CRON US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 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 Group Inc. is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and are seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach®, PEACE NATURALS®, Lord Jones®, Happy Dance® and PEACE+TM.

Unless otherwise noted or the context indicates otherwise, references in this Annual Report on Form 10-K (this “Annual 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 U.S. Agricultural Improvement Act of 2018, including hemp-derived cannabidiol (“CBD”).

Strategy

Cronos Group seeks to create value for shareholders by focusing on four core strategic priorities:

•growing a portfolio of iconic brands that responsibly elevate the consumer experience;

•developing a diversified global sales and distribution network;

•establishing an efficient global supply chain; and

•creating and monetizing disruptive intellectual property.

Business Segments

We report through two segments: “United States” (the “U.S. segment”) and “Rest of World” (the “ROW segment”). These two segments represent the geographic regions in which we operate and the different product offerings within each geographic region.

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 Group or its affiliates operate (including Australia and Colombia) and was recognized as a pandemic by the World Health Organization. The COVID-19 pandemic resulted in a sharp contraction in many areas of the global economy and increased volatility and uncertainty in the capital markets. In response to the pandemic, the governments of many countries, provinces, states, municipalities, and other geographic regions took preventative or protective actions, including closures of certain businesses, mandatory quarantines, limits on individuals’ time outside of their homes, travel restrictions and social distancing or other preventative measures. Such measures were eased or lifted in varying degrees by different governments of various countries, states and municipalities throughout 2020 and 2021, but the continued spread of COVID-19 and increased infection rates has caused, and may continue to cause, some jurisdictions to roll back reopening plans that had been underway and re-impose quarantines, border closures, closure of certain businesses and stay-at-home orders.

The COVID-19 pandemic continues to impact the global economy and, specifically, the U.S., Canada, Israel, and the other countries in which Cronos Group or its affiliates operate (including Australia and Colombia). We continue to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the health and safety of our employees remains one of our top priorities.

In the U.S., numerous states have continued to remove their COVID-19 related restrictions as the rollout of vaccines continues. This has resulted in the re-opening of, and increased occupancy capacities in, retail outlets, including those that sell our products. Any reinstatement of restrictions on the operations of retail outlets could negatively impact our short-term results of operations in the U.S. Recently in the U.S., there have been a number of supply chain challenges, such as container ships facing delays due to congestion in ports, impacting many industries, including the industries in which we operate. Although we have not yet seen a significant impact from supply chain disruptions, we continue to monitor our supply chain closely.

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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. Each province is responsible for implementing re-opening plans and certain provinces, including Ontario, are progressing through phases of re-opening which may permit continued increases to the allowance of in-person shopping, typically in the form of percentage of store capacity. All provinces have some form of cannabis retail open to consumers, whether it be restricted in-person shopping, curb-side pickup or delivery. Some provinces have imposed requirements that retail shoppers show proof of vaccination before entering retail stores, which we expect will impact sales of our products in those outlets. Although most COVID-19 restrictions except some capacity limitations were lifted in most provinces during the third and fourth quarters of 2021, the increase in cases related to the Omicron variant beginning in late December has caused the reinstatement of restrictions on non-essential retail stores in some provinces, including Quebec, in January 2022, which we expect will 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 the our business cannot be reasonably estimated, but such impact could materially adversely affect our business, financial condition and results of operations.

Despite the impacts of the COVID-19 pandemic, we believe that our significant cash on hand and short-term investments will be adequate to meet liquidity and capital requirements for at least the next twelve months. The impact of reduced interest rates has inhibited our ability to generate interest income, but this has not had, and is not expected to have, a material impact on our liquidity or capital resources.

2021 Business Highlights

PharmaCann Strategic Investment

In June 2021, Cronos Group announced a strategic investment (the “PharmaCann Investment”) in PharmaCann Inc. (“PharmaCann”), a leading vertically integrated U.S. cannabis company. A wholly owned subsidiary of Cronos Group purchased an option (the “PharmaCann Option”) to acquire an approximately 10.5% ownership stake in PharmaCann on a fully-diluted basis for a total consideration of approximately $110.4 million. PharmaCann has a broad geographic footprint in the U.S. and has built an efficient, effective and scalable operating model operating under the VerilifeTM brand. The PharmaCann Option exercise will be based upon various factors, including the status of U.S. federal cannabis legalization, as well as regulatory approvals, including in the states where PharmaCann operates that may be required upon exercise. Following the exercise of the PharmaCann Option, Cronos Group and PharmaCann will enter into commercial agreements that would permit each party to offer its products through either party’s distribution channels.

On October 12, 2021, PharmaCann announced that it had entered into a definitive merger agreement with LivWell Holdings, Inc. (“LivWell”) pursuant to which PharmaCann will acquire LivWell (the “LivWell Transaction”). LivWell is a multi-state cannabis cultivation and retail leader based in Colorado. On February 28, 2022, PharmaCann closed the LivWell Transaction. Based upon the terms of the definitive merger agreement, our best estimate is that our ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.7%. Under the terms of our investment in PharmaCann, our rights to nominate an observer or a director to the PharmaCann board of directors could be lost if our ownership drops below 6% on a fully-diluted basis and it sells or transfer all or any portion of the option (subject to certain exceptions). As a result, further dilution could adversely affect our rights under the PharmaCann Option.

Spinach® Branded Product Portfolio Expansion

Throughout 2021, we brought premium high-THC strains to market in the dried flower category under the Spinach® brand, including, GMO Cookies, Atomic Sour Grapefruit and Cocoa Bomba.

In June 2021, we launched SOURZ by SpinachTM, an exciting new line of cannabis gummies with bold and unique dual flavor combinations, into the Canadian adult-use market. SOURZ by SpinachTM gummies deliver bold fruit flavors in a distinctive “S” shape with a proprietary coating designed to provide a sour and sweet flavor profile, differentiating the product and elevating the consumer experience.

In October 2021, we launched our first cultured cannabinoid product, the SPINACH FEELZTM Chill Bliss 2:1 THC|CBG gummy. We, through the Spinach® brand’s new platform and sub-brand, SPINACH FEELZTM, plan to produce a variety of cannabis products that will prominently feature rare cannabinoids, designed to deliver unique and enhanced experiences made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids, like THC and CBD.

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Cronos GrowCo

In the third quarter of 2021, Cronos GrowCo, our joint venture in Canada, began selling to Canadian license holders in the wholesale market. In addition, we have begun purchasing dried flower from Cronos GrowCo, marking a milestone in the evolution of our Canadian cannabis supply chain.

Appointments

We appointed Jeff Jacobson Senior Vice President, Head of Growth (North America). Mr. Jacobson previously served as our General Manager of Canada and Europe. Mr. Jacobson has been with Cronos Group since December 2016 and previous to that was a co-founder of Peace Naturals. Mr. Jacobson's expertise and experience in licensing and compliance, new business development, project management and resource management help Cronos Group lead in domestic and international markets.

We have also appointed John Griese Senior Vice President, Head of Operations (North America). Mr. Griese joined Cronos Group in August 2021 as the Vice President of Operations. Mr. Griese has worked with several cannabis organizations and was most recently the Chief Operating Officer (“COO”) for The Supreme Cannabis Company, Inc. (“Supreme”). Prior to Supreme, Mr. Griese garnered cannabis experience during California’s adult use implementation as COO for global cannabis company Creso Pharma Limited. Prior to that he spent the majority of his career in supply chain and operations with PepsiCo, Inc., Nestle and Sofina Foods Inc. Mr. Griese’s experience in building supply chains around the world will help us win in the markets we are in today, while staying nimble in order to move fast and pivot as the industry changes over time.

Bob Madore joined Cronos Group as Chief Financial Officer, effective August 9, 2021. Mr. Madore recently served as Chief Financial Officer of American Eagle Outfitters Inc. from 2016 to 2020. Prior to that, Mr. Madore served in a number of key financial and operational roles at Ralph Lauren Corporation beginning in 2004 through 2016, most recently as Chief Financial Officer from April 2015 to September 2016. Before joining Ralph Lauren, Mr. Madore was Chief Financial Officer for New York & Company from 2003 to 2004, and served as Chief Operating Officer and Chief Financial Officer of FutureBrand, a division of McCann Erickson, from 2001 to 2003. Before that, Mr. Madore held various executive management positions at Nine West Group, Inc. from 1995 through 2000. Mr. Madore began his career in 1987 at Deloitte & Touche in audit services and worked in the firm’s mergers and acquisitions practice from 1993 until 1995.

Carlos Cortez joined Cronos Group as Vice President & Controller, a role which includes serving as Cronos Group’s principal accounting officer. Mr. Cortez joins Cronos Group with over 18 years of experience, most recently serving as Corporate Controller of SharpSpring, Inc., a publicly traded cloud-based marketing technology company. Prior to his time at SharpSpring, Inc., Mr. Cortez was the Senior Finance Director – Record to Report for Discovery, Inc., a publicly traded global media company, from August 2019 until December 2020. Prior to his time at Discovery, Inc., Mr. Cortez spent five years as Corporate Controller for Malibu Boats, Inc., a publicly traded manufacturer of recreational powerboats.

Strategic and Organizational Update

Following the evaluation of our global supply chain, we announced the planned exit of our Peace Naturals Campus in Stayner, Ontario, Canada (the “Stayner Facility”).

We will continue to operate the Peace Naturals Campus with a phased reduction and transition of activities with a planned exit from the Stayner Facility by the end of 2022. Various research and development initiatives, inclusive of cannabinoid formulation, product development, tissue culture and micropropagation, will continue across multiple facilities available to us.

We have focused on building joint ventures and partnerships around the world, such as with Cronos GrowCo. As Cronos GrowCo has developed its capabilities, it has become an important component of our biomass supply. We intend to obtain a sales license from Health Canada at Cronos GrowCo’s facility to maintain our customer relationships and ability to continue supplying the Canadian market. In addition to further leveraging our joint venture with Cronos GrowCo, we will continue to maintain a network of third-party licensed producers to supplement cultivation and manufacturing needs.

As a result of our planned exit from the Stayner Facility, we have incurred a $119.9 million non-cash impairment charge on long-lived assets in the fourth quarter of 2021. In addition, we expect to incur charges of approximately $4.5 million in connection with the planned exit, all of which impact the ROW segment. These charges include employee-related costs, such as severance, relocation and other termination benefits, as well as contract termination and other related costs, which are expected to be incurred primarily in the second half of 2022. In addition, we anticipate capital expenditures of approximately $2.5 million to modernize information technology systems and build distribution capabilities. These anticipated charges and capital expenditures are subject to a number of assumptions, including product costs, the timing of certain events, market factors and others. As a result of these assumptions, actual results may differ materially.

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Canadian Medical Market.

We exited the direct-to-client medical cannabis market in Canada in the fourth quarter of 2021. Beginning in the first quarter of 2022, our PEACE NATURALS® medical cannabis products will be sold in Canada through the Medical Cannabis by Shoppers Drug MartTM platform.

2020 Compared to 2019

Results of Operations

For a discussion of our 2020 results of operations compared to 2019, 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, 2020.

Cash Flows

For a discussion of our 2020 cash flows compared to 2019, 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, 2020.

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, 2021 and December 31, 2020, 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, 2021, December 31, 2020 and December 31, 2019, 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,

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Consolidated Results of Operations

The tables below sets 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,

Operating expenses:

Depreciation and amortization 4,484 2,872

Impairment loss on long-lived assets 127,619 —

Income tax benefit (expense) 431 (1,347)

Loss from discontinued operations (500) (650)

Net loss attributable to non-controlling interest (1,097) (2,133)

Net loss attributable to Cronos Group $ (396,107) $ (73,137)

Summary of select financial results

Year ended December 31, Change

Gross margin(i) (24) % (55) % N/A 31 pp

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

Net revenue

For the fiscal year 2021 (“FY 2021”), we reported consolidated net revenue of $74.4 million, representing an increase of $27.7 million from the fiscal year 2020 (“FY 2020”). This change was primarily due to an increase in sales in the Rest of World (“ROW”) segment in FY 2021 compared to FY 2020, driven by the continued growth of the adult-use market in Canada and higher sales in the Israeli medical market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in FY 2021.

Cost of sales

For FY 2021, we reported consolidated cost of sales of $80.0 million, representing an increase of $33.5 million from FY 2020. This change was primarily due to increased sales volumes, inventory adjustments to reflect net realizable value, and increased production costs on new products launched in the ROW and U.S. segments.

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Inventory write-downs

For FY 2021, we reported consolidated inventory write-downs of $12.0 million, representing a decrease of $14.1 million from FY 2020. The decrease was primarily due to higher inventory write-downs in FY 2020 related to the increasing pricing pressures in the Canadian market, which resulted in reducing carrying amounts to net realizable value. During FY 2021, write-downs related to adjustments for obsolete inventory in Canada, and write-downs for cannabis strains and products with potency levels that are no longer in-line with consumer preferences in the Canadian market.

Gross profit

For FY 2021, we reported consolidated gross profit of $(17.5) million, representing an improvement of $8.3 million from FY 2020. The increase in gross profit is primarily due to lower inventory write-downs in FY 2021 and a favorable sales mix of our cannabis extract products in the ROW segment.

Operating expenses

Year ended December 31, Change

Sales and marketing

For FY 2021, we reported sales and marketing expenses of $44.9 million, representing an increase of $10.6 million from FY 2020. The increase was primarily due to efforts to expand our advertising and marketing campaigns related to our brands in the U.S. and ROW segments, as well as the increased headcount and other costs related to these efforts.

Research and development

For FY 2021, we reported research and development expenses of $23.3 million, representing an increase of $3.0 million from FY 2020. This increase was primarily due to additional spending on product development and developing cannabinoid intellectual property in the ROW segment.

General and administrative

For FY 2021, we reported general and administrative expenses of $96.5 million, representing an increase of $15.9 million from FY 2020. The increase was primarily due to recognizing additional allowances for expected credit losses of $12.0 million on our loans receivable in the ROW segment, as well as increased headcount in both the ROW and U.S. segments.

Share-based payments

For FY 2021, we reported share-based payment expenses of $10.2 million, representing a decrease of $5.2 million from FY 2020. The decrease was primarily due to the acceleration of restricted share units pursuant to separation agreements with certain employees in the U.S. segment during FY 2020.

Depreciation and amortization

For FY 2021, depreciation and amortization expenses were $4.5 million, representing an increase of $1.6 million from FY 2020. The change was primarily due to in-progress assets placed into service in 2021 and additional capital expenditures in the ROW segment in FY 2021.

