Cronos Group Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Overview 54 Recent Developments 55 Consolidated Results of Operations 57 Summary of financial results – ROW 61 Summary of financial results – U.S. 62 Non-G AAP Measures 62 Liquidity and Capital Resources 67 Critical Accounting Estimates 68 Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and related notes, which are included in Item 8 of this Annual Report on Form 10-K (this “Annual Report”), to enhance the understanding of our operations and our present business environment. This discussion contains Forward-Looking Statements that involve risks and uncertainties. For more information about our operations and the risks facing our business, see Item 1 “ Business ” and Item 1A “ Risk Factors ”, respectively, of this Annual Report. Business Overview Cronos is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos is building an iconic brand portfolio. Cronos’ diverse international brand portfolio includes Spinach ® , PEACE NATURALS ® and Lord Jones ® . Unless otherwise noted or the context indicates otherwise, references in this Annual Report to the “Company”, “Cronos”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect wholly owned subsidiaries and, if applicable, its joint ventures and investments accounted for by the equity method; the term “cannabis” means the plant of any species or subspecies of genus Cannabis and any part of that plant, including all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers; the term “U.S. hemp” has the meaning given to term “hemp” in the U.S. Agricultural Improvement Act of 2018, including hemp-derived cannabidiol (“CBD”). Strategy Cronos 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 products through e-commerce, retail and hospitality partner channels in the United States under the Lord Jones ® brand. The ROW segment is involved in the cultivation, manufacturing, and marketing of cannabis products for the medical and adult-use markets. In Canada, Cronos 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 “Peace Naturals Campus”), 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 oils in the Israeli medical market. Cronos has established two strategic joint ventures in Canada and Israel. Additionally, as of December 31, 2022, Cronos held approximately 10% of the issued capital of Vitura Health Limited (“Vitura”), formerly known as Cronos Australia Limited, which is listed on the Australian Securities Exchange under the trading symbol “VIT” and approximately 13.7% of the issued capital of Natuera. 54 Table of Contents Recent Developments COVID-19 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 or its affiliates operate, 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 have been 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 or its affiliates operate. 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. Additionally, 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. 2022 Business Highlights Spinach ® Branded Product Portfolio Expansion in Canada Throughout 2022, the Company expanded its Spinach ® gummies portfolio under both SOURZ by Spinach ® and Spinach FEELZ™, with the following new products: • April 2022: SOURZ by Spinach ® Cherry Lime (Hybrid), 10mg of THC per pack • July 2022: Spinach FEELZ™ DEEP DREAMZ CBN, 10mg of THC and 5mg of CBN per pack • October 2022: SOURZ by Spinach ® Tropical Triple Berry 2:1 CBD:THC, 20mg of CBD and 10mg of THC per pack • December 2022: Spinach FEELZ™ 1:3 THC+CBC Mango Lime, 10mg of THC and 30mg of CBC per pack 55 Table of Contents In 2022, Cronos was also focused on renovating both its vape and pre-roll offerings and launched the products below in those categories in 2022: Vape: • August 2022: Spinach FEELZ™ Deep Dreamz Blackberry Kush (7:1 THC|CBN) 1-gram vape • May 2022: Spinach ® Cosmic Green Apple and Polar Mint Vortex (800 mg/g THC) 1-gram vapes In November, 2022, Cronos launched two infused pre-rolls in Canada. The first, Fully Charged Atomic GMO, was launched under the Spinach ® brand and is offered in a 5-pack with 0.5 grams per pre-roll. Second, Cronos launched Tropical Diesel CBG, a 3-pack of CBG infused pre-rolls with 0.5 grams per pre-roll under the Spinach FEELZ™ sub-brand. Intellectual property initiatives In 2022, we continued to progress our fermentation initiative in partnership with Ginkgo. We achieved equity milestones for the following cannabinoids in 2022: • June 2022: tetrahydrocannabivaric acid (“THCVA”) • November 2022: cannabichromenic acid (“CBCA”) • December 2022: cannabichromevarinic acid (“CBCVA”) Strategic and Organizational Update In February 2023, the Company announced a shift in its strategic plans for the Realignment, with the intent to retain select components of its operations at the Peace Naturals Campus, namely distribution and warehousing, certain research and development activities and manufacturing of certain of the Company’s proprietary innovation products. Appointments In March 2022, the Board of Directors appointed Cronos’s founder, Mike Gorenstein, as Chairman, President and Chief Executive Officer. 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. In August 2022, the Company appointed Arye Weigensberg as Senior Vice President, Head of Research & Development, after serving in an interim capacity since November 2021. Prior to serving as interim Head of Research and Development, Mr. Weigensberg was the General Manager and Vice President of Research and Technology at Cronos Research Labs. Before joining the Company, Mr. Weigensberg was the CEO of Altria Israel Ltd (an Altria research and development hub). Since joining Cronos, Mr. Weigensberg has played a foundational role developing the scope of our rare cannabinoid work, while advancing our research capabilities to forge new strategies for differentiated cannabis products. In October 2022, Jeff Jacobson was appointed Chief Growth Officer. Mr. Jacobson previously served as the Company’s Senior Vice President, Head of Growth (North America). Mr. Jacobson has been with Cronos since December 2016 and was a co-founder of Peace Naturals Project Inc. Mr. Jacobson’s expertise and experience in licensing and compliance, new business development, project management and resource management assist Cronos in developing and penetrating domestic and international markets. In November 2022, the Company appointed James Holm as Chief Financial Officer after nearly two decades of finance and accounting experience at leading companies across industries. He most recently served as the Global Vice President of Finance Transformation at Vertiv, a global provider of critical digital infrastructure and continuity solutions, where he led the company’s centralization, standardization and optimization to a Global Shared Service hub for finance processes. Before joining Vertiv, Mr. Holm served as Finance Leader, Finance Solutions & Process Transformation Organization at Worldpay, one of the largest global payment processors. There he drove financial reporting accuracy, capabilities and enhancements across the company. Earlier in his career, he held multiple positions of increasing seniority in the finance department during his eight-year tenure at Procter and Gamble. 