EX-99.2

EX-99.2 3 d212015dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Cresco Labs Inc. (the “Company”, “Cresco Labs”, “we” or “our”) is dated November 18, 2021 and has been prepared for the three and nine months ended September 30, 2021 and 2020. The Company’s interim financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Prior period amounts included in the MD&A have been recast and adjusted to update for historical changes necessary to present the financial results in accordance with U.S. GAAP. It is supplemental to, and should be read in conjunction with, the Company’s audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2020 and 2019, which were prepared in accordance with International Financial Reporting Standards (“IFRS”) and previously filed on SEDAR, and the Company’s unaudited condensed interim consolidated financial statements and accompanying notes as of and for the three and nine months ended September 30, 2021 and 2020. Financial information presented in this MD&A is presented in United States dollars (“$”), unless otherwise indicated. The three and nine months ended data presented below is unaudited.

The Company has provided certain supplemental non-GAAP financial measures in this MD&A. Where the Company has provided such non-GAAP financial measures, we have also provided a reconciliation to the most comparable U.S. GAAP financial measure. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should only be considered in conjunction with, the U.S. GAAP financial measures presented herein. Please see the information under the heading “Non-GAAP Financial Measures” for additional information on the Company’s use of non-GAAP financial measures and the reasons therefore.

This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable United States securities laws and Canadian securities laws. Please refer to the discussion of forward-looking statements and information set out under the heading “Cautionary Note Regarding Forward- Looking Information,” located at the beginning of the Company’s Annual Information Form for the year ended December 31, 2020, filed on SEDAR. As a result of many factors, the Company’s actual results may differ materially from those anticipated in these forward-looking statements and information. Please refer to the discussion of risks and uncertainties set out under the heading “Risk Factors,” located within the Company’s Annual Information Form for the year ended December 31, 2020, filed on SEDAR.

OVERVIEW OF THE COMPANY

Cresco Labs was incorporated in the Province of British Columbia and is licensed to cultivate, manufacture and sell cannabis and cannabis-based products. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Arizona, Maryland, Massachusetts, New York, Michigan, and Florida.

Cresco Labs is primarily engaged in the business of cultivating medical grade cannabis, manufacturing medical grade products derived from cannabis cultivation, and distributing such products to medical or adult-use consumers in legalized cannabis markets. Cresco Labs exists to provide high-quality and consistent cannabis-based products to consumers. Cresco Labs’ business focuses on regulatory compliance while working to develop condition-specific strains of cannabis and non-invasive delivery methods (alternatives to smoke inhalation) to provide controlled- dosage medicinal cannabis relief to qualified patients and consumers in legalized cannabis markets. The Company currently operates three (3) adult-use and medical cannabis cultivation and manufacturing centers, four (4) adult-use and medical dispensary locations, one (1) medical dispensary location and five (5) adult-use dispensary locations in Illinois; one (1) medical cannabis cultivation and manufacturing center and four (4) medical dispensary locations in Pennsylvania; one (1) medical cannabis cultivation and processing center and five (5) medical dispensary locations in Ohio; three (3) adult-use and medical cannabis cultivation centers, one (1) adult-use and medical cannabis manufacturing center and two (2) adult-use and medical cannabis distribution facilities in California; one (1) adult- use and medical cannabis cultivation center, one (1) adult-use and medical cannabis cultivation and manufacturing center, and one (1) adult-use and medical dispensary location in Arizona; one (1) medical processing center in Maryland; one (1) medical cannabis manufacturing center, and four (4) medical dispensary locations in New York; three (3) adult-use and medical cannabis cultivation and m1anufacturing centers, one (1) medical dispensary location,

one (1) adult-use dispensary location, and two (2) adult-use and medical dispensary locations in Massachusetts; one (1) adult-use and medical processing and cannabis cultivation center in Michigan; and one (1) medical cannabis cultivation and manufacturing center and nine (9) medical dispensary locations in Florida. For additional information on wholly-owned or effectively controlled subsidiaries and affiliates of Cresco Labs, refer to Note 2 under the heading “Basis of Consolidation” of the Company’s Unaudited Condensed Interim Consolidated Financial Statements for the three and nine months ended September 30, 2021 and 2020.

During 2019, the Company announced a new dispensary brand, Sunnyside*^®¹, created to accelerate industry growth and shift consumer expectations and perceptions around shopping for cannabis from intimidation and doubt to curiosity and acceptance through a new trial and marketing approach. During 2020, five (5) dispensaries were opened and rebranded as Sunnyside* and five (5) additional Sunnyside* locations were launched in the Illinois market,, four (4) dispensaries were rebranded as Sunnyside* in New York, three (3) dispensaries were rebranded as Sunnyside* in Pennsylvania, and one (1) dispensary was rebranded as Sunnyside* in each of Arizona, Massachusetts, and Ohio. During the first quarter of 2021, the Company closed its acquisition of four (4) dispensaries in Ohio previously operated by Verdant Creations, LLC and its affiliates (collectively “Verdant”). The four (4) dispensaries were rebranded as Sunnyside*. During the second quarter of 2021, the Company closed its acquisition of Bluma Wellness Inc. (“Bluma”), which included eight (8) One Plant dispensaries. The eight (8) dispensaries were rebranded as Sunnyside* in the third quarter of 2021 During 2021, one (1) Sunnyside* dispensary was opened in each of Pennsylvania and Florida. Cresco Labs’ portfolio of owned cannabis consumer packaged goods includes Cresco^®¹, Cresco Reserve^®², High Supply^®², Mindy’sTM, Good News^®², RemediTM, Wonder Wellness Co.^®², and FloraCal^®² Farms. The Company distributes and markets these products primarily to third-party licensed retail cannabis stores across the United States as well as to Cresco Labs-owned retail stores.

Cresco Labs’ corporate headquarters is currently located at Suite 110, 400 W. Erie St, Chicago, IL 60654 and employs approximately 3,200 people across the organization, while being named as a “Top Diversity Employer” by Diversity Jobs in 2021. The Company’s registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

Issuing IPO, Reverse Takeover & Corporate Structure

The Company (then Randsburg Gold Corporation) was incorporated in the Province of British Columbia under the Company Act (British Columbia) on July 6, 1990. On December 30, 1997, the Company changed its name from Randsburg Gold Corporation to Randsburg International Gold Corp. (“Randsburg”) and consolidated its common shares on a five (5) old for one (1) new basis. On November 30, 2018, in connection with a reverse takeover (the “Transaction”), the Company, (i) consolidated its outstanding Randsburg common shares on an 812.63 old for one (1) new basis, and (ii) filed an alteration to its Notice of Articles with the British Columbia Registrar of Companies to (a) change its name from Randsburg to Cresco Labs Inc., (b) amend the rights and restrictions of its existing class of common shares and redesignate such class as the class of Subordinate Voting Shares (“SVS”) and (c) create the Proportionate Voting Shares and the Super Voting Shares (“MVS”).

Pursuant to the Transaction, the Company (then Randsburg) and Cresco Labs, LLC, completed a series of transactions on November 30, 2018 resulting in a reorganization of Cresco Labs, LLC and Randsburg in which Randsburg became the indirect parent and sole voting unitholder of Cresco Labs, LLC. The Transaction constituted a reverse takeover of Randsburg by Cresco Labs, LLC under applicable securities laws. Cresco Labs, LLC was formed as a limited liability company under the laws of the State of Illinois on October 8, 2013 and is governed by a limited liability company agreement that was amended and restated in connection with the completion of the Transaction. The Pre-Combination LLC Agreement was further amended and restated in connection with the completion of the Transaction.

¹	The Sunnyside*^®(inclusive of the stand-alone asterisk mark) and Cresco^® brands maintain federal trademark registrations for websites pertaining to medical cannabis and cannabis educational services, as well as multiple state trademark registrations.

²	The High Supply^®, Good News^®, Wonder Wellness Co.^®, Cresco Reserve^®, and FloraCal^® brands maintain federal trademark registrations for apparel and multiple state trademark registrations.

Set forth below is the organization chart of the Company.

LOGO

Recent Developments

On January 13, 2021, the Company filed a Form 40-F with the U.S. Securities and Exchange Commission (“SEC”), which is a registration statement pursuant to Section 12 of the Securities and Exchange Act of 1934, as amended.

On January 14, 2021, the Company announced the commencement of a best efforts overnight marketed offering (the “January 2021 Offering”) of SVS. On January 15, 2021, the Company closed the January 2021 Offering of 9.9 million SVS at a price of C$16.00 (USD $12.67) per share for total gross proceeds of approximately $120.7 million, net of $3.4 million in commission and other fees, with a corresponding increase to share capital of $124.1 million. The SVS were offered in each of the provinces of Canada, other than Québec, pursuant to a prospectus supplement dated January 19, 2021 to the Company’s base shelf prospectus dated July 25, 2019 and in the United States on a private placement basis to “qualified institutional buyers.”

On January 14, 2021, the Company entered into a definitive agreement with Bluma (the “Bluma Agreement”), pursuant to which Cresco Labs acquired all of the issued and outstanding shares of Bluma in an all-share transaction that valued Bluma at an equity value of $213.0 million (the “Bluma Transaction”), or $1.12 per Bluma share. Under the terms of the Bluma Agreement, holders of common shares of Bluma received 0.0859 SVS of Cresco Labs for each Bluma share. On March 15, 2021, Cresco Labs agreed to extend $7.5 million to One Plant Florida (“One Plant”), Bluma’s operating subsidiary, for the expansion of One Plant’s operations in Florida and to satisfy tax liabilities relating to the settlement of vested restricted share units. The acquisition closed on April 14, 2021. The Company issued 15.1 million SVS valued at $183.30 million and 0.8 million replacement restricted share units valued at $10.0 million in conjunction with the acquisition.

On February 16, 2021, the Company announced the closing of its acquisition of Verdant. Total consideration was $27.1 million and consisted of 0.1 million SVS valued at $2.0 million, cash payments of $1.5 million, settlement of cashless exercise option on loans receivable of $10.0 million, settlement of a preexisting lease arrangement of $2.2 million and settlement of other preexisting loan relationships of $11.4 million.

On March 1, 2021, the Company filed and received a receipt for a preliminary short form base shelf prospectus (the “2021 Shelf Prospectus”) with the securities commissions in each of the provinces of Canada, except Québec, and filed a corresponding shelf registration statement on Form F-10 (the “Registration Statement”) with the SEC under the U.S./Canada Multijurisdictional Disclosure System (“MJDS”). The 2021 Shelf Prospectus and Registration Statement replaced the Company’s prior shelf prospectus. The 2021 Shelf Prospectus and Registration Statement were made effective on April 23, 2021 and allow the Company to offer up to $1.0 billion SVS, debt securities, subscription receipts, warrants, and units, or any combination thereof, from time to time during the 25-month period that the 2021 Shelf Prospectus is effective (subject to MJDS eligibility). The Company filed the 2021 Shelf Prospectus in order to maintain financial strength and flexibility. Additionally, in April 2021, the Company announced a new equity distribution agreement with Canaccord Genuity Corp. to replace the equity distribution agreement filed in December 2019 due to the expiration of the prior shelf prospectus. Pursuant to this agreement, the Company may, from time to time, sell up to $100.0 million of its SVS in Canada.

On March 18, 2021, the Company entered into a definitive agreement to acquire all of the issued and outstanding equity interests in Cultivate Licensing LLC and BL Real Estate LLC (collectively, “Cultivate”), a vertically- integrated Massachusetts operator. On September 2, 2021 the Company announced that it had completed the acquisition of the issued and outstanding shares of Cultivate. Total consideration was $99.3 million and consisted of 4.8 million SVS valued at $46.6 million, cash payments $1.0 million to pay for the sellers’ transaction fees, contingent consideration of $29.6 million, settlement of preexisting loan relationships of $1.9 million and payment the sellers’ third-party debt of $20.1 million.

On March 30, 2021, the Company divested all of its equity interest in 180 Smoke and related intercompany receivables to Spyder Cannabis Inc. and Plant-Based Investment Corp. for approximately $1.1 million, after certain adjustments. The sale resulted in a loss of $3.3 million, plus an additional loss of $0.3 million for accumulated foreign currency translation previously included in other comprehensive loss.

On August 12, 2021, the Company closed on an agreement for a senior secured term loan (the “Senior Loan”) with an undiscounted principal balance of $400.0 million and an original issue discount of $13.0 million. The facility has a five (5) year term with an interest rate of 9.5%. Proceeds from the Senior Loan were used to retire the existing term loan (the “Amended Term Loan”), fund capital expenditures, and pursue other targeted growth initiatives within the U.S. cannabis sector. Under the agreement, the Company is subject to certain financial and non-financial covenants.

On August 17, 2021, the Company announced the execution of a definitive agreement to acquire 100% of the outstanding equity interests in Blair Wellness, LLC, a Baltimore, Maryland medical cannabis dispensary (the “Blair Wellness Transaction”). The Blair Wellness Transaction will be completed on a cash-free, debt-free basis with a mutually agreed upon normalized target level of working capital. The acquisition consideration will be satisfied through the payment of cash and a twenty-four month promissory note. The cash consideration would be payable upon closing of the transaction, which is expected in the fourth quarter of 2021.

On September 23, 2021, the Company announced the execution of a definitive agreement to acquire 100% of the outstanding equity interests in Bay, LLC d/b/a Cure Pennsylvania for aggregate consideration equal to $90.0 million, which will be satisfied at closing through the payment of cash and the issuance of SVS. This transaction will be completed on a cash-free, debt-free basis with a mutually agreed upon normalized target level of working capital and is expected to close in the fourth quarter of 2021.

On October 14, 2021, the Company entered into a definitive agreement with Laurel Harvest Labs, LLC (“Laurel Harvest”) to acquire the outstanding equity interests in Laurel Harvest, a Pennsylvania Clinical Registrant, for consideration equal to $80.0 million (the “Laurel Harvest Transaction”). The Laurel Harvest Transaction is expected to close during the fourth quarter of 2021.

Components of Our Results of Operations

Revenue

We derive the majority of our revenue from wholesale of cannabis products to dispensary locations which, for the three and nine months ended September 30, 2021, represents approximately 50.7% and 51.9% of our revenue, respectively. Revenue from company-owned retail dispensary locations, for the three and nine months ended September 30, 2021, represents the remaining 49.3% and 48.1%, respectively. Retail revenue includes medical and adult-use cannabis sales in the United States.

Gross profit

Gross profit is calculated as revenue less cost of goods sold. Cost of goods sold include the direct costs attributable to the cultivation and production of the products sold and is comprised of the following:

•

Direct labor costs: These expenses include all salaries, benefits, and taxes for all employees at the facility.

•

Direct supplies: The direct material cost for maintenance of the plants, the supplies and nutrients, and the production expenses and equipment used to process marijuana.

•

Facility expenses: The facility expense for the cultivation operations is the cost for the facility, utilities, property taxes, maintenance, and costs associated with monitoring the security systems.

•

Other operating expenses: These expenses include all costs associated with the facility itself including insurance, community outreach programs, professional services related to licenses and compliance, uniforms, employee training programs, tracking and inventory management systems, product testing, business development, information technology, license renewal fees and certain excise taxes.

•

Cultivation, manufacturing, and packaging costs: These expenses are comprised of cannabis plant costs and are initially capitalized into inventory in the period in which they are incurred.

In addition to market fluctuations, cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis products. The changes in regulatory environments may create fluctuations in gross profit over comparative periods. Additionally, gross profit may include the cost of inventory required to be marked to fair value as part of purchase accounting in a business combination.

Selling, general and administrative expenses (“SG&A”)

SG&A expenses consist mainly of salary and benefits costs of executive and back-office employees, consulting and professional fees, advertising and marketing, office and retail operation costs, share-based compensation, certain excise taxes, technology, insurance, security, travel and entertainment, rent expense and business expansion costs.

Selling costs generally correlate to revenue. As a percentage of sales, we expect SG&A costs to decrease as our business continues to grow. The decrease is expected to be driven primarily by efficiencies associated with scaling the business.

For the three and nine months ended September 30, 2021, and September 30, 2020, SG&A was comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021			2020
Payroll and employee costs	$	34,341	$	21,318	$	99,693		$	58,973
Selling and marketing expenses		6,265		4,066		24,999			10,843
Share-based compensation		6,083		2,764		20,492			11,060
Depreciation and amortization		5,787		4,317		17,118			12,993
Excise taxes		2,710		4,311		11,131			8,526
Facility expenses		6,082		4,558		14,621			11,478
Consulting and professional fees		4,415		2,605		9,887			14,475
Computer and software expense		3,224		2,274		10,020			5,427
Business insurance		2,622		1,068		6,917			3,127
Rental fees		1,970		1,940		5,295			4,325
Accounting		286		485		3,329			2,397
Legal		3,683		1,110		7,379			4,796
Travel and employee expenses		1,360		523		3,040			2,545
Litigation accrual adjustment		—		—		(810	)		—
Other expenses		2,562		570		5,173			3,828

Total Selling, general and administrative expenses	$	81,390	$	51,909	$	238,284		$	154,793

Other (expense) income

Other (expense) income consists mainly of reoccurring expenses such as gains (losses) on derivative instruments, foreign currency, and derivative liabilities on warrants. Also included are ad hoc expenses such as gain (loss) on extinguishment of debt and investments. These expenses do not generally correlate to revenue and do not include interest income (expense), net or equity investee income, which when added to other (expense) income, sum to total other (expense) net, discussed in the “Selected Financial Information” section below.

For the three and nine months ended September 30, 2021, and 2020, other (expense) income, net consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2021			2020			2021			2020
Unrealized gain (loss) on derivative liabilities—warrants	$	7,956		$	(2,946	)	$	10,672		$	172
Gain on derivative instruments		14,982			2,639			16,080			9,959
Gain (loss) on provision—loan receivable		(332	)		(307	)		(87	)		(420	)
Unrealized gain (loss) on investments held at fair value		(2,647	)		68			(6,587	)		(162	)
Loss on debt extinguishment		(17,987	)		—			(17,987	)		—
Gain on conversion of investment		—			(86	)		—			(86	)
Loss on foreign currency		(249	)		(232	)		(1,274	)		(216	)
Other loss-investments		—			(28	)		—			(148	)
Other income		12			538			1,303			1,075

Total other (expense) income, net	$	1,735		$	(354	)	$	2,120		$	10,174

Income Taxes

The Company is classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the Internal Revenue Code (“IRC”). The Company is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the cannabis industry, the Company is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries.

SELECTED FINANCIAL INFORMATION

The Company reports results of operations of its affiliates from the date that control commences, either through the purchase of the business, through a management agreement or through other arrangements that grant such control. The following selected financial information includes only the results of operations after the Company established control of its affiliates. Accordingly, the information included below may not be representative of the results of operations if such affiliates had included their results of operations for the entire reporting period.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following tables set forth selected consolidated financial information for the periods indicated that was derived from our Unaudited Condensed Interim Consolidated Financial Statements and the respective accompanying notes prepared in accordance with U.S. GAAP.

The selected consolidated financial information set out below may not be indicative of the Company’s future performance:


	Three Months Ended September 30,
($ in thousands)	2021			2020			$ Change			% Change
Revenue	$	215,483		$	153,298		$	62,185			40.6	%
Cost of goods sold		(107,162	)		(76,454	)		(30,708	)		40.2	%

Gross profit		108,321			76,844			31,477			41.0	%
Total operating expenses		372,339			51,909			320,430			nm	²
Total other (expense), net		(11,842	)		(9,250	)		(2,592	)		28.0	%
Income tax recovery		12,408			9,891			2,517			25.4	%

Net (loss) income¹	$	(263,452	)	$	25,576		$	(289,028	)		nm

¹	Net loss includes amounts attributable to non-controlling interests.

²	Percentage changes shown as “nm” (not meaningful) are values greater than 399%.

Revenue

Revenue for the three months ended September 30, 2021 increased $62.2 million, or 40.6%, compared to the three months ended September 30, 2020. The increase in revenue was primarily driven by the Verdant, Bluma, and Cultivate acquisitions, all of which closed in 2021. In addition, continued growth in the states where the Company operates contributed to the increase in revenue, with the exception of California, where revenue declined due to a strategic shift to discontinue certain third-party brand sales to focus on Cresco-owned brands.

Cost of goods sold and Gross profit

Cost of goods sold for the three months ended September 30, 2021 increased $30.7 million, or 40.2%, compared to the three months ended September 30, 2020. The increase was primarily attributable to year-over-year revenue growth, increased cultivation capacity in Illinois, and other organic growth, as well as increased costs of goods sold as a result of the Verdant, Bluma, and Cultivate acquisitions, including charges of $8.4 million related to the fair value mark-up of inventory from the acquisitions of Bluma and Cultivate.

Gross profit increased by $31.5 million, or 41.0%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to the increase in revenue and greater scale in the Company’s established Illinois and Pennsylvania markets, operating synergies realized through acquisitions, and continued efforts to increase cultivation yields. Gross profit as a percentage of revenue for the three months ended September 30, 2021 was 50.3% compared with 50.1% for the three months ended September 30, 2020; excluding the fair value mark-up of acquired inventory, gross profit as a percentage of revenue for the three months ended September 30, 2021 was 54.2% compared with 51.3% in the prior-year period.

Total operating expenses

Total operating expenses for the three months ended September 30, 2021 increased $320.4 million, or nm, compared to the three months ended September 30, 2020. The increase in total operating expenses was primarily attributable to a $290.9 million goodwill and intangibles impairment charge recorded in the third quarter of 2021. The charge was driven by a strategic shift in the Company’s California reporting unit, to discontinue certain third- party brand sales to focus on Cresco-owned brand sales. The remaining fluctuation is driven by significant investments in our team, marketing, information technology, and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Total other (expense), net

Total other expense for the three months ended September 30, 2021 increased $2.6 million, or 28.0%, compared to the three months ended September 30, 2020. The increase in total other expense was due to higher mark-to-market gains on derivative instruments and liability-classified warrants primarily due to changes in the Company’s share price. These gains were partially offset by losses on debt extinguishment, losses on investments held at fair value, and higher interest expense that resulted from the loan agreements the Company amended in the fourth quarter of 2020.

Provision for income taxes

Income tax recovery for the three months ended September 30, 2021 increased $2.5 million, or 25.4%, compared to the three months ended September 30, 2020. The change was due to higher gross profit and increased amounts of permanently nondeductible expenses under IRC Section 280E related to the expansion of the Company’s business operations through organic growth and acquisitions, partially offset by a discrete tax benefit related to updated assumptions for certain uncertain tax positions.

Net (loss) income

Net (loss) for the three months ended September 30, 2021 decreased $289.0 million, or nm, compared to the three months ended September 30, 2020. Higher gross profit in the current period, driven by increased revenue and operational efficiencies, was offset by higher operating expenses, primarily driven by the goodwill and intangible impairment charges, and higher interest expense during the quarter.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The selected consolidated financial information set out below may not be indicative of the Company’s future performance:


	Nine Months Ended September 30,
($ in thousands)	2021			2020			$ Change			% Change
Revenue	$	603,895		$	313,934		$	289,961			92.4	%
Cost of goods sold		(307,570	)		(181,715	)		(125,855	)		69.3	%

Gross profit		296,325			132,219			164,106			124.1	%
Total operating expenses		529,233			156,010			373,223			239.2	%
Total other (expense), net		(35,436	)		(13,370	)		(22,066	)		165.0	%
Income tax (expense)		(16,579	)		(14,423	)		(2,156	)		14.9	%

Net loss¹	$	(284,923	)	$	(51,584	)	$	(233,339	)		nm

¹	Net loss includes amounts attributable to non-controlling interests.

Revenue

Revenue for the nine months ended September 30, 2021 increased $290.0 million, or 92.4%, compared to the nine months ended September 30, 2020. The increase in revenue was primarily driven by the Verdant, Bluma, and Cultivate acquisitions, all of which closed in 2021. In addition, continued growth in the states where the Company operates, contributed to the increase in revenue for the nine months ended September 30, 2021.

Cost of goods sold and Gross profit

Cost of goods sold for the nine months ended September 30, 2021 increased $125.9 million, or 69.3%, compared to the nine months ended September 30, 2020. The increase was primarily attributable to year-over-year revenue growth, increased cultivation capacity in Illinois and Pennsylvania, and other organic growth, as well as increased costs of goods sold as a result of the Verdant, Bluma, and Cultivate acquisitions, including $15.0 million of charges for inventory required to be marked up to fair value in purchase accounting.

Gross profit increased by $164.1 million, or 124.1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to the increase in revenue and greater scale in the Company’s established Illinois and Pennsylvania markets, operating synergies realized through acquisitions, and continued efforts to increase cultivation yields. Gross profit as a percentage of revenue for the nine months ended September 30, 2021 was 49.1% compared with 42.1% for the prior-year period; excluding the fair value mark-up of acquired inventory, gross profit as a percentage of revenue for the nine months ended September 30, 2021 was 51.6% compared with 43.3% in the prior-year period.

Total operating expenses

Total operating expenses for the nine months ended September 30, 2021 increased $373.2 million, or 239.2%, compared to the nine months ended September 30, 2020. The increase in total operating expenses was primarily attributable to the $290.9 million goodwill and intangibles impairment charge recorded in the third quarter of 2021. The charge was driven by a strategic shift in the Company’s California reporting unit, to discontinue certain third- party brand sales to focus on Cresco-owned brand sales. The remaining fluctuation is driven by significant investments in our team, marketing, information technology, and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Total other (expense), net

Total other expense for the nine months ended September 30, 2021 increased $22.1 million, or 165.0%, compared to the nine months ended September 30, 2020. The increase in total other expense was due to higher mark-to-market gains on derivative instruments and liability-classified warrants primarily due to changes in the Company’s share price. These gains were partially offset by losses on debt extinguishment, losses on investments held at fair value, and higher interest expense which resulted from the loan agreements the Company amended in the fourth quarter of 2020.

Provision for income taxes

Income tax expense for the nine months ended September 30, 2021 increased $2.2 million, or 14.9%, due to higher gross profit and increased amounts of permanently nondeductible expenses under Section 280E related to the expansion of the Company’s business operations through organic growth and acquisitions, partially offset by a discrete tax benefit related to updated assumptions for certain uncertain tax positions.

Net (loss)

Net loss for the nine months ended September 30, 2021 decreased $233.3 million, or nm, compared to the nine months ended September 30, 2020. Higher gross profit in the current period, driven by increased revenue and operational efficiencies, was offset by higher operating expenses, primarily driven by the goodwill and intangible impairment charges, and higher interest expense, and current period income tax expense.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are non-GAAP financial measures and do not have standardized definitions under U.S. GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with U.S. GAAP and may not be comparable to similar measures presented by other issuers. These supplemental non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the U.S. GAAP financial measures presented herein. Accordingly, the Company has included below reconciliations of the supplemental non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.

The following table provides a reconciliation of the Company’s Net loss to Adjusted EBITDA (non-GAAP):


	Three Months Ended September 30,
($ in thousands)	2021			2020			$ Change			% Change
Net (loss) income¹	$	(263,452	)	$	25,576		$	(289,028	)		nm
Depreciation and amortization		10,486			8,641			1,845			21.4	%
Interest expense, net		13,577			8,762			4,815			55.0	%
Income tax recovery		(12,408	)		(9,891	)		(2,517	)		25.4	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (non-GAAP)	$	(251,797	)	$	33,088		$	(284,885	)		nm

Other (income) expense, net		(1,735	)		354			(2,089	)		nm
Loss from equity method investments		—			134			(134	)		100.0	%
Fair value mark-up for acquired inventory		8,396			1,843			6,553			355.6	%
Adjustments for acquisition and other non-core costs		3,830			1,412			2,418			171.2	%
Impairment loss		290,949			—			290,949			100.0	%
Management incentive compensation (share-based)		6,806			3,335			3,471			104.1	%

Adjusted EBITDA (non-GAAP)	$	56,449		$	40,166		$	16,283			40.5	%

¹	Net loss includes amounts attributable to non-controlling interests.

Adjusted EBITDA (non-GAAP)

Adjusted EBITDA, a non-GAAP financial measure which excludes depreciation and amortization, net interest expense, income taxes, other expense, share-based compensation, adjustments for acquisition and other non-core costs, loss on equity method investments and adjustments for fair value of mark-up for acquired inventory, was $56.4 million for the three months ended September 30, 2021 compared to $40.2 million for the three months ended September 30, 2020. The increase in adjusted EBITDA of $16.3 million is due to higher gross profit partially offset by higher operating expenses to support the growth of the business, both organically and inorganically.


	Nine Months Ended September 30,
($ in thousands)	2021			2020			$ Change			% Change
Net (loss)¹	$	(284,923	)	$	(51,584	)	$	(233,339	)		nm
Depreciation and amortization		30,443			23,172			7,271			31.4	%
Interest expense, net		36,360			23,290			13,070			56.1	%
Income tax expense		16,579			14,423			2,156			14.9	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (non-GAAP)	$	(201,541	)	$	9,301		$	(210,842	)		nm

Other income, net		(2,120	)		(10,174	)		8,054			79.2	%
Loss from equity method investments		1,196			254			942			370.9	%
Fair value mark-up for acquired inventory		15,034			3,749			11,285			301.0	%
Adjustments for acquisition and other non-core costs		10,849			13,113			(2,264	)		17.3	%
Impairment loss		290,949			1,194			289,755			nm
Management incentive compensation (share-based)		22,603			13,295			9,308			70.0	%

Adjusted EBITDA (non-GAAP)	$	136,970		$	30,732		$	106,238			345.7	%

¹	Net loss includes amounts attributable to non-controlling interests.

Adjusted EBITDA (non-GAAP)

Adjusted EBITDA, a non-GAAP financial measure which excludes depreciation and amortization, net interest expense, income taxes, other expense, share-based compensation, adjustments for acquisition and other non-core costs, loss on equity method investments and adjustments for fair value mark-up for acquired inventory, was $137.0 million for the nine months ended September 30, 2021 compared to $30.7 million for the nine months ended September 30, 2020. The increase in adjusted EBITDA of $106.2 million is due to higher gross profit partially offset by higher operating expenses to support the growth of the business, both organically and inorganically.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of September 30, 2021, the Company held $252.8 million in cash and cash equivalents, $2.0 million in restricted cash and $239.8 million of working capital compared to December 31, 2020, where the Company held $136.3 million in cash and cash equivalents, $4.4 million in restricted cash and $(3.4) million of working capital. The increase of $243.2 million in working capital was primarily driven by increased cash during the period. On August 12, 2021 the company closed on the Senior Loan of $400.0 million and repaid the previous $200.0 million Amended Term Loan, leading to an increase in cash. The Senior Loan accrues interest at a rate of 9.5% per annum, payable in cash biannually, and has a stated maturity of August 2026. Additionally, the increase was partially driven by higher inventory and accounts receivable, as well as lower accrued liabilities.

The Company is able to access private and/or public financing through, but not limited to, institutional lenders such as the Senior Loan of $400.0 million, which closed on August 12, 2021, private loans through individual investors, and private and public equity raises such as the equity distribution agreement that was announced on April 26, 2021. The Company expects cash on hand and cash flows from operations, along with the private and/or public financing options discussed, will be adequate to meet capital requirements and operational needs for the next 12 months.

Cash Flows

Operating Activities

Net cash used in operating activities was $23.2 million for the nine months ended September 30, 2021, a decrease of cash of $4.4 million compared to $27.6 million of cash used during the nine months ended September 30, 2020. The decrease in net cash used in operating activities was primarily due to an increase in gross profit through improved efficiencies and greater scale in the Company’s established markets. This was offset by higher working capital requirements in the period.

Investing Activities

Net cash used in investing activities was $99.8 million for the nine months ended September 30, 2021, an increase of cash used of $44.5 million compared to $55.3 million used in the nine months ended September 30, 2020. The increase in net cash used in investing activities was primarily due to an increase in loans and advances related to the Bluma, Cultivate and Laurel Harvest acquisitions; higher cash paid for acquisitions; and reduced proceeds from sale- leaseback transactions and tenant improvement allowances in the current-year period.

Financing Activities

Net cash provided by financing activities was $237.4 million for the nine months ended September 30, 2021, an increase in cash provided of $146.9 million compared to $90.5 million for the nine months ended September 30, 2021. The increase in net cash provided by financing activities was primarily due to proceeds received from the Senior Loan, net of Amended Term Loan repayment, of $187.0 million and proceeds received from the equity offering in the first quarter of 2021.

CONTRACTUAL OBLIGATIONS

As of September 30, 2021, maturities of lease liabilities were as follows:


($ in thousands)	Total			Operating Leases			Finance Leases
2021	$	13,715		$	9,818		$	3,897
2022		22,731			17,373			5,358
2023		22,817			17,283			5,534
2024		24,286			18,600			5,686
2025		24,715			18,894			5,821
Thereafter		216,686			180,651			36,035

Total lease payments	$	324,950		$	262,619		$	62,331

Less: imputed interest		(185,963	)		(154,849	)		(31,114	)
Less: tenant improvement allowance		(15,072	)		(14,373	)		(699	)

Present value of lease liabilities		123,915			93,397			30,518

Less: short-term lease liabilities		(18,568	)		(14,673	)		(3,895	)

Present value of long-term lease liabilities	$	105,347		$	78,724		$	26,623

In addition to the future minimum lease payments disclosed above, the Company is responsible for real estate taxes and common operating expenses incurred by the building or facility in which it leases space. Additionally, Cresco Labs will continue to invest in its facilities through construction and other capital expenditures as it expands its footprint in existing and new markets.

OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS

The Company has no material undisclosed off-balance sheet arrangements or proposed transactions that have, or are reasonably likely to have, a current or future effect on its results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources that are material to investors.

RELATED PARTY TRANSACTIONS

The Company’s key management personnel, consisting of the executive management team and management directors, have the authority and responsibility for planning, directing, and controlling the activities of the Company. The material transactions with related parties and changes in related party balances for the three and nine months ended September 30, 2021 and 2020, are discussed below.

As of September 30, 2021 and December 31, 2020, the Company had income tax related receivables of $nil and $0.2 million, respectively, with key management personnel.

Related parties including key management personnel hold 94.2 million redeemable units of Cresco Labs, LLC, which is equal to $33.4 million of non-controlling interests as of September 30, 2021. During the three and nine months ended September 30, 2021, 83.4% and 88.0%, respectively, of required tax distribution payments to holders of Cresco Labs, LLC were made to related parties including key management personnel. During the three and nine months ended September 30, 2020, 83.3% and 84.8%, respectively, of required tax distribution payments to holders of Cresco Labs, LLC were made to related parties including key management personnel.

On August 12, 2021, the Company closed on a new Senior Loan agreement, the proceeds from which were used to retire the existing Amended Term Loan. Upon entering the new Senior Loan agreement, the Company has no borrowings with related parties. Prior to the closing of the new Senior Loan, the Company had borrowings with related parties related to the Amended Term Loan. The balance of the Amended Term Loan as of September 30, 2021 is $nil as payments of $16.6 million were made in the third quarter to satisfy this debt. During the three months

ended September 30, 2021 and 2020, the Company recorded interest expense related to borrowings with related parties of $0.2 million and $0.5 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded interest expense related to borrowings with related parties of $1.2 million and $1.3 million, respectively. As of September 30, 2021 and December 31, 2020, the Company had interest payable related to borrowings with related parties of $nil and $0.1 million, respectively.

Prior to the new Senior Loan agreement, related party lenders included Charlie Bachtell, Chief Executive Officer and member of the board of directors of the Company (the “Board”); Robert Sampson, member of the Board; Global Green Debt, LLC which is owned by Randy Podolsky, member of the Board; Calti, LLC which is owned by Joe Caltabiano, owner of 11.2% of the Company’s outstanding redeemable shares; McCormack Capital, which is owned by Brian McCormack, MVS shareholder; CL Debt, LLC which is owned by Dominic Sergi, MVS shareholder; a holder of minority interest in MedMar, Inc. (“MedMar”); and Vero Management LLC, which is owned by individuals owning 22.2% of the Company’s outstanding redeemable shares.

The Company has lease liabilities for real estate lease agreements in which the lessors have minority interest in SLO Cultivation, Inc. (“SLO”) and MedMar. The lease liabilities were incurred in January 2019 and May 2020 and will expire in 2027 through 2036.

The Company has lease liabilities for real estate lease agreements in which the lessor is Clear Heights Properties where Dominic Sergi is Chief Executive Officer. The lease liabilities were incurred by entering into operating leases, sale-leaseback transactions and financing transactions during 2020 and 2021 with lease terms that will expire in 2030. During the three months ended September 30, 2021, the Company received tenant improvement allowance reimbursements of $nil and $0.8 million, respectively, related to these lease agreements. During the nine months ended September 30, 2021 and 2020, the Company did not receive tenant improvement allowance reimbursements. The Company expects to receive further reimbursements of $2.2 million as of September 30, 2021.

Below is a summary of the expense resulting from the related party lease liabilities for the three and nine months ended September 30, 2021 and 2020 as well as the year ended December 31, 2020:


($ in thousands)	Classification		Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	Classification		2021		2020		2021		2020
Operating Leases
Lessor has minority interest in SLO		Rent expense	$	389	$	517	$	1,180	$	1,742
Lessor has minority interest in		Rent expense		57		—		170		83
Lessor is a member of key management personnel		Rent expense		296		—		871		370
Finance Leases
Lessor has minority interest in		Depreciation	$	70	$	38	$	206	$	75
Lessor has minority interest in MedMar		Interest expense		80		44		231		88
Lessor is a member of key		Depreciation		19		18		55		28
Lessor is a member of key management personnel		Interest expense		21		22		63		37

Additionally, below is a summary of the right of use (“ROU”) assets and lease liabilities attributable to related party lease liabilities as of September 30, 2021 and December 31, 2020:


	As of September 30, 2021				As of December 31, 2020
($ in thousands)	ROU Asset		Lease Liability		ROU Asset		Lease Liability
Operating Leases
Lessor has minority interest in SLO	$	5,574	$	10,196	$	4,926	$	8,560
Lessor has minority interest in MedMar		1,182		1,202		1,146		1,187
Lessor is a member of key management personnel		6,321		6,185		6,334		4,783
Finance Leases
Lessor has minority interest in MedMar	$	2,207	$	2,495	$	1,201	$	1,365
Lessor is a member of key management personnel		635		641		648		678

During both the three and nine months ended September 30, 2021, the Company recorded interest expense on finance lease liabilities of $0.1 million and $0.2 million, respectively. During the three and nine months September 30, 2020, the Company recorded interest expense on finance liabilities of $0.1 million and $0.1 million, respectively. As of September 30, 2021, and December 31, 2020, the Company had finance lease liabilities totaling $1.5 million and $1.5 million, respectively. All finance lease liabilities outstanding are held by a related party owning MVS shares of the Company.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or fair value. The carrying values of financial instruments held at amortized cost approximate their fair values as of September 30, 2021 and 2020 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at fair value.

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

•

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;

•

Level 2 – inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

•

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

There have been no transfers between fair value levels valuing these assets during the year.

The following tables summarize the Company’s financial instruments as of September 30, 2021 and December 31, 2020:


	September 30, 2021
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	252,838	$	—	$	—	$	—	$	252,838
Restricted cash¹		1,959		—		—		—		1,959
Accounts receivable, net		47,757		—		—		—		47,757
Loans receivable, short-term		1,365		—		—		1,178		2,543
Loans receivable, long-term		3,820		—		—		—		3,820
Investments²		—		4,997		781		660		6,438
Security deposits		3,893		—		—		—		3,893
Financial Liabilities:
Accounts payable	$	25,617	$	—	$	—	$	—	$	25,617
Accrued liabilities		69,185		—		—		—		69,185
Short-term borrowings		15,445		—		—		—		15,445
Current portion of lease liabilities		18,542		—		—		—		18,542
Deferred consideration, contingent consideration and other payables		—		89		—		41,803		41,892
Derivative liabilities, short-term		—		—		—		6,180		6,180
Derivative liabilities, long-term		—		—		—		983		983
Lease liabilities		105,347		—		—		—		105,347
Deferred consideration and contingent consideration		—		—		—		8,515		8,515
Long-term notes payable and loans payable		463,864		—		—		—		463,864

¹	Restricted cash balances include various escrow accounts related to investments, acquisitions, facility requirements and building improvements.

²	Investment balances in the amortized cost column represent equity method investments.


	December 31, 2020
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	136,339	$	—	$	—	$	—	$	136,339
Restricted cash¹		4,435		—		—		—		4,435
Accounts receivable, net		29,943		—		—		—		29,943
Loans receivable, short-term		921		—				1,517		2,438
Loans receivable, long-term		1,204		—		—		20,019		21,223
Investments²		3,192		—		1,049		119		4,360
Security deposits		3,558		—		—		—		3,558
Financial Liabilities:
Accounts payable	$	23,231	$	—	$	—	$	—	$	23,231
Accrued liabilities		130,469		—		—		—		130,469
Short-term borrowings		25,924		—		—		—		25,924
Current portion of lease liabilities		18,040		—		—		—		18,040
Deferred consideration, contingent consideration and other payables		—		22		—		19,093		19,115
Derivative liabilities, long-term		—		—		—		17,505		17,505
Lease liabilities		74,468		—		—		—		74,468
Deferred consideration and contingent consideration		—		—		—		7,247		7,247
Long-term notes payable and loans payable		255,439		—		—		—		255,439

¹	Restricted cash balances include various escrow accounts related to investments, acquisitions and facility licensing requirements.

²	Investment balances in the amortized cost column represent equity method investments.

Financial Risk Management

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board and Company management mitigate these risks by assessing, monitoring and approving the Company’s risk management processes:

(a)

Credit and Banking Risk

Credit risk is the risk of a potential loss to the Company if a customer or a third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at September 30, 2021 and December 31, 2020 is the carrying amount of cash, accounts receivable, and loans receivable. The Company does not have significant credit risk with respect to its customers or loan counterparties, based on cannabis industry growth in its key markets and the low interest rate environment. Although all deposited cash is placed with U.S. financial institutions in good standing with regulatory authorities, changes in U.S. federal banking laws related to the deposit and holding of funds derived from activities related to the cannabis industry have passed the U.S. House of Representatives but have not yet been voted on within the U.S. Senate. Given that current U.S. federal law provides that the production and possession of cannabis is illegal, there is a strong argument that banks cannot accept for deposit funds from businesses involved with the cannabis industry.

(b)

Asset Forfeiture Risk

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property was never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

(c)

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company primarily manages liquidity risk through the management of its capital structure by ensuring that it will have sufficient liquidity to settle obligations and liabilities when due. As of September 30, 2021, the Company had working capital (defined as current assets less current liabilities) of $239.8 million, which reflects the equity raise that occurred in the first quarter of 2021.

(d)

Market Risk

(i)

Currency Risk

The operating results and balance sheet of the Company are reported in U.S. dollars. As of September 30, 2021 and December 31, 2020, the Company’s financial assets and liabilities are denominated primarily in U.S. dollars. However, from time to time some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company recorded $0.2 million and $1.3 million in foreign exchange losses during the three and nine months ended September 30, 2021, respectively. The Company recorded $0.2 million in foreign exchange losses for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021 and December 31, 2020, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.

(ii)

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. An increase or decrease in the Company’s incremental borrowing rate by 10.0% would result in an associated increase or decrease in deferred consideration, contingent consideration and other payables and interest expense, net of $0.1 million. The Company’s effective interest rate for its Senior Loan is 11.0% and the stated interest rate is 9.5%.

(iii)

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company is subject to price risk related to derivative liabilities and contingent consideration that are valued based on the Company’s own stock price. An increase or decrease in stock price by 10.0% would result in an associated increase or decrease to deferred consideration, contingent consideration and other payables, derivative liabilities, long-term and deferred consideration and contingent consideration with a corresponding change to other (expense) income, net. As of September 30, 2021 and 2020, an increase or decrease in stock price by 10.0% would result in an impact of $4.3 million or $3.9 million, respectively.

(iv)

Tax Risk

Tax risk is the risk of changes in the tax environment that would have a material adverse effect on the Company’s business, results of operations, and financial condition. Currently, state licensed marijuana businesses are assessed a comparatively high effective federal tax rate due to IRC Section 280E, which bars businesses from deducting all expenses except their cost of goods sold when calculating federal tax liability. Any increase in tax levies resulting from additional tax measures may have a further adverse effect on the operations of the Company, while any decrease in such tax levies will be beneficial to future operations.

