ (148,774) $ (20,885) $ (169,659)

(In thousands of U.S.

dollars) Year ended December 31, 2019

US ROW Total Segments Corporate Expenses Total

Reported operating loss $ (2,777) $ (106,552) $ (109,329) $ (11,779) $ (121,108)

Repurposing charges — 7,268 7,268 — 7,268

Adjusted operating loss $ (2,777) $ (99,284) $ (102,061) $ (11,779) $ (113,840)

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

(i) For the year ended December 31, 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.

For the year ended December 31, 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S.

See Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements under Item 8 of this Annual Report.

(ii) For the year ended December 31, 2021, impairment loss on long-lived assets relates to impairment charges on property, plant and equipment and definite-lived intangible assets in the Canadian asset group, impairment charges for the differences between the consideration paid to Ginkgo for the achievement of two equity milestones in connection with the Ginkgo Collaboration Agreement and the fair values of the CBGA Exclusive License and CBGVA Exclusive License as well as impairment on leased premises in the U.S.

See Note 5 “ Property, Plant and Equipment, net ” and Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report.

(iii) For the years ended December 31, 2021, 2020 and 2019, the gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.

See Note 8 “ Derivative Liabilities ” to the consolidated financial statements in Item 8 of this Annual Report.

(iv) For the year ended December 31, 2021, gain on revaluation of financial instruments relates primarily to our unrealized holding gain on our mark-to-market investment in Cronos Australia as well as revaluations of financial liabilities resulting from DSUs.

For the years ended December 31, 2020 and 2019, gain (loss) on revaluation of financial instruments relates to revaluations of financial liabilities resulting from DSUs.

See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report.

(v) For the years ended December 31, 2021, 2020 and 2019, transaction costs represent 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 consolidated statements of net income (loss) and comprehensive income (loss).

(vi) For the years ended December 31, 2020 and 2019, gain on disposal of 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 (“Whistler Transaction”) in 2020 and as a result of the closing of the Whistler Transaction in 2019.

There were no disposals of investments during the year ended December 31, 2021.

See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report.

(vii) For the years ended December 31, 2021 and 2020, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets.

(viii) For the years ended December 31, 2021, 2020 and 2019, loss from discontinued operations relates to the discontinuance of OGBC.

See Note 16 “ Held-For-Sale Assets and Discontinued Operations ” to the consolidated financial statements in Item 8 of this Annual Report.

(ix) For the years ended December 31, 2021, 2020 and 2019, share-based payments relates to the vesting expenses of share-based compensation awarded to employees under our share-based award plans as described in Note 10 “ Share-based Payments ” to the consolidated financial statements in Item 8 of this Annual Report.

(x) For the years ended December 31, 2021 and 2020, financial statement review costs include costs related to the restatements of our 2019 and second quarter 2021 interim financial statements, costs related to our responses to requests for information from various regulatory authorities relating to such restatements and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement.

Critical Accounting Estimates

Estimates and critical judgments by management

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

The preparation of the consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

These estimates are reviewed periodically and adjustments are made as appropriate in the year they become known.

Items for which actual results may differ materially from these estimates are described in the following section.

Refer to Note 2 “ Summary of Significant Accounting Policies ” within the Consolidated Financial Statements for further information on our critical accounting estimates and policies, which are as follows:

Refer to Note 1 “ Background, Basis of Presentation, and Summary of Significant Accounting Policies ” to the consolidated financial statements in Item 8 of this Annual Report for further information on our critical accounting estimates and policies, which are as follows:

Table of Con tents

Goodwill and indefinite-lived intangible assets

4 unchanged sentences

We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit, as well as the use of the relief-from-royalty method on the Lord Jones ® brand.

Significant inputs include discount rates, growth rates, and cash flow projections, and, for the Lord Jones ® brand, royalty rate.

These valuation inputs are considered Level 3 inputs as defined by ASC 820 Fair Value Measurement .

The expected future cash flows for each reporting unit are significantly impacted by current market conditions.

1 unchanged sentence

Our accounting for goodwill and indefinite-lived intangible assets represents our best estimate of future events.

Based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss related to goodwill and indefinite life intangible assets of $35 million and $5 million in the U.S.

reporting unit, respectively, in FY 2020.

During our annual quantitative impairment test in the fourth quarter of 2020, no further impairment was recorded.

Both fair values of the goodwill as well as the Lord Jones™ brand exceeded carrying value by more than 10%.

No impairment was recorded in FY 2019 or FY 2018.

In the second quarter of 2021, we recognized impairment losses related to goodwill and indefinite-lived intangible assets of $178.4 million and $56.5 million, respectively, in the U.S.

reporting unit.

During our annual quantitative impairment test in the fourth quarter of 2021, an additional impairment of $1.0 million was recognized on the Lord Jones ® brand due to the U.S.

segment’s sustained operating losses and lack of revenue growth.

In FY 2020, based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss related to goodwill and indefinite-lived intangible assets of $35 million and $5 million, respectively, in the U.S.

reporting unit.

During our annual quantitative impairment test in the fourth quarter of 2020, no further impairment was recorded as both fair values of the goodwill as well as the Lord Jones ® brand exceeded carrying amount by more than 10%.

Inventory valuation

8 unchanged sentences

In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels.

Long-lived assets

Long-lived assets are primarily comprised of property, plant, and equipment and definite-lived intangible assets.

We evaluate long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of such assets may not be recoverable.

Long-lived asset recoverability is assessed on an asset group basis.

