Cronos Group CRON Form 10-Q filing Q1 FY2023

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements. 3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 36

Item 4. Controls and Procedures. 37

PART II

OTHER INFORMATION

Item 1. Legal Proceedings. 38

Item 1A. Risk Factors 38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 38

Item 3. Defaults upon Senior Securities. 38

Item 4. Mine Safety Disclosures. 38

Item 5. Other Information. 38

Item 1. Financial Statements.

Item 1. Financial Statements

Cronos Group Inc.

Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars, except share amounts)

See notes to condensed consolidated interim financial statements.

• Cronos Group Inc.
• Condensed Consolidated Statements of Net Loss and Comprehensive Loss
• (In thousands of U.S dollars, except share and per share amounts, unaudited)

See notes to condensed consolidated interim financial statements.

Cronos Group Inc.

Condensed Consolidated Statements of Changes in Equity

For the three months ended March 31, 2023 and 2022

(In thousands of U.S. dollars, except share amounts, unaudited)

See notes to condensed consolidated interim financial statements.

Cronos Group Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars, except share amounts, unaudited)

See notes to condensed consolidated interim financial statements.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

1. Background, Basis of Presentation, and Summary of Significant Accounting Policies

(a)Background

Cronos Group Inc. (“Cronos” or the “Company”) is incorporated in the province of British Columbia and under the Business Corporations Act (British Columbia) with principal executive offices at 111 Peter St., Suite 300, Toronto, Ontario, M5V 2H1. The Company’s common shares are currently listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Market (“Nasdaq”) under the ticker symbol “CRON.”

Cronos 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®.

(b)Basis of presentation

These condensed consolidated interim financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other reporting period.

These condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”).

Certain prior period amounts have been reclassified to conform to the current year presentation of our condensed consolidated interim financial statements. These reclassifications had no effect on the reported results of operations and ending shareholders’ equity.

(c)Segment information

Segment reporting is prepared on the same basis that the Company’s chief operating decision maker (the “CODM”) manages the business, makes operating decisions and assesses the Company’s performance. The Company determined that it has the following two reportable segments: U.S. (the “U.S. segment”) and ROW (the “ROW segment”). The U.S. operating segment consists of the manufacture and distribution of U.S. hemp-derived cannabinoid infused products. The ROW operating segment, which is predominantly composed of operations in Canada and Israel, is involved in the cultivation, manufacture, and marketing of cannabis and cannabis-derived products for the medical and adult-use markets. These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. The results of each segment are regularly reviewed by the CODM to assess the performance of the segment and make decisions regarding the allocation of resources using Adjusted EBITDA (as defined below) as the measure of segment profit or loss. Adjusted EBITDA is defined as earnings before interest, tax, depreciation, non-cash items and items that do not reflect management’s assessment of ongoing business performance.

(d)Concentration of risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short-term investments and loans receivable. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $935,955 and $987,442 as of March 31, 2023 and December 31, 2022, respectively.

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan and a failure to make contractual payments for a period of greater than 120 days past due. As of March 31, 2023 and December 31, 2022, the Company had $4 and $2, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the ROW segment. As of March 31, 2023 and December 31, 2022, the Company had $237 and $217, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the U.S. segment.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

As of March 31, 2023, the Company assessed that there is a concentration of credit risk, as 43% of the Company’s accounts receivable were due from two customers with an established credit history with the Company. As of December 31, 2022, 55% of the Company’s accounts receivable were due from three customers with an established credit history with the Company.

The Company sells products to a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenue. During the three months ended March 31, 2023, the Company earned a total net revenue before excise taxes of $15,168 from two major customers in the ROW segment, together accounting for 56% of the Company’s total net revenues before excise taxes. During the three months ended March 31, 2022, the ROW segment earned a total net revenue before excise taxes of $9,833 from two major customers, together accounting for 33% of the Company’s total net revenues before excise taxes. During the three months ended March 31, 2023 and 2022, the U.S. segment had no major customers.

(e)Adoption of new accounting pronouncements

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU No. 2022-02”). ASU No. 2022-02 eliminates the existing troubled debt restructuring recognition and measurement guidance, and instead aligns the accounting treatment to that of other loan modifications. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU No. 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The adoption of ASU No. 2022-02 did not have a material impact on the Company’s condensed consolidated interim financial statements.

(f)New accounting pronouncements not yet adopted

In June 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU No. 2022-03”). ASU No. 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered in measuring fair value. The amendments also require additional disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, and we expect to adopt ASU 2022-03 prospectively. The Company does not expect the adoption of ASU No. 2022-03 to have a material impact on its condensed consolidated interim financial statements.

2. Inventory, net

Inventory, net is comprised of the following items:

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

3. Investments

(a)Equity method investments, net

A reconciliation of the carrying amount of the investments in equity method investees, net is as follows:

The following is a summary of the Company’s share of net loss from equity method investments:

(b)Other investments

Other investments consist of investments in common shares and options of two companies in the cannabis industry.

PharmaCann, Inc.

In 2021, the Company purchased an option (the “PharmaCann Option”) to acquire 473,787 shares of Class A Common Stock of PharmaCann, Inc. (“PharmaCann”), a vertically integrated cannabis company in the United States, which represented an ownership interest of approximately 10.5% as of the purchase date of the PharmaCann Option, for an aggregate purchase price of approximately $110,392. The PharmaCann Option is classified as an equity security without a readily determinable fair value. The Company has elected to measure the fair value of the PharmaCann Option at cost less impairment, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. As of March 31, 2023, the Company’s proforma ownership percentage in PharmaCann on a fully-diluted basis was approximately 6.3%. The decrease in the Company’s ownership percentage since acquisition does not materially affect the Company’s rights under the PharmaCann Option.

Vitura Health Limited (formerly known as Cronos Australia)

The Company owns approximately 10% of the outstanding common shares of Vitura Health Limited (“Vitura”). The investment is considered an equity security with a readily determinable fair value. Changes in the fair value of the investment are recorded as gain (loss) on revaluation of financial instruments on the condensed consolidated statements of net loss and comprehensive loss.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

The following table summarizes the Company’s other investments activity:

During the three months ended March 31, 2022, the Company identified adverse forecast changes in the financial performance of PharmaCann as indicators of impairment related to the PharmaCann Option and conducted analyses comparing the PharmaCann Option’s carrying amount to its estimated fair value. The fair value was estimated using a combination of the market and income approaches. Under the income approach, significant inputs used in the discounted cash flow method were 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 this analysis, the Company recorded a non-cash impairment charge of $11,238 during the three months ended March 31, 2022, as the difference between the carrying amount of the PharmaCann Option and its estimated fair value in the condensed consolidated statements of net loss and comprehensive loss.

4. Loans Receivable, net

Loans receivable, net consists of the following:

Cronos GrowCo Credit Facility

On August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into a senior secured credit agreement for an aggregate principal amount of C$100,000 (the “GrowCo Credit Facility”). In August 2021, the GrowCo Credit Facility was amended to increase the aggregate principal amount available to C$105,000. As of March 31, 2023 and December 31, 2022, Cronos GrowCo had drawn C$104,000 ($76,946) and C$104,000 ($76,730), respectively, from the GrowCo Credit Facility. The interest rate on the outstanding borrowings is the Canadian Prime Rate plus 1.25%, with interest payments due on December 2021, December 2022, and quarterly thereafter. Principal payments of C$1,000 commenced in March 2022 and are due quarterly thereafter. As of March 31, 2023, Cronos GrowCo had repaid C$5,000 ($3,699) and C$14,465 ($10,702) in principal and interest, respectively, under the terms of the GrowCo Credit Facility.

Mucci Promissory Note

On June 28, 2019, the Company entered into a promissory note receivable agreement (the “Mucci Promissory Note”) for C$16,350 (approximately $12,097) with the Cronos GrowCo joint venture partner (“Mucci”). The Mucci Promissory Note is secured by a general security agreement covering all the assets of Mucci. On September 30, 2022, the Mucci Promissory Note was amended and restated to increase the interest rate from 3.95% to the Canadian Prime Rate plus 1.25%, change the interest payments from quarterly to annual, and defer Mucci’s initial cash interest payment from September 30, 2022 to July 1, 2023.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

Prior to July 1, 2022, interest accrued on the Mucci Promissory Note was capitalized as part of the principal balance. As of July 1, 2023, interest is to be paid in cash.

Cannasoul Collaboration Loan

As of both March 31, 2023 and December 31, 2022, Cannasoul Lab Services Ltd. has received ILS 8,297 (approximately $2,307 and $2,359, respectively), from the Cannasoul Collaboration Loan.

Expected credit loss allowances on the Company’s long-term financial assets for the three ended March 31, 2023 and 2022 were comprised of the following items:

(i)During the three months ended March 31, 2023, $764 was recorded as a decrease to general and administrative expenses on the condensed consolidated statements of net loss and comprehensive loss as a result of principal and interest payments made by Cronos GrowCo reducing our expected credit losses on loans receivable.

5. Derivative Liabilities

Pursuant to the investor rights agreement (the “Investor Rights Agreement”) between the Company and Altria Group Inc. (“Altria”), the Company granted Altria certain rights, among others, summarized in this note.

The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement.

a.The Company granted to Altria, subject to certain qualifications and limitations, upon the occurrence of certain issuances of common shares of the Company executed by the Company (including issuances pursuant to the research and development (“R&D”) partnership with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”), the right to purchase up to such number of common shares of the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any issuance of shares by the Company (“Pre-emptive Rights”), at the same price per common share of the Company at which the common shares are sold in the relevant issuance; provided that if the consideration paid in connection with any such issuance is non-cash, the price per common share of the Company that would have been received had such common shares been issued for cash consideration will be determined by an independent committee (acting reasonably and in good faith); provided further that the price per common share of the Company to be paid by Altria pursuant to its exercise of its Pre-emptive Rights related to the Ginkgo Collaboration Agreement will be C$16.25 per common share. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%.

b.In addition to (and without duplication of) the Pre-emptive Rights, the Company granted to Altria, subject to certain qualifications and limitations, the right to subscribe for common shares of the Company issuable in connection with the exercise, conversion or exchange of convertible securities of the Company issued prior to March 8, 2019 or thereafter (excluding any convertible securities of the Company owned by Altria or any of its subsidiaries), a share incentive plan of the Company, the exercise of any right granted by the Company pro rata to all shareholders of the Company to purchase additional common shares and/or securities of the Company, bona fide bank debt, equipment financing or non-equity interim financing transactions that contemplate an equity component or bona fide acquisitions (including acquisitions of assets or rights under a license or otherwise), mergers or similar business combination transactions or joint ventures involving the Company in order to maintain their ownership percentage of issued and outstanding common shares of the Company immediately preceding any such transactions (“Top-up Rights”).

The price per common share to be paid by Altria pursuant to the exercise of its Top-up Rights will be, subject to certain limited exceptions, the 10-day volume-weighted average price of the common shares of the Company on the TSX for the 10 full days

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

preceding such exercise by Altria; provided that the price per common share of the Company to be paid by Altria pursuant to the exercise of its Top-up Rights in connection with the issuance of common shares of the Company pursuant to the exercise of options or warrants that were outstanding as of March 8, 2019 will be C$16.25 per common share without any set off, counterclaim, deduction, or withholding. These rights may not be exercised if Altria’s ownership percentage of the issued and outstanding shares of the Company falls below 20%. The Pre-emptive Rights, and fixed price Top-up Rights have been classified as derivative liabilities on the Company’s consolidated balance sheet.

