What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-18 · 251 added, 354 removed, 236 unchanged (72% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report.

The following discussion and analysis should be read together with other information, including Cronos Group’s condensed consolidated financial statements and the related notes to those statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report.

Forward-Looking Statements

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Forward-Looking Statements include, but are not limited to, statements with respect to:

• the impact of the ongoing military conflict between Russia and Ukraine (and resulting sanctions) on our business, financial condition and results of operations or cash flows;

• the uncertainties associated with the COVID-19 pandemic, including our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic, the ability to continue our production, distribution and sale of our products, and demand for and the use of our products by consumers;

• laws and regulations and any amendments thereto applicable to our business and the impact thereof, including uncertainty regarding the application of United States (“U.S.”) state and federal law to U.S.

hemp (including CBD) products and the scope of any regulations by the U.S.

hemp (including CBD and other U.S.

hemp-derived cannabinoids) products and the scope of any regulations by the U.S.

Food and Drug Administration (the “FDA”), the U.S.

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Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S.

hemp (including CBD) products;

hemp (including CBD and other U.S.

hemp-derived cannabinoids) products;

• the laws and regulations and any amendments thereto relating to the U.S.

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• expectations related to our announced realignment (the “Realignment”) and any progress, challenges and effects related thereto as well as changes in strategy, metrics, investments, reporting structure, costs, operating expenses, employee turnover and other changes with respect thereto;

• the timing of our exit from our facility in Stayner, Ontario (the “Stayner Facility”) and the expected costs and benefits from the wind-down of the Stayner Facility;

• our ability to effectively wind-down the Stayner Facility in an organized fashion and acquire raw materials from other suppliers, including Cronos Growing Company Inc.

(“Cronos GrowCo”) and the costs and timing associated therewith;

• the grant, renewal and impact of any license or supplemental license to conduct activities with cannabis or any amendments thereof;

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• our ability to successfully create and launch brands and further create, launch and scale U.S.

hemp-derived consumer products and cannabis products;

hemp-derived cannabinoid consumer products and cannabis products;

• the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids;

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• the anticipated benefits and impact of Altria Group Inc.’s investment in the Company (the “Altria Investment”), pursuant to a subscription agreement dated December 7, 2018;

• the potential exercise of one warrant of the Company included as part of the Altria Investment, pre-emptive rights and/or top-up rights in connection with the Altria Investment, including proceeds to us that may result therefrom;

• the potential exercise of one warrant of the Company included as part of the Altria Investment (the “Altria Warrant”), pre-emptive rights and/or top-up rights in connection with the Altria Investment, including proceeds to us that may result therefrom;

• expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment;

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• expectations regarding acquisitions and dispositions and the anticipated benefits therefrom;

• uncertainties as to our ability to exercise the PharmaCann Option (as defined herein) in the near term or the future in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S.

and our ability to realize the anticipated benefits of the transaction with PharmaCann (as defined herein);

• uncertainties as to our ability to exercise our option (the “PharmaCann Option”) in PharmaCann Inc.

(“PharmaCann”), in the near term or the future, in full or in part, including the uncertainties as to the status and future development of federal legalization of cannabis in the U.S.

and our ability to realize the anticipated benefits of the transaction with PharmaCann;

• expectations regarding revenues, expenses and anticipated cash needs;

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• expectations regarding capital expenditures;

• the expansion of our production and manufacturing, the costs and timing associated therewith and the receipt of applicable production and sale licenses;

• expectations regarding growth in our growing, production and supply chain capacities;

• expectations regarding our future production and manufacturing strategy and operations, the costs and timing associated therewith and the receipt of applicable production and sale licenses;

• expectations regarding our growing, production and supply chain capacities;

• expectations regarding the resolution of litigation and other legal and regulatory proceedings, reviews and investigations;

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The Forward-Looking Statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including:

(i) our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic and the ability to continue our production, distribution and sale of our products and customer demand for and use of our products;

(ii) management’s perceptions of historical trends, current conditions and expected future developments;

(iii) our ability to generate cash flow from operations;

(iv) general economic, financial market, regulatory and political conditions in which we operate;

(v) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments;

(vi) consumer interest in our products;

(vii) competition;

(viii) anticipated and unanticipated costs;

(ix) government regulation of our activities and products including, but not limited to, the areas of taxation and environmental protection;

(x) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses;

(xi) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner;

(xii) our ability to conduct operations in a safe, efficient and effective manner;

(xiii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations;

(xiv) our ability to realize the expected cost-savings, efficiencies and other benefits of our Realignment and employee turnover related thereto;

(xv) our ability to complete planned dispositions and, if completed, obtain our anticipated sales price;

(xvi) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann;

and (xvii) other considerations that management believes to be appropriate in the circumstances.

(i) our ability to efficiently and effectively exit the Stayner Facility, receive the benefits of the Stayner Facility wind down and acquire raw materials on a timely and cost-effective basis from third parties, including Cronos GrowCo;

(ii) our ability, and the abilities of our joint ventures and our suppliers and distributors, to effectively deal with the restrictions, limitations and health issues presented by the COVID-19 pandemic and the ability to continue our production, distribution and sale of our products and customer demand for and use of our products;

(iii) management’s perceptions of historical trends, current conditions and expected future developments;

(iv) our ability to generate cash flow from operations;

(v) general economic, financial market, regulatory and political conditions in which we operate;

(vi) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments;

(vii) consumer interest in our products;

(viii) competition;

(ix) anticipated and unanticipated costs;

(x) government regulation of our activities and products including, but not limited to, the areas of taxation and environmental protection;

(xi) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses;

(xii) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner;

(xiii) our ability to conduct operations in a safe, efficient and effective manner;

(xiv) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations;

(xv) our ability to realize the expected cost-savings, efficiencies and other benefits of our Realignment and employee turnover related thereto;

(xvi) our ability to complete planned dispositions, and, if completed, obtain our anticipated sales price;

(xvii) our ability to exercise the PharmaCann Option and realize the anticipated benefits of the transaction with PharmaCann;

and (xviii) other considerations that management believes to be appropriate in the circumstances.

While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.

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A variety of factors, including known and unknown risks, many of which are beyond our control, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf.

Such factors include, without limitation, the risk that the COVID-19 pandemic may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products;

Such factors include, without limitation, that we may not be able to exit the Stayner Facility in an organized fashion or achieve the anticipated benefits of the exit or be able to access raw materials on a timely and cost-effective basis from third parties, including Cronos GrowCo;

the risk that the COVID-19 pandemic and the military conflict between Russia and Ukraine may disrupt our operations and those of our suppliers and distribution channels and negatively impact the demand for and use of our products;

the risk that cost savings and any other synergies from the Altria Investment may not be fully realized or may take longer to realize than expected;

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the implementation and effectiveness of key personnel changes;

the risks that our Realignment will not result in the expected cost-savings, efficiencies and other benefits or will result in greater than anticipated turnover in personnel;

future levels of revenue;

the implementation and effectiveness of key personnel changes;

the risks that our Realignment, the closure of the Stayner Facility and our further leveraging of our strategic partnerships will not result in the expected cost-savings, efficiencies and other benefits or will result in greater than anticipated turnover in personnel;

future levels of revenues;

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Forward-Looking Statements are made as of the date they are made and are based on the beliefs, estimates, expectations and opinions of management on that date.

We undertake no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements.

We undertake no obligation to update or revise any Forward-Looking Statements, whether as a

result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements.

The Forward-Looking Statements contained in this Quarterly Report and other reports we file with, or furnish to, the SEC and other regulatory agencies and made by our directors, officers, other employees and other persons authorized to speak on our behalf are expressly qualified in their entirety by these cautionary statements.

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

The assets and liabilities of the Company’s foreign operations are translated into dollars at the exchange rate in effect as of September 30, 2021, September 30, 2020 and December 31, 2020.

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

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

The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2022, March 31, 2021 and December 31, 2021.

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

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

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

(Exchange rates are shown as C$ per $) As of

September 30, 2021 September 30, 2020 December 31, 2020

Average rate 1.2593 1.3323 1.3036

March 31, 2022 March 31, 2021 December 31, 2021

Average rate 1.2665 1.2665 N/A

Spot rate 1.2507 1.2563 1.2746

Year-to-date average rate 1.2519 1.3539 1.3411

Business Overview

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

Cronos Group is committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is building an iconic brand portfolio.

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

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

The Company no longer produces or distributes products under the COVE ® brand.

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

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Business segments

Cronos Group reports through two segments:

“United States” (“U.S.”) and “Rest of World” (“ROW”).

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

The United States segment manufactures, markets and distributes U.S.

We report through two segments:

“United States” (the “U.S.

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

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

segment manufactures, markets and distributes U.S.

hemp-derived supplements and cosmetic products through e-commerce, retail and hospitality partner channels in the United States under the brands Lord Jones ® , Happy Dance ® and PEACE+ ™ .

The ROW segment is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets.

In Canada, Cronos Group operates two wholly owned license holders under the Cannabis Act (Canada), Peace Naturals Project Inc.

(“Peace Naturals”), which has production facilities near Stayner, Ontario (the “Peace Naturals Campus”), and Cronos Fermentation, which has fermentation and manufacturing facilities in Winnipeg, Manitoba.

In Canada, Cronos Group operates two wholly owned license holders under the Cannabis Act (Canada) (the “Cannabis Act”), Peace Naturals Project Inc.

(“Peace Naturals”), which has production facilities near Stayner, Ontario (the “Stayner Facility”), and Thanos Holdings Ltd., known as Cronos Fermentation (“Cronos Fermentation”), which has a production facility in Winnipeg, Manitoba.

In Israel, the Company operates under the IMC-GAP, IMC-GMP and IMC-GDP certifications required for the cultivation, production and marketing of dried flower, pre-rolls and cannabis oils in the Israeli medical market.

Cronos Group has established strategic joint ventures in Canada, Israel and Colombia.

As of September 30, 2021, Cronos Group additionally held approximately 31% of the issued capital of Cronos Australia Limited, which is listed on the Australian Securities Exchange under the trading symbol “CAU.” Cronos Group currently exports cannabis products to countries that permit the import of such products, such as Australia, Germany and Israel.

Cronos Group has established three strategic joint ventures in Canada, Israel and Colombia.

Additionally, as of March 31, 2022, Cronos Group held approximately 10% of the issued capital of Cronos Australia Limited (“Cronos Australia”), which is listed on the Australian Securities Exchange under the trading symbol “CAU.” Cronos Group currently exports cannabis products to two of the countries that permit the import of such products:

Germany and Israel.

Recent Developments

COVID-19 update

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

Cronos Group continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic.

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

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

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

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

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

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

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

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

In the U.S., numerous states have continued to remove their COVID-19 related restrictions as the rollout of vaccines continues.

This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell the Company’s products.

Any reinstatement of restrictions on the operations of retail outlets could negatively impact the Company’s short-term results of operations in the U.S.

Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which the Company operates.

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

In Canada, COVID-19 related restrictions continued to be removed as the vaccination rate increased.

In the U.S., numerous states have continued to remove their COVID-19 related restrictions.

This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell our products.

Any reinstatement of restrictions on the operations of retail outlets could negatively impact our short-term results of operations in the U.S.

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

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

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

The increase in cases related to the Omicron variant of COVID-19 beginning in December 2021 caused the reinstatement of some restrictions on non-essential retail stores in some provinces, including Quebec, in early 2022;

however, those restrictions have eased in most other provinces.

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

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

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

However, we expect the reopening plans implemented in the third quarter of 2021 to partially mitigate this negative impact in the remainder of 2021.

Most provinces have lifted the requirement that retail shoppers show proof of vaccination before entering retail stores.

The potential for recurring retail restrictions is ongoing, which could negatively impact our results of operations.

In Israel, most COVID-19 restrictions have been removed as vaccination rates have increased.

Occupancy limitations in retail outlets have been removed, including those that sell the Company’s products.

The Company does not expect the remaining COVID-19 restrictions to have a material impact on the Company’s short-term revenue growth in Israel.

In both the U.S.

and ROW segments, there were no material increases in the current expected credit loss in connection with COVID-19.

The Company continues to closely monitor the effects of COVID-19 on its operating results.

Collectively, the effects of the COVID-19 pandemic have adversely affected the Company’s results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect.

Occupancy limitations in retail outlets have been removed, including those that sell our products.

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

Collectively, the effects of the COVID-19 pandemic have adversely affected our results of operations and, if the effects continue unabated, could continue to do so as long as measures to combat the COVID-19 pandemic remain in effect or supply chains continue to be challenged.

At this time, neither the duration nor scope of the disruption can be predicted;

therefore, the ultimate impact to the Company’s business cannot be reasonably estimated but such impact could materially adversely affect the Company’s business and financial results.

Despite the impacts of the COVID-19 pandemic, the Company believes that its significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months.

The impact of reduced interest rates has inhibited the Company’s ability to generate interest income, but this has not had, and is not expected to have, a material impact on the liquidity or capital resources of the Company.

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

Despite the impacts of the COVID-19 pandemic, we believe that our significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months.

The impact of reduced interest rates has inhibited our ability to generate interest income, but this has not had, and is not expected to have, a material impact on our liquidity or capital resources.

Strategic and Organizational Update

As Cronos Group advances its strategy to build disruptive intellectual property by advancing cannabis research, technology and product development, the Company has determined that now is the right time to implement the Realignment of its business around its brands.

The organizational and cost initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time.

The program will consist of the following:

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 reduction initiatives being undertaken are intended to position Cronos Group to drive profitable and sustainable growth over time.

The program consists of the following:

Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs;

Evaluating the Company's global supply chain and performing product reviews, and pricing and distribution optimization in order to reduce fixed expenses and reduce complexity;

Evaluating the Company’s global supply chain and reducing complexity and fixed expenses, which resulted in the announcement of the planned exit of the Stayner Facility in Stayner, Ontario, and the Company’s ongoing review of product, pricing and distribution optimization;

Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S.

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Brand and Product Portfolio

In the third quarter of 2021, the Company continued to build on the success of its dried flower portfolio with the introduction of new high potency cultivars, Atomic Sour Grapefruit and Cocoa Bomba, in select markets in Canada.

These launches, in addition to the launch of Spinach ® GMO Cookies earlier in 2021, are further solidifying the Company’s strength in the dried flower category in the Canadian adult-use cannabis market.

In October 2021, Cronos Group launched its first cultured cannabinoid product, SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy.

The SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy builds on Cronos Group’s successful SOURZ by Spinach ® platform, utilizing the distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile.

In addition, in January 2022, the Company launched a 1-gram vape featuring THC and CBG under the SPINACH FEELZ™ brand in the Canadian adult-use cannabis market.

The Company, through the SPINACH FEELZ™ brand, plans to produce a variety of cannabis products that will prominently feature rare cannabinoids, designed to deliver unique and enhanced experiences made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids, like THC and CBD.

In April 2022, the Company expanded its SOURZ by Spinach™ gummy portfolio with a new flavor, Cherry Lime, in a five piece per pack format with 2mg of THC per piece.

The Company now has five SKUs in the gummy category across its SOURZ by Spinach™ and Spinach FEELZ™ sub-brands.

Global Supply Chain

In the third quarter of 2021, Cronos GrowCo, the Company’s joint venture in Canada, continued to build on success of its first harvest in the first quarter of 2021.

With its processing license in hand, Cronos GrowCo has begun selling to Canadian license holders in the

wholesale market.

In addition, the Company has begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of the Company’s Canadian cannabis supply chain.

Intellectual property initiatives

In August 2021, Cronos Group announced the achievement of the final productivity target in respect of cannabigerolic acid (“CBGA”) under the Ginkgo Strategic Partnership, which supports the launch of the Company’s SPINACH FEELZ™ Chill Bliss 2:1 THC|CBG gummy.

In November 2021, Cronos Group achieved the final productivity target for a second cannabinoid, cannabigerovarinic acid (“CBGVA”), which is a crucial step to developing cultured tetrahydrocannabivarin (“THCV”), releasing the second equity milestone to Ginkgo.

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

Jacobson previously served as the Company's General Manager of Canada and Europe.

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

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

The Company appointed John Griese Senior Vice President, Head of Operations (North America).

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

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

Prior to Supreme, Mr.

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

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

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

In the first quarter of 2022, the Company began to leverage Cronos GrowCo’s capabilities as part of the Realignment.

These activities include, among others, the transfer of certain manufacturing equipment to Cronos GrowCo from the Stayner Facility.

In April 2022, the Company began building dedicated space within Cronos GrowCo for various manufacturing and R&D activities.

In March 2022, the Board of Directors appointed Cronos Group’s founder, Mike Gorenstein, as Chairman, President and Chief Executive Officer, in connection with Kurt Schmidt’s retirement.

Gorenstein previously served as Chairman, President and Chief Executive Officer of Cronos until September 2020, when he transitioned to the Executive Chairman role.

In April 2022, the Company appointed Terry Doucet as Senior Vice President, Legal, Regulatory Affairs and Corporate Secretary, after serving in an interim capacity since December 2021.

Doucet has been with Cronos since 2018 and has guided Cronos through significant growth over the last few years, including the build-out of the Company’s Legal and Regulatory Affairs teams, the Altria Investment, the Ginkgo Strategic Partnership, the PharmaCann Option and various product commercialization initiatives.

Consolidated Results of Operations

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

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

Three months ended March 31,

Net revenue before excise taxes $ 29,406 $ 14,654

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Cost of sales 18,107 15,574

Inventory write-down — — 11,961 11,024

Gross profit 6,926 (2,963)

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General and administrative 22,368 21,906

Share-based payments 2,667 7,916 7,731 12,898

Restructuring costs 3,084 —

Share-based compensation 3,686 2,499

Depreciation and amortization 1,293 735

Impairment loss on goodwill and indefinite-lived intangible assets 142 — 235,056 40,000

Impairment loss on long-lived assets 3,493 1,741

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Operating loss (36,049) (45,200)

Other income 133,839 111,094 134,988 198,886

Income tax benefit (expense) 159 (988) 159 (988)

Income (loss) from discontinued operations 82 (473) (500) (519)

Net income (loss) 77,666 68,464 (263,312) 36,442

Other income (expense) 3,758 (116,404)

Income tax expense (362) —

Loss from discontinued operations — (21)

Net loss (32,653) (161,625)

Net loss attributable to non-controlling interest (15) (313)

Net income (loss) attributable to Cronos Group $ 77,916 $ 69,033 $ (262,470) $ 38,096

Net loss attributable to Cronos Group $ (32,638) $ (161,312)

Summary of select financial results

Three months ended September 30, Change Nine months ended September 30, Change

Three months ended March 31, Change

2022 2021 $ %

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Cost of sales 18,107 15,574 2,533 16 %

Inventory write-down — — — N/A 11,961 11,024 937 8 %

Gross profit 6,926 (2,963) 9,889 334 %

Gross margin (4) % (14) % N/A 10 pp (40) % (37) % N/A (3) pp

For the three months ended September 30, 2021, we reported consolidated net revenue of $20.4 million, representing an increase of $9.0 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported consolidated net revenue of $48.6 million, representing an increase of $19.0 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to the continued growth of the adult-use market in Canada, increased sales in the Israeli medical market, and increased sales of U.S.

hemp-derived CBD products in the U.S.

Gross margin (i)

28 % (23) % N/A 51 pp

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

For the three months ended March 31, 2022, we reported consolidated net revenue of $25.0 million, representing an increase of $12.4 million from the three months ended March 31, 2021.

The increase was primarily due to an increase in net revenue in the ROW segment driven by growth in the Israeli medical market and the Canadian adult-use market.

Cost of sales

For the three months ended September 30, 2021, we reported consolidated cost of sales of $21.1 million, representing an increase of approximately $8.2 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported consolidated cost of sales of $56.2 million, representing an increase of approximately $26.6 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to increased sales volume noted above as well as start-up costs associated with new product development in the ROW segment, increased inventory valuation adjustments, and increased production costs on new product launches in the U.S.

Inventory write-downs

For the three months ended September 30, 2021 and September 30, 2020, we reported no inventory write-downs.

For the nine months ended September 30, 2021, we reported consolidated inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020.

For the nine month comparative period, the increase in inventory-write downs was primarily related to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

For the three months ended September 30, 2021, we reported consolidated gross profit of $(0.7) million, representing an increase in gross profit of $0.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we reported gross profit of $(19.5) million, representing a decrease in gross profit of $8.5 million from the nine months ended September 30, 2020.

For the three month comparative period, the changes in gross profit and gross margin were primarily due to increased sales of cannabis extracts in the Canadian market in the third quarter of 2021, which carries a higher gross profit and gross margin than other product categories.

For the nine month comparative periods, the changes in gross profit and gross margin were primarily due to inventory write-downs in the ROW segment during the second quarter of 2021, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020 as well as start-up costs associated with new product development in the ROW segment.

For the three months ended March 31, 2022, we reported consolidated cost of sales of $18.1 million, representing an increase of approximately $2.5 million from the three months ended March 31, 2021.

The increase was primarily due to higher sales volumes in the ROW segment, partially offset by lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

For the three months ended March 31, 2022, we reported gross profit of $6.9 million, representing an increase in gross profit of $9.9 million compared to the three months ended March 31, 2021.

For the three month comparative period, the change was primarily due to increased cannabis flower revenue in the ROW segment, the introduction of additional cannabis extract products in the ROW segment that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

Operating expenses

Three months ended September 30, Change Nine months ended September 30, Change

Three months ended March 31, Change

2022 2021 $ %

2 unchanged sentences

General and administrative 22,368 21,906 462 2 %

Share-based payments 2,667 7,916 (5,249) (66) % 7,731 12,898 (5,167) (40) %

Restructuring costs 3,084 — 3,084 N/A

Share-based compensation 3,686 2,499 1,187 47 %

Depreciation and amortization 1,293 735 558 76 %

Impairment loss on goodwill and indefinite-lived intangible assets 142 — 142 N/A 235,056 40,000 195,056 488 %

Impairment loss on long-lived assets 1,784 — 1,784 N/A 4,739 — 4,739 N/A

Impairment loss on long-lived assets 3,493 1,741 1,752 101 %

Total operating expenses $ 42,975 $ 42,237 $ 738 2 %

Sales and marketing

For the three months ended September 30, 2021, sales and marketing expenses were $10.8 million, representing an increase of $3.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, sales and marketing expenses were $34.3 million, representing an increase of $13.4 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to an increase in advertising and marketing campaigns related to our brands in the U.S.

segment, which began in the second half of 2020 as well as increased headcount and related costs tied to these marketing efforts.

During the nine months ended September 30, 2020, new hiring and spending on sales and marketing were delayed in the U.S.

segment due to the impact of COVID-19.

For the three months ended March 31, 2022, sales and marketing expenses were $5.0 million, representing a decrease of $5.2 million from the three months ended March 31, 2021.

The decrease was primarily due to the implementation of the Realignment operating expense targets driving more focused investment towards the highest return spend.

Research and development

For the three months ended September 30, 2021, research and development expenses were $6.5 million, representing an increase of $1.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, research and development expenses were $16.8 million, representing an increase of $3.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, this increase was primarily driven by increased spending on product development and developing cannabinoid intellectual property in the ROW segment.

For the three months ended March 31, 2022, research and development expenses were $4.0 million, representing a decrease of $1.1 million from the three months ended March 31, 2021.

The decrease was primarily due to the implementation of the Realignment, which includes operating expense targets driving more focused investment towards margin accretive innovation.

General and administrative

For the three months ended September 30, 2021, general and administrative expenses were $32.5 million, representing an increase of $13.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, general and administrative expenses were $76.9 million, representing an increase of $15.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to an increase in the allowance for expected credit losses of $13.2 million on our loan receivables with equity method investees in the ROW segment as well as increased headcount in both the ROW and U.S.

The increase was offset by a decrease in share based payments related to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S.

segment in the third quarter of 2020.

For the three months ended March 31, 2022, general and administrative expenses were $22.4 million, representing an increase of $0.5 million from the three months ended March 31, 2021.

The increase was primarily due to higher professional fees related to financial statement review costs and employee-related costs.

Restructuring costs

For the three months ended March 31, 2022, restructuring costs were $3.1 million, related to the Realignment, including the planned exit of the Stayner Facility.

Share-based compensation

For the three months ended March 31, 2022, share-based compensation expenses were $3.7 million, representing an increase of $1.2 million from the three months ended March 31, 2021.

The increase was primarily due to the acceleration of equity grants to certain executive employees in connection with their separation from the Company.

Depreciation and amortization

For the three months ended September 30, 2021, depreciation and amortization expenses were $1.3 million, representing an increase of $0.4 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, depreciation and amortization expenses were $3.0 million, representing an increase of $0.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was primarily due to the increased capital expenditures in the ROW segment since December 31, 2020.

Impairment loss on goodwill and indefinite-lived intangible assets

For the nine months ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets was $235.1 million, representing an increase of $195.1 million from the nine months ended September 30, 2020.

For the nine month comparative periods, the increase in impairment loss on goodwill and indefinite-lived intangible assets was primarily due to the $178.4 million impairment charge recorded on the goodwill in the U.S.

reporting unit and a $56.5 million impairment charge recorded on the Lord Jones ® brand in the U.S.

reporting unit compared to a $35.0 million impairment charge recorded on the U.S.

reporting unit and a $5.0 million impairment charge recorded on the Lord Jones ® brand in the U.S.

recorded in the first half of 2020.

For the three months ended March 31, 2022, depreciation and amortization expenses were $1.3 million, representing an increase of $0.6 million from the three months ended March 31, 2021.

The change was primarily due to assets placed into service during the latter part of the year ended December 31, 2021.

Impairment loss on long-lived assets

For the three months ended September 30, 2021, impairment loss on long-lived assets was $1.8 million compared to no impairment loss on long-lived assets in the three months ended September 30, 2020.

For the nine months ended September 30, 2021, impairment loss on long-lived assets was $4.7 million, compared to no impairment loss on long-lived assets in the nine months ended September 30, 2020.

For the three month comparative periods, the increase was due to a $1.8 million impairment charge for the difference between the consideration paid Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property.

For the nine month comparative periods, the increase was due to impairment charges of $1.8 million related to the aforementioned Ginkgo exclusive license, an impairment loss of $1.7 million related to the leased premises in the U.S.

segment in the first quarter of 2021 as well as a $1.2 million impairment of property, plant and equipment in the U.S.

Other income (loss) & discontinued operations

Three months ended September 30, Change Nine months ended September 30, Change

For the three months ended March 31, 2022, impairment loss on long-lived assets was $3.5 million, representing an increase of $1.8 million from the three months ended March 31, 2021.

For the three months ended March 31, 2022, $2.0 million was related to a right-of-use lease asset and $1.5 million related to leasehold improvements as a result of our decision to seek a sublease for the Company’s corporate headquarters in Toronto, Canada.

During the three months ended March 31, 2021, we recognized impairment charges of $0.7 million related to a right-of-use lease asset and $1.0 million related to leasehold improvements as a result of our decision to no longer use certain leased premises located in Los Angeles, California.

See Note 12 “ Impairment Loss on Long-lived Assets ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

Other income (loss), income tax expense and discontinued operations

Three months ended March 31, Change (i)

2022 2021 $ %

Interest income, net $ 2,046 $ 2,329 $ (283) (12) %

Gain on revaluation of derivative liabilities 132,916 105,307 27,609 26 % 131,290 182,795 (51,505) (28) %

Gain (loss) on revaluation of derivative liabilities 10,419 (116,874) 127,293 109 %

Share of loss from equity accounted investments — (1,643) 1,643 100 %

Gain on disposal of other investments — 3,974 (3,974) N/A — 4,743 (4,743) N/A

Other, net 273 (641) 914 143 % 1,184 (625) 1,809 289 %

Gain (loss) on revaluation of financial instruments 4,268 (200) 4,468 N/M

Impairment loss on other investments (11,238) — (11,238) N/A

Foreign currency transaction loss (1,872) — (1,872) N/A

Other, net 135 (16) 151 N/M

Total other income (loss) 3,758 (116,404) 120,162 103 %

Income (loss) from discontinued operations 82 (473) 555 117 % (500) (519) 19 4 %

Net income (loss) $ 77,666 $ 68,464 $ 9,202 13 % $ (263,312) $ 36,442 $ (299,754) (823) %

Income tax expense (362) — (362) N/A

Loss from discontinued operations — (21) 21 100 %

Net loss $ (32,653) $ (161,625) $ 128,972 80 %

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

Interest income, net

For the three months ended September 30, 2021, interest income, net was $2.1 million, representing a decrease of $1.7 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, interest income, net was $6.7 million, representing a decrease of $8.6 million from the nine months ended September 30, 2020.

For the three months ended September 30, 2021, the decrease in net interest income was primarily due to a decrease in our interest-earning cash equivalents and short-term investment balances compared to the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the decrease in net interest income was due to a decrease in our average variable interest rate as well as a decrease in our cash equivalents and short-term investment balances compared to the nine months ended September 30, 2020.

Gain on revaluation of derivative liabilities

For the three months ended September 30, 2021, the gain on revaluation of derivative liabilities was $132.9 million, representing an increase of $27.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the gain on revaluation of derivative liabilities was $131.3 million, including an out-of-period adjustment of $11.3 million, representing a decrease of $51.5 million from the nine months ended September 30, 2020.

The valuation of derivative liabilities is based on inputs such as the Company’s share price and volatility, expected remaining term and expected risk-free interest rate which have in the past, and may in the future, fluctuate significantly from period to period.

The Company expects continued fluctuations in the derivative valuations.

For further information, see Note 6.

Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1.

“Financial Statements” of this Quarterly Report.

For the three months ended March 31, 2022, interest income, net was $2.0 million, representing a decrease of $0.3 million from the three months ended March 31, 2021.

The decrease in net interest income was primarily due to lower invested balances during the comparative periods.

Gain (loss) on revaluation of derivative liabilities

For the three months ended March 31, 2022, the gain on revaluation of derivative liabilities was $10.4 million, representing an increase of $127.3 million from the three months ended March 31, 2021.

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

For further information, see Note 5 “ Derivative Liabilities ” to the condensed consolidated financial statements under Item 1 “Financial Statements” of this Quarterly Report.

Share of loss from equity accounted investments

For the three months ended September 30, 2021, share of loss from equity accounted investments was $1.4 million, representing an increase in losses of $0.1 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, share of loss from equity accounted investments was $4.2 million, representing an increase in losses of $0.9 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was due to increased recurring losses from the Company’s equity accounted investments.

Gain on disposal of other investments

For both the three and nine months ended September 30, 2021, there was no gain on disposal of other investments.

For the three and nine months ended September 30, 2020, gain on disposal of other investments was $4.0 million and $4.7 million, respectively.

For both the three and nine month comparative periods, the gain on disposal of other investments related to the sale of common shares of Aurora Cannabis, Inc.

(“Aurora”), which were received in connection with the achievement of milestones related to Aurora’s acquisition of Whistler Medical Marijuana Corporation (“Whistler”).

For the three months ended September 30, 2021, other, net was $0.3 million, representing an increase of other, net income of $0.9 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, other, net was $1.2 million, representing an increase of $1.8 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the change was primarily due to the revaluation of held-for-sale assets related to the land and office building located in Winnipeg, Manitoba Canada in the second quarter of 2021 compared to the revaluation of held-for-sale assets related to substantially all of the assets of Original B.C.

Gain (loss) from discontinued operations

For the three months ended September 30, 2021, gain from discontinued operations was $0.1 million, representing an increase of $0.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, loss from discontinued operations was $0.5 million, essentially unchanged from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, gain (loss) from discontinued operations relates to the discontinuance of OGBC.

For the three months ended March 31, 2022, share of loss from equity accounted investments was $nil, representing a decrease in losses of $1.6 million from the three months ended March 31, 2021.

The change was due to a decrease in losses in equity accounted investments during the three months ended March 31, 2022.

Gain (loss) on revaluation of financial instruments

For the three months ended March 31, 2022 and 2021, the gain (loss) on revaluation of financial instruments was $4.3 million, representing an increase of $4.5 million from the three months ended March 31, 2021.

The increase primarily related to the change in fair value of our investment in Cronos Australia during the quarter since becoming an equity security with a readily determinable fair value in connection with its merger with CDA Health Pty Ltd, an Australian medicinal cannabis company, in December 2021.

Prior to the merger, Cronos Australia was accounted for under the equity method of accounting.

Impairment loss on other investments

For the three months ended March 31, 2022, the impairment loss on other investments of $11.2 million was driven by an impairment of the PharmaCann Option for the difference between its estimated fair value and the carrying amount of the PharmaCann Option.

Refer to Note 3 “ Investments ” in our condensed consolidated financial statements under Item 1 of this Quarterly Report.

Foreign currency transaction loss

For the three months ended March 31, 2022, the foreign currency transaction loss was $1.9 million, which related to certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future.

For the three months ended March 31, 2022, other, net was $0.1 million, representing an increase of $0.2 million from the three months ended March 31, 2021.

Results of Operations by Business Segment:

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

ROW and U.S., expressed in U.S.

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

the ROW segment and the U.S.

segment, expressed in U.S.

dollars and in thousands for the periods presented.

2 unchanged sentences

Summary of select financial results – ROW

Three months ended September 30, Change Nine months ended September 30, Change

Three months ended March 31, Change

2022 2021 $ %

1 unchanged sentence

Cost of sales 15,995 14,309 1,686 12 %

Inventory write-down — — — N/A 11,961 11,024 937 8 %

Gross profit 6,710 (4,139) 10,849 262 %

Gross margin 3 % (23) % N/A 26 pp (48) % (56) % N/A 8 pp

Gross margin 30 % (41) % N/A 71 pp

Net revenue – ROW

Three months ended September 30, Change Nine months ended September 30, Change

Three months ended March 31, Change

2022 2021 $ %

3 unchanged sentences

Net revenue $ 22,705 $ 10,170 $ 12,535 123 %

For the three months ended September 30, 2021, the ROW segment reported net revenue of $18.3 million, representing an increase of $8.6 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported net revenue of $41.9 million, representing an increase of $18.2 million from the nine months ended September 30, 2020.

For the three month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower and extracts markets in Canada and sales in the Israeli medical cannabis market.

For the nine month comparative period, the change was primarily due to continued growth of the adult-use cannabis flower market in Canada and sales in the Israeli medical cannabis market.

For the three months ended March 31, 2022, the ROW segment reported net revenue of $22.7 million, representing an increase of $12.5 million from the three months ended March 31, 2021.

The change was primarily due to an increase in net revenue in the Israeli medical market largely attributable to the cannabis flower category and the Canadian adult-use market driven primarily by cannabis extracts used in edibles and vaporizers.

Cost of sales – ROW

For the three months ended September 30, 2021, the ROW segment reported cost of sales of $17.7 million, representing an increase of $5.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported cost of sales of $49.9 million, representing an increase of $24.0 million from the nine months ended September 30, 2020.

For the three month comparative period, the increase was primarily due to an increase in sales volumes.

For the nine month comparative period, the increase was primarily due to an increase in sales volume as well as start-up costs associated with new product development in Canada.

Inventory write-downs – ROW

For the three months ended September 30, 2021 and 2020, the ROW segment reported no inventory write-downs.

For the nine months ended September 30, 2021, the ROW segment reported inventory write-downs of $12.0 million, representing an increase of approximately $0.9 million from the nine months ended September 30, 2020.

For the nine month comparative period, the increase in inventory-write downs primarily relates to cannabis strains and potency levels that are no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada.

For the three months ended March 31, 2022, the ROW segment reported cost of sales of $16.0 million, representing an increase of $1.7 million from the three months ended March 31, 2021.

The increase was primarily due to higher sales volumes, partially offset by lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

Gross profit – ROW

For the three months ended September 30, 2021, the ROW segment reported gross profit of $0.6 million, representing an increase in gross profit of $2.8 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the ROW segment reported gross profit of $(20.0) million, representing a decrease in gross profit of $6.7 million from the nine months ended September 30, 2020.

For the three month comparative period, the change from negative gross profit in 2020 to positive gross profit in 2021 was primarily driven by increased sales of cannabis extracts in the third quarter of 2021, which carry higher gross profit and gross margin than other product categories.

For the nine month comparative period, the decrease in gross profit was primarily due to inventory write-downs, the impact of strategic price reductions on various adult-use cannabis products in Canada in the second half of 2020, as well as start-up costs associated with new product development.

For the three months ended March 31, 2022, the ROW segment reported gross profit of $6.7 million, representing an increase in gross profit of $10.8 million from the three months ended March 31, 2021.

For the three month comparative period, the change was primarily due to increased cannabis flower revenue, the introduction of additional cannabis extract products that carry a higher gross profit and gross margin than other product categories, lower inventory valuation adjustments, lower depreciation expense as a result of the lower fair value of the Stayner Facility in connection with the impairment taken in the three months ended December 31, 2021, and lower cannabis biomass costs as we began to further leverage our joint venture with Cronos GrowCo.

Summary of select financial results – U.S.

Three months ended September 30, Change Nine months ended September 30, Change

Three months ended March 31, Change

2022 2021 $ %

2 unchanged sentences

Gross profit 216 1,176 (960) (82) %

Gross margin (62) % 41 % N/A (103) pp 8 % 39 % N/A (31) pp

Gross margin 9 % 48 % N/A (39) pp

Net revenue – U.S.

For the three months ended September 30, 2021, the U.S.

segment reported net revenue of $2.1 million, representing an increase of $0.5 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported net revenue of $6.8 million, representing an increase of $0.8 million from the nine months ended September 30, 2020.

For the three and nine month comparative periods, the increase was primarily driven by sales of U.S.

hemp-derived CBD products introduced in the second half of 2020.

For the three months ended March 31, 2022, the U.S.

segment reported net revenue of $2.3 million, representing a decrease of $0.1 million from the three months ended March 31, 2021.

The decrease was primarily driven by a reduction in sales as a result of a decrease in promotional spend as the Company works through its review of the U.S.

business as part of the Realignment.

Cost of sales – U.S.

For the three months ended September 30, 2021, the U.S.

segment reported cost of sales of $3.4 million, representing an increase of $2.4 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported cost of sales of $6.3 million, representing an increase of $2.6 million from the nine months ended September 30, 2020.

For both the three and nine month comparative periods, the increase was primarily due to increased inventory valuation adjustments, increased revenue and increased production costs related to new product introductions launched in the fourth quarter of 2020.

For the three months ended March 31, 2022, the U.S.

segment reported cost of sales of $2.1 million, representing an increase of $0.8 million from the three months ended March 31, 2021.

The increase was primarily due to increased inventory valuation adjustments, higher shipping costs and unfavorable sales mix.

Gross profit – U.S.

For the three months ended September 30, 2021, the U.S.

segment reported gross profit of $(1.3) million, compared with gross profit of $0.7 million during the three months ended September 30, 2020, representing a decrease of $2.0 million from the three months ended September 30, 2020.

For the nine months ended September 30, 2021, the U.S.

segment reported gross profit of $0.5 million, representing a decrease of $1.8 million from the nine months ended September 30, 2020.

For the three month comparative period, the decrease was primarily due to the increase in cost of sales as stated above.

For the nine month comparative period, the decrease was primarily due to the cost of sales as stated above.

For the three months ended March 31, 2022, the U.S.

segment reported gross profit of $0.2 million, representing a decrease of $1.0 million from the three months ended March 31, 2021.

For the three months ended March 31, 2022, gross profit was negatively impacted by higher cost of sales.

Non-GAAP Measures

12 unchanged sentences

Adjusted EBITDA

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

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

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

share of loss from equity accounted investments;

impairment loss on goodwill and indefinite-lived assets:

impairment loss on goodwill and intangible assets;

impairment loss on long-lived assets;

gain on revaluation of derivative liabilities;

(gain) loss on revaluation of derivative liabilities;

(gain) loss on revaluation of financial instruments;

transaction costs related to strategic projects;

impairment loss on other investments;

foreign currency transaction loss;

loss from discontinued operations;

share-based payments;

and review costs related to the restatements of the Company’s 2019 interim financial statements and 2021 interim financial statements, the Company’s responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement (see Part II, Item 1.

“Legal Proceedings” of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 and 2021 interim financial statements).

restructuring costs;

share-based compensation;

and review costs related to the restatements of our 2019 and 2021 interim financial statements, including the costs related to our responses to the reviews of such interim financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement (see Part II, Item 1 “Legal Proceedings” of this Quarterly Report for a discussion of the regulatory reviews and shareholder class action complaints relating to the restatement of the 2019 interim financial statements and the regulatory reviews relating to the restatements of the second quarter 2021 interim financial statements).

Impairment loss on other investments has been included as an adjustment to Adjusted EBITDA due to the PharmaCann Option impairment analysis.

Foreign currency transaction loss has been included as an adjustment to Adjusted EBITDA for the anticipated settlement of intercompany loans denominated in foreign currencies.

Additionally, restructuring costs have been included as an adjustment to Adjusted EBITDA in light of the Realignment and the exit from the Stayner Facility.

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

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

The following tables set forth reconciliations of net income (loss) as determined in accordance with U.S.

GAAP to Adjusted EBITDA for the periods indicated (dollars in thousands):

Three months ended September 30, 2021

United States Rest of World Corporate Total

Net income (loss) $ (13,499) $ 97,198 $ (6,033) $ 77,666

Interest income, net (4) (2,060) — (2,064)

Income tax benefit — (159) — (159)

Share of loss from equity accounted investments — 1,414 — 1,414

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

Impairment loss on long-lived assets (ii)

— 1,784 — 1,784

Gain on revaluation of derivative liabilities (iii)

— (132,916) — (132,916)

Transaction costs (iv)

Other, net (vi)

— (273) — (273)

Income from discontinued operations (vii)

— (82) — (82)

Share-based payments (viii)

967 1,700 — 2,667

Financial statement review costs (ix)

Depreciation and amortization 231 3,597 — 3,828

Adjusted EBITDA $ (12,200) $ (29,760) $ (4,813) $ (46,773)

Three months ended September 30, 2020

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

(In thousands of U.S.

dollars) Three months ended March 31, 2022

United States Rest of World Corporate Total

2 unchanged sentences

Income tax expense — 362 — 362

Share of loss from equity accounted investments — 1,327 — 1,327

Gain on revaluation of derivative liabilities (iii)

— (105,307) — (105,307)

Gain on disposal of other investments (v)

— (3,974) — (3,974)

Other, net (vi)

Loss from discontinued operations (vii)

Share-based payments (viii)

6,469 1,447 — 7,916

Financial statement review costs (ix)

Depreciation and amortization 35 2,181 — 2,216

Adjusted EBITDA $ (5,687) $ (14,371) $ (10,021) $ (30,079)

Nine months ended September 30, 2021

United States Rest of World Corporate Total

Net income (loss) $ (273,438) $ 34,678 $ (24,552) $ (263,312)

Interest income, net (27) (6,659) — (6,686)

Income tax benefit — (159) — (159)

Share of loss from equity accounted investments — 4,172 — 4,172

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

Impairment loss on long-lived assets (i)

— 3,493 — 3,493

Impairment loss on long-lived assets (ii)

Gain on revaluation of derivative liabilities (ii)

— (10,419) — (10,419)

Gain on revaluation of derivative liabilities (iii)

Gain on revaluation of financial instruments (iv)

— (4,268) — (4,268)

Transaction costs (iv)

Impairment loss on other investment (v)

11,238 — — 11,238

Foreign currency transaction loss — 1,872 — 1,872

Other, net (vi)

— (135) — (135)

Loss from discontinued operations (vii)

Share-based payments (viii)

Restructuring costs (viii)

1,053 2,031 — 3,084

Financial statement review costs (ix)

Share-based compensation (ix)

2,436 1,250 — 3,686

Financial statement review costs (x)

— — 4,062 4,062

Depreciation and amortization 432 2,392 — 2,824

Adjusted EBITDA $ (7,086) $ (3,425) $ (8,389) $ (18,900)

Nine months ended September 30, 2020

(In thousands of U.S.

dollars) Three months ended March 31, 2021

United States Rest of World Corporate Total

Net income (loss) $ (64,507) $ 125,640 $ (24,691) $ 36,442

Net loss $ (12,092) $ (142,147) $ (7,386) $ (161,625)

Interest income, net (3) (2,326) — (2,329)

Income tax expense 143 845 — 988

Share of loss from equity accounted investments — 1,643 — 1,643

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

40,000 — — 40,000

Gain on revaluation of derivative liabilities (iii)

Impairment loss on long-lived assets (i)

1,741 — — 1,741

Gain on disposal of other investments (v)

Loss on revaluation of derivative liabilities (ii)

— 116,874 — 116,874

Transaction costs (iii)

Loss on revaluation of financial instruments (iv)

Other, net (vi)

Loss from discontinued operations (vii)

Share-based payments (viii)

Share-based compensation (ix)

745 1,754 — 2,499

Financial statement review costs (ix)

Financial statement review costs (x)

— — 2,005 2,005

1 unchanged sentence

Adjusted EBITDA $ (9,510) $ (22,184) $ (4,880) $ (36,574)

(i) For the nine months ended September 30, 2021 and 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S.

For the three months ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S.

segment and impairment on an indefinite-lived trademark related to our ROW segment.

Goodwill and Intangible Assets, Net to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(ii) For the three months ended September 30, 2021, impairment loss on long-lived assets relates to impairment charges for the difference between the consideration paid to Ginkgo for the achievement of certain milestones in connection with the Ginkgo Collaboration Agreement and the fair value of the Ginkgo exclusive license intellectual property .

For the nine months ended September 30, 2021, impairment loss on long-lived assets relates to an impairment on leased premises in the U.S.

segment, impairment on property, plant and equipment in the U.S.

segment and the aforementioned impairment of the Ginkgo intellectual property.

For the three and nine months ended September 30, 2020, there was no impairment loss on long-lived assets.

Impairment Loss on Long-lived Assets and Note 5.

Goodwill and Intangible Assets, net to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(iii) For the three and nine months ended September 30, 2021 and 2020, the gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.

Derivative Liabilities to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(iv) For the three and nine months ended September 30, 2021, transaction costs represents legal, financial and other advisory fees and expenses incurred in connection with various strategic investments.

(i) For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space located in Toronto, Ontario, Canada.

For the three months ended March 31, 2021, impairment loss on long-lived assets related to an impairment on leased premises in the U.S.

See Note 12 “ Impairment Loss on Long-lived Assets ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

(ii) For the three months ended March 31, 2022 and 2021, the (gain) loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities.

See Note 5 “ Derivative Liabilities ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

(iii) For the three months ended March 31, 2021, 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 condensed consolidated statements of net income (loss) and comprehensive income (loss).

(v) For the three and nine months ended September 30, 2020, gain on disposal of other investments net is primarily comprised of the gain recorded related to the sale of common shares of Aurora, which were received in connection with the achievement of a milestone related to Aurora’s acquisition of Whistler.

There were no disposals of investments during the three and nine months ended September 30, 2021.

Investments to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(vi) For the three and nine months ended September 30, 2021 and 2020, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets, (gain) loss recognized on the revaluation of financial liabilities and (gain) loss on disposal of assets.

(vii) For the three and nine months ended September 30, 2021 and 2020, loss (income) from discontinued operations relates to the discontinuance of OGBC.

Held-For-Sale Assets and Discontinued Operations to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(viii) For the three and nine months ended September 30, 2021 and 2020, share-based payments relates to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7.

Share-based Payments to the Company’s condensed consolidated financial statements under Item 1.

of this Quarterly Report.

(ix) For the three and nine months ended September 30, 2021 and 2020, financial statement review costs include costs related to the restatements of the Company’s 2019 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the restatement.

(iv) For the three months ended March 31, 2022, gain on revaluation of financial instruments related primarily to the Company’s equity securities in Cronos Australia.

See Note 3 “ Investments ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

For the three months ended March 31, 2021, loss on revaluation of financial instruments related primarily to revaluations of financial liabilities resulting from DSUs.

(v) For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount.

See Note 3 “ Investments ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

(vi) For the three months ended March 31, 2022 and 2021, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets.

(vii) For the three months ended March 31, 2021, loss from discontinued operations related to the discontinuance of OGBC.

(viii) For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment and the exit of the Stayner Facility.

See Note 6 “ Restructuring ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

(ix) For the three months ended March 31, 2022 and 2021, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7 “ Share-based Compensation ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report.

(x) For the three months ended March 31, 2022 and 2021, financial statement review costs include costs related to the restatements of the Company’s 2019 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 restatement and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.

Liquidity and Capital Resources

As of September 30, 2021, we had $842.6 million in cash and cash equivalents and $197.2 million in short-term investments, which comprise the majority of the Company’s cash position.

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

The following table summarizes the cash flows from operating, investing and financing activities in thousands of U.S.

Nine months ended September 30,

As of March 31, 2022, we had $861.5 million in cash and cash equivalents and $119.9 million in short-term investments, which comprise the majority of the Company’s cash position.

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

The following table summarizes the cash flows from operating, investing and financing activities:

(In thousands of U.S.

dollars) Three months ended March 31,

Cash flows used in operating activities $ (33,911) $ (46,615)

3 unchanged sentences

Net change in cash $ (25,438) $ (53,573)

Comparison of cash flows between the nine months ended September 30, 2021 and the nine months ended September 30, 2020

Comparison of cash flows between the three months ended March 31, 2022 and the three months ended March 31, 2021

Operating activities

During the nine months ended September 30, 2021, we used $117.7 million of cash in operating activities as compared to cash used of $106.5 million in the nine months ended September 30, 2020, representing an increase in cash used of $11.1 million.

This change is primarily driven by a $35.5 million decrease in net income after adjusting for non-cash items, partially offset by an increase of $53.7 million in changes in operating assets and liabilities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

During the three months ended March 31, 2022, we used $33.9 million of cash in operating activities as compared to cash used of $46.6 million in the three months ended March 31, 2021, representing decrease in cash used of $12.7 million.

This change is primarily driven by a $12.0 million increase in net income after adjusting for non-cash items during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Investing activities

During the nine months ended September 30, 2021, we used $110.2 million of cash in investing activities, compared to $37.8 million of cash provided by investing activities during the nine months ended September 30, 2020, representing an increase of $148.0 million in cash used by investing activities.

This change is primarily driven by the Company’s investment in PharmaCann of approximately $110.4 million, and a $78.5 million;

net decrease in proceeds from short-term investments, partially offset by a $30.1 million decrease in loans receivables to joint ventures and a $12.7 million decrease in capital expenditures compared to the nine months ended September 30, 2020.

The decrease in capital expenditures is primarily due to a reduction in construction costs in the ROW segment and a decrease in costs related to the implementation of the Company’s enterprise resource planning system compared to the nine months ended September 30, 2020.

During the three months ended March 31, 2022, we generated $0.1 million of cash in investing activities, compared to $9.7 million of cash used in investing activities during the three months ended March 31, 2021, representing a decrease of $9.8 million in cash used by investing activities.

This change is primarily driven by lower purchases of property, plant and equipment and a decrease in disbursements related to loans receivable with related parties for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Financing activities

During the nine months ended September 30, 2021, cash used in financing activities was $13.2 million, compared to 2.3 million of cash used in financing activities during the nine months ended September 30, 2020, representing an increase of $10.8 million in cash used in financing activities.

This change is primarily driven by an increase of $11.0 million in withholding taxes paid on share-based awards during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

During the three months ended March 31, 2022, cash used in financing activities was $0.5 million, compared to $8.7 million of cash used in financing activities during the three months ended March 31, 2021, representing a decrease of $8.2 million in cash used in financing activities.

This change is primarily driven by a decrease of $8.1 million in withholding taxes paid on share-based awards during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Cash Requirements

The Company’s cash requirements have not changed significantly since the filing of the Annual Report.

Critical Accounting Policies and Estimates

The Company’s critical accounting policies and estimates are discussed in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Loans Receivable, net.

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

In the third quarter of 2021, the Company changed methodologies for estimating the allowance for credit loss on loans receivable from the historical credit loss method to the probability of default method.

The probability of default rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary.

The Company may also record a specific reserve for individual accounts when it becomes aware of specific borrower circumstances, such as in the case of a bankruptcy filing or deterioration in the borrower’s operating results or financial position.

The allowance for credit loss accrual balance was $14.9 million and $2.6 million as of September 30, 2021 and December 31, 2020, respectively.

Valuation of Derivative Liabilities.

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

The Company measures derivative liabilities at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in net income (loss) and comprehensive income (loss).

The Company calculates fair value of derivative liabilities using the Black-Scholes model.

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

Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company as of September 30, 2021.

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

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

Other than the changes in accounting estimates above, there have been no material changes to these critical accounting policies and estimates.

Our critical accounting policies and estimates are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

Our critical accounting policies and estimates have not changed significantly since the filing of the Annual Report.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis