Cronos Group Inc

Consolidated Results of Operations - 2023 Compared to 2022

The tables below set forth our consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. Our consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods.

Summary of select financial results

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

For 2023, we reported consolidated net revenue of $87.2 million, representing a $0.5 million increase from 2022. This change was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market and the initiation of sales in Germany and Australia, partially offset by lower cannabis flower sales in Israel driven by pricing pressure as a result of competitive activity, the slowdown in patient permit authorizations and the Israel-Hamas War, an adverse price/mix in the Canadian cannabis flower category driving increased excise tax payments as a percentage of revenue, and the impact of the weakened Canadian dollar and New Israeli Shekel against the U.S. dollar during the period.

Cost of sales

For 2023, we reported consolidated cost of sales of $74.5 million, representing a $3.2 million increase from 2022. This was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market, partially offset by lower cannabis flower sales in the Israeli medical market, lower inventory reserves, lower cannabis biomass costs and the impact of the weakened Canadian dollar and New Israeli Shekel against the U.S. dollar during the period.

Inventory write-down

For 2023, we reported inventory write-downs of $0.8 million, as a result of the Company’s decision to wind down operations at a production facility in Winnipeg, Manitoba, held by license holder Cronos Fermentation. For further information, see Note 16 “Restructuring” to the consolidated financial statements in Item 8 of this Annual Report.

For 2023, we reported consolidated gross profit of $11.9 million, representing a $3.5 million decrease from 2022. The decrease in gross profit was primarily due to lower cannabis flower sales in the Israeli medical market, an adverse price/mix on cannabis flower sales in Canada resulting in higher excise taxes as a percentage of revenue and the inventory write-down recognized as a result of the decision to wind down operations at Cronos Fermentation, partially offset by higher cannabis flower and extract sales in the Canadian adult-use market.

Sales and marketing

For 2023, we reported sales and marketing expenses of $22.7 million, representing an increase of $4.7 million from 2022. The increase was primarily due to higher advertising and marketing spend.

Research and development

For 2023, we reported research and development expenses of $5.8 million, representing a decrease of $7.3 million from 2022. This decrease was primarily due to lower costs associated with the collaboration and license agreement between Ginkgo Bioworks Holdings, Inc. (“Ginkgo”) and the Company (the “Ginkgo Collaboration Agreement”).

General and administrative

For 2023, we reported general and administrative expenses of $49.5 million, representing a decrease of $18.2 million from 2022. The decrease was primarily due to lower professional fees, largely related to lower financial statement review costs, and lower bonus, payroll and insurance costs.

Restructuring costs

For 2023, we reported restructuring costs of $1.5 million, representing a decrease of $2.0 million from 2022. The restructuring costs in 2023 and 2022 were related to Realignment activities. For further information, see Note 16 “Restructuring” to the consolidated financial statements in Item 8 of this Annual Report.

For 2023, we reported share-based compensation expenses of $8.8 million, representing a decrease of $6.3 million from 2022. The decrease was primarily due to the 2022 acceleration of expense on equity awards granted to certain executive employees in connection with their separation from the Company as well as the approval of the grant of previously held-back equity awards granted in 2022 to certain executives in connection with the settlements with the Securities and Exchange Commission (the “SEC”) and the Ontario Securities Commission (the “OSC”). For further information, see Note 11 “Share-based Compensation” to the consolidated financial statements in Item 8 of this Annual Report.

Depreciation and amortization

For 2023, depreciation and amortization expenses were $5.0 million, representing a decrease of $0.9 million from 2022. The decrease was primarily due to the recognition of certain tax credits related to the Company’s fixed assets, partially offset by higher amortization on Ginkgo-related intangible assets.

Impairment loss on long-lived assets

During 2023, we recorded a $3.4 million impairment charge related to our Ginkgo exclusive license for cannabichromevarinic acid (“CBCVA”). For 2022, we recorded $3.5 million of impairment charges related to the right-of-use lease asset and leasehold improvements associated with our corporate headquarters in Toronto, Ontario, Canada, which the Company has subleased in part. See Note 7 “Goodwill and Intangible Assets, net”, Note 6 “Property, plant and equipment, net” and Note 8 “Leases” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

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

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

Interest income, net

For 2023, we reported interest income, net of $51.2 million, representing an increase of $28.7 million from 2022 primarily due to higher interest rates and higher short-term investment balances during 2023.

Gain (loss) on revaluation of derivative liabilities

For 2023, we reported a loss on revaluation of derivative liabilities of $0.1 million, representing a change of $14.1 million compared to a gain in 2022 related to the irrevocable relinquishment by Altria of its warrant on December 16, 2022. We expect continued changes in derivative valuations as our share price fluctuates period to period and the remaining expected terms of our derivative instruments change over time. For further information, see Note 9 “Derivative Liabilities” to the consolidated financial statements in Item 8 of this Annual Report.