(v)

Regulatory Risk

Regulatory risk pertains to the risk that the Company’s business objectives are contingent, in part, upon the compliance of regulatory requirements. Due to the nature of the industry, the Company recognizes that regulatory requirements are more stringent and punitive in nature. Any delays in obtaining, or failure to obtain regulatory approvals can significantly delay operational and product development and can have a material adverse effect on the Company’s business, results of operation, and financial condition. The Company is cognizant of the advent of regulatory changes occurring in the cannabis industry on the city, state, and national levels. Although regulatory outlook on the cannabis industry has been moving in a positive trend, the Company is aware of the effect that unforeseen regulatory changes could have on the goals and operations of the business as a whole.

The novel coronavirus was declared a pandemic by the World Health Organization on March 12, 2020. During the fourth quarter of 2020, the first vaccine utilized to prevent coronavirus infection was approved by the U.S. Food and Drug Administration. As of September 30, 2021, the vaccine is becoming more widely available, however, there remains significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on the Company’s future financial results.

SUMMARY OF OUTSTANDING SHARE DATA

Cresco has the following securities issued and outstanding, as of September 30, 2021:


Securities	Number of Shares (in thousands)
Issued and Outstanding
Super Voting Shares		500
Subordinate Voting Shares		253,131
Proportionate Voting Shares¹		20,777
Special Subordinate Voting Shares²		1
Warrants		9,854
Stock Options		24,634
Restricted Stock Units		1,204

¹	PVS presented on an “as-converted” basis to SVS (1-to-200)

²	SSVS presented on an “as-converted” basis to SVS (1-to-0.00001)

Federal Regulatory Environment

Canadian-Securities Administrators Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”) provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis-related activities in the United States as permitted within a particular state’s regulatory framework. All issuers with United States cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other required disclosure documents.

In accordance with Staff Notice 51-352, Cresco Labs will evaluate, monitor and reassess the disclosure contained herein, and any related risks, on an ongoing basis and the same will be supplemented, amended and communicated to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. As a result of the Company’s operations, it is subject to Staff Notice 51-352 and accordingly provides the following disclosure:

Cresco Labs currently directly derives a substantial portion of its revenues from the cannabis industry in certain U.S. states, which industry is illegal under U.S. Federal Law. As of September 30, 2021, the Company is directly involved (through licensed subsidiaries) in both the medical and adult-use cannabis industry in the states of Illinois, Pennsylvania, Ohio, California, Arizona, Maryland, Massachusetts, New York, Michigan, and Florida as permitted within such states under applicable state law which states have regulated such industries.

The cultivation, sale and use of cannabis is illegal under federal law pursuant to the U.S. Controlled Substance Act of 1970 (“CSA”). Under the CSA, the policies and regulations of the U.S. Federal Government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. The Supremacy Clause of the U.S. Constitution establishes that the U.S. Constitution and federal laws made pursuant to it are paramount and in case of conflict between federal and state law, the federal law shall apply.

On January 4, 2018, former U.S. Attorney General Jeff Sessions issued a memorandum to U.S. district attorneys which rescinded previous guidance from the U.S. Department of Justice specific to cannabis enforcement in the United States, including the Cole Memo (the “Memo”). The Memo previously provided guidance to prioritize a limited scope of federal enforcement including the prevention of the distribution of marijuana to minors, revenue from the sale of marijuana from going to criminal enterprises, diversion of marijuana from states where it is legal under state law in some form to other states, state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity, violence and the use of firearms in the cultivation and distribution of marijuana, drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use, the growing of marijuana on public lands and marijuana possession or use on federal property. With the Memo rescinded, U.S. federal prosecutors have been given discretion in determining whether to prosecute cannabis-related violations of U.S. Federal Law. If the Department of Justice policy was to aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such Department of Justice policies through pursuing prosecutions, then the Company could face, (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis. Additionally, as has recently been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of the Company who are not U.S. citizens face the risk of being barred from entry into the United States for life. The Rohrabacher–Farr amendment (also known as the Rohrabacher–Blumenauer amendment) prohibits the Department of Justice from spending funds to interfere with the implementation of state medical cannabis laws. It first passed the U.S. House of Representatives in May 2014 and became law in December 2014 as part of an omnibus spending bill. The passage of the amendment was the first time either chamber of Congress had voted to

protect medical cannabis patients and is viewed as a historic victory for cannabis reform advocates at the federal level. The amendment does not change the legal status of cannabis, however, and must be renewed each fiscal year in order to remain in effect. Since 2015, Congress has used a rider provision in the Consolidated Appropriations Acts (currently the Joyce Amendment, but previously called the Rohrabacher-Blumenauer Amendment, and before that the Rohrabacher-Farr Amendment) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against state-compliant actors in jurisdictions that have legalized medical cannabis and cannabis-related activities. Additionally, the Blumenauer-McClintock-Norton-Lee amendment is currently under consideration. This amendment would extend the protections of the Joyce Amendment to adult use business.

Unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current U.S. federal law. If the U.S. Federal Government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects would be materially adversely affected.

Despite the current state of the federal law and the CSA, the states of Arizona, California, Nevada, Massachusetts, Maine, Michigan, New Mexico, New York, New Jersey, Illinois, Montana, Washington, Oregon, Colorado, Virginia, Vermont and Alaska, Connecticut, and the District of Columbia, have legalized recreational use of cannabis. During the November 2020 election, voters in Arizona, New Jersey, South Dakota, and Montana passed adult-use marijuana measures to allow for the sale of recreational marijuana in those states. South Dakota and Mississippi voters passed initiatives to allow medical marijuana. On February 8, 2021, South Dakota circuit court judge Christina Klinger rejected the measure approved by voters in the November election noting that it is a violation of the state’s requirement that constitutional amendments deal with one subject and would have broad changes to the state government. In April 2021, the South Dakota Supreme Court began hearing oral arguments on the constitutionality of the ballot initiative. Although the District of Columbia voters passed a ballot initiative in November 2014, no commercial recreational operations exist because of a prohibition on using funds for regulation within a federal appropriations amendment to local District spending powers. Early in 2021, the government moved to rectify the situation through local legislation. Two separate bills have been introduced: Mayor Muriel Bowser’s Safe Cannabis Sales Act of 2021, and Councilmember Phil Mendelson’s Comprehensive Cannabis Legalization and Regulation Act of 2021. On May 7, 2021, the Mississippi Supreme Court overturned the voter-approved initiate to legalize medical marijuana in Mississippi after legal challenges arguing the constitutional amendment violated procedural rules for placing measures on the ballot. Should these bills pass, they could not be implemented until the congressional rider on DC’s appropriations bill, prohibiting DC from using any funds to implement and regulate adult-use cannabis sales in DC, is lifted.

In addition, over half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis, provided that there are strict purchasing or possession limits. However, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions.

The Company’s objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the cannabis industry in the U.S. Accordingly, there are significant risks associated with the business of the Company. Unless and until the U.S. Congress amends the CSA with respect to medical and/or adult- use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law in the U.S.

For these reasons, the Company’s investments in the U.S. cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities. There are risks associated with the business of the Company. See sections “Risk Factors”,“General Development of the Business” and “Description of the Business” in the Annual Information Form for the year ended December 31, 2020, filed on SEDAR.

On November 20, 2019, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (the “MORE Act”) by a 24 to 10 vote. The MORE Act would decriminalize and remove Cannabis as a Schedule I controlled substance. In April 2021, days before a floor vote in the U.S. House of Representatives, the MORE Act was stalled due a late added amendment. While the main thrust of the bill remained intact, including a tax to fund programs to repair the harms of the drug war, a provision was added requiring a federal permit to operate a “cannabis enterprise” along with restrictions that could ban people with prior marijuana convictions from being eligible. Advocates viewed the amendment as problematic as it allows for federal cannabis permits to be suspended or revoked if a person has a past or current legal proceeding related to a felony violation of any state or federal cannabis law. Following the Judiciary Committee approval in November, 2019 MORE was passed by the House by a vote of 228-164 in December 2020. The bill did not advance in the Senate. The bill was reintroduced by Representative Nadler (D-NY 10^th Dist.) in May 2021. On September 30, 2021, the MORE Act passed the House Judiciary Committee by a vote of 26-15. Two Republicans joined all of the committee’s Democratic members to move the bill forward. The next step is for the legislation to once again move to the House floor for consideration.

On April 19, 2021, the SAFE Banking Act of 2019 (the “SAFE Banking Act” or “SAFE”) again passed the U.S. House of Representatives by a 321 – 101 vote. Management believes, based on currently available information, that the likelihood of the SAFE Banking Act’s passage is high, however, the particular timing and legislative vehicle is still unknown. The U.S. Senate has declined to bring the SAFE Banking Act up for a vote due to pending comprehensive federal reform legislation from Senate Majority Leader Chuck Schumer (D-NY), Senate Finance Committee Chair Ron Wyden (D-OR), and Senate Judiciary Criminal Justice and Counterterrorism Subcommittee Chair Cory Booker (D-NJ). The provisions of SAFE were offered by Congressman Earl Perlmutter (D-CO) as an amendment to the House version of the Defense Authorization Act (NDAA/H.R. 4350), which passed the House on September 23, 2021. The Senate is currently developing its version of the bill, which is not expected to include SAFE. The differences between the two versions of the NDAA, including whether the NDAA will ultimately contain the language of SAFE, will need to be resolved by the House and the Senate before enacted into law.

On February 1, 2021, Leader Schumer and Senators Wyden and Booker issued a joint statement announcing the imminent release of comprehensive cannabis reform legislation which stated, “We will release a unified discussion draft on comprehensive reform to ensure restorative justice, protect public health and implement responsible taxes and regulations.”

On May 5, 2021, U.S. Representatives David Joyce (R-OH) and Don Young (R-AK) introduced the Republican reform proposal called the Common Sense Cannabis Reform for Veterans, Small Businesses, and Medical Professionals Act.

On July 14, 2021, Leader Schumer and Senators Wyden and Booker released the Cannabis Administration and Opportunity Act, a 163-pagediscussion draft bill, alongside a 30-page summary document, which effectively deschedules cannabis, provides restorative justice for past cannabis-related convictions, and establishes a federal regulatory system within the Food and Drug Administration (FDA) for cannabis products. In addition to the aforementioned provisions, the bill also maintains state authority to establish individual cannabis policies and establishes a federal tax on cannabis products. Stakeholder comments were submitted to the Sponsoring Offices on or before the requested deadline of September 1, 2021. The Sponsoring Offices are currently considering those comments and are expected to amend the discussion draft bill before filing the same. It is unclear when the bill will be filed.

The States in Which We Operate, Their Legal Framework and How it Affects Our Business

Illinois Operations

The Compassionate Use of Medical Cannabis Pilot Program Act, which allows individuals diagnosed with a debilitating medical condition access to medical marijuana, became effective January 1, 2014. There were over 41 qualifying conditions as part of the initial medical program.

The Opioid Alternative Pilot Program launched on January 31, 2019 and allows patients that receive or are qualified to receive opioid prescriptions access to medical marijuana as an alternative in situations where an opioid could generally be prescribed. Under this program, patients with doctor approval can receive near-immediate access to cannabis products from an Illinois licensed dispensary. The Opioid Alternative Pilot Program eliminates the previously required fingerprinting and background checks that often delay patients’ access to medical cannabis by up to three months.

In January 2019, J.B. Pritzker was sworn into office as Governor of Illinois. Cresco Labs’ CEO and co-founder, Charles Bachtell, was appointed to the Cannabis Legalization Subcommittee of the Governor’s transition team. Cannabis Legalization was one of four subcommittees under the Governor’s Restorative Justice and Safe Communities Transition Committee. The primary goals of the Cannabis Legalization Subcommittee were to evaluate and develop implementation recommendations for the Governor’s platform on legalizing cannabis.

