SEC Filing | The Cronos Group

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cron-20230331

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, 2023

☐ 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 5, 2023, there were 380,815,921 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 United States (“U.S.”). Agricultural Improvement Act of 2018 (the “2018 Farm Bill”), including hemp-derived cannabidiol (“CBD”); and the term “U.S. Schedule I cannabis” means cannabis excluding U.S. hemp.

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

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

(Exchange rates are shown as C$ per $)

As of

March 31, 2023

March 31, 2022

December 31, 2022

Spot rate

1.3516

1.2507

1.3554

Year-to-date average rate

1.3520

1.2665

N/A

(Exchange rates are shown as ILS per $)

As of

March 31, 2023

March 31, 2022

December 31, 2022

Spot rate

3.5966

3.1906

3.5178

Year-to-date average rate

3.5319

3.1942

N/A

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 3 1 , 202 3 (Unaudited) and December 31, 202 2			4
Condensed Consolidated Statements of Net Loss and Comprehensive Loss for the three months ended March 3 1 , 202 3 and 202 2 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three months ended March 3 1 , 202 3 and 202 2 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 3 1 , 202 3 and 202 2 (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, 2023		As of December 31, 2022
Assets
Current assets
Cash and cash equivalents	$	413,667	$	764,644
Short-term investments	422,763		113,077
Accounts receivable, net	14,855		23,113
Other receivables	7,049		5,767
Current portion of loans receivable, net	5,570		8,890
Inventory, net	44,268		37,559
Prepaids and other current assets	7,967		7,106

Total current assets	916,139		960,156
Equity method investments, net	18,313		18,755
Other investments	62,833		70,993
Non-current portion of loans receivable, net	72,051		72,345
Property, plant and equipment, net	59,785		60,557
Right-of-use assets	2,038		2,273
Goodwill	1,036		1,033
Intangible assets, net	25,897		26,704
Other	1,483		193
Total assets	$	1,159,575	$	1,213,009

Liabilities
Current liabilities
Accounts payable	$	12,842	$	11,163
Income taxes payable	266		32,956
Accrued liabilities	14,332		22,268
Current portion of lease obligation	1,236		1,330
Derivative liabilities	80		15
Current portion due to non-controlling interests	375		384
Total current liabilities	29,131		68,116
Non-current portion due to non-controlling interests	1,370		1,383
Non-current portion of lease obligation	2,296		2,546
Deferred income tax liability	378		—
Total liabilities	33,175		72,045


Shareholders’ equity
Share capital (authorized for issue as of March 31, 2023 and December 31, 2022: unlimited; shares outstanding as of March 31, 2023 and December 31, 2022: 380,815,921 and 380,575,403, respectively)	612,235		611,318
Additional paid-in capital	44,044		42,682
Retained earnings	471,513		490,682
Accumulated other comprehensive income (loss)	1,537		(797)
Total equity attributable to shareholders of Cronos Group	1,129,329		1,143,885
Non-controlling interests	(2,929)		(2,921)
Total shareholders’ equity	1,126,400		1,140,964
Total liabilities and shareholders’ equity	$	1,159,575	$	1,213,009

See notes to condensed consolidated interim financial statements.


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

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


	Three months ended March 31,
		2023		2022
Net revenue, before excise taxes		$	27,203	$	29,406
Excise taxes		(7,059)		(4,373)
Net revenue		20,144		25,033
Cost of sales		17,764		18,107

Gross profit		2,380		6,926
Operating expenses
Sales and marketing		5,872		5,012
Research and development		2,041		4,039
General and administrative		12,379		22,368
Restructuring costs		—		3,084
Share-based compensation		2,551		3,686
Depreciation and amortization		1,533		1,293

Impairment loss on long-lived assets		—		3,493
Total operating expenses		24,376		42,975
Operating loss		(21,996)		(36,049)
Other income
Interest income, net		11,180		2,046
Gain (loss) on revaluation of derivative liabilities		(65)		10,419
Share of loss from equity method investments		(496)		—
Gain (loss) on revaluation of financial instruments		(7,758)		4,268
Impairment loss on other investments		—		(11,238)
Foreign currency transaction loss		(1,643)		(1,872)
Other, net		85		135
Total other income		1,303		3,758
Loss before income taxes		(20,693)		(32,291)
Income tax expense (benefit)		(1,436)		362


