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 interim 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 September 30, 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 and court decisions (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 planned 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; 30 Table of Contents • the impact of the loss of our ability to rely on private offering exemptions under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”); and the loss of our status as a well-known seasoned issuer, each as a result of our settlement with the SEC (the “SEC Order”); • our compliance with the terms of the SEC Order and the settlement with the Ontario Securities Commission (the “OSC Settlement”), including complying with any recommendations made by the independent consultant to be appointed pursuant to the SEC Order (the “Consultant”); • 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. 31 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 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); our ability to raise capital under Regulation D under the Securities Act and to qualify as a well-known seasoned issuer; 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 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 32 Table of Contents 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 “$” are to U.S. dollars. The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of September 30, 2022, September 30, 2021 and December 31, 2021. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The condensed consolidated statements of net income (loss) and comprehensive income (loss) and condensed consolidated statements of cash flows of our foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the reporting period as reported on Bloomberg. The exchange rates used to translate from Canadian dollars (“C$”) to dollars is shown below: (Exchange rates are shown as C$ per $) As of September 30, 2022 September 30, 2021 December 31, 2021 Quarter-to-date average rate 1.3053 1.2593 N/A Spot rate 1.3829 1.2680 1.2746 Year-to-date average rate 1.2829 1.2519 1.2541 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 September 30, 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.” 33 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 since implementation in 2020, 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, and 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. 34 Table of Contents Strategic and Organizational Update In the third quarter of 2022, following the decision to begin a phased exit of the wholesale beauty category in the U.S. business in the second quarter of 2022, the Company continued to reduce operating expenses in the U.S. to better align the business structure with the new strategy to focus on adult-use product formats in the direct-to-consumer channel. Due to the restructuring of the U.S. business and other newly identified cost savings opportunities, the Company now expects to incur approximately $6.1 million in expenses in connection with the Realignment, a decrease from the previously stated $6.4 million. The Company now anticipates exiting the Peace Naturals Campus in 2023 due to longer than anticipated transition timing for contract manufacturers, lead times on required equipment, and the receipt of necessary regulatory licenses. As the Company continues its transition out of the Peace Naturals Campus in Stayner, Ontario into 2023, it anticipates that it will begin to incur the majority of the expected capital expenditures related to the Realignment. Brand and Product Portfolio In the third quarter of 2022, Cronos Israel was awarded a prestigious Clio Award in the Social Good category for the PEACE NATURALS ® brand campaign in partnership with the Warriors for Life Association in Israel. In October 2022, the Company continued to expand its gummy offering with the launch of SOURZ by Spinach™ Tropical Triple Berry 2:1 CBD:THC. This marks Cronos’ first CBD dominant edible in the Canadian adult-use market for those looking for a more mellow low-dose experience. In November 2022, Cronos will launch two infused pre-rolls in Canada. The first, under the Spinach® brand is called Fully Charged Atomic GMO, which will be offered in a 5-pack with 0.5 grams per pre-roll. Secondly, Cronos is launching a CBG infused pre-roll under the Spinach FEELZ™ brand called Tropical Diesel CBG, which will be offered in a 3-pack with 0.5 grams per pre-roll. 35 Table of Contents Consolidated Results of Operations The tables below set 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Net revenue, before excise taxes $ 26,584 $ 24,590 $ 84,544 $ 58,092 Excise taxes (5,661) (4,183) (15,527) (9,452) Net revenue 20,923 20,407 69,017 48,640 Cost of sales 19,766 21,137 56,814 56,156 Inventory write-down — — — 11,961 Gross profit 1,157 (730) 12,203 (19,477) Operating expenses Sales and marketing 5,923 10,821 16,517 34,284 Research and development 2,569 6,473 10,910 16,774 General and administrative 17,167 32,546 56,540 76,869 Restructuring costs 524 — 4,878 — Share-based compensation 4,265 2,667 10,567 7,731 Depreciation and amortization 1,713 1,251 4,417 3,029 Impairment loss on goodwill and indefinite-lived intangible assets — 142 — 235,056 Impairment loss on long-lived assets — 1,784 3,493 4,739 Total operating expenses 32,161 55,684 107,322 378,482 Operating loss (31,004) (56,414) (95,119) (397,959) Other income (expense) (3,764) 133,839 7,414 134,988 Income tax benefit (expense) (2,118) 159 (2,172) 159 Income (loss) from discontinued operations — 82 — (500) Net income (loss) (36,886) 77,666 (89,877) (263,312) Net income (loss) attributable to non-controlling interest 105 (250) (27) (842) Net