In June 2019, the Illinois House of Representatives and Senate passed Senate Bill 2023 which added 11 additional debilitating illnesses such as chronic pain, migraines and irritable bowel syndrome to the list of qualifying medical conditions. This bill was signed into law in August 2019 by Governor J.B. Pritzker.

Additionally, in June 2019, Governor Pritzker signed the Cannabis Regulation and Taxation Act into law, making Illinois the 11^th state to legalize recreational marijuana. Adult-use sales of marijuana in Illinois began on January 1, 2020.

Illinois’ retail market for 2020 was approximately $1.0 billion, representing a 312.0% year-over-year increase. Illinois’ retail market for the three months ended September 30, 2021, was approximately $470.7 million an increase of 5.0% quarter over quarter. Cresco Labs currently owns and operates three (3) medical and adult-use cannabis cultivation and manufacturing centers in Illinois, one (1) medical use dispensary location, four (4) medical/adult-use dispensary locations, and five (5) adult-use dispensary locations. Licenses were awarded based on merit in a highly competitive application process to applicants who demonstrated strong operational expertise and financial backing.

Cresco Labs is licensed to operate in the State of Illinois as a medical and adult-use cultivator and product manufacturer. Cresco Labs Phoenix Farms, LLC (“Phoenix”), PDI Medical III, LLC (“PDI”), FloraMedex, LLC (“FloraMedex”), MedMar Lakeview, LLC (“MedMar Lakeview”), and MedMar Rockford, LLC (“MedMar Rockford”) are licensed to operate retail dispensaries in the State of Illinois. These dispensaries were rebranded as Sunnyside* dispensaries in early 2020. Under applicable laws, the licenses permit Cresco Labs and its subsidiaries to collectively cultivate, manufacture, process, package, sell, and purchase marijuana pursuant to the terms of the licenses, which are issued by the Illinois Department of Agriculture (“IDOA”) and the Illinois Department of Financial and Professional Regulation (“IDFPR”) under the provisions of the Illinois Revised Statutes 410 ILCS 130 and 410 ILCS 705. All licenses are, as of the date hereof, active with the State of Illinois. There are five categories of licenses in Illinois, (i) cultivation/processing, (ii) dispensary, (iii) craft grower, (iv) infuser, (v) and transporting. The licenses are independently issued for each approved activity.

All cultivation/processing establishments must register with the IDOA and all dispensaries must register with the IDFPR. If applications contain all required information and after vetting by officers, establishments are issued a medical marijuana establishment registration certificate. Registration certificates are valid for a period of one (1) year and are subject to annual renewals after required fees are paid and the business remains in good standing. Renewal requests are typically communicated through email from the IDOA or IDFPR and include a renewal form. While Cresco Labs’ compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Illinois cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Illinois cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The retail dispensary licenses held by Phoenix, PDI, FloraMedex, MedMar Lakeview, and MedMar Rockford permit the Company to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients and adult-use customers. As of September 30, 2021, the Company has opened ten (10) Sunnyside* dispensary locations in Illinois. Two (2) of the ten (10) are located within the City of Chicago.

The Cannabis Regulation and Tax Act mandates that the Department of Agriculture issue up to 40 craft grower and infuser licenses in addition to transporting licenses by July 1, 2020. The Act further requires the Department of Agriculture to issue up to 60 craft grower licenses by December 21, 2021, and states the Department may also issue up to 60 infuser licenses by the same date. On August 2, 2021, the Department of Agriculture announced that it had issued 32 initial craft grow licenses, 28 infuser licenses, and 9 transporter licenses. The Department of Agriculture also announced that some applicants that received a Notice of Award for craft grow and infuser licenses requested and received an extension from the Department to submit their licensing fee and other documents, meaning other licenses would be awarded. It had not issued craft grower, infuser, or transporter licenses before that time. The Department of Agriculture later announced that it would be selecting the next round of licensees (up to 60 craft grower and infuser licenses to be awarded by December 21, 2021) from the group of remaining applicant pool. The Cannabis Regulation and Tax Act also requires the award of conditional adult use dispensing licenses by the Department of Financial and Professional Regulation. On September 3, 2021, the Department of Financial and Professional Regulation announced the results of several lotteries to award 185 conditional adult use dispensing licenses that have been part of an application process since early 2020. However, as a result of a series of lawsuits, those licenses have not yet been formally awarded. Further, the Department of Financial and Professional Regulation announced its intention to conduct an additional lottery to award conditional adult use dispensing organization licenses and resolve the pending litigation.

The three (3) medical cultivation licenses held by Cresco Labs permit it to acquire, possess, cultivate, manufacture/ process into edible medical marijuana products and/or medical marijuana-infused products, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to medical marijuana dispensaries. In September 2019, the three (3) cultivation facilities were approved for growing adult-use cannabis by the IDOA, for a total cultivation capacity of 0.6 million square feet, the maximum allowed by law.

On September 27, 2019, the Company announced that it has signed a binding agreement to sell its Joliet and Kankakee, Illinois facilities to Innovative Industrial Properties, Inc. (“IIP”) for approximately $46.3 million, which amount includes funding for additional tenant improvements at the Kankakee facility. Concurrent with the closing of the sale, Cresco Labs entered into a long-term, triple-net lease agreement with IIP and will continue to operate each property as a licensed cannabis cultivation and processing facility. The Joliet transaction was accounted for as a financing transaction. The two properties represent approximately 100,000 square feet of industrial space in aggregate.

On December 12, 2019, the Company announced that it had completed the sale of its Lincoln, Illinois cultivation facility to GreenAcreage Real Estate Corp. (“GreenAcreage”), for $50.0 million and accounted for as a financing transaction. Cresco Labs entered into a long-term, triple-net lease agreement with GreenAcreage and will continue to operate the facility as a licensed medical and adult-use cannabis cultivation and processing facility. The Company’s Lincoln property is approximately 215,000 square feet, making it the largest such facility in Illinois.

Pennsylvania Operations

The Pennsylvania medical marijuana program was signed into law on April 17, 2016 under Act 16 and provided access to state residents with one of 21 qualifying conditions. The state, which consists of over 12 million U.S. citizens and qualifies as the fifth largest population in the U.S., operates as a high-barrier market with very limited market participation. The state originally awarded only 12 licenses to cultivate/process and 27 licenses to operate retail dispensaries (which entitled holders up to three medical dispensary locations). Out of the hundreds of applicants in each license category, Cresco Yeltrah, LLC (“Yeltrah”) was awarded one (1) medical cannabis cultivation and processing center license in Pennsylvania, and one (1) dispensary license allowing three (3) dispensary locations in Pennsylvania. Cresco Labs was awarded the second highest overall score during the application process. On June 30, 2021, Pennsylvania Governor Tom Wolf signed into law PA HB 1024, amending Act 16. HB 1024 implemented several changes to Act 16 including but not limited to the ability for grower/ processors to obtain and transport bulk postharvest plant material between grower/processors to process medical marijuana. The amendatory legislation also expanded the list of qualifying conditions, permits limited remediation of cannabis flower, requires the Department of Agriculture to update its list of approved pesticides, and expands the number of clinical registrants and affords clinical registrants with the same rights as grower/processors.

Retail sales commenced in February 2018 to a limited number of retail locations across the state. On February 15, 2018, Yeltrah was the first cultivator/processor to release product into the Pennsylvania market (approximately six (6) weeks ahead of any other producer), and its dispensary was the first to sell product to patients in the state.

On March 22, 2018, it was announced that the final phase of the Pennsylvania medical marijuana program would initiate its rollout, which would include 13 additional cultivation/processing licenses and 23 additional dispensary licenses. The application period ran from April 2018 through May 2018. Yeltrah submitted additional dispensary applications and in December 2018 an additional dispensary license was obtained to open three (3) additional dispensary locations, for a total of six (6) dispensary locations in the State of Pennsylvania. On June 21, 2021, the fourth Sunnyside* dispensary opened in Philadelphia, Pennsylvania. Of the six (6) approved dispensary locations, two (2) are not currently operational as of September 30, 2021.

However, on October 21, 2021, the Company opened its fifth Sunnyside* dispensary in Wyomissing, Pennsylvania, leaving only one (1) more approved dispensary location to open.

Under applicable laws, the licenses permit Yeltrah to cultivate, manufacture, process, package, sell, and purchase medical marijuana pursuant to the terms of the licenses, which are issued by the Pennsylvania Department of Health (“PDOH”) under the provisions of Medical Marijuana Act (35 P.S. §10231.101 — 10231.2110) and Chapters 1141, 1151 and 1161 of the Pennsylvania regulations. All licenses are, as of the date hereof, active with the Commonwealth of Pennsylvania. There are two categories of licenses in Pennsylvania: (i) cultivation/processing and (ii) dispensary. The licenses are independently issued for each approved activity for use at Yeltrah facilities in Pennsylvania.

All cultivation/processing establishments and all dispensaries must register with the PDOH. Registration certificates are valid for a period of one year and are subject to annual renewals after required fees are paid and the business remains in good standing. Specifically, licenses that Yeltrah currently holds have each undergone one or two renewals. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Pennsylvania cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Pennsylvania cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The retail dispensary licenses permit Yeltrah to purchase marijuana and marijuana products from cultivation/ processing facilities and allows the sale of marijuana and marijuana products to registered patients.

The medical cultivation licenses permit Yeltrah to acquire, possess, cultivate, manufacture/process into edible medical marijuana products and/or medical marijuana-infused products, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to medical marijuana dispensaries. In May 2020, the Company announced the completion of its cultivation and manufacturing facility expansion which provides an additional 66,000 square feet of indoor and greenhouse cultivation area, bringing the total cultivation space in the facility to 88,000 square feet, subsequently updated to 85,000 square feet upon conversion of cultivation space to packaging space.

On September 25, 2019, Pennsylvania Governor Tom Wolf held a press conference to announce that a majority of Pennsylvania citizens were in favor of adult-use cannabis. He called on the General Assembly to consider the legalization of adult-use cannabis and provided additional actions to seek a path forward. On October 13, 2020, the Governor reaffirmed his support for adult-use cannabis and discussed the economic growth potential and restorative justice benefits of legalizing adult-use cannabis. On January 28, 2021, Governor Wolf further reiterated his support for adult-use cannabis and called for the legalization in his 2021 agenda. On February 24, 2021, Senator Dan Laughlin, (R-Erie County) joined by Senator Sharif Street, (D-Philadelphia), announced the intent to file bipartisan legislation to legalize adult-use cannabis in the Commonwealth of Pennsylvania. Since the announcement by Senators Laughlin and Street, on September 28, 2021, Representatives Jake Wheatley (D) and Dan Frankel (D) introduced an adult use bill. Additionally, on October 6, 2021, Representative Amen Brown (D) and Senator Mike Regan (R) announced their intention to file an adult use bill of their own.

Ohio Operations

House Bill 523, effective on September 8, 2016, legalized medical marijuana in Ohio. The Ohio Medical Marijuana Control Program (“MMCP”) allows people with certain medical conditions, upon the recommendation of an Ohio- licensed physician certified by the State Medical Board, to purchase and use medical marijuana. House Bill 523 required that the framework for the MMCP become effective as of September 2018. This timeframe allowed for a deliberate process to ensure the safety of the public and to promote access to a safe product.

