SEC Filing | The Cronos Group

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cron-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 001-38403

__________________________

CRONOS GROUP INC.

(Exact name of registrant as specified in its charter)

__________________________


British Columbia, Canada						N/A
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification No.)

111 Peter St. Suite 300
Toronto, Ontario						M5V 2H1
(Address of principal executive offices)						(Zip Code)

416-504-0004

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, no par value

CRON

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of May 9, 2022, there were 375,579,171 common shares of the registrant issued and outstanding.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Item 4.

Controls and Procedures.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.

Defaults upon Senior Securities.

Item 4.

Mine Safety Disclosures.

Item 5.

Other Information.

Item 6.

Exhibits.

Unless otherwise noted or the context indicates otherwise, references in this Quarterly Report on Form 10-Q (this “Quarterly Report”) to the “Company”, “Cronos Group”, “we”, “us” and “our” refer to Cronos Group Inc., its direct and indirect wholly owned subsidiaries and, if applicable, its joint ventures and investments accounted for by the equity method; the term “cannabis” means the plant of any species or subspecies of genus Cannabis and any part of that plant, including all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers; the term “U.S. hemp” has the meaning given to term “hemp” in the U.S. Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), including hemp-derived cannabidiol (“CBD”); and the term “U.S. Schedule I cannabis” means cannabis excluding U.S. hemp.

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

All currency amounts in this Quarterly Report are stated in U.S. dollars, which is our reporting currency, unless otherwise noted. All references to “dollars” or “$” are to U.S. dollars; all references to “C$” are to Canadian dollars; all references to “A$” are to Australian dollars; and all references to “ILS” are to New Israeli Shekels.

(Exchange rates are shown as C$ per $)

As of

March 31, 2022

March 31, 2021

December 31, 2021

Average rate

1.2665

N/A

Spot rate

1.2507

1.2563

1.2746

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

PART I
FINANCIAL INFORMATION

Table of Contents

Item 1. Financial Statements


Table of Contents

Condensed Consolidated Balance Sheets as of March 31 , 202 2 (Unaudited) and December 31, 2021			4
Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31 , 202 2 and 202 1 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three months ended March 3 1 , 202 2 and 202 1 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31 , 202 2 and 202 1 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8


Cronos Group Inc.
Condensed Consolidated Balance Sheets

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


	As of March 31, 2022		As of December 31, 2021
Assets	(Unaudited)		(Audited)
Current assets
Cash and cash equivalents	$	861,535	$	886,973
Short-term investments	119,933		117,684
Accounts receivable, net	25,814		22,067
Other receivables	3,297		5,765
Current portion of loans receivable, net	6,235		5,460
Inventory, net	37,054		32,802
Prepaids and other current assets	9,537		8,967

Total current assets	1,063,405		1,079,718
Investments in equity accounted investees, net	17,084		16,764
Other investments	111,761		118,392
Non-current portion of loans receivable, net	81,529		80,635
Property, plant and equipment, net	71,828		74,070
Right-of-use assets	6,325		8,882
Goodwill	1,119		1,098
Intangible assets, net	17,880		18,079
Other assets	70		100
Total assets	$	1,371,001	$	1,397,738

Liabilities
Current liabilities
Accounts payable	$	10,904	$	11,218
Accrued liabilities	23,076		26,069
Current portion of lease obligation	2,173		2,711
Derivative liabilities	4,099		14,375
Total current liabilities	40,252		54,373
Due to non-controlling interests	1,888		1,913
Non-current portion of lease obligation	7,094		7,095
Deferred income tax liability	396		81
Total liabilities	49,630		63,462


Shareholders’ equity
Share capital (authorized for issue as of March 31, 2022 and December 31, 2021: unlimited; shares outstanding as of March 31, 2022 and December 31, 2021: 375,299,980 and 374,952,693, respectively)	596,368		595,497
Additional paid-in capital	35,365		32,465
Retained earnings	626,778		659,416
Accumulated other comprehensive income	66,088		49,865
Total equity attributable to shareholders of Cronos Group	1,324,599		1,337,243
Non-controlling interests	(3,228)		(2,967)
Total shareholders’ equity	1,321,371		1,334,276
Total liabilities and shareholders’ equity	$	1,371,001	$	1,397,738

See notes to condensed consolidated interim financial statements.