Impairment loss on goodwill and indefinite-lived intangible assets

For FY 2021, we reported an impairment loss on goodwill and intangible assets of $236.1 million, representing an increase of $196.1 million from FY 2020. The change was primarily due to a $178.4 million impairment charge on the U.S. reporting unit and a $57.5 million impairment charge on the Lord Jones® brand during the year ended December 31, 2021. For further information, see Note 6 “Goodwill and Intangible Assets, net” to the consolidated financial statements in Item 8 of this Annual Report.

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Impairment loss on long-lived assets

For FY 2021, we reported an impairment loss on long-lived assets of $127.6 million, compared to no impairment loss on long-lived assets for FY 2020. For FY 2021, we recorded an impairment charge of $119.9 million on long-lived assets related to the planned exit from the Stayner Facility. Additionally, we recorded impairment charges of $4.8 million in the aggregate related to our 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, our U.S. segment recorded an impairment loss 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 loss 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 & Intangible Assets, net” and Note 7 “Leases” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Total other income, income tax benefit (expense) & loss from discontinued operations

Year ended December 31, Change(i)

Gain on disposal of other investments — 4,789 (4,789) (100) %

Share of loss from equity accounted investments (6,313) (4,510) (1,803) 40 %

Gain (loss) on revaluation of financial instruments 8,611 (9) 8,620 N/M

Loss from discontinued operations (500) (650) 150 (23) %

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

Interest income, net

For FY 2021, we reported interest income, net of $9.1 million, representing a decrease of $9.3 million from FY 2020 primarily due to the impact of lower interest rates and lower short-term investment balances during FY 2021 compared to FY 2020.

Gain (loss) on revaluation of derivative liabilities

For FY 2021, we reported a gain on revaluation of derivative liabilities of $151.4 million, representing an increase of $22.1 million from FY 2020 primarily due to a decrease in our share price since December 31, 2020. We expect continued changes in derivative valuations as our share price fluctuates period to period. See Note 8 “Derivative Liabilities” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Gain on disposal of other investments

For FY 2020, we reported a gain on disposal of other investments of $4.8 million as a result of the sale of shares associated with the Whistler Transaction, as defined below. There were no such transactions in FY 2021. See Note 3 “Investments” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Share of loss from equity accounted investments

For FY 2021, we reported share of loss from equity accounted investments of $6.3 million, representing an increase in losses of $1.8 million from FY 2020. The change was due to increased recurring losses from our equity accounted investments. See Note 3 “Investments” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Gain (loss) on revaluation of financial instruments

For FY 2021, we reported a gain on revaluation of financial instruments of $8.6 million, related to our investment in Cronos Australia. See Note 3 “Investments” to the consolidated financial statements in Item 8 of this Annual Report for additional information. The reported loss in FY 2020 was negligible.

Other, net

For FY 2021, we reported other income, net of $0.7 million, compared to other expenses, net of $1.8 million for FY 2020 primarily due to the revaluation of held-for-sale assets related to the land and office building located in Winnipeg, Manitoba, Canada in the second quarter of 2021 compared to the revaluation of held-for-sale assets related to substantially all of the assets of Original B.C. Ltd. (“OGBC”) in FY 2020.

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Income tax benefit (expense)

For FY 2021, we reported an income tax benefit of $0.4 million, representing a change of $1.8 million from the FY 2020 income tax expense primarily due to the recognition of current year losses incurred to be carried back against prior period taxable income. See Note 11 “Income Taxes” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Loss from discontinued operations

For FY 2021, we reported loss from discontinued operations of $0.5 million, representing a decrease in losses of $0.2 million from FY 2020 primarily due to a $0.1 million gain from the sale of OGBC’s property, plant and equipment in FY 2021. See Note 16 “Discontinued Operations and Held-for-sale Assets” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Results of Operations by Business Segment: FY 2021 compared with FY 2020

The tables below sets 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

Gross margin (27) % (81) % N/A 54 pp

Net revenue – ROW

Year ended December 31, Change

For FY 2021, the ROW segment reported net revenue of $64.6 million, representing an increase of $27.3 million from FY 2020. This increase was primarily due to the continued growth in the adult-use market in Canada attributable to increasing demand for flower and increased sales in the Israeli medical market, partially offset by strategic price reductions on various adult-use cannabis products in Canada in FY 2021.

Cost of sales - ROW

For FY 2021, the ROW segment reported cost of sales of $70.2 million, representing an increase of $29.0 million from FY 2020. This change was primarily due to increased sales volume, inventory adjustments to reflect net realizable value and start-up costs associated with new product development.

Inventory write-downs - ROW

For FY 2021, the ROW segment reported inventory write-downs of $12.0 million, representing a decrease of $14.1 million from FY 2020. The decrease was primarily due to higher inventory write-downs in FY 2020 related to increasing pricing pressures in the Canadian market, which resulted in reducing carrying amounts to net realizable value. This change is primarily due to operational improvements and efficiencies with the cultivation and manufacturing processes which led to more successful products being produced for the Canadian adult-use market that required less adjustments for obsolete inventory, offset by continued write-downs related to obsolete inventory related to the COVE® brand.

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Gross profit - ROW

For FY 2021, the ROW segment reported gross profit of $(17.6) million, representing an increase in gross profit of $12.4 million from FY 2020. The increase in gross profit is primarily due to lower inventory write-downs in FY 2021 and a favorable sales mix of our cannabis extract products.

Summary of financial results – U.S.

Year ended December 31, Change

Gross margin 1 % 44 % N/A (43) pp

Net revenue – U.S.

For FY 2021, the U.S. segment reported net revenue of $9.9 million, representing an increase of $0.4 million from FY 2020. The increase primarily due to the introduction of new U.S. hemp-derived CBD products.

Cost of sales – U.S.

For FY 2021, the U.S. segment reported cost of sales of $9.8 million, representing an increase of $4.5 million from FY 2020. This increase was primarily due to the costs associated with the introduction of new U.S. hemp-derived CBD products, inventory valuation adjustments to reflect net realizable value, and increased headcount.

Gross profit – U.S.

For FY 2021, the U.S. segment reported gross profit of $0.1 million, representing a decrease in gross profit of $4.1 million from FY 2020. This decrease was primarily due to the increase in cost of sales, as described above.

Liquidity

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. Historically, we have primarily funded our operations through equity financing. In March 2019, Altria closed a C$2.4 billion (approximately $1.8 billion) 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.

Cash flows

(In thousands of U.S. dollars) Year ended December 31,

FY 2021 cash flows vs FY 2020 cash flows

Operating activities

During FY 2021, we used $153.6 million of cash in operating activities as compared to $144.9 million in FY 2020, representing an increase of $8.7 million in cash used. This change is primarily driven by a $17.8 million increase in net loss after adjusting for non-cash items, partially offset by a $9.0 million increase in changes in operating assets and liabilities in FY 2021.

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Investing activities

During FY 2021, we used $28.9 million of cash in investing activities, as compared to $20.2 million of cash provided by investing activities during FY 2020, representing an increase of $49.0 million in net cash used. This change is primarily driven by the investment in PharmaCann in FY 2021, partially offset by a decrease in cash disbursements related to loans receivable from related parties, primarily Cronos GrowCo, in FY 2021 compared to FY 2020.