income (loss) attributable to Cronos Group $ (36,991) $ 77,916 $ (89,850) $ (262,470) Summary of select financial results Three months ended September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Net revenue $ 20,923 $ 20,407 $ 516 3 % $ 69,017 $ 48,640 $ 20,377 42 % Cost of sales 19,766 21,137 (1,371) (6) % 56,814 56,156 658 1 % Inventory write-down — — — N/A — 11,961 (11,961) (100) % Gross profit 1,157 (730) 1,887 258 % 12,203 (19,477) 31,680 163 % Gross margin (i) 6 % (4) % N/A 10 pp 18 % (40) % N/A 58 pp (i) Gross margin is defined as gross profit divided by net revenue. Net revenue For the three months ended September 30, 2022, we reported consolidated net revenue of $20.9 million, representing an increase of $0.5 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, we reported consolidated net revenue of $69.0 million, representing an increase of $20.4 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the increase was primarily due to higher cannabis flower sales in the Israeli medical market and higher cannabis extract sales in the Canadian adult-use market, partially offset by a reduction in revenue in the U.S. segment, lower cannabis flower sales in the Canadian adult-use market driven by an adverse price/mix shift and the impact of the weakening Canadian dollar against the U.S. dollar during the current period. 36 Table of Contents Cost of sales For the three months ended September 30, 2022, we reported consolidated cost of sales of $19.8 million, representing a decrease of $1.4 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, we reported consolidated cost of sales of $56.8 million, representing an increase of approximately $0.7 million from the nine months ended September 30, 2021. For the three-month comparative period, the decrease was primarily due to lower cannabis biomass costs, lower sales volumes in the U.S. segment and the impact of the weakening Canadian dollar against the U.S. dollar during the current period, partially offset by higher sales volumes in the ROW segment and lower fixed cost absorption due to the timing of wind down activities associated with our planned exit of the Stayner Facility. For the nine-month comparative period, the increase was primarily due to higher sales volumes in the ROW segment and lower fixed cost absorption due to the timing of wind down activities associated with our planned exit of the Stayner facility, partially offset by lower cannabis biomass costs, lower sales volumes in the U.S. segment and the impact of the weakening Canadian dollar against the U.S. dollar during the period. Inventory write-down For the nine months ended September 30, 2021, we reported inventory write-downs of $12.0 million primarily related to cannabis strains and potency levels that were no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada. We reported no such write-down for the three months ended September 30, 2021 and for the three and nine months ended September 30, 2022. Gross profit For the three months ended September 30, 2022, we reported gross profit of $1.2 million, representing an increase in gross profit of $1.9 million compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, we reported gross profit of $12.2 million, representing an increase in gross profit of $31.7 million compared to the nine months ended September 30, 2021. For the three-month comparative period, the change was primarily due to increased revenue in the ROW segment driven mainly by sales of cannabis flower in Israel and a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility and lower revenue in the U.S. segment. For the nine-month comparative period, the change was primarily due to increased revenue in the ROW segment driven mainly by sales of cannabis flower in Israel and a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, the absence of inventory write-downs in the current period, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility and lower revenue in the U.S. segment. Operating expenses Three months ended September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Sales and marketing $ 5,923 $ 10,821 $ (4,898) (45) % $ 16,517 $ 34,284 $ (17,767) (52) % Research and development 2,569 6,473 (3,904) (60) % 10,910 16,774 (5,864) (35) % General and administrative 17,167 32,546 (15,379) (47) % 56,540 76,869 (20,329) (26) % Restructuring costs 524 — 524 N/A 4,878 — 4,878 N/A Share-based compensation 4,265 2,667 1,598 60 % 10,567 7,731 2,836 37 % Depreciation and amortization 1,713 1,251 462 37 % 4,417 3,029 1,388 46 % Impairment loss on goodwill and indefinite-lived intangible assets — 142 (142) (100) % — 235,056 (235,056) (100) % Impairment loss on long-lived assets — 1,784 (1,784) (100) % 3,493 4,739 (1,246) (26) % Total operating expenses $ 32,161 $ 55,684 $ (23,523) (42) % $ 107,322 $ 378,482 $ (271,160) (72) % Sales and marketing For the three months ended September 30, 2022, sales and marketing expenses were $5.9 million, representing a decrease of $4.9 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, sales and marketing expenses were $16.5 million, representing a decrease of $17.8 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the decrease was primarily due to lower advertising and marketing spend and lower payroll-related costs in the U.S. segment as a result of the Realignment. 