As of March 31, 2023, Altria beneficially held 156,573,537 of the Company’s common shares, an approximate 41% ownership interest in the Company (calculated on a non-diluted basis).

Reconciliation of the Company’s derivative liabilities activity are as follows:

Fluctuations in the expected life of the derivative instruments and the Company’s share price are primary drivers for the changes in the derivative valuations during each reporting period. As the period of time that the derivative liability is expected to be outstanding decreases and the share price decreases, the fair value typically decreases for each related derivative instrument. Weighted-average expected life and share price are two of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments.

The fair values of the derivative liabilities were determined using the Black-Scholes pricing model using the following inputs:

(i)The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. As of March 31, 2023 and December 31, 2022, the risk-free interest rate uses a range of approximately 3.56% to 4.21% and 3.81% to 4.37%, respectively, for the Pre-emptive Rights and Top-up Rights.

(ii)The expected life represents the period of time, in years, that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. As of March 31, 2023 and December 31, 2022, the expected life uses a range of approximately 0.25 years to 2.50 years and 0.25 years to 2.75 years, respectively, for the Pre-emptive Rights and Top-up Rights.

(iii)Volatility was based on an equally weighted blended historical and implied volatility level of the underlying equity securities of the Company.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

6. Restructuring

In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). As part of the Realignment, on February 28, 2022, the Board approved plans to leverage the Company’s strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting its production facility in Stayner, Ontario, Canada (the “Peace Naturals Campus”). On February 27, 2023, the Board approved revisions to the Realignment, which are expected to result in the Company maintaining select components of its operations at the Peace Naturals Campus, namely distribution warehousing, certain research and development activities and manufacturing of certain of the Company’s products, while seeking to sell and lease back all or some of the Peace Naturals Campus or to lease certain portions of the Peace Naturals Campus to third parties. The Realignment initiatives were intended to position the Company to drive profitable and sustainable growth over time.

During the three months ended March 31, 2022, the Company recognized $3,084 of restructuring costs in connection with the Realignment, including the change in the nature of operations at the Peace Naturals Campus. Charges related thereto include employee-related costs such as severance, relocation and other termination benefits, as well as contract termination and other related costs. The Company incurred no restructuring costs during the three months ended March 31, 2023.

The Company incurred the following restructuring costs by reportable segment:

The following table summarizes the Company’s restructuring activity for the three months ended March 31, 2023:

The following table summarizes the Company’s restructuring activity for the three months ended March 31, 2022:

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

7. Share-based Compensation

(a)Share-based award plans

The Company has granted stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees and non-employee directors under the Stock Option Plan dated May 26, 2015 (the “2015 Stock Option Plan”), the 2018 Stock Option Plan dated June 28, 2018 (the “2018 Stock Option Plan” and, together with the 2015 Stock Option Plan, the “Prior Option Plans”), the Employment Inducement Award Plan #1 (the “Employment Inducement Award Plan”), the 2020 Omnibus Equity Incentive Plan dated March 29, 2020 (the “2020 Omnibus Plan”) and the DSU Plan dated August 10, 2019 (the “DSU Plan”). The Company can no longer make grants under the Prior Option Plans or the Employment Inducement Award Plan.

The following table summarizes the total share-based compensation expense associated with the Company’s stock options, RSUs and liability-classified awards for the three months ended March 31, 2023 and 2022:

(b)Stock options

Vesting conditions for grants of options are determined by the Compensation Committee. The typical vesting for stock option grants made under the 2020 Omnibus Plan is annual vesting over three to five years with a maximum term of ten years. The typical vesting for stock option grants made under the Prior Option Plans is quarterly vesting over three to five years with a maximum term of seven years. The Prior Option Plans did not, and the 2020 Omnibus Plan does not, authorize grants of options with an exercise price below fair market value.

The following is a summary of the changes in stock options for the three months ended March 31, 2023 and 2022:

(i)The weighted-average exercise price reflects the conversion of foreign currency-denominated stock options translated into C$ using the average foreign exchange rate as of the date of issuance.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

For the three months ended March 31, 2023, the weighted-average fair value per option at grant date was C$2.07. The fair value of the options issued during the period was determined using the Black-Scholes option pricing model, using the following inputs:

The following table summarizes stock options outstanding:

(c)Restricted share units

The following is a summary of the changes in RSUs for the three months ended March 31, 2023 and 2022:

(i)RSUs granted in the period vest annually in equal installments over a three-year period from either the grant date or after a three or five year “cliff-period.” All RSUs are subject to such holder’s continued employment through each vesting date. The vesting of such RSUs is not subject to the achievement of any performance criteria.

(ii)The weighted-average grant date fair value reflects the conversion of foreign currency-denominated RSUs translated into C$ using the foreign exchange rate as of the date of issuance.

(d)Deferred share units

The following is a summary of the changes in DSUs for the three months ended March 31, 2023 and 2022:

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

8. Loss Per Share

Basic and diluted earnings (loss) per share from continuing and discontinued operations are calculated as follows (in thousands, except share and per share amounts):

(i)In computing diluted loss per share, incremental common shares are not considered in periods in which a net loss is reported as the inclusion of the common share equivalents would be anti-dilutive.

For the three months ended March 31, 2023 and 2022, total securities of 30,086,428 and 118,224,080, respectively, were not included in the computation of diluted shares outstanding, because the effect would be anti-dilutive.

9. Segment Information

The tables below set forth our condensed consolidated results of operations by segment. The Company’s condensed consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that the Company will achieve in future periods. Segment data was as follows for the three months ended March 31, 2023 and 2022:

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

The following tables set forth a reconciliation of net income (loss) as determined in accordance with U.S. GAAP to Adjusted EBITDA for the periods indicated:

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

(i)For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space in Toronto, Ontario, Canada during the first quarter of 2022. See Note 12 “Impairment Loss on Long-lived Assets.”