2021 Compared to 2020 Results of Operations For a discussion of our 2021 results of operations compared to 2020, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021. Cash Flows 56 Table of Contents For a discussion of our 2021 cash flows compared to 2020, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021. Foreign currency exchange rates All currency amounts in this Annual Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of December 31, 2022 and December 31, 2021, as reported on Bloomberg. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The consolidated statements of net income (loss) and comprehensive income (loss) and consolidated statements of cash flows of our foreign operations are translated into dollars by applying the average foreign exchange rate in effect for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, as reported on Bloomberg. The exchange rates used to translate from Canadian dollars (“C$”) to dollars are shown below: (Exchange rates are shown as C$ per $) Year ended December 31, 2022 2021 2020 Average rate 1.3017 1.2541 1.3411 Spot rate 1.3554 1.2746 1.2751 Consolidated Results of Operations The tables below set forth our consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. Our consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods . Year ended December 31, 2022 2021 Net revenue before excise taxes $ 114,456 $ 89,486 Excise taxes (22,552) (15,051) Net revenue 91,904 74,435 Cost of sales 79,935 80,008 Inventory write-down — 11,961 Gross profit 11,969 (17,534) Operating expenses: Sales and marketing 22,282 44,937 Research and development 13,381 23,331 General and administrative 71,178 96,482 Restructuring costs 5,333 — Share-based compensation 15,115 10,151 Depreciation and amortization 6,025 4,484 Impairment loss on goodwill and indefinite-lived intangible assets — 236,056 Impairment loss on long-lived assets 3,493 127,619 Total operating expenses 136,807 543,060 Operating loss (124,838) (560,594) Other income (expense) (9,721) 163,459 Income tax benefit (expense) (34,175) 431 Loss from discontinued operations — (500) Net loss (168,734) (397,204) Net loss attributable to non-controlling interest — (1,097) Net loss attributable to Cronos Group $ (168,734) $ (396,107) 57 Table of Contents Summary of select financial results Year ended December 31, Change 2022 2021 $ % Net revenue $ 91,904 $ 74,435 $ 17,469 23 % Cost of sales 79,935 80,008 (73) — % Inventory write-down — 11,961 (11,961) (100) % Gross profit 11,969 (17,534) 29,503 168 % Gross margin (i) 13 % (24) % N/A 37 pp (i) Gross margin is defined as gross profit divided by net revenue. Net revenue For 2022, we reported consolidated net revenue of $91.9 million, representing a $17.5 million increase from 2021. This 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 a reduction in revenue in the U.S. segment, lower cannabis flower sales in the Canadian adult-use market driven by an unfavorable price/mix shift and the impact of the weakening Canadian dollar against the U.S. dollar during 2022. Cost of sales For 2022, we reported consolidated cost of sales of $79.9 million, essentially flat with 2021, despite a 23% increase in net revenue. This 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 period, partially offset by higher sales volumes in the ROW segment and lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus. Inventory write-downs For 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 inventory write-downs for 2022. Gross profit For 2022, we reported consolidated gross profit of $12.0 million, representing a $29.5 million improvement from 2021. The improvement in gross profit is primarily due to increased revenue in the ROW segment driven mainly by a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, higher sales of cannabis flower in Israel, the absence of inventory write-downs in 2022, and lower cannabis biomass costs, partially offset by lower revenue in the U.S. segment and lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus. Operating expenses Year ended December 31, Change 2022 2021 $ % Sales and marketing $ 22,282 $ 44,937 $ (22,655) (50) % Research and development 13,381 23,331 (9,950) (43) % General and administrative 71,178 96,482 (25,304) (26) % Restructuring costs 5,333 — 5,333 100 % Share-based compensation 15,115 10,151 4,964 49 % Depreciation and amortization 6,025 4,484 1,541 34 % Impairment loss on goodwill and indefinite-lived intangible assets — 236,056 (236,056) (100) % Impairment loss on long-lived assets 3,493 127,619 (124,126) (97) % Operating expenses $ 136,807 $ 543,060 $ (406,253) (75) % Sales and marketing For 2022, we reported sales and marketing expenses of $22.3 million, representing a decrease of $22.7 million from 2021. The decrease was primarily due to lower advertising and marketing spend and lower personnel-related costs in the U.S. segment as a result of the Realignment. 58 Table of Contents Research and development For 2022, we reported research and development expenses of $13.4 million, representing a decrease of $10.0 million from 2021. This decrease was primarily due to lower costs associated with the Ginkgo Collaboration Agreement and cancellation of beauty-focused product development spending in the U.S. segment. General and administrative For 2022, we reported general and administrative expenses of $71.2 million, representing a decrease of $25.3 million from 2021. The decrease was primarily due to lower expected credit losses on our loans to joint venture partners when compared to 2021, lower legal and advisory fees associated with strategic initiatives and lower personnel-related costs associated with the Realignment. Restructuring costs For 2022, we reported restructuring costs of $5.3 million, compared to no restructuring costs in 2021. The restructuring costs in 2022 were related to Realignment activities. For further information, see Note 16 “ Restructuring ” to the consolidated financial statements in Item 8 of this Annual Report. Share-based compensation For 2022, we reported share-based compensation expenses of $15.1 million, representing an increase of $5.0 million from 2021. 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 the approval for grant of previously held-back equity awards granted to certain executives in connection with the SEC and OSC settlements. For further information, see Note 10 “ Share-based Compensation ” to the consolidated financial statements in Item 8 of this Annual Report. Depreciation and amortization For 2022, depreciation and amortization expenses were $6.0 million, representing an increase of $1.5 million from 2021. The increase was primarily due to higher amortization on our Ginkgo exclusive license intangible assets. Impairment loss on goodwill and indefinite-lived intangible assets For 2021, we reported impairment loss on goodwill and intangible assets of $236.1 million due to impairment charges on the goodwill associated with our U.S. reporting unit and impairment on our Lord Jones ® brand. For 2022, we reported no such impairment losses. For further information, see Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report. Impairment loss on long-lived assets During 2022, we recorded impairment charges of $3.5 million related to the right-of-use lease asset and leasehold improvements associated with our corporate headquarters in Toronto, Ontario, Canada, which the Company plans to sublease. For 2021, we recorded an impairment charge of $119.9 million on long-lived assets related to the previously announced planned exit from the Peace Naturals Campus. Additionally, in 2021, we recorded impairment charges of $4.8 million related to our Ginkgo exclusive licenses for cannabigerolic acid (“CBGA”) and cannabigerovarinic acid (“CBGVA”) for the difference between the fair value of the licenses and the consideration paid. Furthermore, in 2021, our U.S. segment recorded impairment charges of $1.2 million on property, plant, and equipment where the carrying value of those assets was not recoverable and a $1.7 million impairment charge related to ceasing use of certain leased premise and the derecognition of the associated right-of-use asset. See Note 5 “ Property, plant and equipment, net ” Note 6, “ Goodwill and Intangible Assets, net ” and Note 7 “ Leases ” to the consolidated financial statements in Item 8 of this Annual Report for additional information. 