Impairment loss on other investments

For 2023, we recognized $23.4 million of impairment loss on other investments, driven by an impairment charge recorded on our PharmaCann Option for the difference between its estimated fair value and its carrying amount. For 2022, impairment loss on other investments was $61.4 million, driven by impairment charges recorded on our PharmaCann Option for the difference between its estimated fair value and its carrying amount. For more information, see Note 4 “Investments” to the consolidated financial statements in Item 8 of this Annual Report.

Share of income from equity method investments

For 2023, we reported share of income from equity method investments of $1.6 million, representing a decrease of $1.5 million from 2022. The decrease was primarily due to lower income pick-ups from our equity method investment in Cronos GrowCo. Periodic income and loss pickups from our equity method investment in Cronos GrowCo are impacted both by the profitability of Cronos GrowCo and any unsold inventory remaining at Cronos at the end of the period that originated from Cronos GrowCo.

Gain (loss) on revaluation of financial instruments

For 2023, we reported a loss on revaluation of financial instruments of $12.0 million, compared to a gain of $14.7 million in 2022. The change was due to the change in fair value of our investment in Vitura. See Note 4 “Investments” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Foreign currency transaction loss

For 2023, foreign currency transaction loss was $7.3 million, representing an increased loss of $5.0 million from 2022. The change was primarily due to certain foreign currency-denominated cash equivalents and short-term investments and certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future.

Other, net

For 2023, other, net was income of $1.1 million, compared to a loss of $0.3 million in 2022. The change was primarily driven by gains on the disposal of assets.

Income tax benefit (expense)

For 2023, we reported an income tax benefit of $3.2 million, compared to an income tax expense of $34.2 million in 2022. The change was due primarily to a capital gain for tax purposes of $479.8 million, which resulted in an income tax liability of $34.2 million, related to the irrevocable relinquishment by Altria of the Warrant on December 16, 2022.

Loss from discontinued operations

For 2023, we reported a loss from discontinued operations of $4.1 million, compared to a loss from discontinued operations of $13.6 million in 2022. The decreased loss was driven by the decrease in operating expenses as a result of the exit of U.S. operations in the second quarter of 2023. See Note 2 “Discontinued Operations” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Consolidated Results of Operations - 2022 Compared to 2021

The tables below set forth our consolidated results of operations, expressed in thousands of U.S. dollars for the periods presented. Our consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods.

Summary of select financial results

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

For 2022, we reported consolidated net revenue of $86.7 million, representing a $22.2 million increase from 2021. This change was primarily due to higher cannabis flower sales in the Israeli medical market and higher cannabis extract sales in the Canadian adult-use market, partially offset by lower cannabis flower sales in the Canadian adult-use market driven by an unfavorable price/mix shift and the impact of the weakening Canadian dollar against the U.S. dollar during 2022.

Cost of sales

For 2022, we reported consolidated cost of sales of $71.3 million, representing a $1.1 million increase from 2021, despite a 34% increase in net revenue. This was primarily due to lower cannabis biomass costs and the impact of the weakening Canadian dollar against the U.S. dollar during the period, partially offset by higher sales volumes and lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus.

Inventory write-down

For 2021, we reported inventory write-downs of $12.0 million, primarily related to cannabis strains and potency levels that were no longer in-line with consumer preferences in the Canadian market and adjustments for obsolete inventory in Canada. We reported no inventory write-downs for 2022.

For 2022, we reported consolidated gross profit of $15.4 million, representing a $33.0 million improvement from 2021. The improvement in gross profit is primarily due to increased revenue driven mainly by a favorable mix of cannabis extract products, which carry a higher gross profit and gross margin than other product categories, higher sales of cannabis flower in Israel, the absence of inventory write-downs in 2022, and lower cannabis biomass costs, partially offset by lower fixed cost absorption due to the timing of the wind-down of cultivation and certain production activities associated with the change in the nature of operations at the Peace Naturals Campus.

Sales and marketing

For 2022, we reported sales and marketing expenses of $18.0 million, representing a decrease of $2.9 million from 2021. The decrease was primarily due to lower advertising and marketing spend.

Research and development

For 2022, we reported research and development expenses of $13.1 million, representing a decrease of $8.7 million from 2021. This decrease was primarily due to lower costs associated with the Ginkgo Collaboration Agreement.

General and administrative

For 2022, we reported general and administrative expenses of $67.7 million, representing a decrease of $23.2 million from 2021. The decrease was primarily due to lower expected credit losses on our loans to joint venture partners when compared to 2021, lower legal and advisory fees associated with strategic initiatives and lower personnel-related costs associated with the Realignment.