Net loss		(19,257)		(32,653)
Net loss attributable to non-controlling interest		(88)		(15)
Net loss attributable to Cronos Group		$	(19,169)	$	(32,638)

Comprehensive loss
Net loss		$	(19,257)	$	(32,653)
Other comprehensive income
Foreign exchange gain on translation		2,414		15,977
Comprehensive loss		(16,843)		(16,676)
Comprehensive loss attributable to non-controlling interests		(8)		(261)
Comprehensive loss attributable to Cronos Group		$	(16,835)	$	(16,415)

Net loss from continuing operations per share
Basic - continuing operations		$	(0.05)	$	(0.09)
Diluted - continuing operations		$	(0.05)	$	(0.09)

See notes to condensed consolidated interim financial statements.


Cronos Group Inc.
Condensed Consolidated Statements of Changes in Equity
For the three months ended March 31, 2023 and 2022
(In thousands of U.S. dollars, except share amounts, unaudited)


	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, 2023	380,575,403	$	611,318	$	42,682	$	490,682	$	(797)	$	(2,921)	$	1,140,964


Activities relating to share-based compensation	240,518	917		1,362		—		—		—		2,279
Net loss	—	—		—		(19,169)		—		(88)		(19,257)
Foreign exchange gain on translation	—	—		—		—		2,334		80		2,414
Balance as of March 31, 2023	380,815,921	$	612,235	$	44,044	$	471,513	$	1,537	$	(2,929)	$	1,126,400


	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, 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

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,
	2023		2022
Operating activities
Net loss	$	(19,257)	$	(32,653)
Adjustments to reconcile net loss to cash used in operating activities:
Share-based compensation	2,551		3,686
Depreciation and amortization	2,405		2,824

Impairment loss on long-lived assets	—		3,493
Impairment loss on other investments	—		11,238
Loss (gain) from investments	8,419		(4,196)
Loss (gain) on revaluation of derivative liabilities	65		(10,419)

Changes in expected credit losses on long-term financial assets	(764)		—
Foreign currency transaction loss	1,643		1,872
Other non-cash operating activities, net	(2,850)		(271)
Changes in operating assets and liabilities:
Accounts receivable, net	8,201		(3,530)
Other receivables	(1,282)		2,435
Prepaids and other current assets	(848)		(1,195)
Inventory	(6,824)		(3,867)
Accounts payable	1,555		(178)
Income taxes payable	(32,813)		—
Accrued liabilities	(7,894)		(3,150)
Cash flows used in operating activities	(47,693)		(33,911)
Investing activities
Purchase of short-term investments	(422,612)		—
Proceeds from short-term investments	113,355		—


Proceeds from repayment on loan receivables	6,249		790
Purchase of property, plant and equipment	(804)		(711)
Purchase of intangible assets	—		(23)
Other investing activities	—		44
Cash flows provided by (used in) investing activities	(303,812)		100
Financing activities
Withholding taxes paid on share-based awards	(743)		(534)
Other financing activities, net	—		70
Cash flows used in financing activities	(743)		(464)
Effect of foreign currency translation on cash and cash equivalents	1,271		8,837
Net change in cash and cash equivalents	(350,977)		(25,438)
Cash and cash equivalents, beginning of period	764,644		886,973
Cash and cash equivalents, end of period	$	413,667	$	861,535
Supplemental cash flow information
Interest paid	$	—	$	—
Interest received	$	7,558	$	822
Income taxes paid	$	32,932	$	66

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 Summary of Significant Accounting Policies

(a)Background

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

Cronos is an innovative global cannabinoid company committed to building disruptive intellectual property by advancing cannabis research, technology and product development. With a passion to responsibly elevate the consumer experience, Cronos is building an iconic brand portfolio. Cronos’ diverse international brand portfolio includes Spinach®, PEACE NATURALS® and Lord Jones®.