Cronos Group Inc.
Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)

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


	Three months ended March 31,
	2022		2021
Net revenue, before excise taxes	$	29,406	$	14,654
Excise taxes	(4,373)		(2,043)
Net revenue	25,033		12,611
Cost of sales	18,107		15,574

Gross profit	6,926		(2,963)
Operating expenses
Sales and marketing	5,012		10,254
Research and development	4,039		5,102
General and administrative	22,368		21,906
Restructuring costs	3,084		—
Share-based compensation	3,686		2,499
Depreciation and amortization	1,293		735

Impairment loss on long-lived assets	3,493		1,741
Total operating expenses	42,975		42,237
Operating loss	(36,049)		(45,200)
Other income (expense)
Interest income, net	2,046		2,329
Gain (loss) on revaluation of derivative liabilities	10,419		(116,874)
Share of loss from equity accounted investments	—		(1,643)
Gain (loss) on revaluation of financial instruments	4,268		(200)
Impairment loss on other investments	(11,238)		—
Foreign currency transaction loss	(1,872)		—
Other, net	135		(16)
Total other income (expense)	3,758		(116,404)
Loss before income taxes	(32,291)		(161,604)
Income tax expense	362		—
Loss from continuing operations	(32,653)		(161,604)
Loss from discontinued operations	—		(21)
Net loss	(32,653)		(161,625)
Net loss attributable to non-controlling interest	(15)		(313)
Net loss attributable to Cronos Group	$	(32,638)	$	(161,312)

Comprehensive loss
Net loss	$	(32,653)	$	(161,625)
Other comprehensive income
Foreign exchange gain on translation	15,977		16,284
Comprehensive loss	(16,676)		(145,341)
Comprehensive income (loss) attributable to non-controlling interests	(261)		826
Comprehensive loss attributable to Cronos Group	$	(16,415)	$	(146,167)

Net loss from continuing operations per share
Basic - continuing operations	$	(0.09)	$	(0.44)
Diluted - continuing operations	(0.09)		(0.44)

See notes to condensed consolidated interim financial statements.


Cronos Group Inc.
Condensed Consolidated Statements of Changes in Equity
For the three months ended March 31, 2022 and 2021
(In thousands of U.S. dollars, except share amounts, unaudited)			Table of Contents


	Number of shares	Share capital		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income		Non-controlling interests		Total shareholders’ equity
Balance as of January 1, 2022	374,952,693	$	595,497	$	32,465	$	659,416	$	49,865	$	(2,967)	$	1,334,276


Activities relating to share-based compensation	347,287	871		2,900		—		—		—		3,771
Net loss	—	—		—		(32,638)		—		(15)		(32,653)
Foreign exchange gain (loss) on translation	—	—		—		—		16,223		(246)		15,977
Balance as of March 31, 2022	375,299,980	$	596,368	$	35,365	$	626,778	$	66,088	$	(3,228)	$	1,321,371


	Number of shares	Share capital		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Non-controlling interests		Total shareholders’ equity
Balance as of January 1, 2021	360,253,332	$	569,260	$	34,596	$	1,064,509	$	42,999	$	(3,196)	$	1,708,168


Activities relating to share-based compensation	11,403,258	15,652		(2,506)		(7,694)		—		—		5,452
Net loss	—	—		—		(161,312)		—		(313)		(161,625)
Foreign exchange gain on translation	—	—		—		—		15,145		1,139		16,284
Balance as of March 31, 2021	371,656,590	$	584,912	$	32,090	$	895,503	$	58,144	$	(2,370)	$	1,568,279

See notes to condensed consolidated interim financial statements.


Cronos Group Inc.
Condensed Consolidated Statements of Cash Flows

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


	Three months ended March 31,
	2022		2021
Operating activities
Net loss	$	(32,653)	$	(161,625)
Adjustments to reconcile net loss to cash used in operating activities:
Share-based compensation	3,686		2,499
Depreciation and amortization	2,824		1,880

Impairment loss on long-lived assets	3,493		1,741
Impairment loss on other investments	11,238		—
Share of loss from investments in equity accounted investees	—		1,643
Gain (loss) on revaluation of derivative liabilities	(10,419)		116,874

Expected credit losses on long-term financial assets	—		416
Foreign currency transaction loss	1,872		—
Other non-cash operating activities, net	(4,467)		106
Changes in operating assets and liabilities:
Accounts receivable, net	(3,530)		1,931
Other receivables	2,435		5,687
Prepaids and other current assets	(1,195)		(3,737)
Inventory	(3,867)		(742)
Accounts payable	(178)		(3,119)
Accrued liabilities	(3,150)		(10,169)
Cash flows used in operating activities	(33,911)		(46,615)
Investing activities




