Cronos Group Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Table of Contents Reports of KPMG LLP (PCAOB ID: 85 ), Independent Registered Public Accounting Firm located in Vaughan, Ontario, Canada 71 Consolidated Balance Sheets 75 Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) 76 Consolidated Statements of Changes in Shareholders’ Equity 77 Consolidated Statements of Cash Flows 79 Notes to Consolidated Financial Statements 81 70 Table of Con tents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cronos Group Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cronos Group Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of net income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Impact of Ineffective Control Environment As discussed in Item 9A. Controls and Procedures in the Form 10-K, management identified that a material weakness existed as of December 31, 2021 as the Company did not maintain an effective control environment. Specifically, the control environment did not ensure that senior personnel in the accounting function engaged consistently in appropriate professional conduct and conduct consistent with the Company’s Code of Business Conduct and Ethics. We identified the evaluation of the sufficiency of audit evidence in response to the material weakness as a critical audit matter. Evaluating the sufficiency of the audit evidence obtained required especially subjective auditor judgement because of the material weakness identified above. The following are the primary procedures we performed to address this critical audit matter. We applied significant auditor judgment to determine the nature and extent of procedures to be performed over processes for which control reliance could or could not be placed on certain key internal controls as a result of the material weakness. In those areas where we were unable to rely on internal controls, we reflected the effect of the material weakness in our assessment of risk; we increased the number of items selected to perform certain audit procedures and lowered the testing thresholds for investigating differences between recorded amounts and independent expectations developed by us as relative to what we would have done if the Company’s controls were designed and operating effectively; and we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed. 71 Table of Con tents Evaluation of the impairment loss on goodwill and indefinite-lived intangible asset As discussed in Notes 1(t) and 6(a) to the consolidated financial statements, the Company’s reporting units and indefinite-lived intangible assets are reviewed for impairment annually in the fourth quarter or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying amount. An impairment charge would be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. As discussed in Note 6(a) to the consolidated financial statements, the Company determines the fair values of its U.S. reporting unit and the Lord Jones brand indefinite-lived intangible asset using a discounted cash flow method on the reporting unit and the relief-from-royalty method on the Lord Jones brand. Significant inputs include discount rates, growth rates, and cash flow projections, and, for the Lord Jones brand, royalty rate. As discussed in Notes 6(a) and 6(b) to the consolidated financial statements, the Company recorded impairment losses of $178,414 thousand against the goodwill in the U.S. reporting unit and $57,500 thousand against the Lord Jones brand for the year ended December 31, 2021. We identified the evaluation of the impairment losses on the U.S. reporting unit goodwill and Lord Jones brand as a critical audit matter. The evaluation of the Company’s significant inputs including the growth rates and, discount rates, and for the Lord Jones brand, royalty rate, required a high degree of auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the growth rates by comparing against external analyst expectations for the industry in the United States. We involved valuation professionals with specialized skills and knowledge who assisted in: • evaluating the discount rates by comparing against the internal rates of return and comparing the weighted average cost of capital to a range that was independently developed using publicly available market data for comparable entities • evaluating the royalty rate which was applied to estimate forecasted revenues, to calculate forecasted royalty income, using industry knowledge, and considering comparable brand royalty rates and qualitative factors specific to the brand. /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants We have served as the Company’s auditor since 2018. Vaughan, Canada March 1, 2022 72 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cronos Group Inc.: Opinion on Internal Control Over Financial Reporting We have audited Cronos Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of net income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the following have been identified and included in management’s assessment: • an ineffective control environment which (i) did not ensure that senior personnel in the Company’s accounting function engaged consistently in appropriate professional conduct and conduct consistent with the Company’s Code of Business Conduct and Ethics; and (ii) lacked personnel in the accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting rules; and • the Company did not design and maintain effective controls to assess goodwill and indefinite-lived intangible asset for potential impairment. The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements, and this report does not affect our report on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Annual Report on Form 10-K item 9A(b) Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 73 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants Vaughan, Canada March 1, 2022 74 CRONOS GROUP INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 Cronos Group Inc. Consolidated Balance Sheets As of December 31, 2021 and 2020 (In thousands of U.S. dollars) Table of Contents As of December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 886,973 $ 1,078,023 Short-term investments 117,684 211,766 Accounts receivable, net 22,067 8,928 Other receivables 5,765 10,033 Current portion of loans receivable, net 5,460 7,083 Prepaids and other current assets 8,967 11,161 Inventory, net 32,802 44,002 Held-for-sale assets — 1,176 Total current assets 1,079,718 1,372,172 Investments in equity accounted investees, net 16,764 19,235 Other investments 118,392 — Non-current portion of loans receivable, net 80,635 87,191 Property, plant and equipment, net 74,070 187,599 Right-of-use assets 8,882 9,776 Goodwill 1,098 179,522 Intangible assets, net 18,079 69,720 Other assets 100 467 Total assets $ 1,397,738 $ 1,925,682 Liabilities Current liabilities Accounts payable $ 11,218 $ 19,346 Accrued liabilities 26,069 22,756 Current portion of lease obligation 2,711 1,322 Derivative liabilities 14,375 163,410 Total current liabilities 54,373 206,834 Due to non-controlling interests 1,913 2,188 Non-current portion of lease obligation 7,095 8,492 Deferred income tax liability 81 — Total liabilities 63,462 217,514 Shareholders’ equity Share capital (authorized for issue as of December 31, 2021 and 2020: unlimited; shares outstanding as of December 31, 2021 and 2020: 374,952,693 and 360,253,332 , respectively) 595,497 569,260 Additional paid-in capital 32,465 34,596 Retained earnings 659,416 1,064,509 Accumulated other comprehensive income 49,865 42,999 Total equity attributable to shareholders of Cronos Group 1,337,243 1,711,364 Non-controlling interests ( 2,967 ) ( 3,196 ) Total shareholders’ equity 1,334,276 1,708,168 Total liabilities and shareholders’ equity $ 1,397,738 $ 1,925,682 See notes to consolidated financial statements. 75 Cronos Group Inc. Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S dollars, except share and per share amounts) Table of Contents Year ended December 31, 2021 2020 2019 Net revenue, before excise taxes $ 89,486 $ 54,353 $ 25,639 Excise taxes ( 15,051 ) ( 7,634 ) ( 1,889 ) Net revenue 74,435 46,719 23,750 Cost of sales 80,008 46,497 12,174 Inventory write-down 11,961 26,055 29,173 Gross profit ( 17,534 ) ( 25,833 ) ( 17,597 ) Operating expenses Sales and marketing 44,937 34,386 23,048 Research and development 23,331 20,366 12,155 General and administrative 96,482 80,569 81,479 Share-based payments 10,151 15,361 11,619 Depreciation and amortization 4,484 2,872 2,090 Impairment loss on goodwill and indefinite-lived intangible assets 236,056 40,000 — Impairment loss on long-lived assets 127,619 — — Repurposing charges — — 5,328 Total operating expenses 543,060 193,554 135,719 Operating loss ( 560,594 ) ( 219,387 ) ( 153,316 ) Other income (expense) Interest income, net 9,071 18,415 27,969 Gain on revaluation of derivative liabilities 151,360 129,254 1,276,819 Gain on disposal of investments — 4,789 16,277 Share of loss from equity accounted investments ( 6,313 ) ( 4,510 ) ( 2,009 ) Gain (loss) on revaluation of financial instruments 8,611 ( 9 ) 197 Other, net 730 ( 1,825 ) — Total other income 163,459 146,114 1,319,253 Income (loss) before income taxes ( 397,135 ) ( 73,273 ) 1,165,937 Income tax expense (benefit) ( 431 ) 1,347 — Income (loss) from continuing operations ( 396,704 ) ( 74,620 ) 1,165,937 Loss from discontinued operations ( 500 ) ( 650 ) ( 363 ) Net income (loss) ( 397,204 ) ( 75,270 ) 1,165,574 Net loss attributable to non-controlling interest ( 1,097 ) ( 2,133 ) ( 932 ) Net income (loss) attributable to Cronos Group $ ( 396,107 ) $ ( 73,137 ) $ 1,166,506 Comprehensive income (loss) Net income (loss) $ ( 397,204 ) $ ( 75,270 ) $ 1,165,574 Foreign exchange gain on translation 8,192 14,951 37,687 Comprehensive income (loss) ( 389,012 ) ( 60,319 ) 1,203,261 Comprehensive income (loss) attributable to non-controlling interest 229 ( 2,343 ) ( 953 ) Comprehensive income (loss) attributable to Cronos Group $ ( 389,241 ) $ ( 57,976 ) $ 1,204,214 Net income (loss) from continuing operations per share Basic $ ( 1.07 ) $ ( 0.21 ) $ 3.76 Diluted $ ( 1.07 ) $ ( 0.21 ) $ 3.33 See notes to consolidated financial statements. 76 Cronos Group Inc. Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S dollars, except number of share amounts) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2021 360,253,332 $ 569,260 $ 34,596 $ 1,064,509 $ 42,999 $ ( 3,196 ) $ 1,708,168 Warrants exercised 7,842,859 1,165 ( 1,163 ) — — — 2 Vesting of options — — 7,604 — — — 7,604 Options exercised 3,814,964 3,447 ( 3,433 ) — — — 14 Restricted share units settled 106,558 676 ( 676 ) — — — — Share issuance pursuant to research and development milestones 2,934,980 17,374 — — — — 17,374 Withholding taxes on share-based awards — — ( 1,301 ) ( 12,157 ) — — ( 13,458 ) Vesting of restricted share units — — 2,547 — — — 2,547 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 ( 626 ) — — — 1,374 Recovery of forfeited awards — — ( 281 ) ( 56 ) — — ( 337 ) Accelerated restricted share units vesting out-of-period adjustment — 4,802 ( 4,802 ) — — — — Top-up Rights exercised out-of-period adjustment — ( 3,227 ) — 3,227 — — — Net loss — — — ( 396,107 ) — ( 1,097 ) ( 397,204 ) Other comprehensive income — — — — 6,866 1,326 8,192 Balance as of December 31, 2021 374,952,693 $ 595,497 $ 32,465 $ 659,416 $ 49,865 $ ( 2,967 ) $ 1,334,276 Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2020 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 Warrants exercised 9,755,642 1,244 ( 1,137 ) — — — 107 Options exercised 1,266,130 1,586 ( 1,577 ) — — — 9 Restricted share units settled 414,088 — — — — — — Vesting of options — — 7,185 — — — 7,185 Vesting of restricted share units — — 8,176 — — — 8,176 Vesting of common shares issued in connection with the use of certain publicity rights in brand development — 2,000 863 — — — 2,863 Taxes withheld on share-based awards — — ( 2,148 ) — — — ( 2,148 ) Top-up Rights exercised — 3,265 — — — — 3,265 Net loss — — — ( 73,137 ) — ( 2,133 ) ( 75,270 ) Other comprehensive income (loss) — — — — 15,161 ( 210 ) 14,951 Balance as of December 31, 2020 360,253,332 $ 569,260 $ 34,596 $ 1,064,509 $ 42,999 $ ( 3,196 ) $ 1,708,168 77 Cronos Group Inc. Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S dollars, except number of share amounts) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Non-controlling interests Total shareholders’ equity Balance as of January 1, 2019 178,720,022 $ 175,001 $ 11,263 $ ( 27,945 ) $ ( 9,870 ) $ 100 $ 148,549 Shares issued 155,773,757 304,411 410 — — — 304,821 Share issuance costs — ( 3,722 ) — — — — ( 3,722 ) Warrants exercised 7,390,961 2,034 ( 596 ) — — — 1,438 Options exercised 190,349 368 ( 351 ) ( 915 ) — — ( 898 ) Vesting of options — — 11,619 — — — 11,619 Vesting of restricted share units — — 889 — — — 889 Contribution by non-controlling interests 6,742,383 83,073 — — — — 83,073 Net income (loss) — — — 1,166,506 — ( 932 ) 1,165,574 Other comprehensive income (loss) — — — — 37,708 ( 21 ) 37,687 Balance as of December 31, 2019 348,817,472 $ 561,165 $ 23,234 $ 1,137,646 $ 27,838 $ ( 853 ) $ 1,749,030 See notes to consolidated financial statements. 78 Cronos Group Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S dollars) Table of Contents Year ended December 31, 2021 2020 2019 Operating activities Net income (loss) $ ( 397,204 ) $ ( 75,270 ) $ 1,165,574 Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on revaluation of derivative liabilities ( 151,360 ) ( 129,254 ) ( 1,276,819 ) Impairment loss on goodwill and indefinite-lived intangible assets 236,056 40,000 — Impairment loss on long-lived assets 127,619 — — Expected credit losses on long-term financial assets 12,202 2,437 — Share-based payments 10,151 15,361 11,619 Depreciation and amortization 15,402 11,176 4,271 Share of loss from investments in equity accounted investees 6,313 4,510 2,009 Gain on disposal of investments — ( 4,789 ) ( 16,277 ) Loss (gain) on revaluation of financial instruments ( 8,611 ) 9 ( 197 ) Non-cash sales and marketing 1,383 2,863 410 Non-cash repurposing costs — — 4,439 Other non-cash operating activity expense (income) ( 3,562 ) 1,215 ( 46 ) Changes in operating assets and liabilities: Accounts receivable, net ( 13,163 ) ( 4,724 ) ( 566 ) Other receivables 3,838 ( 5,300 ) ( 10,509 ) Prepaids and other current assets 3,102 — ( 4,585 ) Inventory, net 11,565 ( 4,866 ) ( 23,073 ) Accounts payable ( 2,373 ) ( 3,292 ) ( 46 ) Accrued liabilities ( 4,974 ) 5,053 12,603 Net cash used in operating activities ( 153,616 ) ( 144,871 ) ( 131,193 ) Investing activities Proceeds from short-term investments 215,303 296,730 — Purchase of short-term investments ( 119,610 ) ( 201,326 ) ( 299,923 ) Purchase of investments ( 110,392 ) — ( 1,658 ) Proceeds from sale of investments — 4,789 19,614 Proceeds from held-for-sale assets 2,770 — — Advances to joint ventures, net of repayments ( 4,707 ) ( 44,652 ) ( 58,472 ) Purchase of property, plant and equipment, net of disposals ( 11,144 ) ( 31,412 ) ( 38,664 ) Purchase of intangible assets, net of disposals ( 1,118 ) ( 3,979 ) ( 289 ) Acquisition of Redwood — — ( 224,295 ) Other non-cash investing activity expense — — 415 Net cash provided by (used in) investing activities ( 28,898 ) 20,150 ( 603,272 ) 79 Cronos Group Inc. Consolidated Statements of Cash Flows (continued) For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S dollars) Table of Contents Year ended December 31, 2021 2020 2019 Financing activities Advance to non-controlling interests — ( 1,019 ) — Withholding taxes paid on equity awards ( 13,458 ) ( 2,148 ) ( 915 ) Proceeds from Altria Investment — — 1,809,556 Proceeds from exercise of Top-up Rights — — 67,051 Proceeds from exercise of warrants and options 16 116 1,455 Share issuance costs — — ( 3,722 ) Repayment of construction loan payable — — ( 15,971 ) Advance under Credit Facility — — 48,715 Repayment of Credit Facility — — ( 48,309 ) 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 and cash equivalents ( 191,050 ) ( 121,670 ) 1,175,766 Cash and cash equivalents, beginning of period 1,078,023 1,199,693 23,927 Cash and cash equivalents, end of period $ 886,973 $ 1,078,023 $ 1,199,693 Supplementary cash flow information: Interest paid $ — $ — $ 759 Interest received 8,988 18,105 25,520 Taxes paid 892 — — See notes to consolidated financial statements. 80 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents 1. Background, Basis of Presentation, and Summary of Significant Accounting Policies (a) Background Cronos Group Inc. (“Cronos Group” or the “Company”) is incorporated in the province of British Columbia and under the Business Corporations Act (British Columbia) with principal executive offices at 111 Peter St., Suite 300, Toronto, Ontario, M5V 2H1. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.” Cronos Group is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach ® , PEACE NATURALS ® , Lord Jones ® , Happy Dance ® , and PEACE+™. COVE ® was a premium positioned adult-use brand focused on creating crafted experience. The Company no longer produces or distributes products under the COVE ® brand. Cronos Group has established three strategic joint ventures in Canada, Israel, and Colombia. Cronos Israel (as defined herein) is consolidated for financial reporting purposes. The Company also holds approximately 10 % of the issued capital of Cronos Australia Limited (“Cronos Australia”) and accounts for its investment under the fair value method of accounting. For additional discussion regarding the joint ventures and strategic investments, see Note 3 “ Investments .” (b) Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting periods. Certain prior year amounts have been reclassified to conform to the current year presentation of our consolidated financial statements. These reclassifications had no effect on reported results of operations and ending shareholders’ equity. (c) Basis of consolidation The accompanying consolidated financial statements include the accounts of the Company, and all entities in which the Company has a controlling voting interest or is the primary beneficiary of a variable interest as of and for the reporting periods. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Investments in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, but does not have control, are accounted for under the equity method of accounting. The Company consolidates the financial results of the following entities, which the Company controls: Subsidiaries Jurisdiction of incorporation Incorporation date Ownership interest (ii) Cronos Israel G.S. Cultivation Ltd. (i) Israel February 4, 2018 70 % Cronos Israel G.S. Manufacturing Ltd. (i) Israel September 4, 2018 90 % Cronos Israel G.S. Store Ltd. (i) Israel June 28, 2018 90 % Cronos Israel G.S. Pharmacy Ltd. (i) Israel February 15, 2018 90 % (i) These Israeli entities are collectively referred to as “Cronos Israel.” (ii) “Ownership interest” is defined as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest as described herein. In the consolidated statements of net income (loss) and comprehensive income (loss), net income (loss) and comprehensive income (loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of Cronos Israel are presented separately in the shareholders’ equity section of the consolidated balance sheets and consolidated statements of shareholders’ equity. All intercompany transactions and balances are eliminated upon consolidation. 81 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (d) Out-of-period adjustments During the year ended December 31, 2021, the Company identified an error in the accounting related to the withholding taxes on the net exercise of stock options resulting in an understatement of accrued liabilities of $ 966 and overstatements of other receivables, retained earnings and share capital of $ 3,202 , $ 3,838 and $ 330 , respectively, as of December 31, 2020. This error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during the year ended December 31, 2021 to correct the error. The impact of the out-of-period adjustments are included within the changes in operating assets and liabilities and withholding taxes paid on share-based awards lines in the Company’s consolidated statement of cash flows. During the year ended December 31, 2021, the Company identified an error in the accounting related to the exercise of Top-up Rights (as defined herein), which resulted in an overstatement of share capital and an understatement of gain on revaluation of derivative liabilities of $ 3,227 as of December 31, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during 2021 to correct the error. The out-of-period adjustment had no impact on the consolidated statements of net income (loss) and comprehensive income (loss) or the consolidated statements of cash flows. During the year ended December 31, 2021, the Company identified an error in the accounting related to shares issued pursuant to the accelerated vesting of RSUs in the third quarter of 2020, which resulted in an understatement of share capital of $ 4,802 and an overstatement of additional paid-in-capital of $ 4,802 as of December 31, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during 2021 to correct the error. The out-of-period adjustment had no impact on the consolidated statements of net income (loss) and comprehensive income (loss) or the consolidated statements of cash flows. (e) Use of estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates and assumptions include, among other things, valuation of derivative liabilities, expected credit losses on long-term financial assets, impairment losses on goodwill and indefinite-lived intangible assets, impairment losses on long-lived assets, inventory write-downs, share-bared payments, valuation allowance on deferred income tax assets and uncertain tax liabilities. Actual results could differ from those estimates. (f) Cash and cash equivalents and short term investments Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less. Cash and cash equivalents include amounts held in dollars, C$ and ILS and security deposits. Short-term investments consist of debt securities that (i) have original maturities of greater than three months and (ii) the Company has the ability to convert into cash within one year. Short-term investments are classified as held-to-maturity. Our investments classified as held-to-maturity are recorded at cost. Interest earned on short-term investments is recorded in other receivables on the consolidated balance sheets and interest income on the consolidated statements of net income (loss) and comprehensive income (loss). Cash inflows and outflows related to the purchase and maturity of short-term investments are classified as investing activities in the Company’s consolidated statements of cash flows. (g) Inventory Inventory is comprised of raw materials, finished goods and work-in-progress, such as pre-harvested cannabis plants, dried cannabis flower, by-products to be extracted, cannabis extracts and by-products, dry cannabis and cannabis extract containers, and boxes. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and irrigation, are capitalized into inventory until the time of harvest. Inventory is stated at the lower of cost and net realizable value, determined using weighted average cost. Cost includes expenditures directly related to manufacturing and distribution of the products. Primary costs include consumables (insect control, fertilizers, soil), packaging, shipping, direct labor, overhead, supplies and small tools, and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, rent, utilities, security, and property taxes. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost and net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable products. 82 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (h) Investments Variable interest entities A variable interest entity is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or equity investors at risk that lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. The Company evaluates whether it is the primary beneficiary of each VIE it identifies on a periodic basis and considers the impact of any reconsideration events. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To make this determination, the Company considers both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company consolidates the VIE when it is determined that it is the primary beneficiary of the VIE. Equity method investments The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling financial interest using the equity method. Under the equity method, the Company records its proportionate share of income or loss in the consolidated statements of net income (loss) and comprehensive income (loss). Cash payments to equity method investees such as additional investments and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends and distributions are recorded as adjustments to investment balances. If the current fair value of an investment falls below its carrying amount, this may indicate that an impairment loss should be recorded. Any impairment losses recognized cannot be reversed in subsequent periods. Other investments Other investments include common stock and options in third party entities in which the Company’s influence is deemed non-significant. The Company holds other investments with and without readily determinable fair values. Other investments with readily determinable fair values are recorded using the fair value method of accounting as of period-end on the consolidated balance sheets. Other investments without readily determinable fair values are recorded using the cost method of accounting on the consolidated balance sheets. Other investments without readily determinable fair values are assessed for temporary and other than temporary observable price changes on a periodic basis. Changes in the reported value of other investments are reported in the consolidated statements of net income (loss) and comprehensive income (loss). (i) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Rate Building and leasehold improvements 15 to 20 years Machinery and equipment 5 to 7 years Furniture and fixtures 5 years Equipment under finance lease Lesser of term of lease and useful life When assets are disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which increase productivity or extend the useful life of the asset, are capitalized. Available for use is defined as the point at which the related property, plant and equipment is operational, including the possession of any requisite licenses. Depreciation commences at the point the assets are available for use. (j) Definite-lived intangible assets Intangible assets are recorded at cost less any accumulated amortization and accumulated impairment losses. Intangible assets acquired through a business combination are measured at fair value at the acquisition date. The Company capitalizes certain costs incurred in connection with its enterprise software, which include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of the software for the function intended. All other costs are expensed as incurred. 83 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Intangible assets with definite useful lives are amortized over their estimated useful lives using the following methods and rates: Method Rate Software Straight-line 5 years Health Canada licenses Straight-line Useful life of corresponding facilities Ginkgo exclusive licenses Straight-line 10 years Israeli codes (i) Straight-line Useful life of corresponding facilities (i) The preliminary licenses granted to Kibbutz Gan Shmuel (the Cronos Israel joint venture partner) by the Medical Cannabis Unit of the Israeli Ministry of Health in early 2017 (the “Israeli codes”) were transferred by non-controlling interests to Cronos Israel in exchange for equity interests in the Cronos Israel entities specified above. Amortization begins when assets become available for use. The estimated useful life, amortization method, and rate are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets originating from the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”) are accounted for in accordance with the acquisition method of accounting. Equity interests issued in exchange for an asset are initially recognized and measured at the date of acquisition at fair value. We estimate fair value using the relief-from-royalty method and key assumptions include the discount rate and estimated life. Definite-lived intangible assets, including intangible assets originating from the Ginkgo Strategic Partnership, are subject to amortization and reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value has been reduced to less than its carrying amount. (k) Accrued liabilities Accrued liabilities consist of the following: As of December 31, 2021 2020 Accrued payroll and related expenses $ 13,308 $ 9,697 Accrued professional fees 8,337 7,395 Accrued taxes 3,488 2,843 Other accrued expenses 936 2,821 Total accrued liabilities $ 26,069 $ 22,756 Accrued payroll and related expenses include salaries and wages, bonuses, and other related payroll expenses associated with the Company’s employees. Accrued professional fees include fees for legal expenses, litigation, consulting, marketing, and other related expenses. Accrued taxes include sales, excise and other taxes owed. Other accrued expenses include the fair value of deferred share units outstanding to directors and other general expenses. (l) Leases The Company enters into leases in the normal course of business, primarily for the land-use rights, office premises, and equipment used in the production of its products. At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company performs an analysis over the classification of the lease agreement as either an operating lease or finance lease. A right-of-use asset and the related lease obligation associated with the lease are recorded at the inception of the lease. The right-of-use asset’s recorded amount is based on the present value of future lease payments over the lease term at the commencement date plus any initial direct costs incurred. If the rate implicit in the lease is not readily determinable for the Company’s operating leases, an incremental borrowing rate is generally used based on information available at the lease commencement date to determine the present value of future lease payments. Subsequent changes to these lease payments due to rate updates are recorded as lease expense in the period incurred. Leases with a term of 12 months or less are not recorded on the balance sheet as a lease. The right-of-use asset is subject to impairment testing whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The leased asset is amortized over the shorter of the lease term or its estimated useful life if title does not transfer to the Company, while the leased asset is depreciated in accordance with the Company’s depreciation policy if the title is to eventually transfer to the Company. 84 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The Company’s lease agreements generally exclude non-lease components. As a result, non-lease components are accounted for separately for all classes of assets and expensed as incurred. In addition, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For finance leases, from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term, the right-of-use asset is amortized on a straight-line basis and the interest expense is recognized on the lease liability using the effective interest method. For operating leases, lease expense is recognized on a straight-line basis over the term of the lease and presented as a single charge in the consolidated statements of net income (loss) and comprehensive income (loss). (m) Derivative liabilities For financial instruments classified as derivatives that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of net income (loss) and comprehensive income (loss) each period. The Company does not enter into or hold derivative financial instruments for trading or speculative purposes. Derivative liabilities are initially recognized at fair value at the date on which the derivative contract was entered into. Any attributable transaction costs are recognized in net income (loss) as incurred. Subsequent to initial recognition, derivative liabilities are measured 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). For more details on derivative liabilities consisting of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights, see Note 8 “ Derivative Liabilities .” (n) Capital stock Capital stock is presented at the fair value at the time of issuance of the shares issued. Costs related to the issuance of shares are reported in equity, net of tax, as a deduction from the issuance proceeds. (o) Revenue recognition The Company’s contracts with customers for the sale of dried cannabis, cannabis oil, cannabinoid-derived products and “hemp” (as defined in the U.S. Agricultural Improvement Act of 2018 “U.S. hemp”) derived personal care products consist of one performance obligation. The Company has concluded that revenue from the sale of these products should be recognized at the point in time when control is transferred to the customer, which is upon shipment or delivery, depending on the contract. For consumer sales in the United States segment (the “U.S. segment”), control passes to the customer upon shipment and, thus, revenue is recognized upon the transfer of goods to the shipping carrier in accordance with the terms of service agreed to by the customer at the time of purchase. Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. Net revenue before excise taxes from sale of goods, as presented in the consolidated statements of net income (loss) and comprehensive income (loss), represents revenue from the sale of goods less expected price discounts, allowances for customer returns and other forms of consideration paid to customers. Net revenue before excise taxes excludes excise taxes, which the Company pays as principal, and excludes duties and taxes collected on behalf of third parties. Excise taxes are a production tax classified as government remittances payable, which when applicable, become payable when a product is delivered to the customer and are not directly related to the value of revenue. Refer to Note 12 “ Segment Information and Disaggregated Net Revenue ” for further information on disaggregated revenue. The Company treats shipping and handling activities as a fulfillment cost, classified as cost of sales. Accordingly, the Company accrues all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. Within the Company’s Rest of World segment (the “ROW segment”), dried cannabis sales outside of Canada may include profit sharing arrangements with distributors which give rise to variable consideration. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated using the expected value method, based on the Company’s historical information, at contract inception. The Company’s payment terms vary by customer and product type. 85 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (p) Research and development The Company has research and development centers in Canada and Israel which perform scientific research on the interaction of cannabinoids as well as strain development, growing conditions, extraction technology, and biosynthesis. In Canada, fermentation and production related research is performed to further strategic initiatives around rare cannabinoids. In addition, the Company has a collaboration and license agreement with Ginkgo (the “Ginkgo Collaboration Agreement”) to research, produce, and commercialize cultured cannabinoids. Technological feasibility is considered to be established once productivity targets or commercialization are achieved, at which point the exclusive license is recognized at cost less impairment charges. As of the acquisition date of each exclusive license, cost less impairment charges is equal to the fair value. Refer to Note 6 “ Goodwill and Intangible Assets, net ” for more information on the Ginkgo Collaboration Arrangement. Research and development costs associated with these collective efforts are expensed as incurred as part of operating expenses in the Company’s consolidated statements of net income (loss) and comprehensive income (loss). (q) Advertising costs Advertising costs include costs to sell the Company’s products and are expensed as incurred through sales and marketing expenses in the consolidated statements of net income (loss) and comprehensive income (loss). Advertising costs were $ 11,514 , $ 6,087 and $ 1,287 for the years ended December 31, 2021, 2020, and 2019, respectively. (r) Share-based compensation As described in more detail below, the Company has five share-based compensation plans under which awards have been made: the 2020 Omnibus Plan, the 2018 Stock Option Plan, the 2015 Stock Option Plan, the Employment Inducement Award Plan and the DSU Plan (each as defined below). Share-based awards consists of equity-settled share-based awards such as stock options and restricted share units (“RSUs”) that are issued to eligible employees, non-executive directors, and non-employees. Cash-settled deferred share units (“DSUs”) that are issued to non-executive directors under the DSU Plan are recorded in accrued liabilities with the fair value adjustment recorded in other income. Equity instruments granted are initially measured at fair value on the grant date. The fair value of the stock options is determined using the Black-Scholes option pricing model. The fair value of RSUs and DSUs are determined using the market price of the Company’s common shares. This is recognized on a straight-line basis in the consolidated statements of net income (loss) and comprehensive income (loss) over the vesting period for employees, and over the contractual term for non-employees. The fair value of the payout of cash-settled DSUs is determined at each reporting date based on the fair value of the Company’s common shares at the reporting date and is recorded within other liabilities. The related costs for all equity-settled share-based awards are reflected in additional paid-in capital until the awards are settled or exercised. Upon settlement or exercise, shares are issued and the amount previously reflected in the additional paid-in capital is, along with any proceeds paid upon settlement or exercise, credited to share capital. Forfeitures are estimated at the time of grant, and the Company revises these estimates in subsequent periods if there is a difference in actual forfeitures and the estimates. (s) Impairment of long-lived assets The Company reviews its long-lived assets, such as property, plant and equipment and definite-lived intangible assets, for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment . In accordance with ASC Topic 360, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying amount may not be recoverable. The Company periodically reviews for indicators and, if indicators are present, tests the carrying amount of long-lived assets, assessing their fair values based on estimated undiscounted cash flows over their remaining estimated useful lives. The Company groups assets at the lowest level for which cash flows are separately identifiable, referred to as an asset group. If the carrying amount of an asset (or asset group) exceeds its estimated undiscounted future cash flows, an impairment charge is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on discounted cash flows. (t) Impairment of goodwill and indefinite-lived intangible assets Goodwill and indefinite-lived intangible assets are not amortized. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying amount in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other . The Company performs an impairment test annually in the fourth quarter by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has two segments: the U.S. segment and the Rest of World segment. 86 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (u) Income taxes The Company uses the liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includes the enactment date. The Company determines deferred tax assets including net operating losses and liabilities, based on temporary differences between the book and tax bases of assets and liabilities. A valuation allowance is established to reduce some or all net deferred tax assets to amounts that are more likely than not to be realized. The Company considers all available evidence, both positive and negative, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies, in assessing the need for a valuation allowance. The Company has a full valuation allowance against its net deferred tax assets, and has concluded, based on the weight of all available evidence, that it is more likely than not that the net deferred tax assets will not be realized, primarily due to the historical net operating losses. The valuation allowance against the net deferred tax assets does not in any way impact the Company’s ability to use future tax deductions such as the Company’s net operating loss carryforwards; rather, the valuation allowance indicates, according to the provisions of Accounting Standards Codification (“ASC”) 740, Income Taxes , it is more likely than not that the deferred tax assets will not be realized. The valuation allowance that was established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets will be realized. The Company’s income tax expense for future periods will be reduced to the extent of corresponding decreases in our valuation allowance. There is uncertainty regarding any future realization of the benefit by the Company of all or part of our net deferred tax assets. Judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The Company uses a two-step approach for evaluating uncertain tax positions. Step one, recognition, requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. If a tax position is not considered “more likely than not” to be sustained, no benefits of the position are recognized. If we determine that a position is “more likely than not” to be sustained, then we proceed to step two, measurement, which is based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with income tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, our net operating loss and credit carryforwards, to the extent not covered by a valuation allowance, could be materially impacted in the period which such determination is made. The Company recognizes uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense in the consolidated statements of net income (loss) and comprehensive income (loss). Accrued interest and penalties are included in accounts payable and other liabilities in the consolidated balance sheets. (v) Foreign currency The Company’s functional currency is the Canadian dollar (“C$”) and its reporting currency is the U.S. dollar. Functional currencies for the entities in these consolidated financial statements are their respective local currencies, including C$, Australian dollars (“A$”) and Israeli New Shekel (“ILS”). All assets and liabilities of operations with a functional currency other than the U.S. dollar are translated at period-end currency exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss), net of tax. Revenues and expenses of operations, as well as all cash flows, with a functional currency other than the U.S. dollar are translated at the average exchange rates for the period. Transaction gains and losses resulting from changes in foreign currency exchange rates are recorded in either cost of sales, general and administrative expenses, or other, net in the consolidated statements of net income (loss) and comprehensive income (loss). (w) Segments Cronos Group reports through two segments: the U.S. segment and the ROW segment. These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. Refer to Note 12 “ Segment Information and Disaggregated Net Revenue ” for additional information. 87 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (x) Earnings (loss) per share The Company presents basic and diluted earnings (loss) per share data for its common shares. Basic earnings (loss) per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potentially dilutive common shares. (y) Fair value measurements The carrying amount of the Company’s cash and cash equivalents, accounts receivable, other receivables, loans receivable, account payables and other liabilities approximate fair value, given their short-term nature. Cronos Group uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities, noted as Level 1 measurements, and the lowest priority to unobservable inputs, noted as Level 3 measurements. The following are the three levels of inputs used to measure fair value: • Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets and liabilities. • Level 2 – valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3 – valuation techniques using the inputs for the asset or liability that are not based on observable market data. The Company’s policy for determining when transfers between levels of the fair value hierarchy occur is based on the date of the event or changes in circumstances that caused the transfer. (z) Assets held for sale and discontinued operations In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations , a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph ASC 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and other liabilities are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), are reported as components of net income (loss) separate from the net income (loss) of continuing operations. During the year ended December 31, 2020, Original B.C. Ltd. (“OGBC”), formerly included within the Rest of World segment, met the criteria for “held-for-sale”. As a result, the Company has reflected amounts relating to OGBC as a disposal group classified as held-for-sale on the consolidated balance sheet and included as part of discontinued operations on the consolidated statements of net income (loss) and comprehensive income (loss) for all periods presented. OGBC is no longer included in the segment reporting following the reclassification to discontinued operations. During the year ended December 31, 2021, the Company sold its OGBC assets previously classified as held-for-sale. Discontinued operations are described in further detail in Note 16 “ Held-For-Sale Assets and Discontinued Operations .” (aa) Adoption of new accounting pronouncements On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2020-01, Investments – Equity Securities (Topic 321) , Investments – Equity Method and Joint Ventures (Topic 323) , and Derivatives and Hedging (Topic 815) (“ASU No. 2020-01”). ASU No. 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method as well as measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU No. 2020-01 did not have an impact on the Company’s consolidated financial statements. On January 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application of U.S. GAAP-related changes in enacted tax laws or rates and employee stock option plans. The adoption of ASU No. 2019-12 did not have an impact on the Company’s consolidated financial statements. 88 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (ab) New accounting pronouncements not yet adopted In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU No 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU No 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of ASU No. 2020-06 to have a material impact on its consolidated financial statements. 2. Inventory, net Inventory, net is comprised of the following items: As of December 31, 2021 2020 Raw materials $ 9,211 $ 11,489 Work-in-progress 12,405 26,278 Finished goods 10,778 5,905 Supplies and consumables 408 330 Total $ 32,802 $ 44,002 3. Investments (a) Variable interest entities and investments in equity accounted investees, net The Company holds variable interests in Cronos Growing Company Inc. (“Cronos GrowCo”), NatuEra S.à.r.l. (“Natuera”) and Cannasoul Lab Services Ltd. (“CLS”). The Company’s investments in Cronos GrowCo and Natuera are exposed to economic variability from each entity’s performance; however, the Company does not consolidate the entities as it does not have the power to direct the activities that most significantly impact each entity’s economic performance. Thus, the Company is not considered the primary beneficiary of each entity. These investments are accounted for as equity method investments classified as “Investments in equity accounted investees, net” in the consolidated balance sheets. Cronos GrowCo Cronos GrowCo is a joint venture incorporated under the Canada Business Corporations Act (“CBCA”) on June 14, 2018 with the objective of cultivating and commercializing cannabis and cannabis products. Cronos GrowCo’s economic performance is driven by the day-to-day operations of Cronos GrowCo, which are controlled by 2645485 Ontario Inc. (“Mucci”), the Company’s joint venture partner. During the year ended December 31, 2021, the Company concluded that lower than expected sales forecasts combined with the increase to the aggregate principal amount of the GrowCo Facility (as defined below) were indicators of impairment for the Company’s equity method investment in Cronos GrowCo. Accordingly, the Company performed a quantitative impairment assessment in the third quarter of 2021 to compare the fair value of the investment in Cronos GrowCo to its carrying amount. The fair value was estimated using the discounted cash flow method. Significant inputs include discount rate, growth rates, and cash flow projections. As a result of this analysis, the Company concluded that as of September 30, 2021, the estimated fair value was higher than the carrying amount and no impairment charges were recorded. MedMen MedMen Canada Inc. (“MedMen Canada”) was a joint venture incorporated under the CBCA on March 13, 2018, with the objective of the retail sale and marketing of cannabis products in Canada. The Company held variable interests in MedMen Canada through its ownership of 50 % of MedMen Canada’s common shares and other subordinated debt. Effective as of December 31, 2021, the Company and MedMen Enterprises, Inc., the joint venture partner (“the MedMen JV Partner”), dissolved MedMen Canada due to its prolonged inactivity and a lack of business operations. In accordance with the MedMen dissolution agreement, cash of $ 256 and $ 220 was distributed to the Company and the MedMen JV Partner, respectively. The remaining $ 118 of cash held by MedMen Canada will be used to settle any remaining legal fees and related charges. Any remaining funds will then be distributed equally between the Company and the MedMen JV Partner. 89 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Natuera Natuera is a joint venture registered in Luxembourg with the objective of cultivating and commercializing hemp and cannabis products. The Company holds variable interests in Natuera through its ownership of 50 % of Natuera’s common shares. An affiliate of Agroidea SAS, a Colombian agricultural services provider, owns the remaining 50 % of Natuera’s common shares (such affiliate, the “Natuera JV Partner”). Natuera’s economic performance is driven by the quantity and strains of cannabis grown, which is mutually determined by the joint venture partners. During the year ended December 31, 2021, the Company concluded that lower than expected sales forecasts as of December 31, 2021 were an other than temporary indicator of impairment for the Company’s equity method investment in Natuera. Accordingly, the Company performed a qualitative assessment to determine whether there was any value remaining in the investment. As a result of this analysis, the Company concluded that, as of December 31, 2021, the estimated fair value was zero , and $ 167 was recorded as an impairment loss on equity method investees on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. CLS CLS is a wholly owned subsidiary of Cannasoul Analytics Ltd., incorporated with the purpose of establishing a commercial cannabis analytical testing laboratory located on the premises of Cronos Israel (the “Cannasoul Collaboration”). Cronos Israel agreed to advance up to ILS 8,297 ($ 2,664 ) by a non-recourse loan (the “Cannasoul Collaboration Loan”) to CLS over a period of two years from April 1, 2020 for the capital and operating expenditures of the laboratory. The loan bears interest at 3.5 % annually. Cronos Israel will receive 70 % of the profits of the laboratory until such time as it has recovered 150 % of the amounts advanced to CLS, after which time it will receive 50 % of the laboratory profits. As a result, the Company is exposed to economic variability from CLS’s performance. The Company does not consolidate CLS as it does not have the power to direct the activities that most significantly impact the entity’s economic performance; thus, the Company is not considered the primary beneficiary of the entity. The carrying amount of the non-recourse loan is recorded under loans receivable and the full loan amount, ILS 8,297 , represents the Company’s maximum potential exposure to losses through the Cannasoul Collaboration. See Note 4 “ Loans Receivable, net ” for further information regarding loans receivable. A reconciliation of the carrying amount of the investments in equity method investees, net is as follows: Ownership interest As of December 31, 2021 2020 Cronos Australia (i) 31 % N/A $ — Cronos GrowCo 50 % $ 16,764 19,235 Natuera (ii, iii) 50 % — — $ 16,764 $ 19,235 (i) As of December 31, 2021, the Company held an approximately 10 % ownership interest in Cronos Australia, which is included in other investments on the consolidated balance sheet. As such, the Company’s investment in Cronos Australia is no longer included as an investment in equity-method investees in the table above. As of December 31, 2020, the Company held an approximately 31 % ownership interest in Cronos Australia. The gross investment balance in Cronos Australia was offset by equity losses as of December 31, 2020. (ii) On April 1, 2021, the Company and the Natuera JV Partner, converted all advances made to Natuera under the master loan agreement entered into with Natuera on September 27, 2019 (the “Natuera Series A Loan”), plus accrued interest, into equity of Natuera. Total aggregate gross advances to Natuera under the Natuera Series A Loan were $ 15,500 , of which the Company advanced 50 % and the Natuera JV Partner advanced the remaining 50 %, or $ 7,750 each. As a result, the Company transferred the carrying amount of the Natuera Series A Loan of approximately $ 2,013 plus accrued interest of $ 540 , for a total investment value of $ 2,553 , which approximated the then fair value, to investments in equity accounted investees in respect of Natuera. See Note 4 “ Loans Receivable, net .” (iii) As of December 31, 2021, the Company concluded that the estimated fair value of the investment in Natuera was lower than the carrying amount resulting in an impairment charge of $ 167 being recorded as an impairment loss on equity method investees in the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. 