(b)Basis of presentation

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

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

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

(c)Segment information

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

(d)Concentration of risk

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

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


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

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

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

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

(e)Adoption of new accounting pronouncements

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

(f)New accounting pronouncements not yet adopted

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

2. Inventory, net

Inventory, net is comprised of the following items:


	As of March 31, 2023		As of December 31, 2022
Raw materials	$	8,540	$	7,421
Work-in-progress	15,263		15,646
Finished goods	19,719		13,503
Supplies and consumables	746		989
Total	$	44,268	$	37,559


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

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

3. Investments

(a)Equity method investments, net

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


	Ownership interest	As of March 31, 2023		As of December 31, 2022

Cronos Growing Company Inc. (“Cronos GrowCo”)	50%	$	18,313	$	18,755

		$	18,313	$	18,755

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


	For the three months ended March 31,
		2023		2022
Cronos GrowCo		$	(496)	$	—

		$	(496)	$	—

(b)Other investments

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

PharmaCann, Inc.

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

Vitura Health Limited (formerly known as Cronos Australia)

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


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

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

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


	As of January 1, 2023		Unrealized loss		Impairment charges		Foreign exchange effect		As of March 31, 2023
PharmaCann	$	49,000	$	—	$	—	$	—	$	49,000
Vitura	21,993		(7,923)		—		(237)		13,833
	$	70,993	$	(7,923)	$	—	$	(237)	$	62,833


	As of January 1, 2022		Unrealized gain		Impairment charges		Foreign exchange effect		As of March 31, 2022
PharmaCann	$	110,392	$	—	$	(11,238)	$	—	$	99,154
Vitura	8,000		4,196		—		411		12,607
	$	118,392	$	4,196	$	(11,238)	$	411	$	111,761

During the three months ended March 31, 2022, the Company identified adverse forecast changes in the financial performance of PharmaCann as indicators of impairment related to the PharmaCann Option and conducted analyses comparing the PharmaCann Option’s carrying amount to its estimated fair value. The fair value was estimated using a combination of the market and income approaches. Under the income approach, significant inputs used in the discounted cash flow method were the discount rate, growth rates, cash flow projections, and the timing of federal legalization of cannabis in the U.S. Under the market valuation approach, the key assumptions that require judgment under the Guideline Public Companies method are cash flow projections, selected multiples and the discount for lack of marketability. As a result of this analysis, the Company recorded a non-cash impairment charge of $11,238 during the three months ended March 31, 2022, as the difference between the carrying amount of the PharmaCann Option and its estimated fair value in the condensed consolidated statements of net loss and comprehensive loss.

4. Loans Receivable, net

Loans receivable, net consists of the following:


	As of March 31, 2023		As of December 31, 2022

GrowCo Credit Facility	$	4,933	$	4,427
Add: Current portion of accrued interest	637		4,463
Total current portion of loans receivable	5,570		8,890
GrowCo Credit Facility	56,594		56,898
Mucci Promissory Note	13,474		13,438
Cannasoul Collaboration Loan	1,793		1,837
Add: Long-term portion of accrued interest	190		172
Total long-term portion of loans receivable	72,051		72,345
Total loans receivable, net	$	77,621	$	81,235

Cronos GrowCo Credit Facility

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

Mucci Promissory Note

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


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

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

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

Cannasoul Collaboration Loan

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

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


	As of January 1, 2023		Increase (decrease)(i)		Foreign exchange effect		As of March 31, 2023
GrowCo Credit Facility	$	12,455	$	(770)	$	34	$	11,719

Mucci Promissory Note	89		2		—		91
Cannasoul Collaboration Loan	522		4		(12)		514
	$	13,066	$	(764)	$	22	$	12,324


	As of January 1, 2022		Increase (decrease)		Foreign exchange effect		As of March 31, 2022
GrowCo Credit 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

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

5. Derivative Liabilities

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

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

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

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

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


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

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

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

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

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


	As of January 1, 2023		Revaluation (gain) loss		Foreign exchange effect		As of March 31, 2023