59 Table of Contents Total other income, income tax benefit (expense) and loss from discontinued operations Year ended December 31, Change (i) 2022 2021 $ % Interest income, net $ 22,537 $ 9,071 $ 13,466 148 % Gain on revaluation of derivative liabilities 14,060 151,360 (137,300) (91) % Impairment loss on other investments (61,392) — (61,392) N/M Share of income (loss) from equity method investments 3,114 (6,313) 9,427 149 % Gain on revaluation of financial instruments 14,739 8,611 6,128 71 % Foreign currency transaction loss (2,286) — (2,286) N/M Other, net (493) 730 (1,223) (168) % Total other income (9,721) 163,459 (173,180) (106) % Income tax benefit (expense) (34,175) 431 (34,606) N/M Loss from discontinued operations — (500) 500 (100) % Net loss $ (168,734) $ (397,204) $ 228,470 58 % (i) “N/M” is defined as not meaningful. Interest income, net For 2022, we reported interest income, net of $22.5 million, representing an increase of $13.5 million from 2021 primarily due to higher short-term investment balances and higher interest rates in 2022 when compared to 2021. Gain on revaluation of derivative liabilities For 2022, we reported a gain on revaluation of derivative liabilities of $14.1 million, representing a decrease of $137.3 million from 2021 primarily due to the greater impact on the derivative liabilities in 2021 from the decreased estimated term of the derivative instruments and the decreased price of Cronos common shares. Impairment loss on other investments For 2022, impairment loss on other investments was $61.4 million, driven by impairment charges recorded on our PharmaCann Option for the difference between its estimated fair value and its carrying amount. There were no such impairment losses on other investments during 2021. For more information, see Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report for additional information. Share of income (loss) from equity method investments For 2022, we reported share of income from equity method investments of $3.1 million, representing an increase of $9.4 million from 2021. The change was primarily due to improved results from our equity method investment in Cronos GrowCo. Gain (loss) on revaluation of financial instruments For 2022, we reported a gain on revaluation of financial instruments of $14.7 million, representing an increase of $6.1 million from 2021. The increase was due to the change in fair value of our investment in Vitura. See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report for additional information. Foreign currency transaction loss For 2022, foreign currency transaction loss was $2.3 million, 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 2021. Other, net For 2022, other, net was a loss of $0.5 million, compared to income of $0.7 million in 2021. The change was primarily due to loss on disposal of assets associated with the Realignment, partially offset by $0.4 million of dividend income from our Vitura investment during 2022. Income tax benefit (expense) For 2022, we reported income tax expense of $34.2 million, compared to an income tax benefit of $0.4 million in 2021. The change was due primarily to a capital gain for tax purposes of $479.8 million, which resulted in an income tax liability of $34.2 million, related to the irrevocable relinquishment by Altria of the Warrant on December 16, 2022. 60 Table of Contents Loss from discontinued operations For 2021, we reported loss from discontinued operations of $0.5 million. There was no such loss from discontinued operations in 2022. Results of Operations by Business Segment: 2022 compared with 2021 The tables below set forth our 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 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 financial results – ROW Year ended December 31, Change 2022 2021 $ % Net revenue $ 86,749 $ 64,561 $ 22,188 34 % Cost of sales 71,313 70,193 1,120 2 % Inventory write-down — 11,961 (11,961) (100) % Gross profit 15,436 (17,593) 33,029 188 % Gross margin 18 % (27) % N/A 45 pp Net revenue – ROW Year ended December 31, Change 2022 2021 $ % Cannabis flower $ 63,593 $ 55,194 $ 8,399 15 % Cannabis extracts 22,522 8,807 13,715 156 % Other 634 560 74 13 % Net revenue $ 86,749 $ 64,561 $ 22,188 34 % For 2022, the ROW segment reported net revenue of $86.7 million, representing an increase of $22.2 million from 2021. This increase was primarily due to higher cannabis extract sales in the Canadian adult-use market and higher cannabis flower sales in the Israeli medical market, partially offset by lower cannabis flower sales in the Canadian adult-use market driven by an unfavorable price/mix shift and the impact of the weakening Canadian dollar against the U.S. dollar during 2022. Cost of sales - ROW For 2022, the ROW segment reported a year-over-year increase in cost of sales of 2%, while net revenue increased 34%. This increase was primarily due to higher sales volumes and lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus, partially offset by lower cannabis biomass costs and the impact of the weakening Canadian dollar against the U.S. dollar during 2022. Inventory write-downs - ROW We reported no inventory write-downs for 2022. For 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. Gross profit - ROW For 2022, the ROW segment reported gross profit of $15.4 million, representing an increase of $33.0 million from 2021. The improvement in gross profit is primarily due to increased revenue driven mainly by a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, sales of cannabis flower in Israel, the absence of inventory write-downs in 2022, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities at the Peace Naturals Campus. 