Financing activities

During FY 2021, cash used in financing activities was $13.4 million, as compared to $3.1 million of cash used in financing activities in FY 2020, representing an increase of $10.4 million. This change is primarily driven by withholding taxes paid on equity awards in FY 2021 compared to FY 2020, partially offset by amounts advances to non-controlling interests in FY 2020.

Capital resources

As of December 31, 2021, we had $887.0 million in cash and cash equivalents and $117.7 million in short term investments. As of December 31, 2021, we had no external financing.

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, 2021:

Leases

We have operating leases for buildings and office space, vehicles and land, and a finance lease relating to equipment. As of December 31, 2021, the future minimum payments required under these leases totaled $10.7 million, with $2.8 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, 2021, Cronos GrowCo had approximately $0.8 million undrawn on its loan receivable, with $0.8 million 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.

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. As of December 31, 2021, we had purchase obligations of $17.7 million, with $15.5 million payable within 12 months. Other purchase obligations consist primarily of noncancelable obligations related to maintenance, internet, and telecommunication services. As of December 31, 2021, we had other purchase obligations of $3.3 million, with $1.0 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”) and Technion Research and Development Foundation of the Technion – Israel Institute of Technology (“Technion”), 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, 2021, we had approximately $30.2 million in cash requirements related to R&D, with $20.2 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.

Non-GAAP Measures

Cronos Group 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.

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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, depreciation and amortization adjusted for: share of loss from equity accounted investments; impairment loss on goodwill and intangible assets; impairment loss on long-lived assets; gain on revaluation of derivative liabilities; gain on revaluation of financial instruments; transaction costs related to strategic projects; other, net; loss from discontinued operations; share-based payments; and review and investigation costs related to the restatements of our 2019 and 2021 interim financial statements, including costs related to our responses to the reviews of such financial statements by various regulatory authorities and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement (see Part I, Item 3, Legal Proceedings, of this Annual Report for a discussion of the regulatory reviews relating to the restatements of the 2019 and 2021 interim financial statements 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.

Adjusted EBITDA is reconciled to net income (loss) as follows:

(in thousands of U.S. dollars) Year ended December 31, 2021

US ROW Corporate Total

Share of loss from equity accounted investments — 6,313 — 6,313

Gain on revaluation of derivative liabilities(iii) — (151,360) — (151,360)

Gain on revaluation of financial instruments(iv) — (8,611) — (8,611)

Loss from discontinued operations(viii) — 500 — 500

Financial statement review costs(x) — — 7,102 7,102

(in thousands of U.S. dollars) Year ended December 31, 2020

US ROW Corporate Total

Share of loss from equity accounted investments — 4,510 — 4,510

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

Gain on disposal of investments(vi) — (4,789) — (4,789)

Loss from discontinued operations(viii) — 650 — 650

Financial statement review costs(x) — — 9,688 9,688

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(in thousands of U.S. dollars) Year ended December 31, 2019

US ROW Corporate Total

Share of loss from equity accounted investments — 2,009 — 2,009

Gain on revaluation of derivative liabilities(iii) — (1,276,819) — (1,276,819)

Gain on revaluation of financial instruments(iv) — (197) — (197)

Gain on disposal of investments(vi) — (16,277) — (16,277)

Loss from discontinued operations(viii) — 363 — 363

(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, 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, 2021, 2020 and 2019, 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 year ended December 31, 2021, gain on revaluation of financial instruments relates primarily to our unrealized holding gain on our mark-to-market investment in Cronos Australia as well as revaluations of financial liabilities resulting from DSUs. For the years ended December 31, 2020 and 2019, gain (loss) on revaluation of financial instruments relates to revaluations of financial liabilities resulting from DSUs. See Note 3 “Investments” to the consolidated financial statements in Item 8 of this Annual Report.

(v)For the years ended December 31, 2021, 2020 and 2019, 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 years ended December 31, 2020 and 2019, 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 year ended December 31, 2021. See Note 3 “Investments” to the consolidated financial statements in Item 8 of this Annual Report.

(vii)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, 2020 and 2019, loss from discontinued operations relates to the discontinuance of OGBC. See Note 16 “Held-For-Sale Assets and Discontinued Operations” to the consolidated financial statements in Item 8 of this Annual Report.

(ix)For the years ended December 31, 2021, 2020 and 2019, share-based payments 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 Payments” to the consolidated financial statements in Item 8 of this Annual Report.

(x)For the years ended December 31, 2021 and 2020, financial statement review costs include costs related to the restatements of our 2019 and second quarter 2021 interim financial statements, costs related to our responses to requests for information from various regulatory authorities relating to such restatements and legal costs defending shareholder class action complaints brought against us as a result of the 2019 restatement.

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:

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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.

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 FY 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 which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which 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.

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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 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. Equity in Cronos Group issued in exchange for the cannabinoid exclusive licenses are initially recognized and measured at the date of acquisition. Subsequently, we measure each cannabinoid exclusive license at fair value. 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 the cannabinoid CBGA. At that time, we issued 1.5 million shares of Cronos Group valued at $9.0 million based on the observable market price. 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 ten 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 the cannabinoid CBGVA. At that time, we issued 1.5 million shares of Cronos Group valued at $8.2 million based on the observable market price. 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 ten 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.

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

Derivative liabilities consist of the Altria Warrant, 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 volatility of our stock price, expected dividend yield, expected term and expected risk-free interest rate. Volatility was based on an equally weighted blended historical and implied volatility level of our underlying equity securities as of December 31, 2021. As of December 31, 2020, volatility was based on our and our peer companies’ blended historical volatility levels. 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.

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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 $14.6 million and $2.6 million as of December 31, 2021 and 2020, respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest rate risk

Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of income and expense recorded on the cash equivalents and short-term investments, and the market value of all interest-earning assets, other than those which possess a short-term to maturity. During the year ended December 31, 2021 and December 31, 2020, we had net interest income of $9.1 million and $18.4 million, respectively. A 10% change in the interest rate in effect on December 31, 2021 and December 31, 2020, would not have a material effect on (i) fair value of the cash equivalents and short-term investments as the majority of the portfolio has a maturity date of three months or less, or (ii) net interest income. Management continues to monitor external interest rates and revise our investment strategy as a result.

During the year ended December 31, 2021, our average variable interest rate did not materially change. During the year ended December 31, 2020, our average variable interest rate fell 1.49%, which resulted in a decrease of net interest income of $15.7 million in the period.

Foreign currency risk

Our consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of the annual report are expressed in U.S. dollars. In addition, we have 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 adversely impact operating income and net earnings, while depreciating foreign currencies relative to the U.S. dollar will have a positive impact.

As of December 31, 2021 and December 31, 2020, we had foreign currency gain (loss) on translation of $8.2 million and $15.0 million, respectively. A 10% change in the exchange rates for the Canadian dollar would affect the carrying amount of the net assets by approximately $133.4 million and $170.8 million as of December 31, 2021 and December 31, 2020, 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 our results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Consolidated Balance Sheets 75

Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) 76

Consolidated Statements of Changes in Shareholders’ Equity 77

Consolidated Statements of Cash Flows 79

Notes to Consolidated Financial Statements 81

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Cronos Group Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Cronos Group Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of net income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impact of Ineffective Control Environment

As discussed in Item 9A. Controls and Procedures in the Form 10-K, management identified that a material weakness existed as of December 31, 2021 as the Company did not maintain an effective control environment. Specifically, the control environment did not ensure that senior personnel in the accounting function engaged consistently in appropriate professional conduct and conduct consistent with the Company’s Code of Business Conduct and Ethics.

We identified the evaluation of the sufficiency of audit evidence in response to the material weakness as a critical audit matter. Evaluating the sufficiency of the audit evidence obtained required especially subjective auditor judgement because of the material weakness identified above.

The following are the primary procedures we performed to address this critical audit matter. We applied significant auditor judgment to determine the nature and extent of procedures to be performed over processes for which control reliance could or could not be placed on certain key internal controls as a result of the material weakness. In those areas where we were unable to rely on internal controls, we reflected the effect of the material weakness in our assessment of risk; we increased the number of items selected to perform certain audit procedures and lowered the testing thresholds for investigating differences between recorded amounts and independent expectations developed by us as relative to what we would have done if the Company’s controls were designed and operating effectively; and we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed.

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Evaluation of the impairment loss on goodwill and indefinite-lived intangible asset

As discussed in Notes 1(t) and 6(a) to the consolidated financial statements, the Company’s reporting units and indefinite-lived intangible assets are reviewed for impairment annually in the fourth quarter or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying amount. An impairment charge would be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. As discussed in Note 6(a) to the consolidated financial statements, the Company determines the fair values of its U.S. reporting unit and the Lord Jones brand indefinite-lived intangible asset using a discounted cash flow method on the reporting unit and 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. As discussed in Notes 6(a) and 6(b) to the consolidated financial statements, the Company recorded impairment losses of $178,414 thousand against the goodwill in the U.S. reporting unit and $57,500 thousand against the Lord Jones brand for the year ended December 31, 2021.

We identified the evaluation of the impairment losses on the U.S. reporting unit goodwill and Lord Jones brand as a critical audit matter. The evaluation of the Company’s significant inputs including the growth rates and, discount rates, and for the Lord Jones brand, royalty rate, required a high degree of auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the growth rates by comparing against external analyst expectations for the industry in the United States. We involved valuation professionals with specialized skills and knowledge who assisted in:

•evaluating the discount rates by comparing against the internal rates of return and comparing the weighted average cost of capital to a range that was independently developed using publicly available market data for comparable entities

•evaluating the royalty rate which was applied to estimate forecasted revenues, to calculate forecasted royalty income, using industry knowledge, and considering comparable brand royalty rates and qualitative factors specific to the brand.

/s/ KPMG LLP

Chartered Professional Accountants, Licensed Public Accountants

We have served as the Company’s auditor since 2018.

Vaughan, Canada

March 1, 2022

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Cronos Group Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Cronos Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of net income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the following have been identified and included in management’s assessment:

•an ineffective control environment which (i) did not ensure that senior personnel in the Company’s accounting function engaged consistently in appropriate professional conduct and conduct consistent with the Company’s Code of Business Conduct and Ethics; and (ii) lacked personnel in the accounting function with appropriate level of knowledge and experience in U.S. GAAP sufficient to properly assess evidence and interpret accounting rules; and

•the Company did not design and maintain effective controls to assess goodwill and indefinite-lived intangible asset for potential impairment.

The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Annual Report on Form 10-K item 9A(b) Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Chartered Professional Accountants, Licensed Public Accountants

Vaughan, Canada

March 1, 2022

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CRONOS GROUP INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

Cronos Group Inc.

Consolidated Balance Sheets

As of December 31, 2021 and 2020

(In thousands of U.S. dollars)

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As of December 31,

Assets

Current assets

Current portion of loans receivable, net 5,460 7,083

Prepaids and other current assets 8,967 11,161

Held-for-sale assets — 1,176

Investments in equity accounted investees, net 16,764 19,235

Non-current portion of loans receivable, net 80,635 87,191

Liabilities

Current liabilities

Current portion of lease obligation 2,711 1,322

Due to non-controlling interests 1,913 2,188

Non-current portion of lease obligation 7,095 8,492

Deferred income tax liability 81 —

Shareholders’ equity

Accumulated other comprehensive income 49,865 42,999

Total equity attributable to shareholders of Cronos Group 1,337,243 1,711,364

Non-controlling interests (2,967) (3,196)

See notes to consolidated financial statements.

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Cronos Group Inc.

Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)

For the years ended December 31, 2021, 2020, and 2019

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

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Year ended December 31,

Operating expenses

Impairment loss on long-lived assets 127,619 — —

Repurposing charges — — 5,328

Other income (expense)

Gain on disposal of investments — 4,789 16,277

Share of loss from equity accounted investments (6,313) (4,510) (2,009)

Gain (loss) on revaluation of financial instruments 8,611 (9) 197

Income tax expense (benefit) (431) 1,347 —

Loss from discontinued operations (500) (650) (363)

Net loss attributable to non-controlling interest (1,097) (2,133) (932)

Comprehensive income (loss)

Net income (loss) from continuing operations per share

See notes to consolidated financial statements.

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Cronos Group Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

Withholding taxes on share-based awards — — (1,301) (12,157) — — (13,458)

Vesting of restricted share units — — 2,547 — — — 2,547

Recovery of forfeited awards — — (281) (56) — — (337)

Top-up Rights exercised out-of-period adjustment — (3,227) — 3,227 — — —

Restricted share units settled 414,088 — — — — — —

Vesting of restricted share units — — 8,176 — — — 8,176

Taxes withheld on share-based awards — — (2,148) — — — (2,148)

Top-up Rights exercised — 3,265 — — — — 3,265

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Cronos Group Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

Share issuance costs — (3,722) — — — — (3,722)

Vesting of restricted share units — — 889 — — — 889

See notes to consolidated financial statements.

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Cronos Group Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2021, 2020, and 2019

(In thousands of U.S dollars)

Table of Contents

Year ended December 31,

Operating activities

Impairment loss on long-lived assets 127,619 — —

Expected credit losses on long-term financial assets 12,202 2,437 —

Share of loss from investments in equity accounted investees 6,313 4,510 2,009

Gain on disposal of investments — (4,789) (16,277)

Loss (gain) on revaluation of financial instruments (8,611) 9 (197)

Non-cash repurposing costs — — 4,439

Other non-cash operating activity expense (income) (3,562) 1,215 (46)

Changes in operating assets and liabilities:

Prepaids and other current assets 3,102 — (4,585)

Investing activities

Proceeds from sale of investments — 4,789 19,614

Proceeds from held-for-sale assets 2,770 — —

Advances to joint ventures, net of repayments (4,707) (44,652) (58,472)

Purchase of intangible assets, net of disposals (1,118) (3,979) (289)

Acquisition of Redwood — — (224,295)

Other non-cash investing activity expense — — 415

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Cronos Group Inc.

Consolidated Statements of Cash Flows (continued)

For the years ended December 31, 2021, 2020, and 2019

(In thousands of U.S dollars)

Table of Contents

Year ended December 31,

Financing activities

Advance to non-controlling interests — (1,019) —

Withholding taxes paid on equity awards (13,458) (2,148) (915)

Proceeds from Altria Investment — — 1,809,556

Proceeds from exercise of Top-up Rights — — 67,051

Proceeds from exercise of warrants and options 16 116 1,455

Share issuance costs — — (3,722)

Repayment of construction loan payable — — (15,971)

Advance under Credit Facility — — 48,715

Repayment of Credit Facility — — (48,309)

Supplementary cash flow information:

Interest paid $ — $ — $ 759

Taxes paid 892 — —

See notes to consolidated financial statements.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

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

(a)Background

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

Cronos Group is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development and is seeking to build an iconic brand portfolio. Cronos Group’s diverse international brand portfolio includes Spinach®, PEACE NATURALS®, Lord Jones®, Happy Dance®, and PEACE+TM. COVE® was a premium positioned adult-use brand focused on creating crafted experience. The Company no longer produces or distributes products under the COVE® brand.

Cronos Group has established three strategic joint ventures in Canada, Israel, and Colombia. Cronos Israel (as defined herein) is consolidated for financial reporting purposes. The Company also holds approximately 10% of the issued capital of Cronos Australia Limited (“Cronos Australia”) and accounts for its investment under the fair value method of accounting. For additional discussion regarding the joint ventures and strategic investments, see Note 3 “Investments.”

(b)Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of net revenues and expenses during the reporting periods. Certain prior year amounts have been reclassified to conform to the current year presentation of our consolidated financial statements. These reclassifications had no effect on reported results of operations and ending shareholders’ equity.

(c)Basis of consolidation

The accompanying consolidated financial statements include the accounts of the Company, and all entities in which the Company has a controlling voting interest or is the primary beneficiary of a variable interest as of and for the reporting periods. The Company assesses control under the variable interest entity (“VIE”) model to determine whether the Company is the primary beneficiary of that entity’s operations. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Investments in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, but does not have control, are accounted for under the equity method of accounting.The Company consolidates the financial results of the following entities, which the Company controls:

Cronos Israel G.S. Cultivation Ltd.(i) Israel February 4, 2018 70%

Cronos Israel G.S. Manufacturing Ltd.(i) Israel September 4, 2018 90%

Cronos Israel G.S. Store Ltd.(i) Israel June 28, 2018 90%

Cronos Israel G.S. Pharmacy Ltd.(i) Israel February 15, 2018 90%

(i)These Israeli entities are collectively referred to as “Cronos Israel.”

(ii)“Ownership interest” is defined as the proportionate share of net income to which the Company is entitled; equity interest may differ from ownership interest as described herein.

In the consolidated statements of net income (loss) and comprehensive income (loss), net income (loss) and comprehensive income (loss) are attributed to the equity holders of the Company and to the non-controlling interests. Non-controlling interests in the equity of Cronos Israel are presented separately in the shareholders’ equity section of the consolidated balance sheets and consolidated statements of shareholders’ equity. All intercompany transactions and balances are eliminated upon consolidation.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

(d)Out-of-period adjustments

During the year ended December 31, 2021, the Company identified an error in the accounting related to the withholding taxes on the net exercise of stock options resulting in an understatement of accrued liabilities of $966 and overstatements of other receivables, retained earnings and share capital of $3,202, $3,838 and $330, respectively, as of December 31, 2020. This error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during the year ended December 31, 2021 to correct the error. The impact of the out-of-period adjustments are included within the changes in operating assets and liabilities and withholding taxes paid on share-based awards lines in the Company’s consolidated statement of cash flows.

During the year ended December 31, 2021, the Company identified an error in the accounting related to the exercise of Top-up Rights (as defined herein), which resulted in an overstatement of share capital and an understatement of gain on revaluation of derivative liabilities of $3,227 as of December 31, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during 2021 to correct the error. The out-of-period adjustment had no impact on the consolidated statements of net income (loss) and comprehensive income (loss) or the consolidated statements of cash flows.

During the year ended December 31, 2021, the Company identified an error in the accounting related to shares issued pursuant to the accelerated vesting of RSUs in the third quarter of 2020, which resulted in an understatement of share capital of $4,802 and an overstatement of additional paid-in-capital of $4,802 as of December 31, 2020. The error was deemed immaterial, and thus the Company has recorded an out-of-period adjustment to the consolidated balance sheet and the consolidated statement of changes in shareholders’ equity during 2021 to correct the error. The out-of-period adjustment had no impact on the consolidated statements of net income (loss) and comprehensive income (loss) or the consolidated statements of cash flows.

(e)Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates and assumptions include, among other things, valuation of derivative liabilities, expected credit losses on long-term financial assets, impairment losses on goodwill and indefinite-lived intangible assets, impairment losses on long-lived assets, inventory write-downs, share-bared payments, valuation allowance on deferred income tax assets and uncertain tax liabilities. Actual results could differ from those estimates.

(f)Cash and cash equivalents and short term investments

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less. Cash and cash equivalents include amounts held in dollars, C$ and ILS and security deposits. Short-term investments consist of debt securities that (i) have original maturities of greater than three months and (ii) the Company has the ability to convert into cash within one year.

Short-term investments are classified as held-to-maturity. Our investments classified as held-to-maturity are recorded at cost. Interest earned on short-term investments is recorded in other receivables on the consolidated balance sheets and interest income on the consolidated statements of net income (loss) and comprehensive income (loss). Cash inflows and outflows related to the purchase and maturity of short-term investments are classified as investing activities in the Company’s consolidated statements of cash flows.

(g)Inventory

Inventory is comprised of raw materials, finished goods and work-in-progress, such as pre-harvested cannabis plants, dried cannabis flower, by-products to be extracted, cannabis extracts and by-products, dry cannabis and cannabis extract containers, and boxes. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and irrigation, are capitalized into inventory until the time of harvest.

Inventory is stated at the lower of cost and net realizable value, determined using weighted average cost. Cost includes expenditures directly related to manufacturing and distribution of the products. Primary costs include consumables (insect control, fertilizers, soil), packaging, shipping, direct labor, overhead, supplies and small tools, and the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related expenses include salaries, wages, employee benefits, rent, utilities, security, and property taxes. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost and net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable products.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

(h)Investments

Variable interest entities

A variable interest entity is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or equity investors at risk that lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. The Company evaluates whether it is the primary beneficiary of each VIE it identifies on a periodic basis and considers the impact of any reconsideration events. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To make this determination, the Company considers both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company consolidates the VIE when it is determined that it is the primary beneficiary of the VIE.

Equity method investments

The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling financial interest using the equity method. Under the equity method, the Company records its proportionate share of income or loss in the consolidated statements of net income (loss) and comprehensive income (loss). Cash payments to equity method investees such as additional investments and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends and distributions are recorded as adjustments to investment balances. If the current fair value of an investment falls below its carrying amount, this may indicate that an impairment loss should be recorded. Any impairment losses recognized cannot be reversed in subsequent periods.

Other investments

Other investments include common stock and options in third party entities in which the Company’s influence is deemed non-significant. The Company holds other investments with and without readily determinable fair values. Other investments with readily determinable fair values are recorded using the fair value method of accounting as of period-end on the consolidated balance sheets. Other investments without readily determinable fair values are recorded using the cost method of accounting on the consolidated balance sheets. Other investments without readily determinable fair values are assessed for temporary and other than temporary observable price changes on a periodic basis. Changes in the reported value of other investments are reported in the consolidated statements of net income (loss) and comprehensive income (loss).

(i)Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Rate

Building and leasehold improvements 15 to 20 years

Machinery and equipment 5 to 7 years

Furniture and fixtures 5 years

Equipment under finance lease Lesser of term of lease and useful life

When assets are disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which increase productivity or extend the useful life of the asset, are capitalized.