37 Table of Contents Research and development For the three months ended September 30, 2022, research and development expenses were $2.6 million, representing a decrease of $3.9 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, research and development expenses were $10.9 million, representing a decrease of $5.9 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the decrease was primarily due to lower costs associated with the timing of Ginkgo milestones and a cancellation of beauty-focused product development spending in the U.S. segment. General and administrative For the three months ended September 30, 2022, general and administrative expenses were $17.2 million, representing a decrease of $15.4 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, general and administrative expenses were $56.5 million, representing a decrease of $20.3 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the decrease was primarily due to credit loss revaluation allowances recognized in the prior comparative period and reduced advisory fees associated with strategic initiatives. Restructuring costs For the three and nine months ended September 30, 2022, restructuring costs were $0.5 million and $4.9 million, respectively, compared to no restructuring costs for the three and nine months ended September 30, 2021. Restructuring costs for both the three and nine months ended September 30, 2022, were related to the Realignment, including the planned exit of the Stayner Facility. Share-based compensation For the three months ended September 30, 2022, share-based compensation expense was $4.3 million, representing an increase of $1.6 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, share-based compensation expense was $10.6 million, representing an increase of $2.8 million from the nine months ended September 30, 2021. For the three-month comparative periods, the increase was primarily due to previously held-back equity awards granted to certain executives in the three months ended September 30, 2022. For the nine-month comparative periods, the increase was primarily due to the acceleration of expense on equity awards granted to certain executive employees in connection with their separation from the Company, as well as previously held-back equity awards granted to certain executives in the nine months ended September 30, 2022. Depreciation and amortization For the three months ended September 30, 2022, depreciation and amortization expenses were $1.7 million, representing an increase of $0.5 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, depreciation and amortization expenses were $4.4 million, representing an increase of $1.4 million from the nine months ended September 30, 2021. For the three- and nine-month comparative periods, the increase was primarily due to higher amortization on Ginkgo-related intangible assets. Impairment loss on goodwill and indefinite-lived intangible assets For both the three and nine month ended September 30, 2022, there was no impairment loss on goodwill and indefinite-lived intangible assets. For both the three and nine month ended September 30, 2021, impairment loss on goodwill and indefinite-lived intangible assets was $0.1 million and $235.1 million, respectively. The impairment loss on goodwill and indefinite-lived intangible assets in the nine months ended September 30, 2021 was due to impairment charges on the goodwill associated with our U.S. reporting unit and Lord Jones ® brand. Impairment loss on long-lived assets For the three months ended September 30, 2022, there was no impairment loss on long-lived assets compared to $1.8 million impairment loss from the three months ended September 30, 2021. For the nine months ended September 30, 2022, impairment loss on long-lived assets was $3.5 million, representing a decrease of $1.2 million from the nine months ended September 30, 2021. For further information, see Note 13 “ Impairment Loss on Long-lived Assets ” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. 38 Table of Contents Other income (loss), income tax expense and discontinued operations Three months ended September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Interest income, net $ 7,209 $ 2,064 $ 5,145 249 % $ 13,030 $ 6,686 $ 6,344 95 % Gain on revaluation of derivative liabilities 375 132,916 (132,541) (100) % 14,204 131,290 (117,086) (89) % Share of income (loss) from equity method investments (1,119) (1,414) 295 21 % 4,078 (4,172) 8,250 198 % Gain on revaluation of financial instruments 17,049 266 16,783 N/M 19,205 143 19,062 N/M Impairment loss on other investments (28,972) — (28,972) N/A (40,210) — (40,210) N/A Foreign currency transaction gain (loss) 2,387 — 2,387 N/A (2,337) — (2,337) N/A Other, net (693) 7 (700) N/M (556) 1,041 (1,597) (153) % Total other income (3,764) 133,839 (137,603) (103) % 7,414 134,988 (127,574) (95) % Income tax benefit (expense) (2,118) 159 (2,277) N/A (2,172) 159 (2,331) N/A Income (loss) from discontinued operations — 82 (82) (100) % — (500) 500 100 % Net income (loss) $ (36,886) $ 77,666 $ (114,552) (147) % $ (89,877) $ (263,312) $ 173,435 66 % (i) “N/M” is defined as not meaningful. Interest income, net For the three months ended September 30, 2022, interest income, net was $7.2 million, representing an increase of $5.1 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, interest income, net was $13.0 million, representing an increase of $6.3 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the increase in net interest income was primarily due to higher short-term investment balances and higher interest rates during the current period. Gain on revaluation of derivative liabilities For the three months ended September 30, 2022, the gain on revaluation of derivative liabilities was $0.4 million, representing a decrease of $132.5 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the gain on revaluation of derivative liabilities was $14.2 million, representing a decrease of $117.1 million from the nine months ended September 30, 2021. We expect continued changes in derivative valuations as our share price