(ii)For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 5 “Derivative Liabilities.”

(iii)For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of financial instruments related primarily to the Company’s equity securities in Vitura. See Note 3 “Investments.”

(iv)For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount. See Note 3 “Investments.”

(v)For the three months ended March 31, 2023 and 2022, other, net related to gain on disposal of assets.

(vi)For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment, including the change in the nature of operations at the Peace Naturals Campus.

(vii)For the three months ended March 31, 2023 and 2022, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7 “Share-based Compensation.”

(viii)For the three months ended March 31, 2023 and 2022, financial statement review costs include costs and reserves taken related to the restatements of the Company’s 2019 and second quarter 2021 interim financial statements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to such restatements and legal costs defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.

Net revenue attributed to a geographic region based on the location of the customer were as follows:

10. Commitments and Contingencies

(a)Commitments

There have been no material changes in the information regarding commitments as disclosed in the Company’s Annual Report.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

(b)Contingencies

The Company is subject to various legal proceedings in the ordinary course of its business and in connection with its marketing, distribution and sale of its products. Many of these legal proceedings are in the early stages of litigation and seek damages that are unspecified or not quantified. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe these legal proceedings, individually or in the aggregate, will have a material adverse effect on its financial condition but could be material to its results of operations for a quarterly period depending, in part, on its results for that quarter.

(i)Class action complaints relating to restatement of 2019 interim financial statements

On March 11 and 12, 2020, two alleged shareholders of the Company separately filed two putative class action complaints in the U.S. District Court for the Eastern District of New York against the Company and its Chief Executive Officer and now former Chief Financial Officer. The court has consolidated the cases, and the consolidated amended complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and Section 20(a) of the Exchange Act against the individual defendants. The consolidated amended complaint generally alleges that certain of the Company’s prior public statements about revenues and internal control were incorrect based on the Company’s disclosures relating to the Audit Committee of the Board’s review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel. The consolidated amended complaint does not quantify a damage request. Defendants moved to dismiss on February 8, 2021.

On June 3, 2020, an alleged shareholder filed a Statement of Claim, as amended on August 12, 2020, in the Ontario Superior Court of Justice in Toronto, Ontario, Canada, seeking, among other things, an order certifying the action as a class action on behalf of a putative class of shareholders and damages of an unspecified amount. The Amended Statement of Claim names (i) the Company, (ii) its Chief Executive Officer, (iii) now former Chief Financial Officer, (iv) former Chief Financial Officer and Chief Commercial Officer, and (v) current and former members of the Board as defendants and alleges breaches of the Ontario Securities Act, oppression under the Ontario Business Corporations Act and common law misrepresentation. The Amended Statement of Claim generally alleges that certain of the Company’s prior public statements about revenues and internal control were misrepresentations based on the Company’s March 2, 2020 disclosure that the Audit Committee of the Board was conducting a review of the appropriateness of revenue recognized in connection with certain bulk resin purchases and sales of products through the wholesale channel, and the Company’s subsequent restatement. The Amended Statement of Claim does not quantify a damage request. On June 28, 2021, the Court dismissed motions brought by the plaintiff for leave to commence a claim for misrepresentation under the Ontario Securities Act and for certification of the action as a class action. The plaintiff appealed the Court’s dismissal of the motions only with respect to the Company, the Chief Executive Officer, and the now former Chief Financial Officer; the remaining defendants were dismissed from the matter with prejudice, and the Company and all individual defendants agreed not to seek costs from plaintiff in connection with the dismissal of the motions. On September 26, 2022, the Court of Appeal for Ontario reversed the Superior Court’s dismissal of the leave and certification motions, granted the plaintiff leave to proceed to bring a claim for misrepresentation under the Ontario Securities Act, and remitted the certification motion back to the Superior Court.

(ii)Regulatory reviews relating to restatements

The Company has been responding to requests for information from various regulatory authorities relating to its previously disclosed restatement of its financial statements for the first three quarters of 2019 as well as the previously disclosed restatement of the second quarter of 2021 interim financial statements (collectively, the “Restatements”). The Company has been responding to all such requests for information and cooperating with all regulatory authorities.

SEC Settlement

On October 24, 2022, the SEC issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8(a) of the Securities Act of 1933 (the “Securities Act”) and Section 21(c) of the Exchange Act, Making Findings, and Imposing a Cease-and-Desist Order (the “Settlement Order”) resolving the Restatements.

The Company has agreed to settle with the SEC, without admitting or denying the allegations described in the Settlement Order. The Settlement Order fully and finally disposes of the investigation of the Company by the SEC into the Restatements without the payment of any civil penalty or other amount.

The Settlement Order required the Company to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 13a-13, 13a-15(a), 13a-16 and 12b-20 thereunder. Additionally, the Company agreed to certain undertakings, which include, among other things, retaining a qualified independent consultant (the “Consultant”) to engage in a review of, and make recommendations with respect to, certain of the Company’s internal accounting controls and internal control over financing reporting.

As a result of the Settlement Order, the Company (i) lost its status as a well-known seasoned issuer for a period of three years, (ii) is unable to rely on the private offering exemptions provided by Regulations A and D under the Securities Act for a period of five years

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

and (iii) is unable to rely on the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 for a period of three years.

OSC Settlement

On October 24, 2022, the Ontario Capital Markets Tribunal approved a settlement agreement (the “Settlement Agreement”) between the Company and the staff of the OSC, resolving the Restatements.

Pursuant to the terms of the Settlement Agreement, which fully and finally disposed the investigation of the Company by the OSC, Cronos agreed to pay a total of C$1.34 million to fully settle the matter, and acknowledged that it had failed to comply with the requirement under Section 77 of the Securities Act (Ontario) to file interim financial reports in the manner set out therein and had acted in a manner contrary to the public interest. Additionally, the Company agreed to retain the Consultant to engage in a review of, and make recommendations with respect to, certain of the Company’s internal accounting controls and internal control over financing reporting, on substantially the same terms as were required by the SEC pursuant the Settlement Agreement.

(iii)Litigation relating to marketing, distribution and sale of products

On April 17, 2023, a group of plaintiffs led by the Green Leaf (Ale Yarok) political party filed a Statement of Claim and Request for Approval of a Class Action on behalf of a purported class of Israeli cannabis consumers in the District Court of Tel Aviv, Israel against 26 cannabis-related parties, including three Cronos Israel entities. The Statement of Claim alleges that the defendants violated certain laws relating to the marketing of medical cannabis products, including marketing to unlicensed cannabis consumers. The lawsuit seeks a total of ILS 420 million.

11. Fair Value Measurements

The Company complies with ASC 820 Fair Value Measurements for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values are determined by:

• Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves.
• Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis:

(i)As of March 31, 2023 and December 31, 2022, the Company’s influence on Vitura is deemed non-significant and the investment is considered an equity security with a readily determinable fair value. See Note 3 “Investments” for additional information.

There were no transfers between fair value categories during the periods presented.

Cronos Group Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands of U.S. dollars, except share amounts)

12. Impairment Loss on Long-lived Assets

(a)Right-of-use assets and property, plant, and equipment, net

During the three months ended March 31, 2022, the Company recognized an impairment charge of $1,986 related to the right-of-use lease asset associated with the Company’s corporate headquarters, encompassing approximately 29,000 square feet, in Toronto, Ontario, Canada, for which the Company determined it would seek a sublease. In addition, the Company recognized an impairment charge of $1,507 during the three months ended March 31, 2022 related to leasehold improvements and other office equipment that it plans to include in any potential sublease agreement. The determination to seek a sublease of the property and include leasehold improvements and other office equipment in any potential sublease agreement triggered the impairment charges. Both of the impairment charges are recognized as impairment loss on long-lived assets on the condensed consolidated statements of net loss and comprehensive loss.

13. Related Party Transactions

(a)Cronos GrowCo

The Company holds a variable interest in Cronos GrowCo through its ownership of 50% of Cronos GrowCo’s common shares and senior secured debt in Cronos GrowCo. See Note 3 “Investments” for additional information.

The Company made the following purchases of cannabis products from Cronos GrowCo:

As of March 31, 2023, and December 31, 2022, the Company had payables outstanding to Cronos GrowCo of $3,087 and $2,519, respectively.

Additionally, on August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into the GrowCo Facility. See Note 4 “Loans Receivable, net” for additional information.

(b)Vendor Agreement

In November 2022, the Company entered into an agreement with an external vendor whereby the vendor would provide certain manufacturing services to the Company. The vendor then subcontracted out a portion of those services to another company whose chief executive officer is an immediate family member of an executive of the Company. The Company has no direct contractual relationship with the related party.

During the three months ended March 31, 2023, the Company purchased $833 of products and services under this agreement and had outstanding accounts payable related to the agreement of $437 and $nil as of March 31, 2023 and December 31, 2022, respectively.

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 March 31, 2023 (this “Quarterly Report”), consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), Part I, Item 1A, Risk Factors, of the Annual Report and Part II, Item 1A, Risk Factors, of this Quarterly Report.

Foreign currency exchange rates

All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars. The assets and liabilities of our foreign operations are translated into dollars at the exchange rate in effect as of March 31, 2023, March 31, 2022, and December 31, 2022. Transactions affecting the shareholders’ equity (deficit) are translated at historical foreign exchange rates. The condensed consolidated statements of net loss and comprehensive 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:

The exchange rates used to translate from Israeli Shekels (“ILS”) to dollars is shown below:

Business Overview

Cronos Group 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®.

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.

Recent Developments

Brand and Product Portfolio

Cronos added to its infused pre-roll portfolio under the Spinach FEELZ™ brand with two new pre-roll products infused with rare cannabinoids:

• Spinach FEELZ™ Mango Kiwi Haze THC:CBC, infused with high potency cold filtered extract, with 32% THC and 5% cannabichromene (“CBC”); and
• Spinach FEELZ™ Blackberry Kush THC:CBN (Deep Dreamz) infused with high potency cold filtered extract with 32% THC and 5% cannabinol (“CBN”).

In the first quarter of 2023, Cronos also added to its Spinach FEELZ™ vape portfolio by adding a product featuring CBC: its Mango Kiwi Haze 7:1 THC:CBC 1-gram vape.

In April 2023, Cronos built on the early success of its Spinach® Sonic Lemon Fuel strain by expanding it into the pre-roll category with a 3x0.5g 20-26% THC offering. In addition to the pre-rolls, Sonic Lemon Fuel is available in 28g and 3.5g flower formats.

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.

Summary of select financial results

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

Net revenue

For the three months ended March 31, 2023, we reported consolidated net revenue of $20.1 million, representing a decrease of $4.9 million from the three months ended March 31, 2022. The decrease was primarily due to lower cannabis flower sales in Israel due to competitive activity, the slowdown in patient permit authorizations and geopolitical unrest, and a reduction in revenue in the U.S. segment. Net revenue in Canada was impacted by an adverse price/mix in the cannabis flower category driving increased excise tax payments as a percentage of revenue and increased returns. Furthermore, the weakened Canadian dollar and Israeli Shekel against the U.S. dollar during the current period impacted results. These decreases were partially offset by higher cannabis extract sales in Canada.

Cost of sales

For the three months ended March 31, 2023, we reported consolidated cost of sales of $17.8 million, representing a decrease of approximately $0.3 million from the three months ended March 31, 2022. The decrease was primarily due to lower cannabis flower sales in the Israeli medical market, lower sales volumes in the U.S. segment, lower cannabis biomass costs and the impact of the weakened Canadian dollar and Israeli Shekel against the U.S. dollar during the current period, partially offset by higher cannabis extract sales in the Canadian adult-use market.

Gross profit

For the three months ended March 31, 2023, we reported gross profit of $2.4 million, representing a decrease in gross profit of $4.5 million compared to the three months ended March 31, 2022. The decrease was primarily due to lower cannabis flower sales in the Israeli medical market, a reduction in revenue in the U.S. segment, adverse price/mix on cannabis flower sales in Canada and increased returns, partially offset by higher cannabis extract sales in the Canadian adult-use market that carry a higher margin profile than other product categories and lower cannabis biomass costs.

Operating expenses

Sales and marketing

For the three months ended March 31, 2023, sales and marketing expenses were $5.9 million, representing an increase of $0.9 million from the three months ended March 31, 2022. The increase was primarily due to higher advertising and marketing spend and higher payroll-related costs in the ROW segment, partially offset by lower advertising and marketing spend and lower payroll-related costs in the U.S. segment as a result of the Realignment announced in 2022.

Research and development

For the three months ended March 31, 2023, research and development expenses were $2.0 million, representing a decrease of $2.0 million from the three months ended March 31, 2022. The decrease was primarily due to lower costs associated with the achievement of Ginkgo milestones.

General and administrative

For the three months ended March 31, 2023, general and administrative expenses were $12.4 million, representing a decrease of $10.0 million from the three months ended March 31, 2022. The decrease was primarily due to lower professional fees related to financial statement review costs and lower personnel-related costs associated with the Realignment announced in 2022.

Restructuring costs

For the three months ended March 31, 2023, we incurred no restructuring costs, compared to $3.1 million of restructuring costs for the three months ended March 31, 2022. Restructuring costs for the three months ended March 31, 2022 were related to the Realignment announced in 2022.

Share-based compensation

For the three months ended March 31, 2023, share-based compensation expense was $2.6 million, representing a decrease of $1.1 million from the three months ended March 31, 2022. The decrease was primarily due to the acceleration of expense in the three months ended March 31, 2022 on equity awards granted to certain executive employees in connection with their separation from the Company.

Depreciation and amortization

For the three months ended March 31, 2023, depreciation and amortization expenses were $1.5 million, representing an increase of $0.2 million from the three months ended March 31, 2022. The increase was primarily due to higher amortization on Ginkgo-related intangible assets.

Impairment loss on long-lived assets

For the three months ended March 31, 2023, we recorded no impairment loss on long-lived assets, compared to $3.5 million in the three months ended March 31, 2022. For further information, see Note 12 “Impairment Loss on Long-lived Assets” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report.

Other income (loss) and income tax benefit (expense)

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

Interest income, net

For the three months ended March 31, 2023, interest income, net was $11.2 million, representing an increase of $9.1 million from the three months ended March 31, 2022. The increase in net interest income was primarily due to higher short-term investment balances and higher interest rates during the current period.

Gain (loss) on revaluation of derivative liabilities

For the three months ended March 31, 2023, the loss on revaluation of derivative liabilities was $0.1 million, compared to a gain on revaluation of derivative liabilities of $10.4 million in the three months ended March 31, 2022. We expect continued changes in derivative valuations as our share price fluctuates period to period and the remaining expected terms of our derivative instruments change over time. For further information, see Note 5 “Derivative Liabilities” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report.

Share of loss from equity method investments

For the three months ended March 31, 2023, our share of loss from equity method investments was $0.5 million, representing an increased loss of $0.5 million from the three months ended March 31, 2022. The change was due to a higher loss pick-up from our equity method investment in Cronos GrowCo.

Gain (loss) on revaluation of financial instruments

For the three months ended March 31, 2023, the loss on revaluation of financial instruments was $7.8 million, representing an increased loss of $12.0 million compared to the three months ended March 31, 2022. The change was primarily related to the change in fair value of our investment in Vitura. For further information, see Note 3 “Investments” to the condensed consolidated interim financial statements under Item 1 of this Quarterly Report.

Impairment loss on other investments

There were no impairment losses on other investments during the three months ended March 31, 2023. For the three months ended March 31, 2022, impairment loss on other investments was $11.2 million, due to impairment charges recorded on our PharmaCann Option for the difference between its estimated fair value and its carrying amount. For more information, see Note 3 “Investments” in our condensed consolidated interim financial statements under Item 1 of this Quarterly Report.

Foreign currency transaction loss

For the three months ended March 31, 2023, foreign currency transaction loss was $1.6 million, compared to $1.9 million in the three months ended March 31, 2022. For both periods, these losses primarily related to certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future.

Other, net

For both the three months ended March 31, 2023 and 2022, other, net was income of $0.1 million.

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

Net revenue – ROW

For the three months ended March 31, 2023, the ROW segment reported net revenue of $19.5 million, representing a decrease of $3.2 million from the three months ended March 31, 2022. The decrease was primarily due to lower cannabis flower sales in Israel driven by increased competition, the slowdown in patient permit authorizations and geopolitical unrest. Net revenue in Canada was impacted by an adverse price/mix in the cannabis flower category driving increased excise tax payments as a percentage of revenue and increased returns. Furthermore, the weakened Canadian dollar and Israeli Shekel against the U.S. dollar during the current period impacted results.

Cost of sales – ROW

For the three months ended March 31, 2023, the ROW segment reported cost of sales of $16.6 million, representing an increase of $0.6 million from the three months ended March 31, 2022. The increase was primarily due to higher sales volumes in the Canadian adult-use market, partially offset by lower cannabis flower sales in the Israeli medical market, lower cannabis biomass costs and the impact of the weakened Canadian dollar and Israeli Shekel against the U.S. dollar during the current period.