Available for use is defined as the point at which the related property, plant and equipment is operational, including the possession of any requisite licenses. Depreciation commences at the point the assets are available for use.

(j)Definite-lived intangible assets

Intangible assets are recorded at cost less any accumulated amortization and accumulated impairment losses. Intangible assets acquired through a business combination are measured at fair value at the acquisition date.

The Company capitalizes certain costs incurred in connection with its enterprise software, which include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of the software for the function intended. All other costs are expensed as incurred.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

Intangible assets with definite useful lives are amortized over their estimated useful lives using the following methods and rates:

Method Rate

Software Straight-line 5 years

Health Canada licenses Straight-line Useful life of corresponding facilities

Ginkgo exclusive licenses Straight-line 10 years

Israeli codes(i) Straight-line Useful life of corresponding facilities

(i) The preliminary licenses granted to Kibbutz Gan Shmuel (the Cronos Israel joint venture partner) by the Medical Cannabis Unit of the Israeli Ministry of Health in early 2017 (the “Israeli codes”) were transferred by non-controlling interests to Cronos Israel in exchange for equity interests in the Cronos Israel entities specified above.

Amortization begins when assets become available for use. The estimated useful life, amortization method, and rate are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Intangible assets originating from the strategic partnership (the “Ginkgo Strategic Partnership”) with Ginkgo Bioworks Holdings, Inc. (“Ginkgo”) are accounted for in accordance with the acquisition method of accounting. Equity interests issued in exchange for an asset are initially recognized and measured at the date of acquisition at fair value. We estimate fair value using the relief-from-royalty method and key assumptions include the discount rate and estimated life. Definite-lived intangible assets, including intangible assets originating from the Ginkgo Strategic Partnership, are subject to amortization and reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value has been reduced to less than its carrying amount.

(k)Accrued liabilities

Accrued liabilities consist of the following:

As of December 31,

Accrued payroll and related expenses $ 13,308 $ 9,697

Accrued payroll and related expenses include salaries and wages, bonuses, and other related payroll expenses associated with the Company’s employees. Accrued professional fees include fees for legal expenses, litigation, consulting, marketing, and other related expenses. Accrued taxes include sales, excise and other taxes owed. Other accrued expenses include the fair value of deferred share units outstanding to directors and other general expenses.

(l)Leases

The Company enters into leases in the normal course of business, primarily for the land-use rights, office premises, and equipment used in the production of its products. At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company performs an analysis over the classification of the lease agreement as either an operating lease or finance lease.

A right-of-use asset and the related lease obligation associated with the lease are recorded at the inception of the lease. The right-of-use asset’s recorded amount is based on the present value of future lease payments over the lease term at the commencement date plus any initial direct costs incurred. If the rate implicit in the lease is not readily determinable for the Company’s operating leases, an incremental borrowing rate is generally used based on information available at the lease commencement date to determine the present value of future lease payments. Subsequent changes to these lease payments due to rate updates are recorded as lease expense in the period incurred. Leases with a term of 12 months or less are not recorded on the balance sheet as a lease.

The right-of-use asset is subject to impairment testing whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The leased asset is amortized over the shorter of the lease term or its estimated useful life if title does not transfer to the Company, while the leased asset is depreciated in accordance with the Company’s depreciation policy if the title is to eventually transfer to the Company.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

The Company’s lease agreements generally exclude non-lease components. As a result, non-lease components are accounted for separately for all classes of assets and expensed as incurred. In addition, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For finance leases, from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term, the right-of-use asset is amortized on a straight-line basis and the interest expense is recognized on the lease liability using the effective interest method. For operating leases, lease expense is recognized on a straight-line basis over the term of the lease and presented as a single charge in the consolidated statements of net income (loss) and comprehensive income (loss).

(m)Derivative liabilities

For financial instruments classified as derivatives that are not designated as hedging instruments or do not qualify for hedge accounting, changes in fair value are recorded in the consolidated statements of net income (loss) and comprehensive income (loss) each period. The Company does not enter into or hold derivative financial instruments for trading or speculative purposes. Derivative liabilities are initially recognized at fair value at the date on which the derivative contract was entered into. Any attributable transaction costs are recognized in net income (loss) as incurred. Subsequent to initial recognition, derivative liabilities are measured 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). For more details on derivative liabilities consisting of the Altria Warrant, Pre-emptive Rights, and certain Top-up Rights, see Note 8 “Derivative Liabilities.”

(n)Capital stock

Capital stock is presented at the fair value at the time of issuance of the shares issued. Costs related to the issuance of shares are reported in equity, net of tax, as a deduction from the issuance proceeds.

(o)Revenue recognition

The Company’s contracts with customers for the sale of dried cannabis, cannabis oil, cannabinoid-derived products and “hemp” (as defined in the U.S. Agricultural Improvement Act of 2018 “U.S. hemp”) derived personal care products consist of one performance obligation. The Company has concluded that revenue from the sale of these products should be recognized at the point in time when control is transferred to the customer, which is upon shipment or delivery, depending on the contract. For consumer sales in the United States segment (the “U.S. segment”), control passes to the customer upon shipment and, thus, revenue is recognized upon the transfer of goods to the shipping carrier in accordance with the terms of service agreed to by the customer at the time of purchase. Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer.

Net revenue before excise taxes from sale of goods, as presented in the consolidated statements of net income (loss) and comprehensive income (loss), represents revenue from the sale of goods less expected price discounts, allowances for customer returns and other forms of consideration paid to customers. Net revenue before excise taxes excludes excise taxes, which the Company pays as principal, and excludes duties and taxes collected on behalf of third parties. Excise taxes are a production tax classified as government remittances payable, which when applicable, become payable when a product is delivered to the customer and are not directly related to the value of revenue. Refer to Note 12 “Segment Information and Disaggregated Net Revenue” for further information on disaggregated revenue.

The Company treats shipping and handling activities as a fulfillment cost, classified as cost of sales. Accordingly, the Company accrues all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment. Within the Company’s Rest of World segment (the “ROW segment”), dried cannabis sales outside of Canada may include profit sharing arrangements with distributors which give rise to variable consideration. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated using the expected value method, based on the Company’s historical information, at contract inception. The Company’s payment terms vary by customer and product type.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

(p)Research and development

The Company has research and development centers in Canada and Israel which perform scientific research on the interaction of cannabinoids as well as strain development, growing conditions, extraction technology, and biosynthesis. In Canada, fermentation and production related research is performed to further strategic initiatives around rare cannabinoids. In addition, the Company has a collaboration and license agreement with Ginkgo (the “Ginkgo Collaboration Agreement”) to research, produce, and commercialize cultured cannabinoids. Technological feasibility is considered to be established once productivity targets or commercialization are achieved, at which point the exclusive license is recognized at cost less impairment charges. As of the acquisition date of each exclusive license, cost less impairment charges is equal to the fair value. Refer to Note 6 “Goodwill and Intangible Assets, net”for more information on the Ginkgo Collaboration Arrangement. Research and development costs associated with these collective efforts are expensed as incurred as part of operating expenses in the Company’s consolidated statements of net income (loss) and comprehensive income (loss).

(q)Advertising costs

Advertising costs include costs to sell the Company’s products and are expensed as incurred through sales and marketing expenses in the consolidated statements of net income (loss) and comprehensive income (loss). Advertising costs were $11,514, $6,087 and $1,287 for the years ended December 31, 2021, 2020, and 2019, respectively.

