Cronos Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 This Quarterly Report, the documents incorporated into this Quarterly Report by reference, other reports we file with, or furnish to, the U.S. Securities and Exchange Commission (“SEC”) and other regulatory agencies, and statements by our directors, officers, other employees and other persons authorized to speak on our behalf contain information that may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, “Forward-Looking Statements”), which are based upon our current internal expectations, estimates, projections, assumptions and beliefs. All information that is not clearly historical in nature may constitute Forward-Looking Statements. In some cases, Forward-Looking Statements can be identified by the use of forward-looking terminology, such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, expressions and phrases, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussion of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of historical fact. 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 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. Drug Enforcement Administration (the “DEA”), the U.S. Federal Trade Commission (the “FTC”), the U.S. Patent and Trademark Office (the “PTO”) and any state equivalent regulatory agencies over U.S. hemp (including CBD and other U.S. hemp-derived cannabinoids) products; • the laws and regulations and any amendments thereto relating to the U.S. hemp industry in the U.S., including the promulgation of regulations for the U.S. hemp industry by the U.S. Department of Agriculture (the “USDA”) and relevant state regulatory authorities; • 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; • our international activities and joint venture interests, including required regulatory approvals and licensing, anticipated costs and timing, and expected impact; • our ability to successfully create and launch brands and further create, launch and scale U.S. hemp-derived cannabinoid consumer products and cannabis products; • the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, including CBD and other cannabinoids; • expectations regarding the implementation and effectiveness of key personnel changes; • 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 (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; 24 Table of Contents • expectations regarding the use of proceeds of equity financings, including the proceeds from the Altria Investment; • the legalization of the use of cannabis for medical or adult-use in jurisdictions outside of Canada, the related timing and impact thereof and our intentions to participate in such markets, if and when such use is legalized; • expectations regarding the potential success of, and the costs and benefits associated with, our joint ventures, strategic alliances and equity investments, including the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”); • our ability to execute on our strategy and the anticipated benefits of such strategy; • expectations of the amount or frequency of impairment losses, including as a result of the write-down of intangible assets, including goodwill; • the ongoing impact of the legalization of additional cannabis product types and forms for adult-use in Canada, including federal, provincial, territorial and municipal regulations pertaining thereto, the related timing and impact thereof and our intentions to participate in such markets; • the future performance of our business and operations; • our competitive advantages and business strategies; • the competitive conditions of the industry; • the expected growth in the number of customers using our products; • our ability or plans to identify, develop, commercialize or expand our technology and research and development (“R&D”) initiatives in cannabinoids, or the success thereof; • expectations regarding acquisitions and dispositions and the anticipated benefits therefrom; • 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; • expectations regarding cash flow, liquidity and sources of funding; • expectations regarding capital expenditures; • 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; • expectations with respect to future production costs; • expectations with respect to future sales and distribution channels and networks; • the expected methods to be used to distribute and sell our products; • the anticipated future gross margins of our operations; • accounting standards and estimates; • our ability to timely and effectively remediate any material weaknesses in our internal control over financial reporting; and • expectations regarding the costs and benefits associated with our contracts and agreements with third parties, including under our third party supply and manufacturing agreements. Certain of the Forward-Looking Statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below. 25 Table of Contents 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 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. By their nature, Forward-Looking Statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. 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, 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; the risk that we will not complete planned dispositions, or, if completed, obtain our anticipated sales price; 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; consumer demand for cannabis and U.S. hemp products; our ability to manage disruptions in credit markets or changes to our credit ratings; future levels of capital, environmental or maintenance expenditures, general and administrative and other expenses; the success or timing of completion of ongoing or anticipated capital or maintenance projects; business strategies, growth opportunities and expected investment; the adequacy of our capital resources and liquidity, including but not limited to, availability of sufficient cash flow to execute our business plan (either within the expected timeframe or at all); the potential effects of judicial, regulatory or other proceedings, or threatened litigation or proceedings, on our business, financial condition, results of operations and cash flows; volatility in and/or degradation of general economic, market, industry or business conditions; compliance with applicable environmental, economic, health and safety, energy and other policies and regulations and in particular health concerns with respect to vaping and the use of cannabis and U.S. hemp products in vaping devices; the anticipated effects of actions of third parties such as competitors, activist investors or federal (including U.S. federal), state, provincial, territorial or local regulatory authorities or self-regulatory organizations; changes in regulatory requirements in relation to our business and products; legal or regulatory obstacles that could prevent us from being able to exercise the PharmaCann Option and thereby realizing the anticipated benefits of the transaction with PharmaCann; dilution of our fully-diluted ownership of PharmaCann and the loss of our rights as a result of that dilution; our remediation of material weaknesses in our internal control over financial reporting and the improvement of our control environment and our systems, processes and procedures; and the factors discussed under Part I, Item 1A “Risk Factors” of the Annual Report. Readers are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on Forward-Looking Statements. Forward-Looking Statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management’s current expectations and plans relating to the future, and the reader is cautioned not to place undue reliance on these Forward-Looking Statements because of their inherent uncertainty and to appreciate the limited purposes for which they are being used by management. While we believe that the assumptions and expectations reflected in the Forward-Looking Statements are reasonable based on information currently available to management, there is no assurance that such assumptions and expectations will prove to have been correct. 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 26 Table of Contents 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. Foreign currency exchange rates All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2022, March 31, 2021 and December 31, 2021. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The condensed consolidated statements of net income (loss) and comprehensive income (loss) and condensed consolidated statements of cash flows of our foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period as reported on Bloomberg. The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below: (Exchange rates are shown as C$ per $) As of 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 Business Overview 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+™. Strategy Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities: • growing a portfolio of iconic brands that responsibly elevate the consumer experience; • developing a diversified global sales and distribution network; • establishing an efficient global supply chain; and • creating and monetizing disruptive intellectual property. Business segments We report through two segments: “United States” (the “U.S. segment”) and “Rest of World” (the “ROW segment”). These two segments represent the geographic regions in which we operate and the different product offerings within each geographic region. The U.S. 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) (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 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. 27 Table of Contents Recent Developments COVID-19 update 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. This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell our products. Any reinstatement of restrictions on the operations of retail outlets could negatively impact our short-term results of operations in the U.S. Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which we operate. Although we have not yet seen a significant impact from supply chain disruptions, we continue to monitor our supply chain closely. 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. 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 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 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 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: 1. Centralizing functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplicative roles and costs; 2. 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; and 28 Table of Contents 3. Implementing an operating expense target to optimize cash deployment for activities such as margin accretive innovation and U.S. adult-use market entry. Brand and Product Portfolio 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 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. Appointments 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. Mr. 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. Mr. 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 The tables below sets forth our condensed consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. 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 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) 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 loss attributable to Cronos Group $ (32,638) $ (161,312) 29 Table of Contents Summary of select financial results Three months ended March 31, Change 2022 2021 $ % Net revenue $ 25,033 $ 12,611 $ 12,422 99 % Cost of sales 18,107 15,574 2,533 16 % Gross profit 6,926 (2,963) 9,889 334 % Gross margin (i) 28 % (23) % N/A 51 pp (i) Gross margin is defined as gross profit divided by net revenue. 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 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. Gross profit 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 March 31, Change 2022 2021 $ % Sales and marketing $ 5,012 $ 10,254 $ (5,242) (51) % Research and development 4,039 5,102 (1,063) (21) % General and administrative 22,368 21,906 462 2 % 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 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 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 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. 30 Table of Contents General and administrative 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 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 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 (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 (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 tax expense (362) — (362) N/A Loss from discontinued operations — (21) 21 100 % Net loss $ (32,653) $ (161,625) $ 128,972 80 % 31 Table of Contents (i) “N/M” is defined as not meaningful. Interest income, net 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 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. Other, net 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. 32 Table of Contents Results of Operations by Business Segment: 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. Our condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods. Certain totals in the tables below will not sum to exactly 100% due to rounding . Summary of select financial results – ROW Three months ended March 31, Change 2022 2021 $ % Net revenue $ 22,705 $ 10,170 $ 12,535 123 % Cost of sales 15,995 14,309 1,686 12 % Gross profit 6,710 (4,139) 10,849 262 % Gross margin 30 % (41) % N/A 71 pp Net revenue – ROW Three months ended March 31, Change 2022 2021 $ % Cannabis flower $ 18,625 $ 9,434 $ 9,191 97 % Cannabis extracts 3,988 703 3,285 467 % Other 92 33 59 179 % Net revenue $ 22,705 $ 10,170 $ 12,535 123 % 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 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 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. 33 Table of Contents Summary of select financial results – U.S. Three months ended March 31, Change 2022 2021 $ % Net revenue $ 2,328 $ 2,441 $ (113) (5) % Cost of sales 2,112 1,265 847 67 % Gross profit 216 1,176 (960) (82) % Gross margin 9 % 48 % N/A (39) pp Net revenue – U.S. 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 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 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 Cronos Group reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This Quarterly Report refers to measures not recognized under U.S. GAAP (“non-GAAP measures”). These non-GAAP measures do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these non-GAAP measures are provided as a supplement to corresponding U.S. GAAP measures to provide additional information regarding the results of operations from management’s perspective. Accordingly, non-GAAP measures should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. All non-GAAP measures presented in this Quarterly Report are reconciled to their closest reported U.S. GAAP measure. Reconciliations of historical adjusted financial measures to corresponding U.S. GAAP measures are provided below. 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 ongoing business performance of our operating segments. Management defines Adjusted EBITDA as net income (loss) before interest, tax expense, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and intangible assets; impairment loss on long-lived assets; (gain) 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; other, net; loss from discontinued operations; 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. 34 Table of Contents 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 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) (In thousands of U.S. dollars) 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 ” 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). (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. 35 Table of Contents (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 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, 2022 2021 Cash flows used in operating activities $ (33,911) $ (46,615) Cash provided by (used in) investing activities 100 (9,717) Cash 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 $ (25,438) $ (53,573) Comparison of cash flows between the three months ended March 31, 2022 and the three months ended March 31, 2021 Operating activities 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 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 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 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.