fluctuates period to period and the remaining expected terms of our derivative instruments decrease. For further information, see Note 6 “Derivative Liabilities” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. Share of income (loss) from equity method investments For the three months ended September 30, 2022, our share of loss from equity method investments was $1.1 million, representing a decrease of $0.3 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, our share of income from equity method investments was $4.1 million, representing an increase of $8.3 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the change was due to improved results from our equity method investment in Cronos GrowCo. Gain on revaluation of financial instruments For the three months ended September 30, 2022, the gain on revaluation of financial instruments was $17.0 million, representing an increased gain of $16.8 million compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, the gain on revaluation of financial instruments was $19.2 million, representing an increased gain of $19.1 million compared to the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the change was primarily related to the change in fair value of our investment in Cronos Australia. For further information, see Note 3 “ Investments ” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. 39 Table of Contents Impairment loss on other investments For the three and nine months ended September 30, 2022, impairment loss on other investments was $29.0 million and $40.2 million, respectively, driven by impairments of the PharmaCann Option for the difference between its estimated fair value and its carrying amount. There were no impairment losses on other investments during the three and nine months ended September 30, 2021. For more information, see Note 3 “ Investments ” in our condensed consolidated interim financial statements under Item 1 of this Quarterly Report. Foreign currency transaction gain (loss) For the three and nine months ended September 30, 2022, foreign currency transaction gain (loss) was $2.4 million and $(2.3) million, respectively, which related to certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future. There were no such foreign currency transaction gains or losses during the three and nine months ended September 30, 2021. Other, net For the three months ended September 30, 2022, other, net was a loss of $0.7 million, compared to breakeven for the three months ended September 30, 2021. For the nine months ended September 30, 2022, other, net was a loss of $0.6 million, compared to income of $1.0 million in the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the change was due to loss on disposal of assets associated with the Realignment, partially offset by dividend income from our Cronos Australia investment during the current periods. 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 September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Net revenue $ 20,409 $ 18,307 $ 2,102 11 % $ 64,716 $ 41,872 $ 22,844 55 % Cost of sales 17,265 17,735 (470) (3) % 50,540 49,906 634 1 % Inventory write-down — — — N/A — 11,961 (11,961) (100) % Gross profit 3,144 572 2,572 450 % 14,176 (19,995) 34,171 171 % Gross margin 15 % 3 % N/A 12 pp 22 % (48) % N/A 70 pp Net revenue – ROW Three months ended September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Cannabis flower $ 13,674 $ 15,306 $ (1,632) (11) % $ 48,038 $ 36,337 $ 11,701 32 % Cannabis extracts 6,627 2,786 3,841 138 % 16,197 5,020 11,177 223 % Other 108 215 (107) (50) % 481 515 (34) (7) % Net revenue $ 20,409 $ 18,307 $ 2,102 11 % $ 64,716 $ 41,872 $ 22,844 55 % For the three months ended September 30, 2022, the ROW segment reported net revenue of $20.4 million, representing an increase of $2.1 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the ROW segment reported net revenue of $64.7 million, representing an increase of $22.8 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the change was primarily due to higher cannabis flower sales in the Israeli medical market and higher cannabis extract sales in the Canadian adult-use market, partially offset by lower cannabis flower sales in the Canadian adult-use market driven by an adverse price/mix shift and the impact of the weakening Canadian dollar against the U.S. dollar during the period. Cost of sales – ROW For the three months ended September 30, 2022, the ROW segment reported cost of sales of $17.3 million, representing a decrease of $0.5 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the ROW segment reported cost of sales of $50.5 million, representing an increase of $0.6 million from the nine months ended September 30, 2021. For 40 Table of Contents the three-month comparative period, the decrease was primarily due to lower cannabis biomass costs and the impact of the weakening Canadian dollar against the U.S. dollar during the current period, partially offset by higher sales volumes and lower fixed cost absorption due to the timing of wind down activities associated with our planned exit of the Stayner Facility. For the nine-month comparative period, the increase was primarily due to higher sales volumes and lower fixed cost absorption due to the timing of wind down activities associated with our planned exit of the Stayner Facility, partially offset by lower cannabis biomass costs and the impact of the weakening Canadian dollar against the U.S. dollar during the current period. Inventory write-down – ROW For the nine months ended September 30, 2021, the ROW segment reported consolidated inventory write-down of $12.0 million primarily related to cannabis strains and potency levels that were no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada. The ROW segment reported no such write-down for the three months ended September 30, 2021 and the three and nine months ended September 30, 2022. Gross profit – ROW For the three months ended September 30, 2022, the ROW segment reported gross profit of $3.1 million, representing an increase in gross profit of $2.6 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the ROW segment reported gross profit of $14.2 million, representing an increase in gross profit of $34.2 million from the nine months ended September 30, 2021. For the three-month comparative period, the change was primarily due to increased revenue driven mainly by sales of cannabis flower in Israel and a higher cannabis extract sales in Canada, which carry a higher gross profit and gross margin than other product categories, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility. For the nine-month comparative period, the change was primarily due to the absence of inventory write-downs in the current periods, increased revenue driven mainly by sales of cannabis flower and a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility. Summary of select financial results – U.S. Three months ended September 30, Change Nine months ended September 30, Change 2022 2021 $ % 2022 2021 $ % Net revenue $ 514 $ 2,100 $ (1,586) (76) % $ 4,301 $ 6,768 $ (2,467) (36) % Cost of sales 2,501 3,402 (901) (26) % 6,274 6,250 24 — % Gross profit (1,987) (1,302) (685) (53) % (1,973) 518 (2,491) (481) % Gross margin (387) % (62) % N/A (325) pp (46) % 8 % N/A (54) pp Net revenue – U.S. For the three months ended September 30, 2022, the U.S. segment reported net revenue of $0.5 million, representing a decrease of $1.6 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the U.S. segment reported net revenue of $4.3 million, representing a decrease of $2.5 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the decrease was primarily driven by a reduction in sales as a result of a decrease in promotional spending and SKU rationalization efforts as the Company implements the Realignment in the U.S. segment. Cost of sales – U.S. For the three months ended September 30, 2022, the U.S. segment reported cost of sales of $2.5 million, representing a decrease of $0.9 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the U.S. segment reported cost of sales of $6.3 million, essentially unchanged from the nine months ended September 30, 2021. For the three-month comparative period, the decrease was primarily due to lower sales volumes. For the nine-month comparative period, the reduction in cost of sales was driven by lower sales volumes, partially offset by a higher level of inventory reserves. Gross profit – U.S. For the three months ended September 30, 2022, the U.S. segment reported gross profit of $(2.0) million, representing a decrease of $0.7 million from the three months ended September 30, 2021. For the nine months ended September 30, 2022, the U.S. segment reported gross profit of $(2.0) million, representing a decrease of $2.5 million from the nine months ended September 30, 2021. For both the three- and nine-month comparative periods, the change was primarily due to lower sales volumes and higher inventory reserves. 41 Table of Contents 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 (benefit), depreciation and amortization adjusted for: share of income (loss) from equity method 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 financial statement review costs and reserves related to the restatements of our 2019 and 2021 interim financial statements (the “Restatements”), including the costs related to the settlement of the SEC’s and the OSC’s investigations of the Restatements 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 shareholder class action complaints relating to the restatement of the 2019 interim financial statements and the settlement of the SEC’s and the OSC’s investigations of the Restatements. 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. Adjusted EBITDA is reconciled to net income (loss) as follows: (In thousands of U.S. dollars) Three months ended September 30, 2022 United States Rest of World Corporate Total Net income (loss) $ (33,223) $ 2,817 $ (6,480) $ (36,886) Interest income, net (1,418) (5,791) — (7,209) Income tax expense — 2,118 — 2,118 Share of loss from equity method investments — 1,119 — 1,119 Gain on revaluation of derivative liabilities (iii) — (375) — (375) Gain on revaluation of financial instruments (v) — (17,049) — (17,049) Impairment loss on other investment (vi) 28,972 — — 28,972 Foreign currency transaction gain — (2,387) — (2,387) Other, net (vii) 159 534 — 693 Restructuring costs (ix) 137 387 — 524 Share-based compensation (x) 8 4,257 — 4,265 Financial statement review costs (xi) — — 1,070 1,070 Depreciation and amortization 501 2,947 — 3,448 Adjusted EBITDA $ (4,864) $ (11,423) $ (5,410) $ (21,697) 42 Table of Contents (In thousands of U.S. dollars) Three months ended September 30, 2021 United States Rest of World Corporate Total Net income (loss) $ (13,499) $ 97,198 $ (6,033) $ 77,666 Interest income, net (4) (2,060) — (2,064) Income tax benefit — (159) — (159) Share of loss from equity method investments — 1,414 — 1,414 Impairment loss on goodwill and indefinite-lived intangible assets (i) 105 37 — 142 Impairment loss on long-lived assets (ii) — 1,784 — 1,784 Gain on revaluation of derivative liabilities (iii) — (132,916) — (132,916) Transaction costs (iv) — — 542 542 Gain on revaluation of financial instruments (v) — (266) — (266) Other, net (vii) — (7) — (7) Income from discontinued operations (viii) — (82) — (82) Share-based compensation (x) 967 1,700 — 2,667 Financial