(r)Share-based compensation

As described in more detail below, the Company has five share-based compensation plans under which awards have been made: the 2020 Omnibus Plan, the 2018 Stock Option Plan, the 2015 Stock Option Plan, the Employment Inducement Award Plan and the DSU Plan (each as defined below).

Share-based awards consists of equity-settled share-based awards such as stock options and restricted share units (“RSUs”) that are issued to eligible employees, non-executive directors, and non-employees. Cash-settled deferred share units (“DSUs”) that are issued to non-executive directors under the DSU Plan are recorded in accrued liabilities with the fair value adjustment recorded in other income.

Equity instruments granted are initially measured at fair value on the grant date. The fair value of the stock options is determined using the Black-Scholes option pricing model. The fair value of RSUs and DSUs are determined using the market price of the Company’s common shares. This is recognized on a straight-line basis in the consolidated statements of net income (loss) and comprehensive income (loss) over the vesting period for employees, and over the contractual term for non-employees. The fair value of the payout of cash-settled DSUs is determined at each reporting date based on the fair value of the Company’s common shares at the reporting date and is recorded within other liabilities. The related costs for all equity-settled share-based awards are reflected in additional paid-in capital until the awards are settled or exercised. Upon settlement or exercise, shares are issued and the amount previously reflected in the additional paid-in capital is, along with any proceeds paid upon settlement or exercise, credited to share capital. Forfeitures are estimated at the time of grant, and the Company revises these estimates in subsequent periods if there is a difference in actual forfeitures and the estimates.

(s)Impairment of long-lived assets

The Company reviews its long-lived assets, such as property, plant and equipment and definite-lived intangible assets, for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment. In accordance with ASC Topic 360, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying amount may not be recoverable. The Company periodically reviews for indicators and, if indicators are present, tests the carrying amount of long-lived assets, assessing their fair values based on estimated undiscounted cash flows over their remaining estimated useful lives. The Company groups assets at the lowest level for which cash flows are separately identifiable, referred to as an asset group. If the carrying amount of an asset (or asset group) exceeds its estimated undiscounted future cash flows, an impairment charge is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on discounted cash flows.

(t)Impairment of goodwill and indefinite-lived intangible assets

Goodwill and indefinite-lived intangible assets are not amortized. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying amount in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The Company performs an impairment test annually in the fourth quarter by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company determined that it has two segments: the U.S. segment and the Rest of World segment.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

(u)Income taxes

The Company uses the liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the year that includes the enactment date. The Company determines deferred tax assets including net operating losses and liabilities, based on temporary differences between the book and tax bases of assets and liabilities.

A valuation allowance is established to reduce some or all net deferred tax assets to amounts that are more likely than not to be realized. The Company considers all available evidence, both positive and negative, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies, in assessing the need for a valuation allowance.

The Company has a full valuation allowance against its net deferred tax assets, and has concluded, based on the weight of all available evidence, that it is more likely than not that the net deferred tax assets will not be realized, primarily due to the historical net operating losses. The valuation allowance against the net deferred tax assets does not in any way impact the Company’s ability to use future tax deductions such as the Company’s net operating loss carryforwards; rather, the valuation allowance indicates, according to the provisions of Accounting Standards Codification (“ASC”) 740, Income Taxes, it is more likely than not that the deferred tax assets will not be realized. The valuation allowance that was established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that the net deferred tax assets will be realized. The Company’s income tax expense for future periods will be reduced to the extent of corresponding decreases in our valuation allowance. There is uncertainty regarding any future realization of the benefit by the Company of all or part of our net deferred tax assets.

Judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The Company uses a two-step approach for evaluating uncertain tax positions. Step one, recognition, requires us to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. If a tax position is not considered “more likely than not” to be sustained, no benefits of the position are recognized. If we determine that a position is “more likely than not” to be sustained, then we proceed to step two, measurement, which is based on the largest amount of benefit which is more likely than not to be realized on effective settlement. This process involves estimating our actual current tax exposure, including assessing the risks associated with income tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. If actual results differ from our estimates, our net operating loss and credit carryforwards, to the extent not covered by a valuation allowance, could be materially impacted in the period which such determination is made.

The Company recognizes uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense in the consolidated statements of net income (loss) and comprehensive income (loss). Accrued interest and penalties are included in accounts payable and other liabilities in the consolidated balance sheets.

(v)Foreign currency

The Company’s functional currency is the Canadian dollar (“C$”) and its reporting currency is the U.S. dollar. Functional currencies for the entities in these consolidated financial statements are their respective local currencies, including C$, Australian dollars (“A$”) and Israeli New Shekel (“ILS”). All assets and liabilities of operations with a functional currency other than the U.S. dollar are translated at period-end currency exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss), net of tax. Revenues and expenses of operations, as well as all cash flows, with a functional currency other than the U.S. dollar are translated at the average exchange rates for the period. Transaction gains and losses resulting from changes in foreign currency exchange rates are recorded in either cost of sales, general and administrative expenses, or other, net in the consolidated statements of net income (loss) and comprehensive income (loss).

(w)Segments

Cronos Group reports through two segments: the U.S. segment and the ROW segment. These two segments represent the geographic regions in which the Company operates and the different product offerings within each geographic region. Refer to Note 12 “Segment Information and Disaggregated Net Revenue” for additional information.

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Cronos Group Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020, and 2019

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

Table of Contents

(x)Earnings (loss) per share

The Company presents basic and diluted earnings (loss) per share data for its common shares. Basic earnings (loss) per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potentially dilutive common shares.

(y)Fair value measurements

The carrying amount of the Company’s cash and cash equivalents, accounts receivable, other receivables, loans receivable, account payables and other liabilities approximate fair value, given their short-term nature. Cronos Group uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities, noted as Level 1 measurements, and the lowest priority to unobservable inputs, noted as Level 3 measurements.

The following are the three levels of inputs used to measure fair value:

•Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets and liabilities.

•Level 2 – valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 – valuation techniques using the inputs for the asset or liability that are not based on observable market data.

The Company’s policy for determining when transfers between levels of the fair value hierarchy occur is based on the date of the event or changes in circumstances that caused the transfer.

(z)Assets held for sale and discontinued operations

In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph ASC 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and other liabilities are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), are reported as components of net income (loss) separate from the net income (loss) of continuing operations.

During the year ended December 31, 2020, Original B.C. Ltd. (“OGBC”), formerly included within the Rest of World segment, met the criteria for “held-for-sale”. As a result, the Company has reflected amounts relating to OGBC as a disposal group classified as held-for-sale on the consolidated balance sheet and included as part of discontinued operations on the consolidated statements of net income (loss) and comprehensive income (loss) for all periods presented. OGBC is no longer included in the segment reporting following the reclassification to discontinued operations. During the year ended December 31, 2021, the Company sold its OGBC assets previously classified as held-for-sale. Discontinued operations are described in further detail in Note 16 “Held-For-Sale Assets and Discontinued Operations.”

(aa)Adoption of new accounting pronouncements

On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU No. 2020-01”). ASU No. 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method as well as measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU No. 2020-01 did not have an impact on the Company’s consolidated financial statements.

On January 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application of U.S. GAAP-related changes in enacted tax laws or rates and employee stock option plans. The adoption of ASU No. 2019-12 did not have an impact on the Company’s consolidated financial statements.

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Cronos Group Inc.