61 Table of Contents Summary of financial results – U.S. Year ended December 31, Change 2022 2021 $ % Net revenue $ 5,155 $ 9,874 $ (4,719) (48) % Cost of sales 8,622 9,815 (1,193) (12) % Gross profit $ (3,467) $ 59 $ (3,526) N/M Gross margin (67) % 1 % N/A (68) pp Net revenue – U.S. For 2022, the U.S. segment reported net revenue of $5.2 million, representing a decrease of $4.7 million from 2021. The decrease in sales was driven by the decision to exit the adult beauty business, 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 2022, the U.S. segment reported cost of sales of $8.6 million, representing a decrease of $1.2 million from 2021. This decrease was primarily due to lower sales volumes due to the decision to exit the adult beauty business, partially offset by higher inventory reserves associated with discontinued products. Gross profit – U.S. For 2022, the U.S. segment reported negative gross profit of $3.5 million, representing a decrease in gross profit of $3.5 million from 2021. This decrease was primarily due to the decision to exit the adult beauty business and higher inventory reserves associated with discontinued products. Non-GAAP Measures Cronos reports its financial results in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). This Annual 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 our 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 Annual Report are reconciled to their closest reported 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 or 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 I, Item 3, Legal Proceedings, of this Annual Report for a discussion of the settlement of the SEC’s and OSC’s regulatory reviews relating to the Restatements and shareholder class action complaints relating to the restatement of the 2019 interim financial statements). Management believes that Adjusted EBITDA provides the most useful insight into underlying business trends and results and provides a more meaningful comparison of year-over-year 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. 62 Table of Contents Adjusted EBITDA is reconciled to net income (loss) as follows: (in thousands of U.S. dollars) Year ended December 31, 2022 US ROW Corporate Total Net loss $ (84,194) $ (54,129) $ (30,411) $ (168,734) Interest income, net (4,518) (18,019) — (22,537) Income tax expense — 34,175 — 34,175 Depreciation and amortization 1,485 11,637 — 13,122 EBITDA (87,227) (26,336) (30,411) (143,974) Share of income from equity accounted investments — (3,114) — (3,114) Impairment loss on long-lived assets (ii) — 3,493 — 3,493 Gain on revaluation of derivative liabilities (iii) — (14,060) — (14,060) Gain on revaluation of financial instruments (iv) — (14,739) — (14,739) Impairment loss on other investments (vi) 61,392 — — 61,392 Foreign currency transaction loss — 2,286 — 2,286 Other, net (vii) 169 324 — 493 Restructuring costs (ix) 1,788 3,545 — 5,333 Share-based compensation (x) 3,744 11,371 — 15,115 Financial statement review costs (xi) — — 7,167 7,167 Adjusted EBITDA $ (20,134) $ (37,230) $ (23,244) $ (80,608) (in thousands of U.S. dollars) Year ended December 31, 2021 US ROW Corporate Total Net loss $ (283,883) $ (81,811) $ (31,510) $ (397,204) Interest income, net (40) (9,031) — (9,071) Income tax benefit (89) (342) — (431) Depreciation and amortization 917 14,485 — 15,402 EBITDA (283,095) (76,699) (31,510) (391,304) Share of loss from equity method investments — 6,313 — 6,313 Impairment loss on goodwill and indefinite-lived intangible assets (i) 236,019 37 — 236,056 Impairment loss on long-lived assets (ii) 2,955 124,664 — 127,619 Gain on revaluation of derivative liabilities (iii) — (151,360) — (151,360) Gain on revaluation of financial instruments (iv) — (8,611) — (8,611) Transaction costs (v) — — 3,801 3,801 Other, net (vii) 3 (733) — (730) Loss from discontinued operations (viii) — 500 — 500 Share-based compensation (x) 3,401 6,750 — 10,151 Financial statement review costs (xi) — — 7,102 7,102 Adjusted EBITDA $ (40,717) $ (99,139) $ (20,607) $ (160,463) 63 Table of Contents (in thousands of U.S. dollars) Year ended December 31, 2020 US ROW Corporate Total Net income (loss) $ (77,368) $ 32,671 $ (30,573) $ (75,270) Interest expense (income), net 18 (18,433) — (18,415) Income tax expense 323 1,024 — 1,347 Depreciation and amortization 234 6,811 — 7,045 EBITDA (76,793) 22,073 (30,573) (85,293) Share of loss from equity accounted investments — 4,510 — 4,510 Impairment loss on goodwill and indefinite-lived intangible assets (i) 40,000 — — 40,000 Gain on revaluation of derivative liabilities (iii) — (129,254) — (129,254) Loss on revaluation of financial instruments (iv) — 9 — 9 Transaction costs (v) 40 — — 40 Other, net (vii) 20 1,805 — 1,825 Loss from discontinued operations (viii) — 650 — 650 Share-based compensation (x) 8,714 6,647 — 15,361 Financial statement review costs (xi) — — 9,688 9,688 Gain on disposal of investments (xii) — (4,789) — (4,789) Adjusted EBITDA $ (28,019) $ (98,349) $ (20,885) $ (147,253) (i) For the year ended December 31, 2021, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S. segment and impairment on an indefinite-lived trademark related to our ROW segment. For the year ended December 31, 2020, impairment loss on goodwill and indefinite-lived intangible assets relates to impairment on goodwill and intangible assets related to our U.S. segment. See Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements under Item 8 of this Annual Report. (ii) For the year ended December 31, 2022, impairment loss on long-lived assets relates 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 year ended December 31, 2021, impairment loss on long-lived assets relates to impairment charges on property, plant and equipment and definite-lived intangible assets in the Canadian asset group, impairment charges for the differences between the consideration paid to Ginkgo for the achievement of two equity milestones in connection with the Ginkgo Collaboration Agreement and the fair values of the CBGA exclusive license and CBGVA exclusive license as well as impairment on leased premises in the U.S. segment. See Note 5 “ Property, Plant and Equipment, net ” and Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report. (iii) For the years ended December 31, 2022, 2021 and 2020, the gain on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 8 “ Derivative Liabilities ” to the consolidated financial statements in Item 8 of this Annual Report. (iv) For the years ended December 31, 2022 and 2021, gain on revaluation of financial instruments relates primarily to our unrealized holding gain on our mark-to-market investment in Vitura as well as revaluations of financial liabilities resulting from deferred share units (“DSUs”) granted to directors. For the year ended December 31, 2020, loss on revaluation of financial instruments relates to revaluations of financial liabilities resulting from DSUs. See Note 3 “ Investments ” and Note 10 “ Share-based Compensation ” to the consolidated financial statements in Item 8 of this Annual Report. (v) For the years ended December 31, 2021 and 2020, transaction costs represent legal, financial and other advisory fees and expenses incurred in connection with various strategic investments. These costs are included in general and administrative expenses on the consolidated statements of net income (loss) and comprehensive income (loss). (vi) For the year ended December 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 consolidated financial statements in Item 8 of this Annual Report. (vii) For the year ended December 31, 2022, other, net primarily related to related to $646 loss on disposal of assets and $390 of dividends declared by Vitura on the Company’s 55,176,065 ordinary shares in the capital of Vitura. For the years ended December 31, 2021 and 2020, other, net is primarily related to (gain) loss on reclassification of held-for-sale assets and (gain) loss on disposal of assets. (viii) For the years ended December 31, 2021 and 2020, loss from discontinued operations relates to the discontinuance