We group assets and liabilities for our asset groups at the reporting unit level, which is the lowest level for which cash flows are separately identifiable.

Long-lived asset recoverability is measured by comparing the carrying amount of the asset group with its estimated future undiscounted pre-tax cash flows over the remaining life of the primary long-lived asset of the asset group.

If the carrying amount exceeds the estimated future undiscounted cash flows as part of the recoverability assessment, an impairment charge is recognized equal to the difference between the carrying amount and fair value of the asset group.

The impairment charge is allocated to the underlying long-lived assets in the asset group on a relative carrying amount basis;

however, carrying amount after allocated impairment is subject to a floor of fair value on an individual asset basis.

We believe the accounting estimates used in the long-lived asset impairment assessment are critical accounting estimates because of the judgment required in identifying indicators of impairment, determining asset groups, assessing future undiscounted cash flows of the asset groups, and as applicable, evaluating the fair value of the determined asset groups as well as the underlying long-lived assets, once indicators of impairment have been identified.

Table of Con tents

We periodically evaluate whether impairment indicators related to our property, plant and equipment, operating leases and other long-lived assets are present.

These impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, early termination of an operating lease, a significant adverse change to the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group.

If impairment indicators are present, we estimate the fair value for the asset or group of assets.

We estimate fair value of long-lived assets through various valuation methods, including the use of the indirect cost approach, income approach, and direct comparison approach.

The indirect cost approach is based on the estimated cost to reproduce the asset as if new, adjusted for physical deterioration and consideration of functional and economic obsolescence.

The income approach is based on estimated rental and capitalization rates.

The direct comparison approach is based on recent observable transactions of comparable assets.

The estimation of future undiscounted cash flows of the asset groups as well as each of these fair value approaches are significantly impacted by market conditions.

A significant adverse change in market conditions could result in fair values that differ from our estimates, which could adversely impact whether an impairment exists and the extent to which an asset group and underlying assets are impaired.

The difference between the fair value and the carrying amount of the asset group is recorded as an impairment charge.

During the fourth quarter of 2021, we concluded that indicators of impairment were present with respect to our Canadian asset group.

As a result, we estimated the undiscounted cash flows for the Canadian asset group and found that the carrying amount exceeded its undiscounted cash flows.

Subsequently, we estimated the fair values of all long-lived assets in the Canadian asset group using the indirect cost approach for personal property, the income and direct comparison approaches for our facility in Stayner, Ontario, Canada, and the indirect cost approach for our facility in Winnipeg, Manitoba Canada, and compared the fair values attributable to the Canadian asset group to their respective carrying amounts and recorded a non-cash impairment charge on long-lived assets of $119.9 million.

Refer to Note 5 “ Property, Plant and Equipment, net ” to the consolidated financial statements in Item 8 of this Annual Report.

We account for the cannabinoid exclusive licenses originating from the Ginkgo Strategic Partnership as definite-lived intangible assets in accordance with the acquisition method of accounting.

Equity in Cronos Group issued in exchange for the cannabinoid exclusive licenses are initially recognized and measured at the date of acquisition.

Subsequently, we measure each cannabinoid exclusive license at fair value.

We believe that the accounting estimate for the cannabinoid exclusive licenses is a critical accounting estimate because of the judgment required in assessing their fair values and the expected future cash flows are significantly impacted by the future expectations for products containing each cannabinoid.

We estimate the fair value using the relief-from-royalty method.

Each cannabinoid exclusive license is subject to amortization.

In August 2021, the Ginkgo Equity Milestone was achieved related to the cannabinoid CBGA.

At that time, we issued 1.5 million shares of Cronos Group valued at $9.0 million based on the observable market price.

In exchange, we received process and background intellectual property related to CBGA, as well as the CBGA Exclusive License, which is a perpetual license with exclusivity for ten years from the date the license is granted.

An impairment of $1.8 million was recognized to record the CBGA Exclusive License at its fair value of $7.3 million.

In November 2021, the Ginkgo Equity Milestone was achieved related to the cannabinoid CBGVA.

At that time, we issued 1.5 million shares of Cronos Group valued at $8.2 million based on the observable market price.

In exchange, we received process and background intellectual property related to CBGVA, as well as the CBGVA Exclusive License, which is a perpetual license with exclusivity for ten years from the date the license is granted.

An impairment of $3.0 million, was recognized to record the CBGVA Exclusive License at its fair value of $5.3 million.

Refer to Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report.

Valuation of derivative liabilities

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

We measure 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).

We calculate fair value of the derivative liabilities using the Black-Scholes model.

Significant assumptions are used in the valuation of derivative liabilities, including the volatility of our 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 our underlying equity securities as of December 31, 2021.

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

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

Sensitivity is performed on various inputs, refer to Note 8 “ Derivative Liabilities ” to the consolidated financial statements in Item 8 of this Annual Report.

Table of Con tents

Share-based compensation

5 unchanged sentences

The expected option term is the number of years that we estimate that the stock options will be outstanding prior to exercise.

Valuation of derivative liabilities

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

We calculate fair value of the derivative liability using the Black-Scholes model.

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

Sensitivity is performed on various inputs, refer to Note 14 “ Derivative Liabilities ” in Item 8 of this Annual Report.

Loans receivable, net

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

In the third quarter of 2021, we 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.

We may also record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the borrower’s operating results or financial condition.

The allowance for credit loss accrual balance was $14.6 million and $2.6 million as of December 31, 2021 and 2020, respectively.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis