Cronos Group Inc. 10-Q

Item 1. Financial Statements Table of Contents Condensed Consolidated Balance Sheets as of March 31 , 202 2 (Unaudited) and December 31, 202 1 4 Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31 , 202 2 and 202 1 (Unaudited) 5 Condensed Consolidated Statements of Changes in Equity for the three months ended March 3 1 , 202 2 and 202 1 (Unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three months ended March 31 , 202 2 and 202 1 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 3 Cronos Group Inc. Condensed Consolidated Balance Sheets (In thousands of U.S. dollars, except share amounts) Table of Contents As of March 31, 2022 As of December 31, 2021 Assets (Unaudited) (Audited) Current assets Cash and cash equivalents $ 861,535 $ 886,973 Short-term investments 119,933 117,684 Accounts receivable, net 25,814 22,067 Other receivables 3,297 5,765 Current portion of loans receivable, net 6,235 5,460 Inventory, net 37,054 32,802 Prepaids and other current assets 9,537 8,967 Total current assets 1,063,405 1,079,718 Investments in equity accounted investees, net 17,084 16,764 Other investments 111,761 118,392 Non-current portion of loans receivable, net 81,529 80,635 Property, plant and equipment, net 71,828 74,070 Right-of-use assets 6,325 8,882 Goodwill 1,119 1,098 Intangible assets, net 17,880 18,079 Other assets 70 100 Total assets $ 1,371,001 $ 1,397,738 Liabilities Current liabilities Accounts payable $ 10,904 $ 11,218 Accrued liabilities 23,076 26,069 Current portion of lease obligation 2,173 2,711 Derivative liabilities 4,099 14,375 Total current liabilities 40,252 54,373 Due to non-controlling interests 1,888 1,913 Non-current portion of lease obligation 7,094 7,095 Deferred income tax liability 396 81 Total liabilities 49,630 63,462 Shareholders’ equity Share capital (authorized for issue as of March 31, 2022 and December 31, 2021: unlimited; shares outstanding as of March 31, 2022 and December 31, 2021: 375,299,980 and 374,952,693 , respectively) 596,368 595,497 Additional paid-in capital 35,365 32,465 Retained earnings 626,778 659,416 Accumulated other comprehensive income 66,088 49,865 Total equity attributable to shareholders of Cronos Group 1,324,599 1,337,243 Non-controlling interests ( 3,228 ) ( 2,967 ) Total shareholders’ equity 1,321,371 1,334,276 Total liabilities and shareholders’ equity $ 1,371,001 $ 1,397,738 See notes to condensed consolidated interim financial statements. 4 Cronos Group Inc. Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) (In thousands of U.S dollars, except share and per share amounts, unaudited) Table of Contents Three months ended March 31, 2022 2021 Net revenue, before excise taxes $ 29,406 $ 14,654 Excise taxes ( 4,373 ) ( 2,043 ) Net revenue 25,033 12,611 Cost of sales 18,107 15,574 Gross profit 6,926 ( 2,963 ) Operating expenses Sales and marketing 5,012 10,254 Research and development 4,039 5,102 General and administrative 22,368 21,906 Restructuring costs 3,084 — Share-based compensation 3,686 2,499 Depreciation and amortization 1,293 735 Impairment loss on long-lived assets 3,493 1,741 Total operating expenses 42,975 42,237 Operating loss ( 36,049 ) ( 45,200 ) Other income (expense) Interest income, net 2,046 2,329 Gain (loss) on revaluation of derivative liabilities 10,419 ( 116,874 ) Share of loss from equity accounted investments — ( 1,643 ) Gain (loss) on revaluation of financial instruments 4,268 ( 200 ) Impairment loss on other investments ( 11,238 ) — Foreign currency transaction loss ( 1,872 ) — Other, net 135 ( 16 ) Total other income (expense) 3,758 ( 116,404 ) Loss before income taxes ( 32,291 ) ( 161,604 ) Income tax expense 362 — Loss from continuing operations ( 32,653 ) ( 161,604 ) Loss from discontinued operations — ( 21 ) Net loss ( 32,653 ) ( 161,625 ) Net loss attributable to non-controlling interest ( 15 ) ( 313 ) Net loss attributable to Cronos Group $ ( 32,638 ) $ ( 161,312 ) Comprehensive loss Net loss $ ( 32,653 ) $ ( 161,625 ) Other comprehensive income Foreign exchange gain on translation 15,977 16,284 Comprehensive loss ( 16,676 ) ( 145,341 ) Comprehensive income (loss) attributable to non-controlling interests ( 261 ) 826 Comprehensive loss attributable to Cronos Group $ ( 16,415 ) $ ( 146,167 ) Net loss from continuing operations per share Basic - continuing operations $ ( 0.09 ) $ ( 0.44 ) Diluted - continuing operations ( 0.09 ) ( 0.44 ) See notes to condensed consolidated interim financial statements. 5 Cronos Group Inc. Condensed Consolidated Statements of Changes in Equity For the three months ended March 31, 2022 and 2021 (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Number of shares Share capital Additional paid-in capital Retained earnings Accumulated other comprehensive income Non-controlling interests Total shareholders’ equity Balance as of January 1, 2022 374,952,693 $ 595,497 $ 32,465 $ 659,416 $ 49,865 $ ( 2,967 ) $ 1,334,276 Activities relating to share-based compensation 347,287 871 2,900 — — — 3,771 Net loss — — — ( 32,638 ) — ( 15 ) ( 32,653 ) Foreign exchange gain (loss) on translation — — — — 16,223 ( 246 ) 15,977 Balance as of March 31, 2022 375,299,980 $ 596,368 $ 35,365 $ 626,778 $ 66,088 $ ( 3,228 ) $ 1,321,371 Number of shares Share capital Additional paid-in capital Retained earnings 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 Activities relating to share-based compensation 11,403,258 15,652 ( 2,506 ) ( 7,694 ) — — 5,452 Net loss — — — ( 161,312 ) — ( 313 ) ( 161,625 ) Foreign exchange gain on translation — — — — 15,145 1,139 16,284 Balance as of March 31, 2021 371,656,590 $ 584,912 $ 32,090 $ 895,503 $ 58,144 $ ( 2,370 ) $ 1,568,279 See notes to condensed consolidated interim financial statements. 6 Cronos Group Inc. Condensed Consolidated Statements of Cash Flows (In thousands of U.S. dollars, except share amounts, unaudited) Table of Contents Three months ended March 31, 2022 2021 Operating activities Net loss $ ( 32,653 ) $ ( 161,625 ) Adjustments to reconcile net loss to cash used in operating activities: Share-based compensation 3,686 2,499 Depreciation and amortization 2,824 1,880 Impairment loss on long-lived assets 3,493 1,741 Impairment loss on other investments 11,238 — Share of loss from investments in equity accounted investees — 1,643 Gain (loss) on revaluation of derivative liabilities ( 10,419 ) 116,874 Expected credit losses on long-term financial assets — 416 Foreign currency transaction loss 1,872 — Other non-cash operating activities, net ( 4,467 ) 106 Changes in operating assets and liabilities: Accounts receivable, net ( 3,530 ) 1,931 Other receivables 2,435 5,687 Prepaids and other current assets ( 1,195 ) ( 3,737 ) Inventory ( 3,867 ) ( 742 ) Accounts payable ( 178 ) ( 3,119 ) Accrued liabilities ( 3,150 ) ( 10,169 ) Cash flows used in operating activities ( 33,911 ) ( 46,615 ) Investing activities Proceeds from dissolution of joint venture 44 — Proceeds from repayment of loans receivable 790 — Purchase of property, plant and equipment ( 711 ) ( 6,680 ) Purchase of intangible assets ( 23 ) ( 392 ) Advances on loans receivable — ( 2,645 ) Cash flows provided by (used in) investing activities 100 ( 9,717 ) Financing activities Withholding taxes paid on share-based awards ( 534 ) ( 8,673 ) Other financing activities, net 70 10 Cash flows used in financing activities ( 464 ) ( 8,663 ) Effect of foreign currency translation on cash and cash equivalents 8,837 11,422 Net change in cash and cash equivalents ( 25,438 ) ( 53,573 ) Cash and cash equivalents, beginning of period 886,973 1,078,023 Cash and cash equivalents, end of period $ 861,535 $ 1,024,450 Supplemental cash flow information Interest received 822 1,157 Income taxes paid 66 624 See notes to condensed consolidated interim financial statements. 7 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 1. Background, Basis of Presentation and 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+™. (b) Basis of presentation The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for any other reporting period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”). Certain prior year amounts have been reclassified to conform to the current year presentation of our condensed consolidated financial statements. These reclassifications had no effect on the reported results of operations and ending shareholders’ equity. (c) Concentration of 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 $ 1,098,413 and $ 1,118,684 as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, the Company had $ 9 and $ 8 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the Rest of World (“ROW”) segment. As of March 31, 2022 and December 31, 2021, the Company had $ 138 and $ 104 , respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the United States (“U.S.”) segment. As of March 31, 2022, the Company assessed that there is a concentration of credit risk, as 72 % of the Company’s accounts receivable were due from three customers with an established credit history with the Company. As of December 31, 2021, 88 % of the Company’s accounts receivable were due from four customers with an established credit history with the Company. The Company sells products to a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenue. During the three months ended March 31, 2022, the Company earned a total net revenue before excise taxes of $ 9,833 from two major customers in the ROW segment, together accounting for 33 % of the Company’s total net revenue before excise taxes. During the three months ended March 31, 2021, the Rest of World segment earned a total net revenue before excise taxes of $ 8,963 from four major customers, together accounting for 61 % of the Company’s total net revenues before excise taxes. During the three months ended March 31, 2022 and 2021, the U.S. segment had no major customers. 8 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents (d) Segment information 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. The Company determined that it has the following two reportable segments: U.S. (the “U.S. segment”) and ROW (the “ROW segment”). The U.S. operating segment consists of the manufacture and distribution of U.S. hemp-derived cannabinoid infused products. The ROW 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 using Adjusted EBITDA (as defined below) as the measure of segment profit or loss. 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. (e) Adoption of new accounting pronouncements On January 1, 2022, the Company adopted ASU No. 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. The adoption of ASU No. 2020-06 did not have an impact on the Company’s interim condensed consolidated financial statements. (f) New accounting pronouncements not yet adopted In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASU No. 2022-02”). ASU No. 2022-02 eliminates the existing troubled debt restructuring recognition and measurement guidance, and instead aligns the accounting treatment to that of other loan modifications. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU No. 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and is to be adopted prospectively. The Company does not expect the adoption of ASU No. 2022-02 to have a material impact on its condensed consolidated financial statements. 2. Inventory, net Inventory, net is comprised of the following items: As of March 31, 2022 As of December 31, 2021 Raw materials $ 8,523 $ 9,211 Work-in-progress 12,353 12,405 Finished goods 15,587 10,778 Supplies and consumables 591 408 Total $ 37,054 $ 32,802 3. Investments (a) Variable interest entities and investments in equity accounted investees, net A reconciliation of the carrying amount of the investments in equity method investees, net is as follows: Ownership interest As of March 31, 2022 As of December 31, 2021 Cronos Growing Company Inc. (“Cronos GrowCo”) 50 % $ 17,084 $ 16,764 NatuEra S.à.r.l. (“Natuera”) 50 % — — $ 17,084 $ 16,764 9 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except 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: For the three months ended March 31, 2022 2021 Cronos GrowCo $ — $ ( 299 ) Natuera — ( 1,344 ) $ — $ ( 1,643 ) (b) Other investments Other investments consist of investments in common shares and options of two companies in the cannabis industry. PharmaCann, Inc. In 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, which represented an ownership interest of approximately 10.5 % as of December 31, 2021. The PharmaCann Option is classified as an equity security without a readily determinable fair value. The Company has elected to measure the fair value of the PharmaCann Option at cost less impairment, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. On February 28, 2022, PharmaCann closed the previously announced transaction with LivWell Holdings, Inc. (“LivWell”) pursuant to which PharmaCann acquired LivWell (the “LivWell Transaction”). LivWell is a multi-state cannabis cultivation and retail leader based in Colorado. As a result of the LivWell Transaction, the Company’s ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.4 %. The decrease in ownership percentage does not materially affect the Company’s rights under the PharmaCann Option. During the three months ended March 31, 2022, the Company identified indicators of impairment related to the PharmaCann Option and conducted an analysis comparing the PharmaCann Option’s carrying amount to its estimated fair value. The fair value was estimated using a combination of the market and income approaches. Under the income approach, significant inputs used in the discounted cash flow method include discount rate, growth rates, and cash flow projections. As a result of this analysis, the Company recorded a non-cash impairment charge of $ 11,238 , as the difference between the carrying amount of the PharmaCann Option and its estimated fair value in the condensed consolidated statements of net income (loss) and comprehensive income (loss). Cronos Australia Limited The Company owns approximately 10 % of the outstanding common shares of Cronos Australia Limited (“Cronos Australia”). The investment is considered an equity security with a readily determinable fair value. Changes in the fair value of the investment are recorded as gain (loss) on revaluation of financial instruments on the condensed consolidated statements of net income (loss) and comprehensive income (loss). The following table summarizes the Company’s other investments activity: As of December 31, 2021 Unrealized gain Impairment charges Foreign exchange effect As of March 31, 2022 PharmaCann $ 110,392 $ — $ ( 11,238 ) $ — $ 99,154 Cronos Australia 8,000 4,196 — 411 12,607 $ 118,392 $ 4,196 $ ( 11,238 ) $ 411 $ 111,761 During the three months ended March 31, 2021, the Company had no gain or loss on revaluation of other investments. As of March 31, 2022 and December 31, 2021, the Company did not hold any additional other investments. 10 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 4. Loans Receivable, net Loans receivable, net consists of the following: As of March 31, 2022 As of December 31, 2021 GrowCo Facility (i) $ 3,198 $ 3,138 Add: Current portion of accrued interest 3,037 2,322 Total current portion of loans receivable 6,235 5,460 GrowCo Facility (i) 64,801 64,367 Mucci Promissory Note 14,414 14,019 Cannasoul Collaboration Loan (ii) 2,192 2,249 Add: Long-term portion of accrued interest 122 — Total long-term portion of loans receivable 81,529 80,635 Total loans receivable, net $ 87,764 $ 86,095 (i) 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 of March 31, 2022 and December 31, 2021, Cronos GrowCo had outstanding borrowings of C$ 103,000 ($ 82,354 ) and C$ 104,000 ($ 81,598 ), respectively, from the GrowCo Facility. As of March 31, 2022, Cronos GrowCo had repaid C$ 1,000 ($ 800 ) under the terms of the GrowCo Facility. The available borrowing capacity under the GrowCo Facility was C$ 1,000 ($ 800 ) at March 31, 2022 and December 31, 2021. (ii) As of March 31, 2022 and December 31, 2021, CLS has received ILS 8,297 ($ 2,600 ) and ILS 8,297 ($ 2,664 ), respectively, from the Cannasoul Collaboration Loan. Expected credit loss allowances on the Company’s long-term financial assets was comprised of the following items: As of January 1, 2022 Increase (decrease) (i) Foreign exchange effect As of March 31, 2022 GrowCo Facility $ 14,089 $ ( 4 ) $ 269 $ 14,354 Mucci Promissory Note 90 1 2 93 Cannasoul Collaboration Loan 415 3 ( 9 ) 409 $ 14,594 $ — $ 262 $ 14,856 As of January 1, 2021 Increase (decrease) (i) Foreign exchange effect As of March 31, 2021 GrowCo Facility $ 1,546 $ — $ 23 $ 1,569 Natuera Series A Loan (ii) 721 416 14 1,151 Mucci Promissory Note 270 — 4 274 Cannasoul Collaboration Loan 26 — — 26 $ 2,563 $ 416 $ 41 $ 3,020 (i) During the three months ended March 31, 2022 and 2021, $ nil and $ 416 , respectively, were recorded to general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses. (ii) As of March 31, 2022 and December 31, 2021, loans receivable, net for the Natuera Series A Loan was $ nil . 5. Derivative Liabilities As of March 31, 2022, Altria Group Inc. (“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) and one warrant of the Company (the “Altria Warrant”). 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 (the “Investor Rights Agreement”), entered into in connection with the closing of Altria’s investment in the Company (the “Altria Investment”) pursuant to a subscription agreement dated December 7, 2018, the Company granted Altria certain rights, among others, summarized in this note. 11 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 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 ( 83,399,995 common shares as of March 31, 2022) 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 (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”)), 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 Strategic Partnership 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”). Reconciliation of the Company’s derivative liabilities activity are as follows: As of January 1, 2022 Revaluation gain Exercise of rights Foreign exchange effect As of March 31, 2022 (a) Altria Warrant $ 13,720 $ ( 10,011 ) $ — $ 136 $ 3,845 (b) Pre-emptive Rights 180 ( 115 ) — 2 67 (c) Top-up Rights 475 ( 293 ) — 5 187 $ 14,375 $ ( 10,419 ) $ — $ 143 $ 4,099 As of January 1, 2021 Revaluation loss Exercise of rights Foreign exchange effect As of March 31, 2021 (a) Altria Warrant $ 138,858 $ 92,964 $ — $ 2,834 $ 234,656 (b) Pre-emptive Rights 12,095 7,833 — 245 20,173 (c) Top-up Rights 12,457 16,077 ( 11,278 ) 215 17,471 $ 163,410 $ 116,874 $ ( 11,278 ) $ 3,294 $ 272,300 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. 12 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents The fair values of the derivative liabilities were determined using the Black-Scholes pricing model using the following inputs: As of March 31, 2022 Altria Warrant Pre-emptive Rights Top-up Rights Share price at valuation date (per share in C$) $ 4.85 $ 4.85 $ 4.85 Subscription price (per share in C$) $ 19 $ 16.25 $ 16.25 Weighted-average risk-free interest rate (i) 1.84 % 1.31 % 1.38 % Weighted-average expected life (in years) (ii) 0.94 0.50 0.75 Expected annualized volatility (iii) 71 % 71 % 71 % Expected dividend yield — % — % — % As of December 31, 2021 Altria Warrant Pre-emptive Rights Top-up Rights Share price at valuation 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 % Weighted-average expected life (in years) (ii) 1.18 0.50 0.80 Expected annualized volatility (iii) 80 % 80 % 80 % 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 March 31, 2022 and December 31, 2021, the risk-free interest rate uses a range of approximately 0.60 % to 2.28 % and 0.16 % to 1.10 %, 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 March 31, 2022 and December 31, 2021, the expected life uses a range of approximately 0.25 years to 3.50 years and 0.25 years to 3.75 years, respectively, for the Pre-emptive Rights and Top-up Rights. (iii) Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company. 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 March 31, 2022 Altria Warrant Pre-emptive Rights Top-up Rights Share price $ 1,445 $ 34 $ 53 Weighted-average expected life 1,114 65 60 Expected annualized volatility 1,930 41 67 10% decrease as of December 31, 2021 Altria Warrant Pre-emptive Rights Top-up Rights Share price $ 3,970 $ 80 $ 123 Weighted-average expected life 2,971 171 133 Expected annualized volatility 5,402 96 155 These inputs are classified as 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. 13 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 6 . Restructuring 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”). As part of the Realignment, on February 28, 2022, the Board approved plans to leverage the Company’s strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting its production facility in Stayner, Ontario, Canada (the “Stayner Facility”). The organizational and cost reduction initiatives being undertaken are intended to position the Company to drive profitable and sustainable growth over time. The Company expects to spend approximately $ 5,800 in connection with the Realignment and the planned exit of the Stayner Facility, of which $ 3,084 has been incurred as of March 31, 2022. Estimated charges related to the exit of the Stayner Facility include employee-related costs such as severance, relocation and other termination benefits, as well as contract termination and other related costs. The Company expects to incur approximately $ 2,700 in additional charges related to the planned exit of the Stayner Facility, 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. The Company incurred the following restructuring costs by reportable segment: Three months ended March 31, 2022 2021 Rest of World $ 2,031 $ — United States 1,053 — Total $ 3,084 $ — The following table summarizes the Company’s restructuring activity for the three months ended March 31, 2022: Accrual as of December 31, 2021 Year-to-date expense Payments Accrual as of March 31, 2022 Employee termination benefits $ — $ 2,503 $ ( 1,249 ) $ 1,254 Other restructuring costs — 581 ( 437 ) 144 Total $ — $ 3,084 $ ( 1,686 ) $ 1,398 7. Share-based Compensation (a) Share-based award plans The Company has granted stock options, restricted share units (“RSUs”) and deferred share units (“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 compensation expense associated with the Company’s stock options and RSUs: Three months ended March 31, 2022 2021 Stock options $ 1,729 $ 2,064 RSUs 1,957 435 Total share-based compensation $ 3,686 $ 2,499 During the three months ended March 31, 2022, the Company recognized $ 1,583 of share-based compensation expense related to the severance of certain executives. 14 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents (b) Stock options Vesting conditions for grants of options are determined by the Compensation Committee of the Company’s Board of Directors. The typical vesting for stock option grants made under the 2020 Omnibus Plan is annual vesting over three to five years with a maximum term of ten years . The typical vesting for stock option grants made under the Prior Option Plans is quarterly vesting over three to five with a maximum term of seven years . The Prior Option Plans did not, and the 2020 Omnibus Plan does not, authorize grants of options with an exercise price below fair market value. The following is a summary of the changes in stock options: Weighted-average exercise price (C$) (i) Number of options Weighted-average remaining contractual term (years) Balance as of January 1, 2022 $ 7.75 8,939,330 2.70 Exercise of options 3.14 ( 1,356,875 ) Cancellation, forfeiture and expiry of options 12.46 ( 55,791 ) Balance as of March 31, 2022 $ 8.55 7,526,664 1.72 Exercisable as of March 31, 2022 $ 7.96 4,654,574 1.14 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 Exercise of options 2.13 ( 5,230,550 ) Cancellation, forfeiture and expiry of options 14.71 ( 25,771 ) Balance as of March 31, 2021 $ 7.38 8,498,827 2.82 Exercisable as of March 31, 2021 $ 5.75 4,896,820 1.46 (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. The following table summarizes stock options outstanding: As of March 31, 2022 As of December 31, 2021 2020 Omnibus Plan 2,900,000 2,900,000 2018 Stock Option Plan 1,523,449 1,550,074 2015 Stock Option Plan 3,103,215 4,489,256 Total stock options outstanding 7,526,664 8,939,330 15 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents (c) Restricted share units The following is a summary of the changes in RSUs: Weighted-average grant date fair value (C$) (i) Number of RSUs Balance as of January 1, 2022 $ 9.22 1,225,870 Granted (i) 3.52 3,950,334 Vested and issued 10.81 ( 78,631 ) Cancellation and forfeitures 7.92 ( 55,479 ) Balance as of March 31, 2022 $ 4.74 5,042,094 Weighted-average grant date fair value (C$) (ii) Number of RSUs Balance as of January 1, 2021 $ 7.66 948,357 Granted (i) 13.27 265,904 Balance as of March 31, 2021 $ 8.89 1,214,261 (i) RSUs granted in the period vest annually in equal installments over a three-year period from the grant date or vest 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. (d) Deferred share units The following is a summary of the changes in DSUs: Financial liability Number of DSUs Balance as of January 1, 2022 $ 408 104,442 Gain on revaluation ( 66 ) — Balance as of March 31, 2022 $ 342 104,442 Financial liability Number of DSUs Balance as of January 1, 2021 $ 577 83,293 Loss on revaluation 211 — Balance as of March 31, 2021 $ 788 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 ( 7,977,349 ) Balance as of March 31, 2021 $ 0.25 10,000 As of March 31, 2022, there are no warrants outstanding other than the Altria Warrant. See Note 5 “ Derivative Liabilities ” for further description of the Altria Warrant. 16 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 8. Earnings (Loss) per Share Basic and diluted earnings (loss) per share from continuing and discontinued operations are calculated as follows (in thousands, except share and per share amounts): Three months ended March 31, 2022 2021 Basic and diluted loss per share computation Net loss from continuing operations attributable to the shareholders of Cronos Group $ ( 32,638 ) $ ( 161,291 ) Weighted-average number of common shares outstanding for computation for basic and diluted earnings per share (i) 375,022,724 363,012,740 Basic loss from continuing operations per share $ ( 0.09 ) $ ( 0.44 ) Diluted loss from continuing operations per share $ ( 0.09 ) $ ( 0.44 ) Loss from discontinued operations attributable to the shareholders of Cronos Group $ — $ ( 21 ) Weighted-average number of common shares outstanding from computation for basic and diluted earnings per share 375,022,724 363,012,740 Basic loss from discontinued operations per share $ 0.00 $ 0.00 Diluted loss from discontinued operations per share $ 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 118,224,080 and 136,945,023 were not included in the computation of diluted shares outstanding for the three months ended March 31, 2022 and, 2021, respectively, because the effect would be anti-dilutive. 9. Segment Information The tables below set forth our condensed consolidated results of operations by segment. The Company’s condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that the Company will achieve in future periods . Segment data was as follows for the three months ended March 31, 2022 and 2021: Three months ended March 31, 2022 United States Rest of World Corporate Total Cannabis flower $ — $ 18,625 $ — $ 18,625 Cannabis extracts 2,328 3,988 — 6,316 Other — 92 — 92 Net revenue $ 2,328 $ 22,705 $ — $ 25,033 Total assets $ 441,064 $ 283,182 $ 646,755 $ 1,371,001 Depreciation and amortization 96 1,197 — 1,293 Adjusted EBITDA ( 7,086 ) ( 3,425 ) ( 8,389 ) ( 18,900 ) Purchase of property, plant and equipment, net — 711 — 711 17 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents Three months ended March 31, 2021 United States Rest of World Corporate Total Cannabis flower $ — $ 9,434 $ — $ 9,434 Cannabis extracts 2,441 703 — 3,144 Other — 33 — 33 Net revenue $ 2,441 $ 10,170 $ — $ 12,611 Share of loss from equity accounted investees $ — $ 1,643 $ — $ 1,643 Total assets $ 252,449 $ 394,442 $ 1,234,391 $ 1,881,282 Depreciation and amortization 71 664 — 735 Loss from discontinued operations — 21 — 21 Adjusted EBITDA ( 9,510 ) ( 22,184 ) ( 4,880 ) ( 36,574 ) Purchase of property, plant and equipment, net 80 6,600 — 6,680 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: Three months ended March 31, 2022 United States Rest of World Corporate Total Net income (loss) $ ( 22,216 ) $ 2,014 $ ( 12,451 ) $ ( 32,653 ) Interest income, net ( 29 ) ( 2,017 ) — ( 2,046 ) Income tax expense — 362 — 362 Impairment loss on long-lived assets (i) — 3,493 — 3,493 Gain on revaluation of derivative liabilities (ii) — ( 10,419 ) — ( 10,419 ) Gain on revaluation of financial instruments (iv) — ( 4,268 ) — ( 4,268 ) Impairment loss on other investment (v) 11,238 — — 11,238 Foreign currency transaction loss — 1,872 — 1,872 Other, net (vi) — ( 135 ) — ( 135 ) Restructuring costs (viii) 1,053 2,031 — 3,084 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 ) 18 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents Three months ended March 31, 2021 United States Rest of World Corporate Total Net loss $ ( 12,092 ) $ ( 142,147 ) $ ( 7,386 ) $ ( 161,625 ) Interest income, net ( 3 ) ( 2,326 ) — ( 2,329 ) Share of loss from equity accounted investments — 1,643 — 1,643 Impairment loss on long-lived assets (i) 1,741 — — 1,741 Loss on revaluation of derivative liabilities (ii) — 116,874 — 116,874 Transaction costs (iii) — — 501 501 Loss on revaluation of financial instruments (iv) — 200 — 200 Other, net (vi) — 16 — 16 Loss from discontinued operations (vii) — 21 — 21 Share-based compensation (ix) 745 1,754 — 2,499 Financial statement review costs (x) — — 2,005 2,005 Depreciation and amortization 99 1,781 — 1,880 Adjusted EBITDA $ ( 9,510 ) $ ( 22,184 ) $ ( 4,880 ) $ ( 36,574 ) (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. segment. See Note 12 “ Impairment Loss on Long-lived Assets .” (ii) For the three months ended March 31, 2022 and 2021, (gain) loss on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 5 “ Derivative Liabilities .” (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). (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. 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. ” (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 Original B.C. Ltd. (“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. ” (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 .” (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. Net revenue attributed to a geographic region based on the location of the customer were as follows: Three months ended March 31, 2022 2021 Canada $ 13,576 $ 7,582 Israel 9,128 2,518 United States 2,329 2,441 Other countries — 70 Net revenue $ 25,033 $ 12,611 19 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents Property, plant and equipment, net were physically located in the following geographic regions: As of March 31, 2022 As of December 31, 2021 Canada $ 47,717 $ 49,117 Israel 23,823 24,473 United States 288 480 Total $ 71,828 $ 74,070 10. Commitments and Contingencies (a) Commitments There have been no material changes in the information regarding commitments as disclosed in the Company’s Annual Report. (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 financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results for that quarter. (i) 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 Chief Executive Officer 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 Securities Exchange Act of 1934 (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 Chief Executive Officer, (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 Chief Executive Officer, 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. (ii) 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. 20 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents (iii) 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 Holding Group, LLC (“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 Quarterly 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. 11. Fair Value Measurements 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. The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis: March 31, 2022 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 861,535 $ — $ — $ 861,535 Short-term investments 119,933 — — 119,933 Other investments (i) 12,607 — — 12,607 Derivative liabilities — — 4,099 4,099 21 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents 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 (i) As of March 31, 2022 and December 31, 2021, the Company’s influence on Cronos Australia is deemed non-significant and the investment is considered an equity security with a readily determinable fair value. See Note 3 “ Investments ” for additional information. There were no transfers between fair value categories during the periods presented. 12. Impairment Loss on Long-lived Assets (a) Right-of-use assets and property, plant, and equipment, net During the three months ended March 31, 2022, the Company recognized an impairment charge of $ 1,986 related to the right-of-use lease asset associated with the Company’s corporate headquarters, encompassing approximately 29,000 square feet, in Toronto, Ontario, Canada, for which the Company determined it would seek a sublease. In addition, the Company recognized an impairment charge of $ 1,507 during the three months ended March 31, 2022 related to leasehold improvements and other office equipment that it plans to include in any potential sublease agreement. The determination to seek a sublease of the property and include leasehold improvements and other office equipment in any potential sublease agreement triggered the impairment charges. Both of the impairment charges are recognized as impairment loss on long-lived assets on the condensed consolidated statements of net income (loss) and comprehensive income (loss). During the three months ended March 31, 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 premise. The Company recognized an impairment charge on the de-recognition of the right-of use asset of $ 702 during the three months ended March 31, 2021. Both the impairment charges are recognized as impairment loss on long-lived assets on the condensed consolidated statements of net income (loss) and comprehensive income (loss). 13. 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 March 31, 2022, 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”): Three months ended March 31, 2022 2021 Altria Pinnacle - expense $ 28 $ 8 As of March 31, 2022 and December 31, 2021, the Company had payables outstanding to Altria Pinnacle of $ 13 and $ nil , respectively. 22 Cronos Group Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands of U.S. dollars, except share amounts) Table of Contents (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 additional information. The Company made the following purchases of cannabis products from Cronos GrowCo: Three months ended March 31, 2022 2021 Cronos GrowCo - purchases $ 3,218 $ — There were $ nil and $ 82 amounts payable to Cronos GrowCo as of March 31, 2022 and December 31, 2021, respectively. Additionally, on August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into the GrowCo Facility. See Note 4 “ Loans Receivable, net ” for additional information. 23 Table of Contents