of Original B.C. Ltd. (“OGBC”). (ix) For the year ended December 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment, including the change in the nature of operations at the Peace Naturals Campus. See Note 16 “ Restructuring” to the consolidated financial statements in Item 8 of this Annual Report. (x) For the years ended December 31, 2022, 2021 and 2020, share-based compensation relates to the vesting expenses of share-based compensation awarded to employees under our share-based award plans as described in Note 10 “ Share-based Compensation ” to the consolidated financial statements in Item 8 of this Annual Report. (xi) For the years ended December 31, 2022, 2021 and 2020, financial statement review costs include costs related to the restatements of the Company’s 2019 interim financial statements and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatements, the costs related to the Settlement Order and Settlement Agreement and legal costs defending shareholder class action complaints brought against the Company as a result of the 2021 and 2019 restatements. (xii) For the year ended December 31, 2020, gain on disposal of investments is primarily comprised of the gain recorded related to the sale of common shares of Aurora, which were received in connection with the achievement of a milestone related to Aurora’s acquisition of Whistler (“Whistler Transaction”) in 2020 and as a result of the closing of the Whistler Transaction in 2019. There were no disposals of investments during the years ended December 31, 2022 and 2021. See Note 3 “ Investments ” to the consolidated financial statements in Item 8 of this Annual Report. 64 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 2022, as well as cash and cash equivalents and short-term investment balances as of December 31, 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 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 comparative period in 2021 rather than the actual average exchange rates in effect during 2022; constant currency current period balance sheet information is translated at the prior year-end spot rate rather than the current year-end 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 Annual 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 an as-reported and constant currency basis for 2022 compared to 2021, as well as cash and cash equivalents and short-term investments as of December 31, 2022, compared to December 31, 2021, on an as-reported and constant currency basis (in thousands): As Reported As Adjusted for Constant Currency Year ended December 31, As Reported Change Year ended December 31, Constant Currency Change 2022 2021 $ % 2022 $ % Net revenue $ 91,904 $ 74,435 $ 17,469 23 % $ 95,237 $ 20,802 28 % Gross profit 11,969 (17,534) 29,503 168 % 12,571 30,105 172 % Gross margin 13 % (24) % N/A 37 pp 13 % N/A 37 pp Operating expenses 136,807 543,060 (406,253) (75) % 140,064 (402,996) (74) % Net loss (168,734) (397,204) 228,470 58 % (170,888) 226,316 57 % Adjusted EBITDA (80,608) (160,463) 79,855 50 % (82,116) 78,347 49 % As of December 31, As Reported Change As of December 31, Constant Currency Change 2022 2021 $ % 2022 $ % Cash and cash equivalents $ 764,644 $ 886,973 $ (122,329) (14) % $ 793,525 $ (93,448) (11) % Short-term investments 113,077 117,684 (4,607) (4) % 120,246 2,562 2 % Total cash and cash equivalents and short-term investments $ 877,721 $ 1,004,657 $ (126,936) (13) % $ 913,771 $ (90,886) (9) % 65 Table of Contents Net revenue As Reported As Adjusted for Constant Currency Year ended December 31, As Reported Change Year ended December 31, Constant Currency Change 2022 2021 $ % 2022 $ % Cannabis flower $ 63,593 $ 55,194 $ 8,399 15 % $ 66,047 $ 10,853 20 % Cannabis extracts 27,677 18,681 8,996 48 % 28,532 9,851 53 % Other 634 560 74 13 % 658 98 18 % Net revenue $ 91,904 $ 74,435 $ 17,469 23 % $ 95,237 $ 20,802 28 % As Reported As Adjusted for Constant Currency Year ended December 31, As Reported Change Year ended December 31, Constant Currency Change 2022 2021 $ % 2022 $ % Canada $ 56,233 $ 50,294 $ 5,939 12 % $ 58,367 $ 8,073 16 % Israel 30,516 13,376 17,140 128 % 31,715 18,339 137 % United States 5,155 9,874 (4,719) (48) % 5,155 (4,719) (48) % Other countries — 891 (891) (100) % — (891) (100) % Net revenue $ 91,904 $ 74,435 $ 17,469 23 % $ 95,237 $ 20,802 28 % Net Revenue For 2022, net revenue on a constant currency basis was $95.2 million, representing a 28% increase from 2021. Net revenue increased on a constant currency basis primarily due to higher cannabis extract sales in the Canadian adult-use market and higher cannabis flower sales in the Israeli medical 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. Gross profit For 2022, gross profit on a constant currency basis was $12.6 million, representing a 172% increase from 2021. Gross profit increased on a constant currency basis primarily due to increased revenue in the ROW segment driven mainly by a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, higher sales of cannabis flower in Israel, the absence of inventory write-downs in 2022, and lower cannabis biomass costs, partially offset by lower revenue in the U.S. segment and lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus. Operating expenses For 2022, operating expenses on a constant currency basis was $140.1 million, representing a 74% decrease from 2021. Operating expenses decreased on a constant currency basis 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, cancellation of beauty-focused product development spending in the U.S. segment, and an expected credit loss allowance revaluation recognized in 2021, partially offset by higher restructuring costs related to the Realignment. Net loss For 2022, net loss on a constant currency basis was $170.9 million, representing a 57% improvement from 2021. Net loss improved primarily due to lower impairment charges, higher gross profit, lower operating expenses, higher interest income and higher income from equity method investments, partially offset by lower gain on revaluation of derivative liabilities and higher share-based compensation expense in 2022. Adjusted EBITDA For 2022, adjusted EBITDA on a constant currency basis was $82.1 million, representing a 49% improvement from 2021. Adjusted EBITDA increased on a constant currency basis primarily due to decreases in general and administrative expenses, sales and marketing expenses, and research and development expenses as a result of the 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 9% to $913.8 million as of December 31, 2022 from $1,004.7 million 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. 