Pre-emptive Rights	$	—	$	79	$	—	$	79
Top-up Rights	15		(14)		—		1
	$	15	$	65	$	—	$	80


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

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

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


	As of March 31, 2023
	Pre-emptive Rights	Top-up Rights
Share price at valuation date (per share in C$)	$2.60	$2.60
Subscription price (per share in C$)	$16.25	$16.25
Weighted-average risk-free interest rate(i)	3.81%	4.18%
Weighted-average expected life (in years)(ii)	1.75	0.46
Expected annualized volatility(iii)	60%	50%
Expected dividend yield	—%	—%


	As of December 31, 2022
	Pre-emptive Rights	Top-up Rights
Share price at valuation date (per share in C$)	$3.44	$3.44
Subscription price (per share in C$)	$16.25	$16.25
Weighted-average risk-free interest rate(i)	4.14%	4.28%
Weighted-average expected life (in years)(ii)	0.25	0.59
Expected annualized volatility(iii)	73%	73%
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, 2023 and December 31, 2022, the risk-free interest rate uses a range of approximately 3.56% to 4.21% and 3.81% to 4.37%, respectively, for the Pre-emptive Rights and Top-up Rights.

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

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


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

(In thousands of U.S. dollars, except share amounts)			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 “Peace Naturals Campus”). On February 27, 2023, the Board approved revisions to the Realignment, which are expected to result in the Company maintaining select components of its operations at the Peace Naturals Campus, namely distribution warehousing, certain research and development activities and manufacturing of certain of the Company’s products, while seeking to sell and lease back all or some of the Peace Naturals Campus or to lease certain portions of the Peace Naturals Campus to third parties. The Realignment initiatives were intended to position the Company to drive profitable and sustainable growth over time.

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

The Company incurred the following restructuring costs by reportable segment:


	Three ended March 31,
	2023		2022
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, 2023:


	As of January 1, 2023		Expenses		Payments/Write-offs		As of March 31, 2023
Employee termination benefits	$	403	$	—	$	(295)	$	108

Other restructuring costs	21		—		(21)		—
Total	$	424	$	—	$	(316)	$	108

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


	As of January 1, 2022		Expenses		Payments/Write-offs		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


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

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

7. Share-based Compensation

(a)Share-based award plans

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

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


	Three months ended March 31,
	2023		2022
Stock options	$	734	$	1,729
RSUs	1,817		1,957

Total share-based compensation	$	2,551	$	3,686

(b)Stock options

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

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


	Weighted-average exercise price (C$) (i)		Number of options	Weighted-average remaining contractual term (years)
Balance as of January 1, 2023	$	10.57	5,350,600	0.73
Issuance of options	2.96		188,317

Cancellation, forfeiture and expiry of options	9.05		(335,091)
Balance as of March 31, 2023	$	10.40	5,203,826	0.75
Exercisable as of March 31, 2023	$	11.88	3,624,498	0.48


	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

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


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

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

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


			2023
Share price at grant date (per share)			C$2.96
Exercise price (per option)			C$2.96
Risk-free interest rate			3.22%
Expected life of options (in years)			7
Expected annualized volatility			72.68%
Expected dividend yield			—
Weighted average Black-Scholes value at grant date (per option)			C$2.07
Forfeiture rate			—

The following table summarizes stock options outstanding:


	As of March 31, 2023	As of December 31, 2022
2020 Omnibus Plan	2,977,264	2,788,947
2018 Stock Option Plan	1,400,937	1,422,069
2015 Stock Option Plan	825,625	1,139,584
Total stock options outstanding	5,203,826	5,350,600

(c)Restricted share units

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


	Weighted-average grant date fair value (C$)(ii)		Number of RSUs
Balance as of January 1, 2023	$	4.63	5,725,470
Granted(i)	2.74		1,927,487
Vested and issued	4.98		(345,433)
Cancellation and forfeitures	4.19		(70,108)
Balance as of March 31, 2023	$	4.11	7,237,416


	Weighted-average grant date fair value (C$)(ii)		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