Restructuring costs

For 2022, we reported restructuring costs of $3.5 million, compared to no restructuring costs in 2021. The restructuring costs in 2022 were related to Realignment activities. For further information, see Note 16 “Restructuring” to the consolidated financial statements in Item 8 of this Annual Report.

For 2022, we reported share-based compensation expenses of $15.0 million, representing an increase of $5.2 million from 2021. The increase was primarily due to the acceleration of expense on equity awards granted to certain executive employees in connection with their separation from the Company as well as the approval of the grant of previously held-back equity awards granted to certain executives in connection with the SEC and OSC settlements. For further information, see Note 11 “Share-based Compensation” to the consolidated financial statements in Item 8 of this Annual Report.

Depreciation and amortization

For 2022, depreciation and amortization expenses were $6.0 million, representing an increase of $1.6 million from 2021. The increase was primarily due to higher amortization on our Ginkgo exclusive license intangible assets.

Impairment loss on goodwill and indefinite-lived intangible assets

For 2021, we reported impairment loss on goodwill and intangible assets of $37 thousand due to impairment charges on our PEACE+™ trademark. For 2022, we reported no such impairment losses. For further information, see Note 7 “Goodwill and Intangible Assets, net” to the consolidated financial statements in Item 8 of this Annual Report.

Impairment loss on long-lived assets

During 2022, we recorded impairment charges of $3.5 million related to the right-of-use lease asset and leasehold improvements associated with our corporate headquarters in Toronto, Ontario, Canada, which the Company has subleased in part. For 2021, we recorded an impairment charge of $119.9 million on long-lived assets related to the previously announced planned exit from the Peace Naturals Campus. Additionally, in 2021, we recorded impairment charges of $4.8 million related to our Ginkgo exclusive licenses for cannabigerolic acid (“CBGA”) and cannabigerovarinic acid (“CBGVA”) for the difference between the fair value of the licenses and the consideration paid. See Note 6 “Property, plant and equipment, net”, Note 7 “Goodwill and Intangible Assets, net” and Note 8 “Leases” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

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

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

Interest income, net

For 2022, we reported interest income, net of $22.5 million, representing an increase of $13.4 million from 2021 primarily due to higher short-term investment balances and higher interest rates in 2022 when compared to 2021.

Gain on revaluation of derivative liabilities

For 2022, we reported a gain on revaluation of derivative liabilities of $14.1 million, representing a decrease of $137.3 million from 2021 primarily due to the greater impact on the derivative liabilities in 2021 from the decreased estimated term of the derivative instruments and the decreased price of Cronos common shares.

Impairment loss on other investments

For 2022, impairment loss on other investments was $61.4 million, driven by impairment charges recorded on our PharmaCann Option for the difference between its estimated fair value and its carrying amount. There were no such impairment losses on other investments during 2021. For more information, see Note 4 “Investments” to the consolidated financial statements in Item 8 of this Annual Report.

Share of income (loss) from equity method investments

For 2022, we reported share of income from equity method investments of $3.1 million, representing an increase of $9.4 million from 2021. The change was primarily due to improved results from our equity method investment in Cronos GrowCo.

Gain (loss) on revaluation of financial instruments

For 2022, we reported a gain on revaluation of financial instruments of $14.7 million, representing an increase of $6.1 million from 2021. The increase was due to the change in fair value of our investment in Vitura. See Note 4 “Investments” to the consolidated financial statements in Item 8 of this Annual Report for additional information.

Foreign currency transaction loss

For 2022, foreign currency transaction loss was $2.3 million, which related to certain foreign currency-denominated intercompany loans anticipated to be settled in the foreseeable future. There were no such foreign currency transaction gains or losses during 2021.

Other, net

For 2022, other, net was a loss of $0.3 million, compared to income of $0.7 million in 2021. The change was primarily due to loss on disposal of assets associated with the Realignment, partially offset by $0.4 million of dividend income from our Vitura investment during 2022.

Income tax benefit (expense)

For 2022, we reported income tax expense of $34.2 million, compared to an income tax benefit of $0.4 million in 2021. The change was due primarily to a capital gain for tax purposes of $479.8 million, which resulted in an income tax liability of $34.2 million, related to the irrevocable relinquishment by Altria of its warrant on December 16, 2022.

Loss from discontinued operations

For 2022, we reported loss from discontinued operations of $13.6 million, compared to a loss from discontinued operations of $269.1 million in 2021. The decreased loss was driven by the $236.0 impairment loss on goodwill and indefinite-lived intangible assets in 2021. See Note 2 “Discontinued Operations” to the consolidated financial statements in Item 8 of this Annual Report for additional information.