66 Table of Contents Liquidity and Capital Resources We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our business operations and capital expenditures over the next twelve months. Our primary need for liquidity is to fund operations and capital expenditures. Our ability to fund operations and capital expenditures depends on, among other things, future operating performance and cash flows that are subject to general economic conditions and financial and other factors, including factors beyond our control. Since 2019, we have been funded by the C$2.4 billion (approximately $1.8 billion) Altria investment in us, pursuant to which we issued to certain wholly owned subsidiaries of Altria 149,831,154 of our common shares and one warrant, as further discussed under “ Altria Strategic Investment ” in Item 1 of this Annual Report. As of December 31, 2022, we had $764.6 million in cash and cash equivalents and $113.1 million in short term investments, compared to $887.0 million in cash and cash equivalents and $117.7 million in short term investments as of December 31, 2021. As of both December 31, 2022 and December 31, 2021, we had no external financing. Cash flows (In thousands of U.S. dollars) Year ended December 31, 2022 2021 2020 Net cash used in operating activities $ (88,948) $ (153,616) $ (144,871) Net cash provided by (used in) investing activities (1,842) (28,898) 20,150 Net cash used in financing activities (2,897) (13,442) (3,051) Effect of foreign currency translation on cash and cash equivalents (28,642) 4,906 6,102 Net change in cash $ (122,329) $ (191,050) $ (121,670) 2022 cash flows vs 2021 cash flows Operating activities During 2022, we used $88.9 million of cash in operating activities, compared to $153.6 million in 2021, representing a decrease in net cash used of $66.8 million. This change is primarily driven by a $42.0 million increase in net income after adjusting for non-cash items, such as impairment charges, share-based payments, depreciation and amortization, and share of loss from investments in equity method investments in 2022, and a net increase in changes in operating assets and liabilities of $22.7 million related to the timing of collections of accounts receivables, payments for income taxes, payments for accruals and payables, and purchases of inventory. Investing activities During 2022, we used $1.8 million of cash in investing activities, compared to $28.9 million during 2021, representing a decrease of $27.1 million in net cash used. This change is primarily driven by the purchase of the PharmaCann Option during 2021, lower purchases of property, plant and equipment and greater repayments than disbursements on loans receivable during 2022, partially offset by a higher level of short-term investments during 2022. Financing activities During 2022, cash used in financing activities was $2.9 million, as compared to $13.4 million in 2021, representing a decrease of $10.5 million. This change is primarily driven by a decrease in withholding taxes paid on share-based awards. Cash requirements In the near-term, we expect to use our available cash and investments to operate our core business and develop new ways to serve our customers as well as invest in our various strategic partnerships and in our investees. We have maintained adequate liquidity to meet working capital requirements. Our material cash requirements include the following contractual and other obligations as of December 31, 2022: Leases We have operating leases for buildings and office space, vehicles and land, and a finance lease relating to equipment. As of December 31, 2022, the future minimum payments required under these leases totaled $4.8 million, with $1.6 million payable within 12 months. Refer to Note 7 “ Leases ” to the consolidated financial statements in Item 8 of this Annual Report for further information. Loans receivable with related parties We have entered into three loan agreements with affiliates. As of December 31, 2022, Cronos GrowCo had approximately $0.7 million undrawn on its loan receivable, with no amounts expected to be drawn within 12 months. All other loans receivable have been fully drawn. Refer to Note 4 “ Loans Receivable, net ” to the consolidated financial statement in Item 8 of this Annual Report for further information. 67 Table of Contents Purchase obligations Our purchase obligations primarily consist of contractual obligations to maintain the ordinary course of business through information technology and capital expenditures related to computer software, agricultural supply services and data analytics. Other purchase obligations consist of noncancellable obligations related to maintenance, internet, and telecommunication service. As of December 31, 2022, we had purchase obligations of $13.5 million, with $10.6 million payable within 12 months. Research and development obligations We have entered into multiple R&D contracts with partners such as Ginkgo Bioworks Holdings, Inc. (“Ginkgo”), as well as maintained internal cash requirements related to R&D activities, to continue to improve processes and gain knowledge on the cannabinoid industry. As of December 31, 2022, we had approximately $1.7 million in cash requirements related to R&D, with $1.7 million payable within 12 months. Refer to Note 9 “ Commitments and Contingencies ” to the consolidated financial statements in Item 8 of this Annual Report for further information. Critical Accounting Estimates Estimates and critical judgments by management The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are reviewed periodically, and adjustments are made as appropriate in the year they become known. Items for which actual results may differ materially from these estimates are described in the following section. Refer to Note 1 “ Background, Basis of Presentation, and Summary of Significant Accounting Policies ” to the consolidated financial statements in Item 8 of this Annual Report for further information on our critical accounting estimates and policies, which are as follows: Revenue recognition Revenue is recognized when the control of the promised goods is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for the performance obligation. Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis products. Excise taxes are recorded as a reduction of sales in net revenue in the consolidated statements of income (loss) and comprehensive income (loss) and are recognized as a current liability within accrued liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority. In addition, amounts disclosed as net revenue are net of allowances, discounts and rebates. In determining the transaction price for the sale of goods, the Company considers the effects of variable consideration and the existence of significant financing components, if any. Some contracts for the sale of goods may provide customers with a right of return, most-favored-customer rights, or early payment discounts. In addition, the Company may provide, in certain circumstances, a retroactive price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retroactive price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting period date. Goodwill and indefinite-lived intangible assets Goodwill and indefinite-lived intangible assets are not subject to amortization. We test goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if an event occurs or circumstances change that could indicate a potential impairment. We compare the fair value of our reporting units with their carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We believe that the accounting estimate for goodwill and indefinite-lived intangible assets is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit, as well as the use of the relief-from-royalty method on the Lord Jones ® brand. Significant inputs include discount rates, growth rates, and cash flow projections, and, for the Lord Jones ® brand, royalty rate. These valuation inputs are considered Level 3 inputs as defined by ASC 820 Fair Value Measurement . The expected future cash flows for each reporting unit are significantly impacted by current market conditions. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill and indefinite-lived intangible assets represents our best estimate of future events. 68 Table of Contents In the second quarter of 2021, we recognized impairment losses related to goodwill and indefinite-lived intangible assets of $178.4 million and $56.5 million, respectively, in the U.S. reporting unit. During our annual quantitative impairment test in the fourth quarter of 2021, an additional impairment of $1.0 million was recognized on the Lord Jones ® brand due to the U.S. segment’s sustained operating losses and lack of revenue growth. In 2020, based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss related to goodwill and indefinite-lived intangible assets of $35 million and $5 million, respectively, in the U.S. reporting unit. During our annual quantitative impairment test in the fourth quarter of 2020, no further impairment was recorded as both fair values of the goodwill as well as the Lord Jones ® brand exceeded carrying amount by more than 10%. Inventory valuation We value our inventory at lower of cost or net realizable value determined using weighted average cost. Inventory is reflected at the lower of cost or net realizable value considering future demand, market conditions and market prices. Our estimates are based upon assumptions believed to be reasonable, but that are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions that do not reflect unanticipated events and circumstances that may occur. We record an inventory valuation adjustment for excess, slow moving, and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value. We also experience inventory write-downs due to reduced market prices. The inventory valuation adjustment to net realizable value establishes a new cost basis of the inventory that cannot be subsequently reversed. Inventory valuation adjustments are based on inventory levels, expected product life, and estimated product demand. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Long-lived assets Long-lived assets are primarily comprised of property, plant, and equipment and definite-lived intangible assets. We evaluate long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of such assets may not be recoverable. Long-lived asset recoverability is assessed on an asset group basis. We group assets and liabilities for our asset groups at the reporting unit level, which is the lowest level for which cash flows are separately identifiable. Long-lived asset recoverability is measured by comparing the carrying amount of the asset group with its estimated future undiscounted pre-tax cash flows over the remaining life of the primary long-lived asset of the asset group. If the carrying amount exceeds the estimated future undiscounted cash flows as part of the recoverability assessment, an impairment charge is recognized equal to the difference between the carrying amount and fair value of the asset group. The impairment charge is allocated to the underlying long-lived assets in the asset group on a relative carrying amount basis; however, carrying amount after allocated impairment is subject to a floor of fair value on an individual asset basis. We believe the accounting estimates used in the long-lived asset impairment assessment are critical accounting estimates because of the judgment required in identifying indicators of impairment, determining asset groups, assessing future undiscounted cash flows of the asset groups, and as applicable, evaluating the fair value of the determined asset groups as well as the underlying long-lived assets, once indicators of impairment have been identified. We periodically evaluate whether impairment indicators related to our property, plant and equipment, operating leases and other long-lived assets are present. These impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, early termination of an operating lease, a significant adverse change to the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If impairment indicators are present, we estimate the fair value for the asset or group of assets. We estimate fair value of long-lived assets through various valuation methods, including the use of the indirect cost approach, income approach, and direct comparison approach. The indirect cost approach is based on the estimated cost to reproduce the asset as if new, adjusted for physical deterioration and consideration of functional and economic obsolescence. The income approach is based on estimated rental and capitalization rates. The direct comparison approach is based on recent observable transactions of comparable assets. The estimation of future undiscounted cash flows of the asset groups as well as each of these fair value approaches are significantly impacted by market conditions. A significant adverse change in market conditions could result in fair values that differ from our estimates, which could adversely impact whether an impairment exists and the extent to which an asset group and underlying assets are impaired. The difference between the fair value and the carrying amount of the asset group is recorded as an impairment charge. During the first quarter of 2022, we concluded that indicators of impairment were present with respect to our corporate headquarters, for which we determined we would seek a sublease. As a result, we recognized an impairment charge of $2.0 million related to the right-of-use lease asset associated with our corporate headquarters. In addition, we recognized an impairment charge of $1.5 million during the year ended December 31, 2022 related to leasehold improvements and other office equipment that we plan to include in any potential sublease agreement. The determination to seek a sublease of the property and include leasehold improvements and other office equipment in any potential sublease agreement triggered the impairment charges. Both of the impairment charges are recognized as impairment loss on long-lived assets on the consolidated statements of net income (loss) and comprehensive income (loss). 69 Table of Contents During the fourth quarter of 2021, we concluded that indicators of impairment were present with respect to our Canadian asset group. As a result, we estimated the undiscounted cash flows for the Canadian asset group and found that the carrying amount exceeded its undiscounted cash flows. Subsequently, we estimated the fair values of all long-lived assets in the Canadian asset group using the indirect cost approach for personal property, the income and direct comparison approaches for our facility in Stayner, Ontario, Canada, and the indirect cost approach for our facility in Winnipeg, Manitoba Canada, and compared the fair values attributable to the Canadian asset group to their respective carrying amounts and recorded a non-cash impairment charge on long-lived assets of $119.9 million. Refer to Note 5 “ Property, plant and equipment, net ” to the consolidated financial statements in Item 8 of this Annual Report. We account for the cannabinoid exclusive licenses originating from the Ginkgo Strategic Partnership as definite-lived intangible assets in accordance with the acquisition method of accounting. The cost of cash and equity in Cronos issued in exchange for