Proceeds from dissolution of joint venture	44		—
Proceeds from repayment of loans receivable	790		—
Purchase of property, plant and equipment	(711)		(6,680)
Purchase of intangible assets	(23)		(392)

Advances on loans receivable	—		(2,645)
Cash flows provided by (used in) investing activities	100		(9,717)
Financing activities
Withholding taxes paid on share-based awards	(534)		(8,673)
Other financing activities, net	70		10
Cash flows used in financing activities	(464)		(8,663)
Effect of foreign currency translation on cash and cash equivalents	8,837		11,422
Net change in cash and cash equivalents	(25,438)		(53,573)
Cash and cash equivalents, beginning of period	886,973		1,078,023
Cash and cash equivalents, end of period	$	861,535	$	1,024,450
Supplemental cash flow information

Interest received	822		1,157
Income taxes paid	66		624

See notes to condensed consolidated interim financial statements.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

1. Background, Basis of Presentation and 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+™.

(b)Basis of presentation

The interim condensed consolidated financial statements of Cronos Group are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for any other reporting period.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”).

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

(c)Concentration of risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its operating activities, primarily accounts receivable and other receivables, and its investing activities, including cash held with banks and financial institutions, short-term investments, loans receivable, and advances to joint ventures. The Company’s maximum exposure to this risk is equal to the carrying amount of these financial assets, which amounted to $1,098,413 and $1,118,684 as of March 31, 2022 and December 31, 2021, respectively.

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on the days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Accounts receivable are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan and a failure to make contractual payments for a period of greater than 120 days past due. As of March 31, 2022 and December 31, 2021, the Company had $9 and $8, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the Rest of World (“ROW”) segment. As of March 31, 2022 and December 31, 2021, the Company had $138 and $104, respectively, in expected credit losses that have been recognized on receivables from contracts with customers in the United States (“U.S.”) segment.

As of March 31, 2022, the Company assessed that there is a concentration of credit risk, as 72% of the Company’s accounts receivable were due from three customers with an established credit history with the Company. As of December 31, 2021, 88% of the Company’s accounts receivable were due from four customers with an established credit history with the Company.

The Company sells products to a limited number of major customers. Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s revenue. During the three months ended March 31, 2022, the Company earned a total net revenue before excise taxes of $9,833 from two major customers in the ROW segment, together accounting for 33% of the Company’s total net revenue before excise taxes. During the three months ended March 31, 2021, the Rest of World segment earned a total net revenue before excise taxes of $8,963 from four major customers, together accounting for 61% of the Company’s total net revenues before excise taxes. During the three months ended March 31, 2022 and 2021, the U.S. segment had no major customers.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

(d)Segment information

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

(e)Adoption of new accounting pronouncements

On January 1, 2022, the Company adopted ASU No. 2020-06, Debt –Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU No. 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The adoption of ASU No. 2020-06 did not have an impact on the Company’s interim condensed consolidated financial statements.

(f)New accounting pronouncements not yet adopted

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASU No. 2022-02”). ASU No. 2022-02 eliminates the existing troubled debt restructuring recognition and measurement guidance, and instead aligns the accounting treatment to that of other loan modifications. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU No. 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and is to be adopted prospectively. The Company does not expect the adoption of ASU No. 2022-02 to have a material impact on its condensed consolidated financial statements.

2. Inventory, net

Inventory, net is comprised of the following items:


	As of March 31, 2022		As of December 31, 2021
Raw materials	$	8,523	$	9,211
Work-in-progress	12,353		12,405
Finished goods	15,587		10,778
Supplies and consumables	591		408
Total	$	37,054	$	32,802

3. Investments

(a)Variable interest entities and investments in equity accounted investees, net

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


	Ownership interest	As of March 31, 2022		As of December 31, 2021

Cronos Growing Company Inc. (“Cronos GrowCo”)	50%	$	17,084	$	16,764
NatuEra S.à.r.l. (“Natuera”)	50%	—		—

		$	17,084	$	16,764


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The following is a summary of the Company’s share of net losses from equity investments accounted for under the equity method of accounting:


	For the three months ended March 31,
		2022		2021



Cronos GrowCo		$	—	$	(299)

Natuera		—		(1,344)

		$	—	$	(1,643)

(b)Other investments

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

PharmaCann, Inc.

In 2021, the Company purchased an option (the “PharmaCann Option”) to acquire 473,787 shares of Class A Common Stock of PharmaCann Inc. (“PharmaCann”), a vertically integrated cannabis company in the United States, which represented an ownership interest of approximately 10.5% as of December 31, 2021. The PharmaCann Option is classified as an equity security without a readily determinable fair value. The Company has elected to measure the fair value of the PharmaCann Option at cost less impairment, if any, and subsequently adjusted for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. On February 28, 2022, PharmaCann closed the previously announced transaction with LivWell Holdings, Inc. (“LivWell”) pursuant to which PharmaCann acquired LivWell (the “LivWell Transaction”). LivWell is a multi-state cannabis cultivation and retail leader based in Colorado. As a result of the LivWell Transaction, the Company’s ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.4%. The decrease in ownership percentage does not materially affect the Company’s rights under the PharmaCann Option.

During the three months ended March 31, 2022, the Company identified indicators of impairment related to the PharmaCann Option and conducted an analysis comparing the PharmaCann Option’s carrying amount to its estimated fair value. The fair value was estimated using a combination of the market and income approaches. Under the income approach, significant inputs used in the discounted cash flow method include discount rate, growth rates, and cash flow projections. As a result of this analysis, the Company recorded a non-cash impairment charge of $11,238, as the difference between the carrying amount of the PharmaCann Option and its estimated fair value in the condensed consolidated statements of net income (loss) and comprehensive income (loss).

Cronos Australia Limited

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

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


	As of December 31, 2021		Unrealized gain		Impairment charges		Foreign exchange effect		As of March 31, 2022
PharmaCann	$	110,392	$	—	$	(11,238)	$	—	$	99,154
Cronos Australia	8,000		4,196		—		411		12,607
	$	118,392	$	4,196	$	(11,238)	$	411	$	111,761

During the three months ended March 31, 2021, the Company had no gain or loss on revaluation of other investments. As of March 31, 2022 and December 31, 2021, the Company did not hold any additional other investments.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

4. Loans Receivable, net

Loans receivable, net consists of the following:


	As of March 31, 2022		As of December 31, 2021

GrowCo Facility(i)	$	3,198	$	3,138
Add: Current portion of accrued interest	3,037		2,322
Total current portion of loans receivable	6,235		5,460
GrowCo Facility(i)	64,801		64,367
Mucci Promissory Note	14,414		14,019
Cannasoul Collaboration Loan(ii)	2,192		2,249
Add: Long-term portion of accrued interest	122		—
Total long-term portion of loans receivable	81,529		80,635
Total loans receivable, net	$	87,764	$	86,095

(i)On August 23, 2019, the Company, as lender, and Cronos GrowCo, as borrower, entered into a senior secured credit agreement for an aggregate principal amount of C$100,000 (the “GrowCo Facility”). In August 2021, the GrowCo Facility was amended to increase the aggregate principal amount available to C$105,000. As of March 31, 2022 and December 31, 2021, Cronos GrowCo had outstanding borrowings of C$103,000 ($82,354) and C$104,000 ($81,598), respectively, from the GrowCo Facility. As of March 31, 2022, Cronos GrowCo had repaid C$1,000 ($800) under the terms of the GrowCo Facility. The available borrowing capacity under the GrowCo Facility was C$1,000 ($800) at March 31, 2022 and December 31, 2021.

(ii)As of March 31, 2022 and December 31, 2021, CLS has received ILS 8,297 ($2,600) and ILS 8,297 ($2,664), respectively, from the Cannasoul Collaboration Loan.

Expected credit loss allowances on the Company’s long-term financial assets was comprised of the following items:


	As of January 1, 2022		Increase (decrease)(i)		Foreign exchange effect		As of March 31, 2022
GrowCo Facility	$	14,089	$	(4)	$	269	$	14,354

Mucci Promissory Note	90		1		2		93
Cannasoul Collaboration Loan	415		3		(9)		409
	$	14,594	$	—	$	262	$	14,856


	As of January 1, 2021		Increase (decrease)(i)		Foreign exchange effect		As of March 31, 2021
GrowCo Facility	$	1,546	$	—	$	23	$	1,569
Natuera Series A Loan(ii)	721		416		14		1,151
Mucci Promissory Note	270		—		4		274
Cannasoul Collaboration Loan	26		—		—		26
	$	2,563	$	416	$	41	$	3,020

(i)During the three months ended March 31, 2022 and 2021, $nil and $416, respectively, were recorded to general and administrative expenses on the condensed consolidated statements of net income (loss) and comprehensive income (loss) as a result of adjustments to our expected credit losses.

(ii)As of March 31, 2022 and December 31, 2021, loans receivable, net for the Natuera Series A Loan was $nil.

