Cronos Group Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 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”). Strategy Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities: • growing a portfolio of iconic brands that responsibly elevate the consumer experience; • developing a diversified global sales and distribution network; • establishing an efficient global supply chain; and • creating and monetizing disruptive intellectual property. Business Segments 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 COVID-19 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 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. 55 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 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 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. 56 Table of Con tents Cronos GrowCo 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. Appointments We appointed Jeff Jacobson Senior Vice President, Head of Growth (North America). Mr. Jacobson previously served as our General Manager of Canada and Europe. Mr. Jacobson has been with Cronos Group since December 2016 and previous to that was a co-founder of Peace Naturals. Mr. Jacobson's expertise and experience in licensing and compliance, new business development, project management and resource management help Cronos Group lead in domestic and international markets. We have also appointed John Griese Senior Vice President, Head of Operations (North America). Mr. Griese joined Cronos Group in August 2021 as the Vice President of Operations. Mr. Griese has worked with several cannabis organizations and was most recently the Chief Operating Officer (“COO”) for The Supreme Cannabis Company, Inc. (“Supreme”). Prior to Supreme, Mr. Griese garnered cannabis experience during California’s adult use implementation as COO for global cannabis company Creso Pharma Limited. Prior to that he spent the majority of his career in supply chain and operations with PepsiCo, Inc., Nestle and Sofina Foods Inc. Mr. Griese’s experience in building supply chains around the world will help 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. Mr. 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. Mr. 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. Mr. 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 $2.5 million to modernize information technology systems and build distribution capabilities. These anticipated charges and capital expenditures are subject to a number of assumptions, including product costs, the timing of certain events, market factors and others. As a result of these assumptions, actual results may differ materially. 57 Table of Con tents Canadian Medical Market. We exited the direct-to-client medical cannabis market in Canada in the fourth quarter of 2021. Beginning in the first quarter of 2022, our PEACE NATURALS ® medical cannabis products will be sold in Canada through the Medical Cannabis by Shoppers Drug Mart™ platform. 2020 Compared to 2019 Results of Operations For a discussion of our 2020 results of operations compared to 2019, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020. Cash Flows For a discussion of our 2020 cash flows compared to 2019, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2020. Foreign currency exchange rates All currency amounts in this Annual Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of 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 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, 2021 2020 2019 Average rate 1.2541 1.3411 1.3268 Spot rate 1.2746 1.2751 1.2990 58 Table of Con tents Consolidated Results of Operations 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, 2021 2020 Net revenue before excise taxes $ 89,486 $ 54,353 Excise taxes (15,051) (7,634) Net revenue 74,435 46,719 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 (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. 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. segments. 59 Table of Con tents 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. Gross profit 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 $ % 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. segments. 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. 60 Table of Con tents 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 $ % Interest income, net $ 9,071 $ 18,415 $ (9,344) (51) % Gain on revaluation of derivative liabilities 151,360 129,254 22,106 17 % Gain on disposal of other investments — 4,789 (4,789) (100) % 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. Other, net 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. Ltd. (“OGBC”) in FY 2020. 61 Table of Con tents 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 Year ended December 31, Change 2021 2020 $ % Net revenue $ 64,561 $ 37,224 $ 27,337 73 % 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 Net revenue – ROW Year ended December 31, Change 2021 2020 $ % Cannabis flower $ 55,194 $ 27,932 $ 27,262 98 % Cannabis extracts 8,807 8,759 48 1 % Other 560 533 27 5 % Net revenue $ 64,561 $ 37,224 $ 27,337 73 % 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. 62 Table of Con tents 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. 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 Net revenue – U.S. 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 primarily due to the introduction of new U.S. hemp-derived CBD products. 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. Liquidity 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. Our primary need for liquidity is to fund operations and capital expenditures. Our ability to fund operations and capital expenditures depends on, among other things, future operating performance and cash flows that are subject to general economic conditions and financial and other factors, including factors beyond our control. 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 ” in Item 1 of this Annual Report. Cash flows (In thousands of U.S. dollars) Year ended December 31, 2021 2020 2019 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) Net cash provided by (used in) financing activities (13,442) (3,051) 1,857,860 Effect of foreign currency translation on cash and cash equivalents 4,906 6,102 52,371 Net change in cash $ (191,050) $ (121,670) $ 1,175,766 FY 2021 cash flows vs FY 2020 cash flows Operating activities 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 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. 63 Table of Con tents Investing activities 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 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: Leases 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 (“U.S. GAAP”). 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. GAAP. 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 U.S. GAAP measures are provided below. 64 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 ongoing business performance of our operating segments. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and 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; other, net; 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. Adjusted EBITDA is reconciled to net income (loss) as follows: (in thousands of U.S. dollars) Year ended December 31, 2021 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) — 500 — 500 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 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) — 9 — 9 Transaction costs (v) 40 — — 40 Gain on disposal of investments (vi) — (4,789) — (4,789) Other, net (vii) 20 1,805 — 1,825 Loss from discontinued operations (viii) — 650 — 650 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) 65 Table of Con tents (in thousands of U.S. dollars) Year ended December 31, 2019 US ROW Corporate Total Net income (loss) $ (2,888) $ 1,180,241 $ (11,779) $ 1,165,574 Interest income, net (6) (27,963) — (27,969) Repurposing charges — 7,268 — 7,268 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) — 363 — 363 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) (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. segment. 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. segment. 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 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 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: 66 Table of Con tents Goodwill and indefinite-lived intangible assets Goodwill and indefinite-lived intangible assets are not subject to amortization. We test goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if an event occurs or circumstances change that could indicate a potential impairment. We compare the fair value of our reporting units with their carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We believe that the accounting estimate for goodwill and indefinite-lived intangible assets is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. 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. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill and indefinite-lived intangible assets represents our best estimate of future events. 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 We value our inventory at lower of cost or net realizable value determined using weighted average cost. Inventory is reflected at the lower of cost or net realizable value considering future demand, market conditions and market prices. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. We record an inventory valuation adjustment for excess, slow moving, and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value. We also experience inventory write-downs due to reduced market prices. The inventory valuation adjustment to net realizable value establishes a new cost basis of the inventory that cannot be subsequently reversed. Inventory valuation adjustments are based on inventory levels, expected product life, and estimated product demand. 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. 67 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. 68 Table of Con tents Share-based compensation We measure the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the Black-Scholes option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based primarily on historical daily price changes of our stock and peers. The expected option term is the number of years that we estimate that the stock options will be outstanding prior to exercise. 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.