the cannabinoid exclusive licenses is initially recognized and measured at the date of acquisition. On the date of acquisition, we then test each cannabinoid exclusive license for impairment by comparing the cost and fair value of each license. We believe that the accounting estimate for the cannabinoid exclusive licenses is a critical accounting estimate because of the judgment required in assessing their fair values and the expected future cash flows are significantly impacted by the future expectations for products containing each cannabinoid. We estimate the fair value using the relief-from-royalty method. Each cannabinoid exclusive license is subject to amortization. In August 2021, the Ginkgo Equity Milestone was achieved related to cannabigerolic acid (“CBGA”). At that time, we issued 1.5 million common shares valued at $9.0 million based on the observable market price of the shares. In exchange, we received process and background intellectual property related to CBGA, as well as the CBGA exclusive license, which is a perpetual license with exclusivity for 10 years from the date the license is granted. An impairment of $1.8 million was recognized to record the CBGA exclusive license at its fair value of $7.3 million. In November 2021, the Ginkgo Equity Milestone was achieved related to cannabigerovarinic acid (“CBGVA”). At that time, we issued 1.5 million common shares valued at $8.2 million based on the observable market price of the shares. In exchange, we received process and background intellectual property related to CBGVA, as well as the CBGVA exclusive license, which is a perpetual license with exclusivity for 10 years from the date the license is granted. An impairment of $3.0 million, was recognized to record the CBGVA exclusive license at its fair value of $5.3 million. In June 2022, the Ginkgo Equity Milestone was achieved related to tetrahydrocannabivaric acid (“THCVA”). At that time, we issued 2.2 million common shares and paid cash of $600, for total consideration of $8.4 million based on the observable market price of the shares. In exchange, we received process and background intellectual property related to THCVA, as well as an exclusive license with respect to THCVA, which is a perpetual license with exclusivity for 10 years from the date the license is granted. No impairment was recorded with respect to the THCVA exclusive license. In November 2022, the Ginkgo Equity Milestone was achieved related to the early commercialization of cannabichromenic acid (“CBCA”). At the time we issued 0.5 million common shares valued at $1.5 million based on the observable market price of the shares. In exchange, we received process and background intellectual property related to CBCA, as well as an exclusive license with respect to CBCA, which is a perpetual license with exclusivity for 10 years from the date the license is granted. No impairment was recorded with respect to the CBCA exclusive license. In December 2022, the Ginkgo Equity Milestone was achieved related to cannabichromevarinic acid (“CBCVA”). At the time we issued 1.5 million common shares valued at $3.7 million based on the observable market price of the shares. In exchange, we received process and background intellectual property related to CBCVA, as well as an exclusive license with respect to CBCVA, which is a perpetual license with exclusivity for 10 years from the date the license is granted. No impairment was recorded with respect to the CBCVA exclusive license. Refer to Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in Item 8 of this Annual Report. Valuation of derivative liabilities Prior to December 16, 2022, derivative liabilities consisted of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights. On December 16, 2022, Altria notified us that its wholly owned subsidiary, Altria Summit LLC, irrevocably relinquished the Warrant and all rights that it may have held in the Warrant or any common shares underlying the Warrant for no consideration. As of December 31, 2022, derivative liabilities consisted of Pre-emptive Rights and certain Top-up Rights. We measure derivative liabilities at fair value at each reporting date until settlement with the re-measurement gain or loss being recognized immediately in net income (loss) and comprehensive income (loss). We calculate fair value of the derivative liabilities using the Black-Scholes model. Significant assumptions are used in the valuation of derivative liabilities, including the expected term and our stock price. The assumptions used in computing the fair value of derivative liabilities reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Sensitivity is performed on various inputs, refer to Note 8 “ Derivative Liabilities ” to the consolidated financial statements in Item 8 of this Annual Report. 70 Table of Contents Impairment of other investments without readily determinable fair values We hold other investments without readily determinable fair values that are measured under the cost method less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same investee. Each reporting period, we qualitatively assess if indicators of impairment are present, and, if present, we estimate the fair value of the investments and record impairment charges on the consolidated statements of income if the carrying value exceeds fair value. To estimate the fair value of the investments, we use a combination of the income and market approaches. Under the income approach, significant assumptions used in the discounted cash flow method that require the use of judgment are the discount rate, growth rates, cash flow projections, and the timing of federal legalization of cannabis in the U.S. Under the market valuation approach, the key assumptions that require judgment under the Guideline Public Companies method are cash flow projections, selected multiples and the discount for lack of marketability. As a result of our analysis, we recorded non-cash impairment charges of $11.2 million, $29.0 million and $21.2 million in the first, third and fourth quarters of 2022, respectively, related to the PharmaCann Option. No such impairments were recorded during the year ended December 31, 2021, as no indicators of impairment were present. Share-based compensation We measure the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the Black-Scholes option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based primarily on historical daily price changes of our stock and peers. The expected option term is the number of years that we estimate that the stock options will be outstanding prior to exercise. Loans receivable, net Loans receivable are presented net of an allowance for credit losses. In the third quarter of 2021, we changed methodologies for estimating the allowance for credit loss on loans receivable from the historical credit loss method to the probability of default method. The probability of default rate is adjusted for current conditions and reasonable and supportable forecasts of future losses as necessary. We may also record a specific reserve for individual accounts when we become aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the borrower’s operating results or financial condition. The allowance for credit loss accrual balance was $13.1 million and $14.6 million as of December 31, 2022 and 2021, respectively.