5. Derivative Liabilities

As of March 31, 2022, Altria Group Inc. (“Altria”) beneficially held 156,573,537 of the Company’s common shares, an approximate 42% ownership interest in the Company (calculated on a non-diluted basis) and one warrant of the Company (the “Altria Warrant”). As summarized in this note, if exercised in full on such date, the exercise of the Altria Warrant would have resulted in Altria holding a total ownership interest in the Company of approximately 52% (calculated on a non-diluted basis). Pursuant to the investor rights agreement between the Company and Altria (the “Investor Rights Agreement”), entered into in connection with the closing of Altria’s investment in the Company (the “Altria Investment”) pursuant to a subscription agreement dated December 7, 2018, the Company granted Altria certain rights, among others, summarized in this note.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The summaries below are qualified entirely by the terms and conditions fully set out in the Investor Rights Agreement and the Altria Warrant, as applicable.

a.The Altria Warrant entitles the holder, subject to certain qualifications and limitations, to subscribe for and purchase up to an additional 10% of the common shares of Cronos (83,399,995 common shares as of March 31, 2022) at a per share exercise price of C$19.00, which expires on March 8, 2023.

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

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

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


	As of January 1, 2022		Revaluation gain		Exercise of rights		Foreign exchange effect		As of March 31, 2022
(a) Altria Warrant	$	13,720	$	(10,011)	$	—	$	136	$	3,845
(b) Pre-emptive Rights	180		(115)		—		2		67
(c) Top-up Rights	475		(293)		—		5		187
	$	14,375	$	(10,419)	$	—	$	143	$	4,099


	As of January 1, 2021		Revaluation loss		Exercise of rights		Foreign exchange effect		As of March 31, 2021
(a) Altria Warrant	$	138,858	$	92,964	$	—	$	2,834	$	234,656
(b) Pre-emptive Rights	12,095		7,833		—		245		20,173
(c) Top-up Rights	12,457		16,077		(11,278)		215		17,471
	$	163,410	$	116,874	$	(11,278)	$	3,294	$	272,300

Fluctuations in the Company’s share price are a primary driver for the changes in the derivative valuations during each reporting period. As the share price decreases for each of the related derivative instruments, the liability of the instrument generally decreases. Share price is one of the significant observable inputs used in the fair value measurement of each of the Company’s derivative instruments.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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


	As of March 31, 2022
	Altria Warrant	Pre-emptive Rights	Top-up Rights
Share price at valuation date (per share in C$)	$4.85	$4.85	$4.85
Subscription price (per share in C$)	$19	$16.25	$16.25
Weighted-average risk-free interest rate(i)	1.84%	1.31%	1.38%
Weighted-average expected life (in years)(ii)	0.94	0.50	0.75
Expected annualized volatility(iii)	71%	71%	71%
Expected dividend yield	—%	—%	—%


	As of December 31, 2021
	Altria Warrant	Pre-emptive Rights	Top-up Rights
Share price at valuation date (per share in C$)	$4.98	$4.98	$4.98
Subscription price (per share in C$)	$19.00	$16.25	$16.25
Weighted-average risk-free interest rate(i)	0.79%	0.39%	0.50%
Weighted-average expected life (in years)(ii)	1.18	0.50	0.80
Expected annualized volatility(iii)	80%	80%	80%
Expected dividend yield	—%	—%	—%

(i)The risk-free interest rate was based on Bank of Canada government treasury bills and bonds with a remaining term equal to the expected life of the derivative liabilities. As of March 31, 2022 and December 31, 2021, the risk-free interest rate uses a range of approximately 0.60% to 2.28% and 0.16% to 1.10%, respectively, for the Pre-emptive Rights and Top-up Rights.

(ii)The expected life represents the period of time, in years, that the derivative liabilities are expected to be outstanding. The expected life of the Pre-emptive Rights and Top-up Rights is determined based on the expected term of the underlying options, warrants, and shares, to which the Pre-emptive Rights and Top-up Rights are linked. As of March 31, 2022 and December 31, 2021, the expected life uses a range of approximately 0.25 years to 3.50 years and 0.25 years to 3.75 years, respectively, for the Pre-emptive Rights and Top-up Rights.

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

The following table quantifies each of the significant inputs described above and provides a sensitivity analysis of the impact on the reported values of the derivative liabilities. The sensitivity analysis for each significant input is performed by assuming a 10% decrease in the input while other significant inputs remain constant at management’s best estimate as of the respective dates. While a decrease in the inputs noted below would cause a decrease in the carrying amount of the derivative liability, there would also be an equal and opposite impact on net income (loss).