90 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The following is a summary of the Company’s share of net losses from equity investments accounted for under the equity method of accounting: Year ended December 31, 2021 2020 2019 Whistler Medicinal Marijuana Company (“Whistler”) (i) $ — $ — $ 29 Cronos Australia (ii) ( 48 ) ( 363 ) ( 1,101 ) Cronos GrowCo ( 2,518 ) ( 1,537 ) ( 167 ) MedMen Canada (iii) — — 35 Natuera (iv) ( 3,747 ) ( 2,610 ) ( 805 ) $ ( 6,313 ) $ ( 4,510 ) $ ( 2,009 ) (i) Whistler was incorporated in British Columbia, Canada and is a license holder under the Cannabis Act (Canada) with production facilities in British Columbia, Canada. The Company fully divested its investment in Whistler during 2019. (ii) As of December 31, 2021, the Company held a 10 % ownership interest in Cronos Australia and Cronos Australia is no longer considered an equity-method investee. As of December 31, 2020, and up to December 16, 2021, the Company held a 31 % ownership interest in Cronos Australia and was considered an equity-method investee. The gross investment balance in Cronos Australia was offset by equity losses as of December 31, 2020. (iii) By agreement of the joint venture partners, MedMen Canada was dissolved effective as of December 31, 2021. (iv) The Company’s share of accumulated net losses in excess of its equity investment in Natuera has been applied as a loss allowance on the loan receivable. See Note 4 “ Loans Receivable, net. ” The following is a summary of financial information for the Company’s equity method investments: As of December 31, 2021 2020 2019 Current assets $ 5,660 $ 19,126 $ 23,200 Non-current assets 125,777 122,099 76,212 Current liabilities 13,457 24,223 52,796 Non-current liabilities 81,594 76,313 33,189 Year ended December 31, 2021 2020 2019 Revenue $ 8,186 $ 367 $ 52 Gross profit ( 5,059 ) ( 631 ) — Net loss ( 12,603 ) ( 11,453 ) ( 2,048 ) The following is a summary of the maximum exposure to loss from the Company’s investments in equity method investees: Ownership interest Other Net Assets (Liabilities) Maximum Exposure to Loss Cronos GrowCo 50 % $ 33,674 $ 21,125 Natuera 50 % 2,712 7,826 Balance as of December 31, 2021 $ 36,386 $ 28,951 Ownership interest Other Net Assets (Liabilities) Maximum Exposure to Loss Cronos Australia (i) 31 % $ 8,976 $ 1,530 Cronos GrowCo 50 % 109,329 21,125 MedMen Canada (ii) 50 % — 467 Natuera 50 % ( 6,849 ) 8,154 Balance as of December 31, 2020 $ 111,456 $ 31,276 (i) As of December 31, 2021, the Company held an approximately 10 % ownership interest in Cronos Australia which is included in other investments on the consolidated balance sheet. As such, the Company’s maximum exposure to loss from the Company’s investment in Cronos Australia is no longer included in the table above. As of December 31, 2020, the Company held an approximately 31 % ownership interest in Cronos Australia. (ii) By agreement of the joint venture partners, MedMen Canada was dissolved effective as of December 31, 2021 . 91 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (b) Other investments Other investments consist of investments in common shares and options of two companies in the cannabis industry. A reconciliation of the carrying amount of the other investments is as follows: Ownership interest As of December 31, 2021 2020 PharmaCann, Inc. 10.5 % $ 110,392 $ — Cronos Australia 10 % 8,000 N/A $ 118,392 $ — PharmaCann On June 14, 2021, the Company purchased an option (the “PharmaCann Option”) to acquire 473,787 shares of Class A Common Stock of PharmaCann, Inc. (“PharmaCann”), a vertically integrated cannabis company in the United States, at an exercise price of $ 0.0001 per share, representing approximately 10.5 % of PharmaCann’s issued and outstanding capital stock on a fully-diluted basis as of the date of the PharmaCann Option, for an aggregate purchase price of approximately $ 110,392 . The option exercise will be based upon various factors, including the status of U.S. federal cannabis legalization, as well as regulatory approvals, including in the states where PharmaCann operates that may be required upon exercise. The Company has deemed its influence in PharmaCann to be non-significant. The PharmaCann Option is classified as an investment without a readily determinable fair value in an equity security. The Company measures the PharmaCann Option at cost less accumulated impairment charges, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The PharmaCann Option is reported as other investments on the consolidated balance sheet for the period ended December 31, 2021. 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. Under the terms of the Company’s investment in PharmaCann, the Company’s rights to nominate an observer or a director to the PharmaCann board of directors could be lost if the Company’s ownership drops below 6 % 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 the Company’s rights under the PharmaCann Option. As a result of the LivWell Transaction, the value of the Company’s option in PharmaCann could be materially impacted. As of December 31, 2021, the Company performed an assessment on the existence of impairment indicators on the PharmaCann Option and noted no indicators of impairment existed. As such, no impairment loss on the investment was recorded during the year ended December 31, 2021. Cronos Australia On September 14, 2021, Cronos Australia entered into a merger agreement to acquire 100 % of the issued shares of CDA Health Pty Ltd, an Australian medicinal cannabis company, subject to customary closing conditions, including shareholder approval (the “Cronos Australia Merger”). The Cronos Australia Merger closed on December 16, 2021. In connection with the closing of the Cronos Australia Merger, all advances made under the Company’s A$ 1,500 unsecured loan to Cronos Australia, plus accrued interest and certain royalties payable, were converted into ordinary shares of Cronos Australia. In addition, the Company’s ownership interest in Cronos Australia decreased to approximately 10 % and the Company’s number of Cronos Australia board seats was reduced from two to one . The reduction in ownership interest and board seats constituted a loss of significant influence and resulted in a reclassification on the consolidated balance sheet from investments in equity accounted investees using the equity method of accounting to other investments using the fair value method of accounting, with unrealized holding gains and losses included in net income (loss) on the consolidated statements of net income (loss) and comprehensive income (loss). As a result, the Company recorded a gain on revaluation of other investments of $ 8,287 included in the gain on revaluation of financial instruments on the statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. The Company’s investment in Cronos Australia was $ 8,000 , included in other investments on the balance sheet as of December 31, 2021. 92 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (c) Disposal of investments The following is a summary of the Company’s gain from disposals of investments: Year ended December 31, 2021 2020 2019 Canopy Growth Corporation (“Canopy”) (i) $ — $ — $ 51 Whistler (ii, iii) — — 15,530 Aurora — 4,789 696 $ — $ 4,789 $ 16,277 (i) The Company sold all remaining 11,602 common shares of Canopy during the year ended December 31, 2019, for net proceeds of $ 355 , resulting in a $ 51 gain on disposal of investments on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2019. (ii) On March 4, 2019, the Company sold all 2,563 shares of Whistler, representing approximately 19.0 % of Whistler’s issued and outstanding common shares, to Aurora Cannabis Inc. (“Aurora”), in connection with Aurora’s acquisition of Whistler (the “Whistler Transaction”). As a result of the closing of the Whistler Transaction, the Company received 2,524,341 Aurora common shares. During the year ended December 31, 2019, the Company sold all 2,524,341 common shares of Aurora, for gross proceeds of $ 19,259 , resulting in a $ 15,530 gain on disposal of investments being recorded on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2019. (iii) During the year ended December 31, 2020, in connection with the achievement of certain milestones related to the Whistler Transaction, the Company received 980,662 common shares of Aurora. The Company sold all 980,662 of the Aurora common shares during the year ended December 31, 2020, for gross proceeds of approximately $ 4,789 , resulting in a $ 4,789 gain on disposal of investments being recorded on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2020. 4. Loans Receivable, net Loans receivable, net consists of the following: As of December 31, 2021 2020 Natuera Series A Loan (i) $ — $ 3,518 GrowCo Facility (ii) 3,138 3,137 Add: Current portion of accrued interest 2,322 428 Total current portion of loans receivable 5,460 7,083 GrowCo Facility (ii) 64,367 69,939 Mucci Promissory Note (iii) 14,019 13,324 Cannasoul Collaboration loan (iv) 2,249 1,261 Add: Long-term portion of accrued interest — 2,667 Total long-term portion of loans receivable 80,635 87,191 Total loans receivable $ 86,095 $ 94,274 (i) On April 1, 2021, the Company and the Natuera JV Partner converted all advances made to Natuera under the Natuera Series A Loan, plus accrued interest, into equity of Natuera (the “Natuera Debt Conversion”). Total aggregate gross advances to Natuera under the Natuera Series A Loan were $ 15,500 , of which the Company advanced 50 % and the Natuera JV Partner advanced the remaining 50 %, or $ 7,750 each. As a result, the Company transferred the carrying amount of the Natuera Series A Loan of approximately $ 2,013 plus accrued interest of $ 540 , for a total investment value of $ 2,553 , which approximates fair value, to investments in equity accounted investments in respect of Natuera. See Note 3 “ Investments .” (ii) On August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into a senior secured credit agreement for an aggregate principal amount of C$ 100,000 (the “GrowCo Facility”). In August 2021, the GrowCo Facility was amended to increase the aggregate principal amount available to C$ 105,000 . As a result of the increase in the aggregate principal amount of the GrowCo Facility and lower than expected sales forecasts from Cronos GrowCo, the Company revalued its allowance for credit loss on the GrowCo Facility resulting in an increase in the allowance of $ 12,748 , which was recorded in general and administrative expenses on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. In conjunction with the aforementioned revaluation, the Company changed its expected credit loss valuation methodology from the historical credit loss method to the probability of default method. As of December 31, 2021 and 2020, Cronos GrowCo had drawn C$ 104,000 ($ 81,598 ) and C$ 95,150 ($ 74,626 ), respectively, from the GrowCo Facility. (iii) On June 28, 2019, the Company entered into a promissory note receivable agreement (the “Mucci Promissory Note”) for C$ 16,350 (approximately $ 12,828 ) with Mucci. The outstanding principal amount of the Mucci Promissory Note bears interest at 3.95 % annually and is due within 90 days of demand. The Company does not intend to demand the loan within 12 months. Interest accrued under the Mucci Promissory Note until July 1, 2021 is payable by way of capitalization on the principal amount and interest thereafter must be paid in cash on a quarterly basis. The Mucci Promissory Note is secured by a general security agreement covering all the assets of Mucci. Subsequent to December 31, 2020, the terms of the Mucci Promissory Note were amended, such that interest accrued under the Mucci Promissory Note until July 1, 2022, is payable by way of capitalization on the principal amount and interest thereafter must be paid in cash on a quarterly basis. (iv) As of December 31, 2021 and 2020, CLS has received ILS 8,297 and ILS 4,148 , respectively (approximately $ 2,664 and $ 1,287 , respectively), from the Cannasoul Collaboration Loan. 93 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Expected credit loss allowances on the Company’s long-term financial assets were comprised of the following items: As of January 1, 2021 Increase (decrease) (i) Foreign exchange effect As of December 31, 2021 GrowCo Facility $ 1,546 $ 12,748 $ ( 205 ) $ 14,089 Natuera Series A Loan 721 ( 737 ) 16 — Mucci Promissory Note 270 ( 183 ) 3 90 Cannasoul Collaboration Loan 26 374 15 415 $ 2,563 $ 12,202 $ ( 171 ) $ 14,594 As of January 1, 2020 Increase (decrease) (i) Foreign exchange effect As of December 31, 2020 GrowCo Facility $ — $ 1,470 $ 76 $ 1,546 Natuera Series A Loan — 685 36 721 Mucci Promissory Note — 257 13 270 Cannasoul Collaboration Loan — 25 1 26 $ — $ 2,437 $ 126 $ 2,563 (i) During the year ended December 31, 2021, $ 737 of expected credit losses on long-term financial assets was transferred to investments in equity method investees in relation to the Natuera Debt Conversion, as the carrying amount of the loan receivable, net, approximated fair value as of the date of transfer. During the years ended December 31, 2021 and 2020, $ 12,939 and $ 2,437 , respectively, were recorded to general and administrative expenses on the consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses. 5. Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following: As of December 31, 2021 Cost Accumulated depreciation Accumulated impairment charges Net Land $ 2,822 $ — $ — $ 2,822 Building and leasehold improvements 188,522 ( 22,720 ) ( 109,177 ) 56,625 Machinery and equipment 18,894 ( 5,778 ) ( 3,876 ) 9,240 Furniture and fixtures 5,937 ( 1,808 ) ( 615 ) 3,514 Construction in progress 2,502 — ( 633 ) 1,869 $ 218,677 $ ( 30,306 ) $ ( 114,301 ) $ 74,070 As of December 31, 2020 Cost Accumulated depreciation Accumulated impairment charges Net Land $ 3,197 $ — $ — $ 3,197 Building and leasehold improvements 162,326 ( 13,970 ) — 148,356 Machinery and equipment 14,032 ( 3,195 ) — 10,837 Furniture and fixtures 5,502 ( 1,130 ) — 4,372 Construction in progress 20,837 — — 20,837 $ 205,894 $ ( 18,295 ) $ — $ 187,599 For the years ended December 31, 2021, 2020 and 2019, depreciation expense on property, plant and equipment was $ 11,668 , $ 9,052 and $ 3,263 , respectively, and was included in cost of sales as well as depreciation and amortization in operating expenses on the consolidated statements of net income (loss) and comprehensive income (loss). 94 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Impairment of Long-lived Assets Accumulated impairment charges on property, plant and equipment consist of the following: As of January 1, 2021 Impairment charges Foreign exchange effect As of December 31, 2021 Building and leasehold improvements $ — $ 110,963 $ ( 1,786 ) $ 109,177 Machinery and equipment — 3,939 ( 63 ) 3,876 Furniture and fixtures — 625 ( 10 ) 615 Construction in progress — 643 ( 10 ) 633 $ — $ 116,170 $ ( 1,869 ) $ 114,301 There were no impairment charges on property, plant and equipment during the years ended December 31, 2020 and 2019. During the fourth quarter of 2021, the Company concluded that indicators of impairment were present with respect to its Canadian asset group in connection with the potential wind down and closure of the Company’s facility in Stayner, Ontario, Canada happening in 2022. Refer to Note 18 “ Subsequent Events ” for further information. As a result, the Company compared the sum of the undiscounted future cash flows attributable to the Canadian asset group to their respective carrying amounts and recorded a non-cash impairment charge on long-lived assets of $ 113,917 as the difference between the carrying amount of the asset group and its estimated fair value for the year ended December 31, 2021, in the consolidated statements of net income (loss) and comprehensive income (loss). During the second quarter of 2021, the Company recognized an impairment charge of $ 1,039 related to leasehold improvements located within leased premises, encompassing approximately 6,000 square feet, in Los Angeles, California, which the Company determined it no longer had plans to use. The significant change in the extent and manner in which the leasehold improvements are being used and the expectation that, more likely than not, the leasehold improvements will be disposed of before the end of their useful life triggered an impairment. The right-of-use lease asset associated with the leasehold improvements was also written down as a result of the Company’s decision to no longer use the leased premises. The Company recognized an impairment charge on the derecognition of the right-of-use asset of $ 702 during the year ended December 31, 2021. Both of the impairment charges described herein are recognized on the consolidated statements of net income (loss) and comprehensive income (loss) as an impairment loss on long-lived assets. During the third quarter of 2021, in connection with the Company’s reassessment of indicators of impairment relating to the U.S. segment’s property, plant and equipment asset group for the quarter ended June 30, 2021, the Company concluded that triggers were present which indicated that the carrying amounts of those assets were not recoverable. Accordingly, the Company compared the sum of the undiscounted future cash flows attributable to the U.S. asset group (the lowest level for which identifiable cash flows are available) to their respective carrying amount and recorded a non-cash impairment charge on long-lived assets of $ 1,214 for the difference between the carrying amount of the asset group and its estimated fair values in the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. 