Gross profit – ROW

For the three months ended March 31, 2023, the ROW segment reported gross profit of $2.9 million, representing a decrease in gross profit of $3.8 million from the three months ended March 31, 2022. The change was primarily due to decreased revenue driven mainly by lower sales of cannabis flower in Israel, adverse price/mix in cannabis flower sales in Canada and increased returns, partially offset

by higher cannabis extract sales in Canada, which carry a higher margin profile than other product categories, and lower cannabis biomass costs.

Summary of select financial results – U.S.

Net revenue – U.S.

For the three months ended March 31, 2023, the U.S. segment reported net revenue of $0.6 million, representing a decrease of $1.7 million from the three months ended March 31, 2022. 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 implemented the Realignment in the U.S. segment.

Cost of sales – U.S.

For the three months ended March 31, 2023, the U.S. segment reported cost of sales of $1.2 million, representing a decrease of $0.9 million from the three months ended March 31, 2022. The decrease was primarily due to lower sales volumes, partially offset by higher inventory reserves associated with discontinued products.

Gross profit – U.S.

For the three months ended March 31, 2023, the U.S. segment reported gross profit of $(0.5) million, representing a decrease of $0.8 million from the three months ended March 31, 2022. The change was primarily due to lower sales volumes and higher inventory reserves.

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:

(i)For the three months ended March 31, 2022, impairment loss on long-lived assets related to the Company’s decision to seek a sublease for leased office space in Toronto, Ontario, Canada during the first quarter of 2022. See Note 12 “Impairment Loss on Long-lived Assets.”

(ii)For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of derivative liabilities represents the fair value changes on the derivative liabilities. See Note 5 “Derivative Liabilities.”

(iii)For the three months ended March 31, 2023 and 2022, gain (loss) on revaluation of financial instruments related primarily to the Company’s equity securities in Vitura.

(iv)For the three months ended March 31, 2022, impairment loss on other investments related to the PharmaCann Option for the difference between its fair value and carrying amount. See Note 3 “Investments.”

(v)For the three months ended March 31, 2023 and 2022, other, net related to gain on disposal of assets.

(vi)For the three months ended March 31, 2022, restructuring costs related to the employee-related severance costs and other restructuring costs associated with the Realignment, including the change in nature of operations at the Peace Naturals Campus. See Note 6 “Restructuring.”

(vii)For the three months ended March 31, 2023 and 2022, share-based compensation related to the vesting expenses of share-based compensation awarded to employees under the Company’s share-based award plans as described in Note 7 “Share-based Compensation.”

(viii)For the three months ended March 31, 2023 and 2022, financial statement review costs include costs and reserves taken related to the Restatements, costs related to the Company’s responses to requests for information from various regulatory authorities relating to the Restatements and legal costs incurred defending shareholder class action complaints brought against the Company as a result of the 2019 restatement.

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 months ended March 31, 2023 as well as cash and cash equivalents and short-term investment balances as of March 31, 2023 compared to December 31, 2022, 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-month comparative periods in 2022 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 2022. 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 months ended March 31, 2023 compared to the three months ended March 31, 2022 as well as cash and cash equivalents and short-term investments as of March 31, 2023 and December 31, 2022, both on an as-reported and constant currency basis (in thousands):

Net revenue

For the three months ended March 31, 2023, net revenue on a constant currency basis was $21.7 million, representing a 14% decrease from the three months ended March 31, 2022. Net revenue decreased for the three months ended March 31, 2023 on a constant currency basis and was primarily due to lower cannabis flower sales in Israel due to competitive activity, the slowdown in patient permit authorizations and geopolitical unrest and a reduction in revenue in the U.S. segment. Net revenue in Canada was impacted by an adverse price/mix in the cannabis flower category driving increased excise tax payments as a percent of revenue and increased returns, partially offset by higher cannabis extract sales in the Canadian adult-use market.

Gross profit

For the three months ended March 31, 2023, gross profit on a constant currency basis was $2.7 million, representing a 62% decrease from the three months ended March 31, 2022. The change was primarily due to lower cannabis flower sales in the Israeli medical market, a reduction in revenue in the U.S. segment, adverse price/mix on cannabis flower sales in Canada and increased returns, partially offset by higher cannabis extract sales in the Canadian adult-use market that carry a higher margin profile than other product categories and lower cannabis biomass costs.

Operating expenses

For the three months ended March 31, 2023, operating expenses on a constant currency basis was $26.0 million, representing a 39% decrease from the three months ended March 31, 2022. On a constant currency basis, operating expenses decreased for the three months ended March 31, 2023 primarily due to decreases in professional fees related to financial statement review costs, personnel-related costs associated with the Realignment, restructuring costs associated with the Realignment, impairment loss on long-lived assets and research and development costs.

Net loss

For the three months ended March 31, 2023, net loss on a constant currency basis was $23.4 million, representing a 28% reduction in net loss from the three months ended March 31, 2022.

Adjusted EBITDA

For the three months ended March 31, 2023, Adjusted EBITDA on a constant currency basis was $(18.0) million, representing a 5% improvement from the three months ended March 31, 2022. The improvement in Adjusted EBITDA for the three months ended March 31, 2023 on a constant currency basis was primarily driven by decreases in general and administrative expenses and research and development expenses as a result of the Company's strategic Realignment, partially offset by a decrease in gross profit.

Cash and cash equivalents & short-term investments

Cash and cash equivalents and short-term investments on a constant currency basis decreased 5% to $835.2 million as of March 31, 2023 from $877.7 million as of December 31, 2022. The decrease in cash and cash equivalents and short-term investments is primarily due to cash flows used in operating activities in the three months ended March 31, 2023.

Liquidity and Capital Resources

As of March 31, 2023, we had $413.7 million in cash and cash equivalents and $422.8 million in short-term investments. We believe that the existing cash and cash equivalents and 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:

Comparison of cash flows between the three months ended March 31, 2023 and the three months ended March 31, 2022

Operating activities

During the three months ended March 31, 2023, we used $47.7 million of cash in operating activities as compared to cash used of $33.9 million in the three months ended March 31, 2022, representing an increase in cash used of $13.8 million. This change is primarily driven by a $32.8 million decrease in income taxes payable as a result of a tax payment connected to the previously disclosed relinquishment by Altria of the its warrant to purchase additional shares of the Company, partially offset by a $16.6 million increase in net income after adjusting for non-cash items during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Investing activities

During the three months ended March 31, 2023, we used $303.8 million of cash in investing activities, compared to $0.1 million of cash provided in investing activities during the three months ended March 31, 2022, representing an increase of $303.9 million in cash used by investing activities. This change is primarily driven by purchases of short-term investments in the three months ended March 31, 2023.

Financing activities

During the three months ended March 31, 2023, cash used in financing activities was $0.7 million, compared to $0.5 million of cash used in financing activities during the three months ended March 31, 2022, representing an increase of $0.3 million in cash used in financing activities. This change is primarily driven by an increase of $0.2 million in withholding taxes paid on share-based awards during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to certain market risks, including changes from foreign currency exchange rates related to our international operations. Except as updated below, the Company’s market risks have not changed significantly from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.

Foreign currency risk

The Company’s condensed consolidated financial statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report are expressed in U.S. dollars. The Company is exposed to foreign currency risk based on its net assets, liabilities, and revenues denominated in foreign currencies, including Canadian dollars and Israeli new shekels. As a result, we are exposed to foreign currency translation gains and losses. Revenue and expenses of all foreign operations are translated into U.S. dollars at the foreign currency exchange rates that approximate the rates in effect during the period when such items are recognized. Appreciating foreign currencies relative to the U.S. dollar will positively impact operating income and net earnings, while depreciating foreign currencies relative to the U.S. dollar will have an adverse impact.

A 10% change in the exchange rates for the Canadian dollar would have affected the carrying amount of the net assets by approximately $75.8 million and $77.4 million as of March 31, 2023 and December 31, 2022, respectively. The corresponding impact would be recorded in accumulated other comprehensive income. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon changes in future currency rates, such gains and losses could have a significant, and potentially adverse, effect on the Company’s results of operations.

During the three months ended March 31, 2023 and 2022, the Company had foreign currency gain on translation of $2.4 million and $16.0 million, respectively.

Item 4. Controls and Procedures.

(a)Evaluation of Disclosure Controls and Procedures.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of March 31, 2023. Based on that evaluation, management has concluded that, as of March 31, 2023, due to the existence of a material weakness in the Company’s internal control over financial reporting described below, the disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Material Weakness in Internal Controls Over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), we have identified the following material weakness:

• ITGCs - User Access:

We did not design and maintain effective controls over Information Technology General Controls (“ITGC”), pertaining to user access management and the provisioning and monitoring of user access, including privileged access. We believe this weakness to be the result of ineffective monitoring of security administrator activities, insufficient retention of documentation to support access requests and lack of training on the importance of ITGC. This material weakness did not impact any information derived from information systems and did not result in any identified misstatements to our financial statements.

Remediation Plan and Status

As discussed above, we have identified a material weakness related to ITGCs in user access management and the provisioning and monitoring of privileged access. As of the filing date, the Company is in the process of implementing various initiatives intended to address the identified material weakness. In this regard, some of our key remedial initiatives include:

• Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status

• ITGCs

• Train security administrators on access provisioning and approval protocols. In Progress Not Tested Not Remediated

• Align approval requirements for all privileged access for consistency and appropriate visibility within the IT function. In Progress Not Tested Not Remediated

• Implement a process to identify instances where privileged access roles or profiles are assigned and, when identified, review activities performed during the period of assigned privileged access. In Progress Not Tested Not Remediated

• Implement a periodic control to compare each user’s system access to their responsibilities. In Progress Not Tested Not Remediated

• Implement an oversight control over security administrator actions. In Progress Not Tested Not Remediated

(b)Changes in Internal Control over Financial Reporting

Other than the material weakness identified above and measures described above to remediate such material weakness, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1: Legal Proceedings.

The information set forth under 11(b), Contingencies, to the Company’s condensed consolidated interim financial statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report is incorporated herein by reference.

Item 1A: Risk Factors.

An investment in us involves a number of risks. A detailed discussion of our risk factors appears in Part I, Item 1A. Risk Factors of the Annual Report. Any of the matters highlighted in the risk factors described in the Annual Report could adversely affect our business, results of operations and financial condition, causing an investor to lose all, or part of, its, his or her investment. The risks and uncertainties described in the Annual Report are those we currently believe to be material, but they are not the only ones we face. If any of the risks described in the Annual Report, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits. 39

Unless otherwise noted or the context indicates otherwise, references in this Quarterly Report on Form 10-Q (this “Quarterly Report”) to the “Company”, “Cronos Group”, “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 United States (“U.S.”). Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), including hemp-derived cannabidiol (“CBD”); and the term “U.S. Schedule I cannabis” means cannabis excluding U.S. hemp.

This Quarterly Report contains references to our trademarks and trade names and to trademarks and trade names belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks or trade names to imply a relationship with, or endorsement or sponsorship of us or our business by, any other companies. In addition, this Quarterly Report includes website addresses. These website addresses are intended to provide inactive, textual references only. The information on or referred to on these websites is not part of or incorporated into this Quarterly Report.

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 “$” are to U.S. dollars; all references to “C$” are to Canadian dollars; all references to “A$” are to Australian dollars; and all references to “ILS” are to New Israeli Shekels.

All summaries of agreements described herein are qualified by the full text of such agreements (certain of which have been filed as exhibits with the U.S. Securities and Exchange Commission).

PART I
FINANCIAL INFORMATION