	10% decrease as of March 31, 2022
	Altria Warrant		Pre-emptive Rights		Top-up Rights
Share price	$	1,445	$	34	$	53
Weighted-average expected life	1,114		65		60
Expected annualized volatility	1,930		41		67


	10% decrease as of December 31, 2021
	Altria Warrant		Pre-emptive Rights		Top-up Rights
Share price	$	3,970	$	80	$	123
Weighted-average expected life	2,971		171		133
Expected annualized volatility	5,402		96		155

These inputs are classified as Level 3 on the fair value hierarchy and are subject to volatility and several factors outside the Company’s control, which could significantly affect the fair value of these derivative liabilities in future periods.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

6. Restructuring

In the first quarter of 2022, the Company initiated a strategic plan to realign the business around its brands, centralize functions and evaluate the Company’s supply chain (the “Realignment”). As part of the Realignment, on February 28, 2022, the Board approved plans to leverage the Company’s strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting its production facility in Stayner, Ontario, Canada (the “Stayner Facility”). The organizational and cost reduction initiatives being undertaken are intended to position the Company to drive profitable and sustainable growth over time.

The Company expects to spend approximately $5,800 in connection with the Realignment and the planned exit of the Stayner Facility, of which $3,084 has been incurred as of March 31, 2022. Estimated charges related to the exit of the Stayner Facility include employee-related costs such as severance, relocation and other termination benefits, as well as contract termination and other related costs. The Company expects to incur approximately $2,700 in additional charges related to the planned exit of the Stayner Facility, primarily in the second half of 2022.

In addition, the Company anticipates capital expenditures of approximately $2,500 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.

The Company incurred the following restructuring costs by reportable segment:


	Three months ended March 31,
	2022		2021
Rest of World	$	2,031	$	—
United States	1,053		—
Total	$	3,084	$	—

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


	Accrual as of December 31, 2021		Year-to-date expense		Payments		Accrual as of March 31, 2022
Employee termination benefits	$	—	$	2,503	$	(1,249)	$	1,254

Other restructuring costs	—		581		(437)		144
Total	$	—	$	3,084	$	(1,686)	$	1,398

7. Share-based Compensation

(a)Share-based award plans

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

The following table summarizes the total share-based compensation expense associated with the Company’s stock options and RSUs:


	Three months ended March 31,
	2022		2021
Stock options	$	1,729	$	2,064
RSUs	1,957		435
Total share-based compensation	$	3,686	$	2,499

During the three months ended March 31, 2022, the Company recognized $1,583 of share-based compensation expense related to the severance of certain executives.


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

(b)Stock options

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

The following is a summary of the changes in stock options:


	Weighted-average exercise price (C$) (i)		Number of options	Weighted-average remaining contractual term (years)
Balance as of January 1, 2022	$	7.75	8,939,330	2.70

Exercise of options	3.14		(1,356,875)
Cancellation, forfeiture and expiry of options	12.46		(55,791)
Balance as of March 31, 2022	$	8.55	7,526,664	1.72
Exercisable as of March 31, 2022	$	7.96	4,654,574	1.14


	Weighted-average exercise price (C$) (i)		Number of options	Weighted-average remaining contractual term (years)
Balance as of January 1, 2021	$	5.40	13,755,148	2.30

Exercise of options	2.13		(5,230,550)
Cancellation, forfeiture and expiry of options	14.71		(25,771)
Balance as of March 31, 2021	$	7.38	8,498,827	2.82
Exercisable as of March 31, 2021	$	5.75	4,896,820	1.46

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

The following table summarizes stock options outstanding:


	As of March 31, 2022	As of December 31, 2021
2020 Omnibus Plan	2,900,000	2,900,000
2018 Stock Option Plan	1,523,449	1,550,074
2015 Stock Option Plan	3,103,215	4,489,256
Total stock options outstanding	7,526,664	8,939,330


Cronos Group Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

(c)Restricted share units

The following is a summary of the changes in RSUs:


	Weighted-average grant date fair value (C$)(i)		Number of RSUs
Balance as of January 1, 2022	$	9.22	1,225,870
Granted(i)	3.52		3,950,334
Vested and issued	10.81		(78,631)
Cancellation and forfeitures	7.92		(55,479)
Balance as of March 31, 2022	$	4.74	5,042,094


	Weighted-average grant date fair value (C$)(ii)		Number of RSUs
Balance as of January 1, 2021	$	7.66