6. Goodwill and Intangible Assets, net (a) Goodwill Goodwill is comprised of the following items: As of December 31, 2021 Cost Accumulated impairment charges Net Peace Naturals Project Inc. (“Peace Naturals”) $ 1,098 $ — $ 1,098 Redwood 213,414 ( 213,414 ) — $ 214,512 $ ( 213,414 ) $ 1,098 As of December 31, 2020 Cost Accumulated impairment charges Net OGBC $ 307 $ ( 307 ) $ — Peace Naturals 1,108 — 1,108 Redwood 213,414 ( 35,000 ) 178,414 $ 214,829 $ ( 35,307 ) $ 179,522 95 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Impairment of Goodwill Accumulated impairment charges on goodwill consist of: As of January 1, 2021 Impairment charges Foreign exchange effect As of December 31, 2021 Redwood $ ( 35,000 ) $ ( 178,414 ) $ — $ ( 213,414 ) As of January 1, 2020 Impairment charges Foreign exchange effect As of December 31, 2020 OGBC (i) $ — $ ( 292 ) $ ( 15 ) $ ( 307 ) Redwood — ( 35,000 ) — ( 35,000 ) $ — $ ( 35,292 ) $ ( 15 ) $ ( 35,307 ) (i) Impairment charges to OGBC goodwill were related to the discontinuation of OGBC and are included in other, net on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2020 . In 2019, the Company acquired (the “Redwood Acquisition”) all of the issued and outstanding shares of each of the four Redwood operating subsidiaries (collectively “Redwood”) for an aggregate consideration of $ 283,300 , which included $ 227,191 in cash and 5,086,586 common shares of the Company with a fair value of $ 56,109 . Goodwill attributable to the acquisition was $ 213,414 . The Company is required to perform a quantitative analysis of goodwill to test for impairment on an annual basis or more frequently when events or changes in circumstances indicate that fair value of the reporting unit may be less than its carrying amount. Under ASC 350 Intangibles - Goodwill and Other , the qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows or planned revenue or earnings of the reporting unit as indicators of impairment when determining the need for a quantitative assessment of impairment. During the third quarter of 2021, the Company reassessed the existence of impairment indicators on goodwill associated with the U.S. reporting unit, derived from the Redwood Acquisition, and the Lord Jones ® brand indefinite-lived intangible asset as of June 30, 2021, and determined that quantitative impairment analyses were required as of June 30, 2021 due to slower actual revenue growth as compared to previous revenue growth forecasts and significant pricing pressures brought about by increased competition and aggressive discounting in the U.S. reporting unit and associated with the Lord Jones ® brand indefinite-lived intangible asset. As such, the Company reassessed its estimates and forecasts as of June 30, 2021, to determine the fair values of the reporting unit and intangible asset using a discounted cash flow method on the reporting unit and the relief-from-royalty method on the Lord Jones ® brand. Significant inputs include discount rates, growth rates, and cash flow projections, and, for the Lord Jones ® brand, royalty rate. These valuation inputs would be considered Level 3 inputs as defined by ASC 820 Fair Value Measurement . As a result of the analysis as of June 30, 2021, the Company concluded that the carrying amount of the U.S. reporting unit exceeded its fair value, which resulted in the recognition of an impairment charge of $ 178,414 on goodwill associated with the its U.S. reporting unit on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. In June 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the second quarter, represented indicators of impairment for the Company’s U.S. reporting unit. Accordingly, the Company performed an interim impairment analysis as of June 30, 2020, which revealed the carrying amount of the reporting unit exceeded its fair value. As a result, the Company recorded an impairment charge of $ 35,000 on goodwill associated with its U.S. reporting unit for the year ended December 31, 2020. (b) Intangible assets, net Intangible assets, net are comprised of the following items: As of December 31, 2021 Cost Accumulated amortization Accumulated impairment charges Net Software $ 5,644 $ ( 1,595 ) $ ( 4 ) $ 4,045 Health Canada licenses 8,793 ( 1,883 ) ( 6,910 ) — Ginkgo exclusive license (i, ii) 17,330 ( 335 ) ( 4,752 ) 12,243 Israeli codes (iii) 330 ( 39 ) — 291 Total definite-lived intangible assets 32,097 ( 3,852 ) ( 11,666 ) 16,579 Lord Jones ® brand 64,000 — ( 62,500 ) 1,500 Trademarks 142 — ( 142 ) — Total intangible assets $ 96,239 $ ( 3,852 ) $ ( 74,308 ) $ 18,079 96 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents As of December 31, 2020 Cost Accumulated amortization Accumulated impairment charges Net Software $ 4,565 $ ( 565 ) $ — $ 4,000 Health Canada licenses 8,790 ( 1,465 ) ( 1,053 ) 6,272 Israeli codes (iii) 322 ( 22 ) — 300 Total definite-lived intangible assets 13,677 ( 2,052 ) ( 1,053 ) 10,572 Lord Jones ® brand 64,000 — ( 5,000 ) 59,000 Trademarks 148 — — 148 Total intangible assets $ 77,825 $ ( 2,052 ) $ ( 6,053 ) $ 69,720 (i) In August 2021, the Company announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”), under the Ginkgo Collaboration Agreement. As a result of this achievement, on August 21, 2021, the Company issued 1,467,490 common shares at a share price of C$ 7.90 for total consideration given of C$ 11,593 ($ 9,042 ) to Ginkgo through the Ginkgo Collaboration Agreement for the achievement of commercialization and productivity milestones for CBGA. The estimated fair value of the exclusive license for CBGA (the “CBGA Exclusive License”) was $ 7,300 determined using a variation of the income approach called the relief-from-royalty method, which requires an estimate or forecast of the expected future cash flows. The definite-lived intangible asset is being amortized using the straight-line method over its estimated useful life of 10 years. The difference between the consideration paid to Ginkgo and the fair value of the exclusive license intangible asset of $ 1,784 was recognized as an impairment charge on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. (ii) In November, 2021, the Company achieved the final productivity target in respect of cannabigerovarinic acid (“CBGVA”), another of the eight target cannabinoids under the Ginkgo Collaboration Agreement. As a result of this achievement on November 12, 2021, the Company issued 1,467,490 common shares at a share price of C$ 7.12 for total consideration given of C$ 10,449 ($ 8,150 ) to Ginkgo. The estimated fair value of the exclusive license for CBGVA (the “CBGVA Exclusive License”) was $ 5,300 determined using a variation of the income approach called the relief-from-royalty method, which requires an estimate or forecast of the expected future cash flows. The definite-lived intangible asset is being amortized using the straight-line method over its estimated useful life of ten years . The difference between the consideration paid to Ginkgo and the fair value of the exclusive license intangible asset of $ 3,008 was recognized as an impairment charge on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. (iii) The Israeli codes were transferred by non-controlling interests to Cronos Israel in exchange for their equity interests in the Cronos Israel entities. For the years ended December 31, 2021, 2020 and 2019, the aggregate amortization expense on intangible assets was $ 1,800 , $ 814 and $ 646 , respectively, and was included in depreciation and amortization in operating expenses on the consolidated statements of net income (loss) and comprehensive income (loss). The estimated future amortization of definite-lived intangible assets is as follows: As of December 31, 2021 2022 $ 2,365 2023 2,339 2024 2,315 2025 2,007 2026 1,394 Thereafter 6,159 $ 16,579 Impairment of Intangible Assets Accumulated impairment charges on intangible assets, net consist of: As of January 1, 2021 Impairment charges Foreign exchange effect As of December 31, 2021 Software $ — $ ( 4 ) $ — $ ( 4 ) Health Canada licenses ( 1,053 ) ( 5,951 ) 94 ( 6,910 ) Ginkgo exclusive license — ( 4,792 ) 40 ( 4,752 ) Lord Jones ® brand ( 5,000 ) ( 57,500 ) — ( 62,500 ) Trademarks — ( 142 ) — ( 142 ) $ ( 6,053 ) $ ( 68,389 ) $ 134 $ ( 74,308 ) 97 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents As of January 1, 2020 Impairment charges Foreign exchange effect As of December 31, 2020 Health Canada licenses $ — $ ( 1,001 ) $ ( 52 ) $ ( 1,053 ) Lord Jones ® brand — ( 5,000 ) — ( 5,000 ) $ — $ ( 6,001 ) $ ( 52 ) $ ( 6,053 ) During the fourth quarter of 2021, in connection with the expected wind down and closure of the Company’s facility in Stayner, Ontario, the Company determined that the Peace Naturals Health Canada license associated with ongoing use of the Stayner facility for cannabis cultivation and production was also impaired. Accordingly, the Company recorded an impairment loss on long-lived assets of $ 5,951 in the consolidated statements of net income (loss) and comprehensive income (loss) for the year end December 31, 2021. Impairment charges on the Company’s Health Canada licenses for the year ended December 31, 2020 are related to the discontinuation of OGBC. As mentioned above, during third and fourth quarter of 2021, the fair value of each of the Company’s Ginkgo exclusive licenses for two cannabinoids that achieved productivity milestones were deemed to be lower than the consideration paid for each of those licenses. As a result, the Company recorded an aggregate impairment loss of $ 4,792 on long-lived assets for the year ended December 31, 2021 in the consolidated statements of net income (loss) and comprehensive income (loss). During the third quarter of 2021, as a result of the reassessment of impairment indicators and interim impairment analysis as of June 30, 2021, as described above, the Company concluded the carrying amount of the Lord Jones ® brand exceeded its fair value, which resulted in impairment charges of $ 56,500 on its Lord Jones ® brand in the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. Additionally, in the fourth quarter of 2021, due to the U.S. segment’s sustained operating losses and lack of revenue growth, the Company performed an additional impairment test on Lord Jones ® brand intangible asset. As a result, the Company concluded the carrying amount of the Lord Jones ® brand exceeded its fair value, which resulted in an additional impairment charge of $ 1,000 on its Lord Jones ® brand for the year ended December 31, 2021 in the consolidated statements of net income (loss) and comprehensive income (loss). In June 2020, the Company concluded that the projected impact of the COVID-19 pandemic on its sales and revenues in the near term, together with the volatility in the market conditions during the quarter, represented indicators of impairment for the U.S. reporting unit’s Lord Jones ® brand. Accordingly, the Company performed an interim impairment analysis as of June 30, 2020, which concluded the carrying amount of the brand exceeded its fair value. As a result of the analysis, the Company recorded an impairment loss on indefinite-lived intangible assets of $ 5,000 on the consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2020. 98 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents 7. Leases The Company has entered into leases primarily for the land-use rights, office premises and equipment used in the production of cannabis, U.S. hemp-derived cannabinoids and other related products. The Company’s leases have terms which range from three years to six years , excluding land use rights, which generally extend to 15 years. These leases often include options to extend the term of the lease for up to 10 years. When it is reasonably certain that the option will be exercised, the impact of the option is included in the lease term for purposes of determining total future lease payments. Operating leases greater than one year are included in right-of-use assets and operating lease liabilities. Finance leases are included in property, plant and equipment on the Company’s consolidated balance sheet. The Company’s finance leases were not material for any of the periods presented. As of December 31, 2021 2020 Lease cost Operating lease cost $ 2,530 $ 2,479 Short-term lease cost 10 60 Total lease cost $ 2,540 $ 2,539 Supplemental cash flow and other information Operating cash flows - cash paid for operating lease obligations $ 2,458 $ 2,414 Non-cash activity - right-of-use assets obtained in exchange for lease obligations 3,277 5,332 Weighted-average remaining lease term (years) – operating leases 4.3 5.5 Weighted-average discount rate – operating leases 7.65 % 8.86 % For the years ended December 31, 2021, 2020 and 2019, the aggregate depreciation expense on right-of-use assets was $ 1,934 , $ 1,310 and $ 480 , respectively, and was included in general and administrative expenses on the consolidated statements of net income (loss) and comprehensive income (loss). During the year ended December 31, 2021, the Company recognized impairment charges of $ 702 related to the derecognition of an unutilized right-of-use asset in the U.S. segment. The following is a summary of the Company’s future minimum lease payments under operating leases for its premises due in future fiscal years: As of December 31, 2021 2022 $ 2,778 2023 2,339 2024 2,095 2025 1,883 2026 882 Thereafter 686 Total lease payments 10,663 Less: imputed interest ( 857 ) Present value of lease liabilities $ 9,806 In addition to the minimum lease payments, the Company is required to pay realty taxes and other occupancy costs in accordance with the terms of the lease agreements. 99 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents 8. Derivative Liabilities On March 8, 2019, the Company closed the previously announced investment in the Company (the “Altria Investment”) by Altria Group Inc. (“Altria”), pursuant to a subscription agreement dated December 7, 2018. As of the closing date of the Altria Investment, the Altria Investment consisted of 149,831,154 common shares of the Company and one warrant of the Company (the “Altria Warrant”), issued to a wholly owned subsidiary of Altria. As of the closing date of the Altria Investment, Altria beneficially held an approximate 45 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 55 % (calculated on a non-diluted basis). As of December 31, 2021, Altria beneficially held 156,573,537 of the Company’s common shares, an approximate 42 % ownership interest in the Company (calculated on a non-diluted basis). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 52 % (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria, entered into in connection with the closing of the Altria Investment (the “Investor Rights Agreement”), the Company granted Altria certain rights, among others, summarized in this note. The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable. a. The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10 % of the common shares of Cronos ( 83,322,820 common shares as of December 31, 2021) at a per share exercise price of C$ 19.00 , which expires on March 8, 2023. b. The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the research and development (“R&D”) partnership with Ginkgo, (refer to Note 9 “ Commitments and Contingencies ”), the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance; provided that if the consideration paid in connection with any such issuance is non-cash, the price per common share of the Company that would have been received had such common shares been issued for cash consideration will be determined by an independent committee (acting reasonably and in good faith); provided further that the price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Collaboration Agreement will be C$ 16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. c. In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”). The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10 -day volume-weighted average price of the common shares of the Company on the TSX for the 10 full days preceding such exercise by Altria; provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$ 16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20 %. The Altria Warrant, Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities. 100 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents A reconciliations of the carrying amounts of the derivative liability are presented below: As of January 1, 2021 Gain on revaluation Exercise of Rights Foreign exchange effect As of December 31, 2021 (a) Altria Warrant $ 138,858 $ ( 127,099 ) $ — $ 1,961 $ 13,720 (b) Pre-emptive Rights 12,095 ( 12,102 ) — 187 180 (c) Top-up Rights 12,457 ( 12,159 ) — 177 475 $ 163,410 $ ( 151,360 ) $ — $ 2,325 $ 14,375 As of January 1, 2020 Gain on revaluation Exercise of Rights Foreign exchange effect As of December 31, 2020 (a) Altria Warrant $ 234,428 $ ( 95,045 ) $ — $ ( 525 ) $ 138,858 (b) Pre-emptive Rights 12,787 ( 885 ) — 193 12,095 (c) Top-up Rights 49,945 ( 33,324 ) ( 3,227 ) ( 937 ) 12,457 $ 297,160 $ ( 129,254 ) $ ( 3,227 ) $ ( 1,269 ) $ 163,410 Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments. The fair values of the derivative liabilities were determined using the Black-Scholes pricing model using the following inputs: As of December 31, 2021 Altria Warrant Pre-emptive Rights Top-up Rights Share price at grant date (per share in C$) $ 4.98 $ 4.98 $ 4.98 Subscription price (per share in C$) $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (i) 0.79 % 0.39 % 0.50 % Weight average expected life (in years) (ii) 1.18 0.50 0.80 Expected annualized volatility (iii) 80 % 80 % 80 % Expected dividend yield — % — % — % As of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Share price at grant date (per share in C$) $ 8.84 $ 8.84 $ 8.84 Subscription price (per share in C$) $ 19.00 $ 16.25 $ 16.25 Weighted average risk-free interest rate (i) 0.21 % 0.17 % 0.13 % Weight average expected life (in years) (ii) 2.18 1.50 0.98 Expected annualized volatility (iii) 81 % 81 % 81 % Expected dividend yield — % — % — % (i) The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. As of December 31, 2021 and December 31, 2020, the risk-free interest rate uses a range of approximately 0.16 % to 1.10 % and 0.10 % to 0.39 %, respectively, for the Pre-emptive Rights and Top-up Rights. (ii) The expected life represents the period of time, in years, that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. As of December 31, 2021 and December 31, 2020, the expected life uses a range of approximately 0.25 years to 3.75 years and 0.50 years to 5 years, respectively. (iii) Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of December 31, 2021. As of December 31, 2020, volatility was based on the blended historical volatility levels of the Company and peer companies. 101 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. While a decrease in the inputs noted below would cause a decrease in the carrying amount of the derivative liability, there would also be an equal and opposite impact on net income (loss). 10% decrease as of December 31, 2021 Altria Warrant Pre-emptive Rights Top-up Rights Share price at issuance date $ 3,970 $ 80 $ 123 Weighted average expected life 2,971 171 133 Expected annualized volatility 5,402 96 155 10% decrease as of December 31, 2020 Altria Warrant Pre-emptive Rights Top-up Rights Share price at issuance date $ 25,819 $ 2,527 $ 2,989 Weighted average expected life 13,541 1,988 2,121 Expected annualized volatility 26,183 2,269 2,602 These inputs are classified in Level 3 on the fair value hierarchy and are subject to volatility and several factors outside the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods. 9. Commitments and Contingencies (a) Commitments R&D commitments (i) Ginkgo. On September 4, 2018, the Company announced an R&D partnership with Ginkgo to develop scalable and consistent production of eight target cannabinoids, including THC, CBD and a variety of other lesser known and rarer cannabinoids. As part of this partnership, Cronos Group has agreed to issue up to 14,674,903 common shares of the Company (aggregate value of approximately $ 100,000 as of July 17, 2018 assuming all milestones are met, collectively the “Ginkgo Equity Milestones”) in tranches and $ 22,000 in cash subject to Ginkgo’s achievement of certain milestones and to fund certain R&D expenses, including foundry access fees. During the year ended December 31, 2021, 2,934,980 shares of the Company’s common stock were issued in conjunction with this partnership. No shares were issued for the years ended December 31, 2020 or December 31, 2019. (ii) Technion. On October 15, 2018, the Company entered into a sponsored research agreement with the Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”). Research was focused on the use of cannabinoids and their role in regulating skin health and skin disorders. This research was conducted by Technion over a three-year period and concluded during the fourth quarter of 2021. During the year ended December 31, 2021, the Company funded $ 60 of cash payments related to this agreement. The Company had no further funding requirements as of December 31, 2021. On February 18, 2019, the Company entered into an agreement with a wholly owned subsidiary of Altria (which agreement was subsequently amended and restated to substitute Altria Pinnacle as a party thereto), to receive strategic advisory and project management services from Altria Pinnacle (the “Services Agreement”). Pursuant to the Services Agreement, the Company will pay Altria Pinnacle a monthly fee equal to the product of 105 % and the sum of: (i) all costs directly associated with the services incurred during the monthly period, and (ii) a reasonable and appropriate allocation of indirect costs incurred during the monthly period. The Company will also pay all third party direct charges incurred during the monthly period in connection with the services, including any reasonable and documented costs, fees and expenses associated with obtaining any consent, license or permit. The Services Agreement will remain in effect until terminated by either party. See Note 15 “ Related Party Transactions .” 102 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Use of publicity rights in brand development On December 23, 2019, the Company issued 856,017 restricted common shares to Kristen Bell, an accredited investor, in a private placement (“Private Placement”) in reliance on Section 4(a)(2) of the Securities Act of 1933 in connection with the use of certain publicity rights in the brand development of Happy Dance ® . One-third of such common shares vested on January 31, 2020 and an additional one-third of such common shares vested on June 23, 2021, with the remaining shares vesting on December 23, 2022. The issuance did not involve a public offering and was made without general solicitation or advertising. The total fair value of the consideration paid for the issuance of such common shares was approximately $ 6,000 . The fair value of the shares was calculated using the 10 -day volume weighted average price per share of the Company’s common shares on Nasdaq. Additional restricted common shares are issued when certain performance milestones are achieved: (i) First Performance Issuance: if, prior to December 23, 2022, the product line generates at least $ 50,000 in net revenue, additional common shares with an aggregate value of $ 1,000 will be issued; and (ii) Second Performance Issuance: if, prior to December 23, 2022, the product line generates at least $ 100,000 in net revenue, additional common shares with an aggregate value of $ 1,000 will be issued (together with the First Performance Issuance noted above). The number of common shares that would be issued upon achieving the foregoing milestones will be determined based on the 10 -day volume weighted average price per share of the Company’s common shares on Nasdaq as of the trading day immediately prior to the date of filing with the Securities and Exchange Commission of the Company’s audited year-end financial statements for the first fiscal year during which such milestones are achieved. (b) Contingencies The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution and sale of its products. Many of these legal proceedings are in the early stages of litigation and seek damages that are unspecified or not quantified. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe these legal proceedings, individually or in the aggregate, will have a material adverse effect on its consolidated financial condition but could be material to its results of operations for any particular reporting period depending, in part, on its results for that period. Class action complaints relating to restatement of 2019 interim financial statements On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in the U.S. District Court for the Eastern District of New York against the Company and its former Chief Executive Officer (now Executive Chairman) and now former Chief Financial Officer. The court has consolidated the cases, and the consolidated amended complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The consolidated amended complaint generally alleges that certain of the Company’s prior public statements about revenues and internal control were incorrect based on the Company’s disclosures relating to the Audit Committee of the Board of Directors’ (the “Board”) review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel. The consolidated amended complaint does not quantify a damage request. Defendants moved to dismiss on February 8, 2021. On June 3, 2020, an alleged shareholder filed a Statement of Claim, as amended on August 12, 2020, in the Ontario Superior Court of Justice in Toronto, Ontario, Canada, seeking, among other things, an order certifying the action as a class action on behalf of a putative class of shareholders and damages of an unspecified amount. The Amended Statement of Claim names (i) the Company, (ii) its former Chief Executive Officer (now Executive Chairman), (iii) now former Chief Financial Officer, (iv) former Chief Financial Officer and Chief Commercial Officer, and (v) current and former members of the Board as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Amended Statement of Claim generally alleges that certain of the Company’s prior public statements about revenues and internal control were misrepresentations based on the Company’s March 2, 2020 disclosure that the Audit Committee of the Board was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Amended Statement of Claim does not quantify a damage request. On June 28, 2021, the Court dismissed motions brought by the plaintiff for leave to commence a claim for misrepresentation under the Ontario Securities Act and for certification of the action as a class action. The plaintiff has appealed the Court’s dismissal of the motions only with respect to the Company, the former Chief Executive Officer (now Executive Chairman), and the now former Chief Financial Officer; the remaining defendants were dismissed from the matter with prejudice and the Company and all individual defendants agreed not to seek costs from plaintiff in connection with the dismissal of the motions. 103 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Regulatory reviews relating to restatements The Company has been responding to requests for information from various regulatory authorities relating to its previously disclosed restatement of its financial statements for the first three quarters of 2019 as well as the previously disclosed restatement of the second quarter of 2021 interim financial statements. The Company is responding to all such requests for information and cooperating with all regulatory authorities. The Company cannot predict the outcome of any such regulatory review or investigation, and it is possible that additional investigations or one or more formal proceedings may be commenced against the Company and its current and former officers and directors in connection with these regulatory reviews and investigations. Litigation relating to marketing, distribution and sale of products On June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and/or distributors. On December 4, 2020, a Third Amended Statement of Claim was filed, which added a second alleged consumer. The Third Amended Statement of Claim alleges claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018. The Third Amended Statement of Claim seeks a total of C$ 500 million for breach of contract, compensatory damages, and unjust enrichment or such other amount as may be proven in trial and C$ 5 million in punitive damages against each defendant, including the Company. The Third Amended Statement of Claim also seeks interest and costs associated with the action. The Company has not responded to the Third Amended Statement of Claim. On January 31, 2022, upon consent of the Company and the plaintiffs, the court dismissed the case in its entirety as to the Company. A number of claims, including purported class actions, have been brought in the U.S. against companies engaged in the U.S. hemp business alleging, among other things, violations of state consumer protection, health and advertising laws. On April 8, 2020, a putative class action complaint was filed in the U.S. District Court for the Central District of California against Redwood, alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and breaches of the California Commercial Code for breach of express warranties and implied warranty of merchantability with respect to Redwood’s marketing and sale of U.S. hemp products. The complaint did not quantify a damage request. On April 10, 2020, the class action complaint was dismissed for certain pleading deficiencies and the plaintiff was granted leave until April 24, 2020 to amend the complaint to establish federal subject matter jurisdiction. On April 28, 2020, the action was dismissed without prejudice for failure to prosecute and for failure to comply with a court order. As of the date of this Annual Report, the plaintiff has not refiled the complaint. The Company expects litigation and regulatory proceedings relating to the marketing, distribution and sale of its products to increase. 10. Share-based Payments (a) Share-based award plans The Company has granted stock options, RSUs and DSUs to employees and non-employee directors under the Stock Option Plan dated May 26, 2015 (the “2015 Stock Option Plan”), the 2018 Stock Option Plan dated June 28, 2018 (the “2018 Stock Option Plan” and, together with the 2015 Stock Option Plan, the “Prior Option Plans”), the Employment Inducement Award Plan #1 (the “Employment Inducement Award Plan”), the 2020 Omnibus Equity Incentive Plan dated March 29, 2020 (the “2020 Omnibus Plan”) and the DSU plan dated August 10, 2019 (the “DSU Plan”). The Company can no longer make grants under the Prior Option Plans or the Employment Inducement Award Plan. The following table summarizes the total share-based payments associated with the Company’s stock options and RSUs: Year ended December 31, 2021 2020 2019 Stock options $ 7,604 $ 7,185 $ 11,619 RSUs 2,547 8,176 889 Total share-based payments $ 10,151 $ 15,361 $ 12,508 104 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (b) Stock options The Company adopted the 2015 Stock Option Plan, which was approved by shareholders of the Company at the annual general meeting of shareholders held on June 28, 2017. The 2015 Stock Option Plan allowed the Board to award options to purchase shares to directors, officers, key employees and service providers of the Company. As of June 28, 2018, no further awards will be granted under the 2015 Stock Option Plan; however, shares may be purchased via option exercise by the holders of any outstanding options previously issued under the 2015 Stock Option Plan. On June 28, 2018, the shareholders of the Company approved the 2018 Stock Option Plan, which replaced the 2015 Stock Option Plan. The 2018 Stock Option Plan terminated the Company’s ability to grant equity under the 2015 Stock Option Plan. As of June 25, 2020, the date on which the 2020 Omnibus Plan was approved by the shareholders of the Company, no further awards will be granted under the 2018 Stock Option Plan; however, shares may be purchased via option exercise by the holders of any outstanding options previously issued under the 2018 Stock Option Plan. On March 29, 2020, the Board adopted the 2020 Omnibus Plan, which was approved by the shareholders of the Company at the annual and special meeting of shareholders held on June 25, 2020. The 2020 Omnibus Plan provides for grants of stock options, share appreciation rights, restricted shares, RSUs and other share-based or cash-based awards, which are subject to terms as determined by the Compensation Committee of the Board (the “Compensation Committee”), and awards may be granted to eligible employees, non-employee directors and consultants. The 2020 Omnibus Plan terminated the Company’s ability to grant equity awards under the 2018 Stock Option Plan and RSUs under the Employment Inducement Award Plan. Options represent the right to purchase Company common shares on the date of exercise at a stated exercise price. The exercise price of an option generally must be at least equal to the fair market value of the Company common shares on the date of grant. Vesting conditions for grants of options are determined by the Compensation Committee. The typical vesting for stock option grants is quarterly vesting over three to five years . The maximum term of options granted under the 2020 Omnibus Plan is seven years . Participants under the 2020 Omnibus Plan are eligible to be granted options to purchase shares at an exercise price established upon approval of the grant by the Compensation Committee. When options are granted, the exercise price is, with respect to a particular date, the closing price as reported by the TSX or the Nasdaq and, if the shares are not traded on the TSX or the Nasdaq, any other stock exchange on which the Company’s common shares are traded (as selected by the Compensation Committee in good faith taking into account applicable legal and tax requirements) on the immediately preceding trading day (the “Fair Market Value”). The 2020 Omnibus Plan does not authorize grants of options with an exercise price below the Fair Market Value. The following is a summary of the changes in options: Weighted average exercise price (C$) (i) Number of options Weighted average remaining contractual term (years) Balance as of January 1, 2021 $ 5.40 13,755,148 2.30 Issuance of options 9.19 900,000 Exercise of options 2.11 ( 5,598,695 ) Cancellation, forfeiture and expiry of options 12.37 ( 117,123 ) Balance as of December 31, 2021 $ 7.75 8,939,330 2.70 Exercisable at December 31, 2021 $ 6.69 5,836,616 1.37 Weighted average exercise price (C$) (i) Number of options Weighted average remaining contractual term (years) Balance as of January 1, 2020 $ 4.84 14,149,502 2.56 Issuance of options 6.96 2,000,000 Exercise of options 2.03 ( 2,131,939 ) Cancellation, forfeiture and expiry of options 14.34 ( 262,415 ) Balance as of December 31, 2020 $ 5.40 13,755,148 2.30 Exercisable at December 31, 2020 $ 3.75 9,643,682 1.34 (i) The weighted average exercise price reflects the conversion of foreign currency-denominated stock options translated into C$ using the average foreign exchange rate as of the date of issuance. 105 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents For the years ended December 31, 2021 and 2020, the fair value per option at grant date was C$ 6.39 and C$ 4.84 , respectively. The fair value of the options issued during the year was determined using the Black-Scholes option pricing model, using the following inputs: 2021 2020 Share price at grant date (per share) C$ 9.19 C$ 6.96 Exercise price (per option) C$ 9.19 C$ 6.96 Risk-free interest rate 1.39 % 0.43 % Expected life of options (in years) (i) 7 5 Expected annualized volatility 75 % 91 % Expected dividend yield — — Weighted average Black-Scholes value at grant date (per option) C$ 6.39 C$ 4.84 Forfeiture rate — — (i) The expected life of the awards represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees’ and non-employees’ historical exercise and, where relevant, post-vesting employment termination behavior. Volatility was estimated by using the historical volatility of the Company’s share price, adjusted for the Company’s expectation of volatility going forward. The risk-free interest rate was based on the Bank of Canada government bonds with a remaining term equal to the expected life of the options at the grant date. The following table summarizes stock options outstanding: Options outstanding as of December 31, 2021 2020 2019 2020 Omnibus Plan 2,900,000 2,000,000 — 2018 Stock Option Plan 1,550,074 1,627,715 1,817,287 2015 Stock Option Plan 4,489,256 10,127,433 12,332,215 Total stock options outstanding 8,939,330 13,755,148 14,149,502 (c) Restricted share units RSUs are granted under the 2020 Omnibus Plan. RSUs represent an equivalent amount of Company common shares on the date of issuance at fair value. Fair value is determined using the closing price of the trading day immediately preceding the date of grant. RSUs issued under the 2020 Omnibus Plan typically vest over a three-year period following the grant date and have no performance requirements. On July 20, 2020, the Company entered into separation agreements with Robert Rosenheck and another Redwood employee pursuant to which they resigned from their employment with Redwood. In connection with such separation agreements, 732,972 outstanding and unvested RSUs granted under the Employment Inducement Award Plan were accelerated and vested during the year ended December 31, 2020. The following is a summary of the changes in RSUs: Weighted average grant date fair value (C$) (ii) Number of RSUs Balance at January 1, 2021 $ 7.66 948,357 Granted (i) 11.06 576,876 Vested and issued 7.57 ( 158,178 ) Cancellation and forfeitures 8.03 ( 141,185 ) Balance at December 31, 2021 $ 9.22 1,225,870 Weighted average grant date fair value (C$) (ii) Number of RSUs Balance at January 1, 2020 $ 15.34 732,972 Granted (i) 7.66 957,854 Vested and issued 15.34 ( 732,972 ) Cancellation and forfeitures 7.52 ( 9,497 ) Balance at December 31, 2020 $ 7.66 948,357 (i) RSUs granted in the period vest annually in equal installments over a three-year period from either the grant date or after a three or five year “cliff-period.” All RSUs are subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria. (ii) The weighted-average grant date fair value reflects the conversion of foreign currency-denominated RSUs translated into C$ using the foreign exchange rate as of the date of issuance. 106 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (d) Deferred share units On August 10, 2019, the Company established the DSU Plan pursuant to which its non-executive directors receive DSUs for Board services. The DSU Plan is designed to promote a greater alignment of long-term interests between non-executive directors and shareholders. The number of DSUs granted under the DSU Plan (including fractional DSUs) is determined by dividing the amount of remuneration payable by the closing price as reported by the TSX on the trading day immediately preceding the date of grant. DSUs are payable at the time a non-executive director ceases to hold the office of director for any reason and are settled by a lump-sum cash payment, in accordance with the terms of the DSU Plan, based on the fair value of the DSUs at such time. The fair value of the cash payout is determined by multiplying the number of DSUs vested at the payout date by the closing price as reported by the TSX on the trading day immediately preceding the payout date. The fair value of the cash payout is determined at each reporting date based on the fair value of the Company’s common shares at the reporting date and is recorded within other liabilities. The following is a summary of the changes in DSUs: Financial liability Number of DSUs Balance at January 1, 2021 $ 577 83,293 Granting and vesting of DSUs 354 48,913 Liabilities settled ( 203 ) ( 27,764 ) Gain on revaluation ( 320 ) — Balance at December 31, 2021 $ 408 104,442 Financial liability Number of DSUs Balance at January 1, 2020 $ 255 $ 33,397 Granting and vesting of DSUs 338 58,380 Liabilities settled ( 46 ) ( 8,484 ) Loss on revaluation 30 — Balance at December 31, 2020 $ 577 $ 83,293 (e) Warrants The following is a summary of the changes in warrants: Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2021 $ 0.25 7,987,349 Exercise of warrants 0.25 ( 7,987,349 ) Balance as of December 31, 2021 $ — — Weighted average exercise price (C$) Number of warrants Balance as of January 1, 2020 $ 0.26 18,066,662 Exercise of warrants 0.27 ( 10,079,313 ) Balance as of December 31, 2020 $ 0.25 7,987,349 As of December 31, 2021, there are no warrants outstanding other than the Altria Warrant. See Note 8 “ Derivative Liabilities ” for further description of the Altria Warrant. 107 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents 11. Income Taxes For financial reporting purposes, income (loss) from continuing operations before income taxes includes the following components: Year ended December 31, 2021 2020 2019 Rest of World $ ( 116,267 ) $ 12,679 $ 1,169,007 United States ( 280,868 ) ( 85,952 ) ( 3,070 ) Total $ ( 397,135 ) $ ( 73,273 ) $ 1,165,937 The loss before income taxes above excludes losses from discontinued operations of $ 500 , $ 650 and $ 363 for the year ended December 31, 2021, 2020 and 2019, respectively. Income tax expense (benefit) consists of the following components: Year ended December 31, 2021 2020 2019 Current: Rest of World $ ( 382 ) $ 1,024 $ — United States ( 89 ) 323 — Total $ ( 471 ) $ 1,347 $ — Deferred: Rest of World $ 40 $ — $ — United States — — — Total $ 40 $ — $ — Included in accounts payable and other liabilities as of December 31, 2021, 2020 and 2019 is $ 105 , $ 865 and $ nil , respectively, related to current income tax expense. Included in other receivables as of December 31, 2021, 2020 and 2019 is $ 543 , $ nil and $ nil , respectively, related to current income tax benefits. Income tax differs from that computed using the combined Canadian federal and provincial statutory income tax rate of 26.5 %. Reconciliation of the expected income tax to the effective tax rate in continuing operations is as follows: Year ended December 31, 2021 2020 2019 Income (loss) before income taxes $ ( 397,135 ) $ ( 73,273 ) $ 1,165,937 Effective income tax rate 26.5 % 26.5 % 26.5 % Expected income tax expense (benefit) $ ( 105,241 ) $ ( 19,417 ) $ 308,973 Non-taxable income 39 ( 711 ) ( 2,156 ) Non-deductible share-based compensation 1,667 2,498 2,839 Non-deductible expenses 53 1,364 764 Non-deductible transaction costs 2,917 3,146 1,523 Effect of provincial tax rate difference ( 1 ) ( 15 ) ( 44 ) Effect of tax rates outside of Canada ( 1,869 ) ( 362 ) 70 Fair value gain on financial liabilities ( 40,111 ) ( 34,250 ) ( 338,409 ) Changes in valuation allowance 141,639 48,227 25,808 Other 476 867 632 Income tax expense (benefit), net $ ( 431 ) $ 1,347 $ — The valuation allowance recorded against the loss on discontinued operations is not reflected in the effective tax rate reconciliation presented above for continuing operations. 108 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The following table summarizes the significant components of the Company’s deferred tax assets and liabilities: As of December 31, 2021 2020 Deferred assets: Tax loss carryforwards $ 111,373 $ 67,476 Interest expense carryforwards 1,047 1,407 Deferred financing costs 2,788 4,233 Share issuance cost 834 1,573 Finance lease obligation 1,847 1,953 Plant and equipment 38,119 5,945 Investment 900 307 Intangible asset 65,088 4,218 Reserve 3,633 1,858 Other 1,450 570 Total deferred tax assets 227,079 89,540 Less valuation allowance ( 224,776 ) ( 85,935 ) Net deferred tax assets 2,303 3,605 Deferred tax liabilities: Health Canada license — ( 1,662 ) Right-of-use assets ( 1,860 ) ( 1,943 ) Unrealized foreign exchange ( 483 ) — Total deferred tax liabilities ( 2,343 ) ( 3,605 ) Net deferred tax liability $ ( 40 ) $ — The realization of deferred tax assets is dependent on the Company’s generating sufficient taxable income in the years that the temporary differences become deductible. A valuation allowance has been provided for the deferred tax assets that the Company determined did not meet the more-likely-than-not recognition threshold under U.S. GAAP. As of December 31, 2021, the Company had net operating losses in Canada, the U.S., and Israel available to offset future years’ taxable income of approximately $ 276,497 , $ 117,983 , and $ 24,843 , respectively. As of December 31, 2020, the Company had net operating losses in Canada, the U.S., and Israel available to offset future years’ taxable income of approximately $ 177,651 , $ 62,851 , and $ 14,042 , respectively. The net operating losses in Canada will begin to expire, for purposes of carryforward, in fiscal year 2033. The net operating losses in the U.S. can be carried forward indefinitely for federal purposes. The net operating losses in Israel can be carried forward indefinitely. Utilization of the net operating loss carryforwards may be subject to limitations under the tax laws applicable in each tax jurisdiction due to ownership changes that could occur in the future. These ownership changes could limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax expense. Specifically, if Altria exercises its warrant the Company would recognize a change in control event and certain Canadian net operating loss carryforwards may be limited. Due to the existence of the valuation allowance, limitations created by ownership changes, if any, will not impact the Company’s effective tax rate. The Company files federal income tax returns in Canada, Israel and the U.S. The Company has open tax years with the taxation jurisdictions. These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations and tax treaties, as they relate to the amount, timing, or inclusion of revenue and expense. As of December 31, 2021, Peace Naturals is under examination with the Canadian Reserve Agency for tax years 2019 and 2020. Jurisdiction Open Years Canada 2016 – 2021 United States 2019 – 2021 Israel 2018 – 2021 The following table outlines the movements in the valuation allowance: Balance at beginning of year Foreign exchange effect Increase Balance at end of year Year ended December 31, 2021 $ ( 85,935 ) $ 2,798 $ ( 141,639 ) $ ( 224,776 ) Year ended December 31, 2020 ( 36,948 ) ( 693 ) ( 48,294 ) ( 85,935 ) 109 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents As of December 31, 2021 and December 31, 2020, the Company recorded a valuation allowance of $ 224,776 and $ 85,935 , respectively. The valuation allowance increased by $ 141,639 and $ 48,294 during the years ended December 31, 2021 and December 31, 2020, respectively. The increase in the valuation allowance during the years ended December 31, 2021 and December 31, 2020 was primarily due to an increase in net operating loss carryforwards. Accounting guidance clarifies the accounting for uncertain tax positions and prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, the authoritative guidance addresses the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. Only tax positions that meet the more-likely-than-not recognition threshold may be recognized. There were no identified unrecognized tax benefits as of December 31, 2021 or December 31, 2020. As of December 31, 2021 and 2020, deferred income taxes have not been provided for any undistributed earnings from operations outside of Canada. The foreign subsidiaries have accumulated losses and as such the amount of undistributed earnings upon which income taxes have not been provided is immaterial to these consolidated financial statements. 12. Segment Information and Disaggregated Net Revenue Segment reporting is prepared on the same basis that the Company’s chief operating decision makers (the “CODMs”) manage the business, make operating decisions and assess the Company’s performance. For the years ended December 31, 2021 and December 31, 2020, the Company determined that it has the following two reportable segments: United States and Rest of World. The United States operating segment consists of the manufacture and distribution of U.S. hemp-derived CBD infused products. The Rest of World operating segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets . These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODMs to assess the performance of the segment and make decisions regarding the allocation of resources. The CODMs review adjusted earnings (loss) before interest, tax, depreciation and amortization (“Adjusted EBITDA”) as the measure of segment profit or loss to evaluate performance of and allocate resources for its reportable segments. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, non-cash items and items that do not reflect management’s assessment of ongoing business performance. The tables below set forth our consolidated results of operations by segment: Year ended December 31, 2021 United States Rest of World Corporate Total Cannabis flower $ — $ 55,194 $ — $ 55,194 Cannabis extracts 9,874 8,807 — 18,681 Other — 560 — 560 Net revenue 9,874 64,561 — 74,435 Share of loss from equity accounted investments — 6,313 — 6,313 Interest income 40 9,058 — 9,098 Interest expense — ( 27 ) — ( 27 ) Interest income (expense), net 40 9,031 — 9,071 Total assets 462,830 273,484 661,424 1,397,738 Depreciation and amortization 295 4,189 — 4,484 Impairment loss on goodwill and indefinite-lived assets 236,019 37 — 236,056 Impairment loss on long-lived assets 2,955 124,664 — 127,619 Loss from discontinued operations — ( 500 ) — ( 500 ) Adjusted EBITDA ( 40,717 ) ( 99,139 ) ( 20,607 ) ( 160,463 ) Purchase of property, plant and equipment, net 776 10,368 — 11,144 110 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Year ended December 31, 2020 United States Rest of World Corporate Total Cannabis flower $ — $ 27,932 $ — $ 27,932 Cannabis extracts 9,495 8,759 — 18,254 Other — 533 — 533 Net revenue 9,495 37,224 — 46,719 Share of loss from equity accounted investees — 4,510 — 4,510 Interest income 16 18,585 — 18,601 Interest expense ( 34 ) ( 152 ) — ( 186 ) Interest income, net ( 18 ) 18,433 — 18,415 Total assets 253,745 388,351 1,283,586 1,925,682 Depreciation and amortization 234 2,638 — 2,872 Impairment loss on goodwill and indefinite-lived assets 40,000 — — 40,000 Loss from discontinued operations — ( 650 ) — ( 650 ) Adjusted EBITDA ( 28,019 ) ( 98,349 ) ( 20,885 ) ( 147,253 ) Purchase of property, plant and equipment, net 385 31,027 — 31,412 Year ended December 31, 2019 United States Rest of World Corporate Total Cannabis flower $ — $ 15,020 $ — $ 15,020 Cannabis extracts 3,364 5,338 — 8,702 Other — 28 — 28 Net revenue 3,364 20,386 — 23,750 Share of loss from equity accounted investees — 2,009 — 2,009 Interest income 6 29,207 — 29,213 Interest expense — ( 1,244 ) — ( 1,244 ) Interest income, net 6 27,963 — 27,969 Total assets 293,985 309,854 1,486,603 2,090,442 Depreciation and amortization 46 2,044 — 2,090 Loss from discontinued operations — ( 363 ) — ( 363 ) Adjusted EBITDA ( 1,703 ) ( 84,826 ) ( 11,779 ) ( 98,308 ) Purchase of property, plant and equipment, net 259 38,405 — 38,664 111 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The following tables set forth a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated: (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 other 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 ) 112 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents (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 — 32,208 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 the 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 the U.S. segment. See Note 6 “ Goodwill and Intangible Assets, net .” (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 .” (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 .” (iv) For the year ended December 31, 2021, gain on revaluation of financial instruments relates primarily to the Company’s unrealized holding gain on its 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 .” (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 the Whistler Transaction in 2020 and as a result of the closing of the Whistler Transaction in 2019. See Note 3 “ Investments .” (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 .” (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 the Company’s share-based award plans as described in Note 10. “ Share-based Payments .” (x) For the years ended December 31, 2021 and 2020, financial statement review costs include costs related to the restatements of the Company’s 2019 interim financial statements and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatements and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement. 113 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Net revenue attributed to a geographic region based on the location of the customer were as follows: Year ended December 31, 2021 2020 Canada $ 50,294 $ 34,538 Israel 13,376 2,539 United States 9,874 9,495 Other countries 891 147 Net revenue $ 74,435 $ 46,719 Property, plant and equipment, net were physically located in the following geographic regions: As of December 31, 2021 2020 Canada $ 49,117 $ 162,163 United States 480 2,293 Israel 24,473 23,143 Total $ 74,070 $ 187,599 13. Earnings (Loss) per Share Basic and diluted earnings (loss) per share from continued and discontinued operations are calculated as follows: Year ended December 31, 2021 2020 2019 Basic earnings (loss) per share computation Net income (loss) from continuing operations attributable to the shareholders of Cronos Group $ ( 395,607 ) $ ( 72,487 ) $ 1,166,869 Weighted-average number of common shares outstanding 370,390,965 351,576,848 310,067,179 Basic earnings (loss) from continuing operations per share $ ( 1.07 ) $ ( 0.21 ) $ 3.76 Loss from discontinued operations attributable to the shareholders of Cronos Group $ ( 500 ) $ ( 650 ) $ ( 363 ) Weighted-average number of common shares outstanding 370,390,965 351,576,848 310,067,179 Basic loss from discontinued operations per share $ — $ — $ — 114 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Year ended December 31, 2021 2020 2019 Diluted earnings (loss) per share computation Net income (loss) used in the computation of basic earnings (loss) from continuing operations per share $ ( 395,607 ) $ ( 72,487 ) $ 1,166,869 Adjustment for exercise of rights on derivative liabilities — — ( 24,416 ) Net income (loss) used in the computation of diluted earnings (loss) from continuing operations per share ( 395,607 ) ( 72,487 ) 1,142,453 Weighted-average number of common shares outstanding used in the computation of basic earnings (loss) per share 370,390,965 351,576,848 310,067,179 Dilutive effect of warrants — — 19,481,352 Dilutive effect of stock options — — 10,649,487 Dilutive effect of restricted share units — — 732,972 Dilutive effect of Top-up Rights - market price — — 1,881,002 Weighted-average number of common shares for computation of diluted earnings (loss) from continuing operations per share (i) 370,390,965 351,576,848 342,811,992 Diluted earnings (loss) per share from continuing operations $ ( 1.07 ) $ ( 0.21 ) $ 3.33 Loss from discontinued operations attributable to the shareholders of Cronos Group $ ( 500 ) $ ( 650 ) $ ( 363 ) Weighted-average number of common shares for computation of diluted earnings (loss) from discontinued operations per share 370,390,965 351,576,848 342,811,992 Diluted loss from discontinued operations per share $ 0.00 $ 0.00 $ 0.00 (i) In computing diluted earnings per share, incremental common shares are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. Total securities of 125,195,001 , 151,338,762 and 131,871,103 were not included in the computation of diluted shares outstanding for the years ended December 31, 2021, 2020 and 2019, respectively, because the effect would be anti-dilutive. 14. Financial Instruments (a) Fair value measurement The Company complies with ASC 820 Fair Value Measurements for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values are determined by: • Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. • Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. 115 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The following tables present information about the Company’s assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value: As of December 31, 2021 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 886,973 $ — $ — $ 886,973 Short-term investments 117,684 — — 117,684 Other investments (i) 8,000 — — 8,000 Derivative liabilities — — 14,375 14,375 As of December 31, 2020 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,078,023 $ — $ — $ 1,078,023 Short-term investments 211,766 — — 211,766 Derivative liabilities — — 163,410 163,410 (i) On December 16, 2021, Cronos Australia closed their merger agreement to acquire CDA Health Pty Ltd, an Australian medicinal cannabis company. In connection with the closing of the Cronos Australia Merger, the Company’s ownership interest in Cronos Australia decreased to approximately 10 % and the Company’s number of Cronos Australia board seats was reduced from two to one which constituted a loss of significant influence. As such, the Company reclassified the investment from an investment in equity method investees under the equity method of accounting to an other investment under the fair value method of accounting. See Note 3 “ Investments .” There were no transfers between fair value categories during the periods presented. (b) Financial risks The Company’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, market risk, interest rate risk, and foreign currency rate risk. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short term investments, loans receivable, and advances to joint ventures. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $ 1,118,684 and $ 1,403,491 as of December 31, 2021 and December 31, 2020, respectively. (i) Accounts receivable The Company had accounts receivable of $ 22,067 and $ 8,928 as of December 31, 2021 and December 31, 2020, respectively. An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan, and a failure to make contractual payments for a period of greater than 120 days past due. As of December 31, 2021, 2020 and 2019, the Company had $ 8 , $ 9 and $ 124 , respectively, in expected credit losses on receivables from contracts with customers in the Rest of World segment and $ 104 , $ 65 and $ 12 , respectively, in expected credit losses on receivables from contracts with customers in the U.S. segment. As of December 31, 2021, the Company has assessed that there is a concentration of credit risk as 88 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. As of December 31, 2020, 78 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. 116 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents The Company sells products through a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenues. During the year ended December 31, 2021, the Company earned a total net revenue before excise taxes of $ 41,603 from three major customers in the ROW segment, together accounting for 56 % of the Company’s total net revenue before excise taxes. During the year ended December 31, 2020, the Rest of World segment earned a total net revenue before excise taxes of $ 34,295 from four major customers, together accounting for 63 % of the Company’s total net revenue before excise taxes. During the year ended December 31, 2019, the Rest of World segment earned a total net revenue before excise taxes of $ 7,597 from one major customer, accounting for 32 % of the Company’s total net revenues before excise taxes. During the years ended December 31, 2021, 2020, and 2019 the U.S. segment had no major customers. (ii) Cash and cash equivalents, short-term investments, and other receivables The Company held cash and cash equivalents of $ 886,973 and $ 1,078,023 as of December 31, 2021 and December 31, 2020, respectively. The short-term investments and related interest receivable of $ 117,684 and $ 211,766 as of December 31, 2021 and December 31, 2020, respectively, represent short-term investments with a maturity of less than a year and accrued interest. The cash and cash equivalents and short-term investments, including guaranteed investment certificates and bankers’ acceptances, are held with central banks and financial institutions that are highly rated. In addition to interest receivable, other receivables include sales taxes receivable from the government. As such, the Company has assessed an insignificant loss allowance on these financial instruments. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and arises principally from the Company’s accounts payable. The Company had trade accounts payable of $ 8,395 and $ 12,107 as of December 31, 2021 and December 31, 2020, respectively, included in accounts payable on the consolidated balance sheet. The Company’s policy is to review liquidity resources and ensure that sufficient funds are available to meet financial obligations as they become due. Further, the Company’s management is responsible for ensuring funds exist and are readily accessible to support business opportunities as they arise. The Company’s funding is primarily provided in the form of capital raised through the issuance of common shares and warrants. As of December 31, 2021, the Company has assessed a concentration of risk of vendors as 19 % of accounts payables were due to one vendor. As of December 31, 2020, the Company has assessed a concentration risk of vendors as 40 % due to four vendors. Market risk Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, market and economic conditions, and equity and commodity prices. The Company is exposed to market risk in divesting its investments, such that unfavorable market conditions could result in dispositions of investments at less than their carrying amounts. Further, the revaluation of securities classified as fair value through net income could result in significant write-downs of the Company’s investments, which would have an adverse impact on the Company’s results of operations, unless these would flow through other comprehensive income. The Company manages risk by having a portfolio of securities from multiple issuers, such that the Company was not materially exposed to any one issuer. Interest rate risk Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of income and expense recorded on the cash equivalents and short-term investments, and the market value of all interest-earning assets, other than those which possess a short term to maturity. A 10% change in the interest rate in effect on December 31, 2021 and December 31, 2020, would not have a material effect on (i) fair value of the cash equivalents and short-term investments as the majority of the portfolio has a maturity date of three months or less, or (ii) interest income. Management continues to monitor external interest rates and revise the Company’s investment strategy as a result. During the years ended December 31, 2021 and December 31, 2020, the Company had net interest income of $ 9,071 and $ 18,415 , respectively. During the year ended December 31, 2021, the Company’s average variable interest rate did not change materially. During the year ended December 31, 2020, the Company’s average variable interest rate fell 1.49 %, which resulted in a decrease of net interest income of $ 15,671 in the period. 117 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents Foreign currency risk Currency rate risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate due to changes in foreign exchange rates. The Company is exposed to this risk on investments in equity investees denominated in A$ and C$, and other assets and liabilities denominated in A$ and C$. The Company is further exposed to this risk through subsidiaries operating in Israel and the U.S. as the Company’s functional currency is in Canadian dollars. The Company does not currently use foreign exchange contracts to hedge its exposure to currency rate risk. As such, the Company’s financial position and financial results may be adversely affected by the unfavorable fluctuations in currency exchange rates. As of December 31, 2021 and December 31, 2020, the Company had foreign currency gain (loss) on translation of $ 8,192 and $ 14,951 , respectively. A 10% change in the exchange rates for the foreign currencies would affect the carrying amounts of net assets by approximately $ 133,428 and $ 170,817 as of December 31, 2021 and December 31, 2020, respectively. 15. Related Party Transactions (a) Altria On March 8, 2019, in connection with the Altria Investment, Altria, through certain of its wholly owned subsidiaries, purchased a 45 % equity interest in the Company. As of December 31, 2021, Altria beneficially held an approximately 42 % ownership interest in the Company (calculated on a non-diluted basis). The Company incurred the following expenses for consulting services from Altria Pinnacle LLC, a subsidiary of Altria (“Altria Pinnacle”): Year ended December 31, 2021 2020 2019 Altria Pinnacle – expense $ 436 $ 1,199 $ 3,479 During 2019, the Company purchased machinery and equipment amounting to $ 1,258 from a subsidiary of Altria, which was fully paid for during the year ended December 31, 2019. There were no amounts payable related to the consulting services with Altria Pinnacle as of December 31, 2021 and 2020. Refer to Note 8 “ Derivative Liabilities ” for further information on the derivative liabilities related to the Altria Investment. (b) Cronos GrowCo The Company holds a variable interest in Cronos GrowCo through its ownership of 50 % of Cronos GrowCo’s common shares and senior secured debt in Cronos GrowCo. See Note 3 “ Investments ” for further discussion. The Company made the following purchases of cannabis products from Cronos GrowCo: Year ended December 31, 2021 2020 2019 Cronos GrowCo – purchases $ 4,820 $ — $ — The Company’s outstanding payable balance to Cronos GrowCo was $ 82 as of December 31, 2021. There was no amount payable to Cronos GrowCo as of December 31, 2020. Additionally, on August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into the GrowCo Facility. See additional information in Note 4 “ Loans Receivable, net .” 118 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (In thousands of U.S. dollars, except for share amounts) Table of Contents 16. Held-For-Sale Assets and Discontinued Operations During the year ended December 31, 2020, the Company advanced its plans for the sale and disposal of substantially all of the assets of OGBC and as a result, OGBC’s results of operations were reclassified to discontinued operations in the accompanying consolidated financial statements. During the second quarter of 2021, the Company determined that the fair value of OGBC was lower than the carrying amount of the assets. As such, a write-down to these held-for-sale assets of $ 561 was recorded in the second quarter of 2021. On September 10, 2021, OGBC was sold for $ 727 , net of costs to sell. As a result, the Company recorded $ 82 in loss from discontinued operations in its consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. On June 10, 2021, the land and office building located in Winnipeg, Manitoba Canada, previously designated as held-for-sale in the first quarter of 2021, was sold for $ 2,059 , net of costs to sell. As a result, the Company recorded a gain on the sale of $ 1,279 in other, net in its consolidated statements of net income (loss) and comprehensive income (loss) for the year ended December 31, 2021. The following table summarizes the financial information for discontinued operations: Year ended December 31, 2021 2020 2019 Loss from discontinued operations, net of income taxes $ ( 500 ) $ ( 650 ) $ ( 363 ) As of December 31, 2021 2020 OGBC assets classified as held-for-sale $ — $ 1,176 17. Non-monetary Transactions The Company had no non-monetary transactions during the year ended December 31, 2021 or 2020. On March 28, 2019, the Company entered into two transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin from the third party and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for at the carrying amount of inventory transferred by the Company, which equaled the value of the cannabis resin received. No revenue was recognized as a result of this transaction and no gain or loss was recognized in the consolidated statements of net income (loss) and comprehensive income (loss). In September 2019, the Company entered into three transactions to simultaneously purchase and sell inventory to a third party. The Company purchased cannabis resin and cannabis tincture oil and in turn sold cannabis dry flower to the third party. The transactions involved the exchange of work in progress inventory and were accounted for in accordance with ASC 845 Non-monetary transactions at the carrying amount of inventory transferred by the Company. $ 2,300 was recognized in revenue as a result of this transaction and no gain or loss was recognized in the consolidated statements of net income (loss) and comprehensive income (loss). 119 Cronos Group Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2019 (In thousands of U.S. dollars, except for gram and share amounts) Table of Contents 18. Subsequent Events (a) Realignment In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). The organizational and cost initiatives being undertaken are intended to position the Company to drive profitable and sustainable growth over time. Restructuring costs of $ 1,219 , which impact all segments and will be incurred in 2022, include mostly one-time employee-related severance associated with the Realignment. (b) Planned Exit of the Stayner Facility On February 28, 2022, the Board approved plans to leverage its strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting its production facility in Stayner, Ontario, Canada (the “Stayner Facility”). The Company expects to incur charges of approximately $ 4,500 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, the Company anticipates capital expenditures of approximately $ 2,500 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. (c) LivWell Transaction On February 28, 2022, PharmaCann closed the LivWell Transaction. Based upon the terms of the definitive merger agreement, the Company’s ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.7 %. The decrease to ownership percentage does not materially affect the Company’s rights under the PharmaCann Option. Further dilution could adversely affect the Company’s rights under the PharmaCann Option. 120 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.