statement review costs (xi) — — 678 678 Depreciation and amortization 231 3,597 — 3,828 Adjusted EBITDA $ (12,200) $ (29,760) $ (4,813) $ (46,773) (In thousands of U.S. dollars) Nine months ended September 30, 2022 United States Rest of World Corporate Total Net loss $ (59,937) $ (3,928) $ (26,012) $ (89,877) Interest income, net (1,873) (11,157) — (13,030) Income tax expense — 2,172 — 2,172 Share of income from equity method investments — (4,078) — (4,078) Impairment loss on long-lived assets (ii) — 3,493 — 3,493 Gain on revaluation of derivative liabilities (iii) — (14,204) — (14,204) Gain on revaluation of financial instruments (v) — (19,205) — (19,205) Impairment loss on other investment (vi) 40,210 — — 40,210 Foreign currency transaction loss — 2,337 — 2,337 Other, net (vii) 159 397 — 556 Restructuring costs (ix) 1,482 3,396 — 4,878 Share-based compensation (x) 2,917 7,650 — 10,567 Financial statement review costs (xi) — — 6,286 6,286 Depreciation and amortization 1,215 9,284 — 10,499 Adjusted EBITDA $ (15,827) $ (23,843) $ (19,726) $ (59,396) 43 Table of Contents (In thousands of U.S. dollars) Nine months ended September 30, 2021 United States Rest of World Corporate Total Net income (loss) $ (273,438) $ 34,678 $ (24,552) $ (263,312) Interest income, net (27) (6,659) — (6,686) Income tax benefit — (159) — (159) Share of loss from equity method investments — 4,172 — 4,172 Impairment loss on goodwill and indefinite-lived intangible assets (i) 235,019 37 — 235,056 Impairment loss on long-lived assets (ii) 2,955 1,784 — 4,739 Gain on revaluation of derivative liabilities (iii) — (131,290) — (131,290) Transaction costs (iv) — — 3,801 3,801 Gain on revaluation of financial instruments (v) — (143) — (143) Other, net (vii) — (1,041) — (1,041) Loss from discontinued operations (viii) — 500 — 500 Share-based compensation (x) 2,534 5,197 — 7,731 Financial statement review costs (xi) — — 4,615 4,615 Depreciation and amortization 536 8,375 — 8,911 Adjusted EBITDA $ (32,421) $ (84,549) $ (16,136) $ (133,106) (i) For the three and nine months ended September 30, 2021, impairment on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and indefinite-lived intangible assets related to the Company’s U.S. segment. (ii) For the nine months ended September 30, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space in Toronto, Ontario, Canada during the first quarter of 2022. For the three months ended September 30, 2021, impairment loss on long-lived assets relates to an impairment on property, plant and equipment in the U.S. segment. For the nine months ended September 30, 2021, impairment loss on long-lived assets relates to the aforementioned impairment loss on property, plant and equipment as well as an impairment loss on leased premises in the U.S. segment from the first quarter of 2021. See Note 13 “ Impairment Loss on Long-lived Assets ” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. (iii) For the three and nine months ended September 30, 2022 and 2021, gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 6 “ Derivative Liabilities ” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. (iv) For the three and nine months ended September 30, 2021, transaction costs represent legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss). (v) For the three and nine months ended September 30, 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 interim financial statements under Item 1 of this Quarterly Report. For three and nine months ended September 30, 2021, gain on revaluation of financial instruments related primarily to revaluations of financial liabilities resulting from DSUs. (vi) For the nine months ended September 30, 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 interim financial statements under Item 1 of this Quarterly Report. (vii) For the three months ended September 30, 2022, other, net related to $1,083 loss on disposal of assets and $390 of dividends declared by Cronos Australia on the Company’s 55,176,065 ordinary shares in the capital of Cronos Australia. For the nine months ended September 30, 2022, other, net related to $946 loss on disposal of assets and $390 of dividends declared by Cronos Australia on the Company’s 55,176,065 ordinary shares in the capital of Cronos Australia. For the three and nine months ended September 30, 2021, other, net primarily related to gain recorded on sale of an asset previously designated as held-for-sale in the first quarter of 2021. (viii) For the three and nine months ended September 30, 2021, loss (income) from discontinued operations related to the discontinuance of OGBC. (ix) For the three and nine months ended September 30, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment, including the planned exit of the Stayner Facility. See Note 7 “ Restructuring ” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report. (x) For the three and nine months ended September 30, 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 8 “ Share-based Compensation ” to the condensed consolidated financial statements under Item 1 of this Quarterly Report. (xi) For the three and nine months ended September 30, 2022 and 2021, financial statement review costs include costs and reserves taken related to the Restatements, costs related to the Company’s settlement of the SEC’s and the OSC’s investigations of the Restatements and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement. 44 Table of Contents Constant Currency To supplement the consolidated financial statements presented in accordance with U.S. GAAP, we have presented constant currency adjusted financial measures for net revenues, gross profit, gross profit margin, operating expenses, net income (loss) and Adjusted EBITDA for the three and nine months ended September 30, 2022 as well as cash and cash equivalents and short-term investment balances as of September 30, 2022 compared to December 31, 2021, which are considered non-GAAP financial measures. We present constant currency information to provide a framework for assessing how our underlying operations performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period income statement results in currencies other than U.S. dollars are converted into U.S. dollars using the average exchange rates from the three- and nine-month comparative periods in 2021 rather than the actual average exchange rates in effect during the respective current periods; constant currency current and prior comparative balance sheet information is translated at the prior year-end spot rate rather than the current period spot rate. All growth comparisons relate to the corresponding period in 2021. We have provided this non-GAAP financial information to aid investors in better understanding the performance of our segments. The non-GAAP financial measures presented in this Quarterly Report should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S. GAAP. The table below sets forth certain measures of consolidated results from continuing operations on a constant currency basis for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 as well as cash and cash equivalents and short-term investments as of September 30, 2022 and December 31, 2021, both on an as-reported and constant currency basis (in thousands): As Reported As Adjusted for Constant Currency Three months ended September 30, As Reported Change Three months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Net revenue $ 20,923 $ 20,407 $ 516 3 % $ 21,817 $ 1,410 7 % Gross profit 1,157 (730) 1,887 258 % 1,341 2,071 284 % Gross margin 6 % (4) % N/A 10 pp 6 % N/A 10 pp Operating expenses 32,161 55,684 (23,523) (42) % 32,679 (23,005) (41) % Net income (loss) (36,886) 77,666 (114,552) (147) % (36,547) (114,213) (147) % Adjusted EBITDA (21,697) (46,773) 25,076 54 % (22,008) 24,765 53 % Nine months ended September 30, As Reported Change Nine months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Net revenue $ 69,017 $ 48,640 $ 20,377 42 % $ 70,426 $ 21,786 45 % Gross profit 12,203 (19,477) 31,680 163 % 12,475 31,952 164 % Gross margin 18 % (40) % N/A 58 pp 18 % N/A 58 pp Operating expenses 107,322 378,482 (271,160) (72) % 108,736 (269,746) (71) % Net loss (89,877) (263,312) 173,435 66 % (89,934) 173,378 66 % Adjusted EBITDA (59,396) (133,106) 73,710 55 % (59,917) 73,189 55 % As of September 30, As of December 31, As Reported Change As of September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Cash and cash equivalents $ 633,296 $ 886,973 $ (253,677) (29) % $ 660,084 $ (226,889) (26) % Short-term investments 255,452 117,684 137,768 117 % 277,158 159,474 136 % Total cash and cash equivalents and short-term investments $ 888,748 $ 1,004,657 $ (115,909) (12) % $ 937,242 $ (67,415) (7) % 45 Table of Contents Net revenue As Reported As Adjusted for Constant Currency Three months ended September 30, As Reported Change Three months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Cannabis flower $ 13,674 $ 15,306 $ (1,632) (11) % $ 14,339 $ (967) (6) % Cannabis extracts 7,141 4,886 2,255 46 % 7,365 2,479 51 % Other 108 215 (107) (50) % 113 (102) (47) % Net revenue $ 20,923 $ 20,407 $ 516 3 % $ 21,817 $ 1,410 7 % Nine months ended September 30, As Reported Change Nine months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Cannabis flower $ 48,038 $ 36,337 $ 11,701 32 % $ 49,038 $ 12,701 35 % Cannabis extracts 20,498 11,788 8,710 74 % 20,895 9,107 77 % Other 481 515 (34) (7) % 493 (22) (4) % Net revenue $ 69,017 $ 48,640 $ 20,377 42 % $ 70,426 $ 21,786 45 % As Reported As Adjusted for Constant Currency Three months ended September 30, As Reported Change Three months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Canada $ 13,370 $ 14,186 $ (816) (6) % $ 13,868 $ (318) (2) % Israel 7,039 3,752 3,287 88 % 7,435 3,683 98 % United States 514 2,100 (1,586) (76) % 514 (1,586) (76) % Other countries — 369 (369) (100) % — (369) (100) % Net revenue $ 20,923 $ 20,407 $ 516 3 % $ 21,817 $ 1,410 7 % Nine months ended September 30, As Reported Change Nine months ended September 30, Constant Currency Change 2022 2021 $ % 2022 $ % Canada $ 41,335 $ 32,432 $ 8,903 27 % $ 42,358 $ 9,926 31 % Israel 23,381 8,580 14,801 173 % 23,767 15,187 177 % United States 4,301 6,768 (2,467) (36) % 4,301 (2,467) (36) % Other countries — 860 (860) (100) % — (860) (100) % Net revenue $ 69,017 $ 48,640 $ 20,377 42 % $ 70,426 $ 21,786 45 % For the three months ended September 30, 2022, net revenue on a constant currency basis was $21.8 million, representing a 7% increase from the three months ended September 30, 2021. For the nine months ended September 30, 2022, net revenue on a constant currency basis was $70.4 million, representing a 45% increase from the nine months ended September 30, 2021. Net revenue increased for both the three and nine months ended September 30, 2022 on a constant currency basis and was primarily due to higher cannabis flower sales in the Israeli medical market and higher cannabis extract sales in the Canadian adult-use market, partially offset by a reduction in revenue in the U.S. segment and lower cannabis flower sales in the Canadian adult-use market driven by an adverse price/mix shift. 46 Table of Contents Gross profit For the three months ended September 30, 2022, gross profit on a constant currency basis was $1.3 million, representing a 284% increase from the three months ended September 30, 2021. For the nine months ended September 30, 2022, gross profit on a constant currency basis was $12.5 million, representing a 164% increase from the nine months ended September 30, 2021. For the three-month comparative period, the change was primarily due to increased revenue in the ROW segment driven mainly by sales of cannabis flower in Israel and a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility and lower revenue in the U.S. segment. For the nine-month comparative period, the change was primarily due to increased revenue in the ROW segment driven mainly by sales of cannabis flower in Israel and a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, the absence of inventory write-downs in the current period, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of wind-down activities associated with our planned exit of the Stayner Facility and lower revenue in the U.S. segment. Operating expenses For the three months ended September 30, 2022, operating expenses on a constant currency basis was $32.7 million, representing a 41% decrease from the three months ended September 30, 2021. For the nine months ended September 30, 2022, operating expenses on a constant currency basis was $108.7 million, representing a 71% decrease from the nine months ended September 30, 2021. On a constant currency basis, operating expenses decreased for both the three and nine months ended September 30, 2022 primarily due to lower advertising and marketing spend and lower payroll-related costs in the U.S. segment as a result of the Realignment, reduced costs associated with the timing of Ginkgo milestones and a cancellation of beauty-focused product development spending in the U.S. segment as well as an expected credit loss allowance revaluation recognized in the three- and nine-month comparative periods, partially offset by higher restructuring costs related to the Realignment, including the planned exit of the Stayner Facility. Net income (loss) For the three months ended September 30, 2022, net loss on a constant currency basis was $36.5 million, representing a 147% reduction in net income from the three months ended September 30, 2021. For the nine months ended September 30, 2022, net loss on a constant currency basis was $89.9 million, representing a 66% improvement from the nine months ended September 30, 2021. Adjusted EBITDA For the three months ended September 30, 2022, Adjusted EBITDA on a constant currency basis was $(22.0) million, representing a 53% improvement from the three months ended September 30, 2021. For the nine months ended September 30, 2022, Adjusted EBITDA on a constant currency basis was $(59.9) million, representing a 55% improvement from the nine months ended September 30, 2021. The improvement in Adjusted EBITDA for both the three and nine months ended September 30, 2022 on a constant currency basis was primarily driven by decreases in general and administrative expenses, sales and marketing expenses, and research and development expenses as a result of the Company's strategic Realignment and an improvement in gross profit. Cash and cash equivalents & short-term investments Cash and cash equivalents and short-term investments on a constant currency basis decreased 7% to $937.2 million as of September 30, 2022 from $1.0 billion as of December 31, 2021. The decrease in cash and cash equivalents and short-term investments is primarily due to cash flows used in operating activities in 2022. Liquidity and Capital Resources As of September 30, 2022, we had $633.3 million in cash and cash equivalents and $255.5 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) Nine months ended September 30, 2022 2021 Cash flows used in operating activities $ (64,576) $ (117,678) Cash flows used in investing activities (160,300) (110,236) Cash flows used in financing activities (2,277) (13,164) Effect of foreign currency translation on cash and cash equivalents (26,524) 5,622 Net change in cash $ (253,677) $ (235,456) 47 Table of Contents Comparison of cash flows between the nine months ended September 30, 2022 and the nine months ended September 30, 2021 Operating activities During the nine months ended September 30, 2022, we used $64.6 million of cash in operating activities as compared to cash used of $117.7 million in the nine months ended September 30, 2021, representing a decrease in cash used of $53.1 million. This change is primarily driven by a $63.1 million increase in net income after adjusting for non-cash items during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Investing activities During the nine months ended September 30, 2022, we used $160.3 million of cash in investing activities, compared to $110.2 million of cash used in investing activities during the nine months ended September 30, 2021, representing an increase of $50.1 million in cash used by investing activities. This change is primarily driven by higher levels of short-term investments, partially offset by the purchase of the PharmaCann option during the nine months ended September 30, 2021, lower purchases of property, plant and equipment and an increase in repayments and decrease in disbursements related to loans receivable with related parties. Financing activities During the nine months ended September 30, 2022, cash used in financing activities was $2.3 million, compared to $13.2 million of cash used in financing activities during the nine months ended September 30, 2021, representing a decrease of $10.9 million in cash used in financing activities. This change is primarily driven by a decrease of $11.0 million in withholding taxes paid on share-based awards during the nine months ended September 30, 2022 compared to the nine months ended September 30, 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.