The three following state government agencies are responsible for the operation of MMCP: (1) the Ohio Department of Commerce is responsible for overseeing medical marijuana cultivators, processors and testing laboratories; (2) the State of Ohio Board of Pharmacy (“Ohio Pharmacy Board”) is responsible for overseeing medical marijuana retail dispensaries, the registration of medical marijuana patients and caregivers, the approval of new forms of medical marijuana and coordinating the Medical Marijuana Advisory Committee; and, (3) the State Medical Board of Ohio is responsible for certifying physicians to recommend medical marijuana and may add to the list of qualifying conditions for which medical marijuana can be recommended.

Several forms of medical marijuana are legal in Ohio, these include: inhalation of marijuana through a vaporizer (not direct smoking), oils, tinctures, plant material, edibles, patches and any other forms approved by the State of Ohio Board of Pharmacy.

On June 4, 2018, the Ohio Pharmacy Board awarded 56 medical marijuana provisional dispensary licenses. The licenses were awarded after an extensive review of 376 submitted dispensary applications.

Provisional licensees are authorized to begin the process of establishing a dispensary in accordance with the representations in their applications and the rules adopted by the Ohio Pharmacy Board. Per Ohio State regulations, all provisional license holders have a maximum of six (6) months to demonstrate compliance with the dispensary operational requirements to obtain a Certificate of Operation. Compliance will be determined through an inspection by a Board of Medical Marijuana Compliance Agent. Once a dispensary is awarded a Certificate of Operation, it can begin selling medical marijuana to Ohio patients and caregivers in accordance with Ohio laws and rules.

By rule, the Ohio Pharmacy Board is limited to issuing up to 60 dispensary licenses across the state but will have the authority to increase the number of licenses. The Board of Pharmacy recently opened up a new application period for dispensaries, increasing the potential number of dispensaries in the state to 130. However, the Board left unchanged a regulation that limits the number of dispensary certificates of operation that a single owner can hold at five. Per the program rules, the Ohio Pharmacy Board will consider, on at least a biennial basis, whether enough medical marijuana dispensaries exist, considering the state population, the number of patients seeking to use medical marijuana, and the geographic distribution of dispensary sites.

Cresco Labs Ohio, LLC (“Cresco Labs Ohio”) was awarded one (1) dispensary license located in Wintersville, Ohio. The dispensary license permits Cresco Labs Ohio to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients.

Cresco Labs Ohio applied for and, on November 30, 2017, received one (1) cultivation license. Cresco Labs Ohio’s cultivation facility is a hybrid greenhouse structure located in Yellow Springs, Ohio. The medical cultivation license authorizes Cresco Labs Ohio to grow, harvest, package and transport medical marijuana products.

On December 12, 2018, Cresco Labs Ohio was granted the first dispensary Certificate of Operation in the state, which was over a month in advance of any other dispensary operator. Retail sales commenced on January 16, 2019, with the first cannabis sale taking place at the Wintersville dispensary. This was the second state medical marijuana program in which the Company was first to market.

On June 8, 2020, Cresco Labs Ohio was granted a provisional processing license by the State of Ohio. This license allows Cresco Labs Ohio to extract oils and manufacture products from cannabis which will now provide the Company the ability to sell its entire brand portfolio in Ohio.

Ohio cultivation and processor licenses are renewable annually by the Ohio Department of Commerce. Renewal applications are due at least thirty days prior to the expiration date of the Certificate of Operation. The Department of Commerce shall grant a renewal if the renewal application was timely filed, the annual fee was timely paid, there are no reasons warranting denial of the renewal and the cultivator/processor passes inspection. Ohio dispensary licenses expire biennially on the date identified on the certificate. Renewal information, including a renewal fee, must be submitted at least 45 days prior to the date the existing certificate expires. If the dispensary is operated in compliance with Ohio dispensary regulations, and the renewal fee is paid, the Ohio Pharmacy Board shall renew the Certificate of Operation within 45 days after the renewal application is received. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Ohio cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Ohio cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

On January 28, 2020, the Company announced that it had completed the sale of its Yellow Springs, OH facility to IIP. The previously announced sale was for consideration equal to approximately $10.5 million, which includes funding for additional tenant improvements. Concurrent with the closing of the sale, Cresco Labs entered into a long-term, triple-net lease agreement with IIP and will continue to operate the property as a licensed cannabis cultivation and processing facility. The Company accounted for the transaction as a financing transaction. The property represents approximately 50,000 square feet of industrial space in aggregate. This sale marked the Company’s fourth completed sale-leaseback or financing transaction, the third with IIP.

On February 16, 2021, the Company closed on the acquisition of Verdant dispensaries in Cincinnati, Chillicothe, Newark and Marion, Ohio. These acquisitions give the Company four additional dispensaries, bringing the Company’s dispensary presence in Ohio to five (5), the maximum allowed by the state.

California Operations

In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act of 1996 (“CUA”). This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation.

In 2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.

In September 2015, the California legislature passed three bills collectively known as the “Medical Cannabis Regulation and Safety Act” (“MCRSA”). The MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition 64, the “Adult-Use of Marijuana Act” (“AUMA”) creating an adult-use marijuana program for adults 21 years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set of regulations to govern medical and adult-use licensing regime for cannabis businesses in the State of California. MAUCRSA went into effect on January 1, 2018. Until recently, the four agencies that regulated marijuana at the state level are the Bureau of Cannabis Control (“BCC”), the California Department of Food and Agriculture (“CDFA”), the California Department of Public Health (“CDPH”), and the California Department of Tax and Fee Administration (“CDTFA”). On July 12, 2021, California Governor Gavin Newson signed into law

Assembly Bill 141 (AB-141), which established the Department of Cannabis Control (“DCC”). The DCC consolidates the BCC, CDFA’s CalCannabis Licensing Division, and CDPH’s Manufactured Cannabis Safety Branch into a single department. The DCC is charged with licensing, inspecting, and providing regulatory oversight over all cannabis businesses in California

In order to legally operate a medical or adult-use cannabis business in California, the operator must have both a local and state license. This requirement limits license holders to operate only in cities with marijuana licensing programs. Therefore, cities in California are allowed to determine if they will have a marijuana licensing program and determine the number of licenses they will issue to marijuana operators.

On June 7, 2018, Cresco Labs acquired a 60.0% ownership interest in SLO, a marijuana cultivation facility in operation in the cities of Carpinteria (Santa Barbara County) and Mendota (Fresno County), California. On September 27, 2018, Cresco Labs acquired a further 20.0% ownership interest to bring the total ownership to 80.0%.

SLO is licensed to cultivate, process, manufacture, and distribute medical and adult-use cannabis in the State of California pursuant to the terms of the California state licenses issued by the BCC, CDFA, CDPH and CDTFA under the provision of MAUCRSA and California Assembly Bill No. 133.

California state and local licenses are renewed annually. Each year, licensees are required to submit a renewal application. While renewals are annual, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable license, SLO would expect to receive the applicable renewed license in the ordinary course of business. While SLO’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that the licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of the California cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

SLO applied for and was granted licenses permitting it to cultivate, manufacture and distribute medical (and in some instances, adult-use) cannabis and cannabis-related products:

Mendota (Fresno County)

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SLO has been issued one (1) provisional license for Type 7 (Manufacturing 2 – Volatile), Adult-Use & Medical (“A&M”).

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SLO has been issued one (1) provisional license for Type 11 (Distribution), A&M.

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SLO submitted annual applications for the two (2) listed license types to the state regulator and is awaiting approval for these annual applications.

Carpinteria (Santa Barbara County)

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SLO has been issued the following provisional licenses:

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Twenty-three (23) Cultivation: Small Mixed-Light Tier 1 licenses.

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One (1) Nursery license: allowing for the planting and cultivation of medical cannabis from seeds, clones and immature plants.

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One (1) Processor license: allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

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SLO submitted annual renewal applications for the three (3) listed license types to the state regulator and is awaiting approval of the annual applications.

Origin House

On January 8, 2020, Cresco Labs acquired all of the issued and outstanding shares of CannaRoyalty Corp. d/b/a Origin House (“Origin House”), a leading distributor and provider of brand support services in California. Under the terms of the plan of arrangement and subsequent amendments, holders of common shares of Origin House received 0.7031 SVS of Cresco Labs for each Origin House share (the “OH Transaction”). The Company acquired 100.0% of all equity interests of Origin House for 66.5 million SVS and 5.7 million replacement equity awards.

The OH Transaction represents a total consideration of $428.2 million on a fully-diluted basis, and as of this date, is among the largest of public company acquisitions in the history of the U.S. cannabis industry. The combined entity is one of the largest vertically-integrated multi-state cannabis operators in the United States; a leading North American cannabis company, by footprint; and one of the largest cannabis brand distributors.

Origin House’s proven strategy has been to build relationships with established dispensaries, build partnerships with established market-leading brands, develop promising cannabis product companies and then leverage its full suite of support services to transform those products into strong California consumer brands. Since the closing of this acquisition, Cresco Labs has access to several additional licenses for cultivation, manufacturing and distribution of cannabis within the State of California.

West Sacramento (Yolo County)

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Origin House has been issued one (1) provisional license for Type 11 (Distribution), Adult-use and Medical (“A&M”).

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Origin House submitted an annual application for the one (1) listed license type to the state regulator and is awaiting approval for the annual application.

La Habra (Orange County)

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Origin House has been issued one (1) provisional license for Type 11 (Distribution), A&M.

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Origin House submitted an annual application for the one (1) listed license type to the state regulator and is awaiting approval for the annual application.

Unincorporated Sonoma (Sonoma County)

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Origin House has been issued one (1) provisional license for Cultivation, Medical Medium Indoor.

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Origin House has been issued one (1) provisional license for Processor, Medical.

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Origin House has been issued one (1) provisional license for Type 11 (Distribution), A&M.

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Origin House has been issued one (1) provisional license for Cultivation: Medical Small Indoor.

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Origin House submitted annual applications for the four (4) listed license types to the state regulator and is awaiting approval for these annual applications.

In addition to the six (6) active licenses listed above, Origin House continues to pursue new state license opportunities and recently applied for an additional Type 11 (Distribution) license for the Unincorporated Sonoma (Sonoma County) location.

During the quarter ended September 30, 2021, the Company mutually terminated the agreement for exclusive distribution rights with a third-party vendor, which resulted in the impairment of the remaining net book value of the market-related intangible of $0.8 million. Management determined that the Company’s shift in strategy to reduce third-party distribution in California was an indicator of impairment as of September 30, 2021 for associated assets. Certain trade names and customer relationship intangibles with remaining net book values of $32.2 million and $57.1 million, respectively, were determined to be fully impaired due to updated cash flow projections associated with these assets. Additionally, $200.6 million in goodwill impairment was recorded to the California reporting unit.

Arizona Operations

In 2010, Arizona passed Ballot Proposition 203, which amended Title 36 to the Arizona Revised Statutes. This amendment added Chapter 28.1, titled the Arizona Medical Marijuana Act. (“AMMA”). The AMMA is codified in Arizona Revised Statutes §36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (“ADHS”) as the regulator for the program and authorized ADHS to promulgate, adopt and enforce regulations for the AMMA. These ADHS regulations are embodied in the Arizona Administrative Code Title 9 Chapter 17 (the “Rules”). In order to qualify to use medical marijuana under the AMMA, a patient is required to have a “debilitating medical condition.”

The ADHS has established the Arizona Department of Health Services Medical Marijuana Program (“MMJ Program”), which includes a vertically-integrated license, meaning if allocated a Medical Marijuana Dispensary Registration Certificate (“Dispensary License”), entities are authorized to dispense and cultivate medical cannabis. Each Dispensary License allows the holding entity to operate one (1) on-site cultivation facility, and one (1) off-site cultivation facility which can be located anywhere within the State of Arizona. An entity holding a Dispensary License is required to file an application to renew with the ADHS on a biannual basis, which must also include audited annual financial statements. While a Dispensary License may not be sold, transferred or otherwise conveyed, Dispensary License holders typically contract with third parties to provide various services related to the ongoing operation, maintenance and governance of its dispensary and/or cultivation facility so long as such contracts do not violate the requirements of the AMMA or the MMJ Program.

On December 6, 2012, Arizona’s first licensed medical marijuana dispensary opened in Glendale.

Once an applicant has been issued a Dispensary Registration Certificate (a “Certificate”), they are allowed to establish one (1) physical retail dispensary location, one (1) cultivation location which is co-located at the dispensary’s retail site (if allowed by local zoning) and one (1) additional off-site cultivation location. None of these sites can be operational, however, until the dispensary receives an approval to operate from ADHS for the applicable site.

On October 24, 2018, Cresco Labs obtained a 100.0% ownership interest in Arizona Facilities Supply, LLC which includes a vertically-integrated cultivation, processing and dispensary operation in Arizona.

The licenses in Arizona are renewed annually. Before expiry, licensees are required to submit a renewal application. While renewals are granted annually, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable license, Cresco Labs would expect to receive the applicable renewed license in the ordinary course of business. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Arizona cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Arizona cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

In November 2020, voters in Arizona passed an adult-use marijuana measure to allow for the sale of recreational marijuana in the state. During 2021, the Company received approval from the ADHS to serve adult-use customers at its Sunnyside* dispensary in Phoenix, Arizona. Adult-use sales launched in February of 2021.

New York Operations

The State of New York’s medical cannabis program was introduced in July 2014 when Governor Andrew Cuomo signed the Compassionate Care Act, which legalized medical cannabis oils for patients with certain qualifying conditions. Under this program, five (5) registered organizations (“ROs”) were licensed to dispense cannabis oil to patients, with the first sale to a patient completed in January 2016. In December 2016, the New York State Department of Health (“NYSDOH”) added chronic pain as a qualifying condition and in the month-and-a-half following the addition of chronic pain, the number of registered patients increased by 18%. In August 2017, the NYSDOH granted licenses to five (5) additional ROs.

In July 2018, the NYSDOH added opioid replacement as a qualifying condition, meaning any condition for which an opioid could be prescribed is now a qualifying condition for medical cannabis. In August 2018, Governor Cuomo, prompted by a NYSDOH study which concluded the “positive effects” of cannabis legalization “outweigh the potential negative impacts,” appointed a group to draft a bill for regulating legal adult-use cannabis sales in New York.

Each RO’s license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four (4) dispensaries in NYSDOH-designated regions throughout the state, and one (1) cultivation/ processing facility. Permitted products include oil-based formulations (i.e., vaporizer cartridges, tinctures and capsules), and ground-flower sold in tamper-proof vessels. Each RO is required to cultivate and process all medical cannabis products they dispense; however, wholesale transactions are permitted with approval from the state and home delivery is now permitted.

All cultivation/processing and dispensing establishments must register with the NYSDOH pursuant to Public Health Law §3365(9). Registrations issued by NYSDOH are valid for a two-year period. As embodied in New York Codes, Rules and Regulations §1004.7, an application to renew such registrations must be filed with the NYSDOH between four and six months prior to the expiration date, must include information prepared in the manner and detail as the commissioner may require, and should be accompanied by application fees and registration fees. Applications completed in accordance with §1004.7 would be expected to receive the applicable renewed license in a timely manner. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that New York cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of New York cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

On October 8, 2019, the Company closed the acquisition of Gloucester Street Capital, the parent entity of Valley Agriceuticals, LLC (“Valley Ag”), for consideration that consisted of cash, deferred consideration, equity and contingent consideration based upon the achievement or occurrence of certain milestones or events, all totaling $129.6 million. Valley Ag is one of the ten holders of a vertically-integrated license from NYSDOH allowing for the cultivation and processing of medical cannabis as well as the establishment of four (4) medical cannabis dispensaries in the State of New York.

Through the aforementioned agreements and regulatory approval, Cresco Labs now has a license for a cultivation and manufacturing facility within the State of New York, as well as four (4) dispensary locations strategically located across the state. These four (4) locations are branded as Sunnyside* dispensaries. Valley Ag has successfully renewed their initial licenses and all licenses are, as of the date hereof, active with the State of New York.

On January 6, 2021, Governor Cuomo announced a proposal to legalize and create a comprehensive system to oversee and regulate adult-use cannabis in New York as part of the 2021 State of the State. Under the Governor’s proposal, a new Office of Cannabis Management would be created to oversee the new adult-use program, as well as the state’s existing medical and cannabinoid hemp programs. Additionally, an equitable structure for the adult-use market will be created by offering licensing opportunities and assistance to entrepreneurs in communities of color who have been disproportionately impacted by the war on drugs. Once fully implemented, legalization is expected to generate more than $300.0 million in tax revenue for the State of New York.

On February 16, 2021, Governor Cuomo announced 30-day amendments to the Governor’s proposal to establish a comprehensive adult-use cannabis program in New York. Specifically, these amendments will detail how the $100.0 million in social equity funding will be allocated, enable the use of delivery services and refine which criminal charges will be enforced as it relates to the improper sale of cannabis to further reduce the impact on communities.

Governor Andrew Cuomo signed Senate Bill 854/Assembly Bill 1248A on March 31, 2021, creating the Empire State’s adult-use cannabis program. This legislation expands our dispensary footprint to eight (8), with three (3) dispensaries reserved to be co-located adult-use, allows existing vertical ROs to wholesale branded products, and creates a strong social equity program with 50.0% of licenses dedicated to social equity applicants. The Cannabis Control Board which will oversee the roll out of the program was seated in summer/early fall 2021. The board held its first meeting on October 5, 2021. At that meeting the board announced changes to the state’s medical program that would go into effect immediately including that cannabis flower could be sold to patients.

Massachusetts Operations

The Massachusetts medical cannabis market was established through “An Act for the Humanitarian Medical Use of Marijuana” in November 2012 when voters passed Ballot Question 3 “Massachusetts Medical Marijuana Initiative” with 63.0% of the vote. The first Massachusetts dispensary opened in June 2015 and by November 2016, Massachusetts voters legalized adult-use cannabis by passing ballot Question 4 – Legalize Marijuana with 54.0% of the vote. In July 2017, Governor Baker signed legislation that would lay the groundwork for the state’s adult-use market. The Cannabis Control Commission (the state’s regulatory body which creates regulations for both the medical and adult-use market) aimed to officially launch adult-use sales on July 1, 2018 but stumbling blocks such as a lack of licensed testing labs and disagreements between officials and businesses slowed the rollout, as sales for adult-use cannabis officially began in November 2018.

The Cannabis Control Commission oversees the medical and adult-use cannabis programs. Each medical licensee must be vertically-integrated and may have up to two (2) locations. Licensed medical dispensaries are given priority in adult-use licensing. Adult-use cultivators will be grouped into 11 tiers of production (ranging from up to 5,000 square feet to no larger than 100,000 square feet) and regulators will move a licensee down to a lower tier if that licensee has not shown an ability to sell at least 70% of what it produced. Medical dispensaries that wish to add the ability to sell cannabis products to non-patients will be required to reserve 35% of their inventory or the six-month average of their medical cannabis sales for medical cannabis patients. In order to achieve an adult-use license, a prospective licensee must first sign a “Host Community Agreement” with the town in which it wishes to locate. Roughly two-thirds of municipalities in the state have a ban or moratorium in place that prohibits cannabis businesses from operating within their jurisdiction. In both the medical and adult-use markets, extracted oils, edibles and flower products are permitted, as well as wholesaling.

On October 1, 2019, Cresco Labs acquired Hope Heal Health, Inc. (“HHH”) via certain agreements giving it operational control before cash consideration was settled. In August 2019, HHH entered into a Host Community Agreement with the municipality of Fall River to allow for the siting of an adult-use cannabis dispensary. On February 7, 2020, the Company announced the legal close of the acquisition and cash funding of $27.5 million. The closing coincided with state approval allowing recreational cannabis sales at the Company’s Fall River dispensary.

Registration certificates are valid for a period of one year and are subject to annual renewals after required fees are paid and the business remains in good standing. Renewal requests are typically communicated through email from the Massachusetts Cannabis Commission and include a renewal form. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Massachusetts cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Massachusetts cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

On July 1, 2020, Cresco Labs announced that it had completed the sale of its Falls River, MA facility to IIP. The sale was for consideration equal to approximately $29.0 million, which includes $21.0 million in funding for additional tenant improvements. Concurrent with the closing of the sale, the Company entered into a long-term, triple-net lease agreement with IIP and will continue to operate the property as a licensed cannabis cultivation, processing and dispensing facility upon completion of redevelopment. The Company accounted for the transaction as a financing transaction. The property represents approximately 50,000 square feet of industrial space in aggregate.

On September 2, 2021, the Company announced that it had completed the acquisition of 100% of the membership interests of Cultivate. Consideration included payment of pre-existing Cultivate debt, equity in the form of SVS and an earnout. Consideration for the acquisition totaled $99.3 million. Cultivate owns and operates two (2) cultivation and manufacturing center locations, two (2) adult-use and medical dispensary locations, and one (1) adult-use dispensary location. The closing of this acquisition was contingent upon the Company surrendering its adult-use retail license for the Fall River dispensary. After the closing of the acquisition, the Fall River dispensary location is medical only.

Michigan Operations

In November 2008, Michigan residents approved the Michigan Medical Marijuana Act (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act (the “MMFLA”) and the Marihuana Tracking Act (the “MTA”) and together with the MMMA, (the “Michigan Cannabis Regulations”) provides a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.

Under the MMFLA, LARA administrates five (5) types of “state operating licenses” for medical marijuana businesses: (i) a “grower” license, (ii) a “processor” license, (iii) a “secure transporter” license, (iv) a “provisioning center” license and (e) a “safety compliance facility” license. There are no stated limits on the number of licenses that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.

On November 6, 2018, Michigan voters approved Proposal 1, to make marijuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marijuana under a system that licenses, regulates and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act. In accordance with Proposal 1, LARA began accepting applications for retail (recreational) dispensaries on November 1, 2019.

On March 25, 2019, the Company announced Cresco Labs Michigan, LLC (“Cresco Michigan”) had completed the most comprehensive portion of Michigan’s application process, being pre-qualified for a cultivation and processing license by the Department of Licensing and Regulatory Affairs Medical Marihuana Licensing Board. The pre- qualification represents the authorization of the entity to move forward with the licensing process for its intended facilities.

On November 13, 2019, the state’s Marijuana Regulatory Agency announced any existing medically licensed businesses would be allowed to sell recreational-use cannabis beginning December 1, 2019. On March 5, 2020, Cresco Michigan was issued a medical processing license to begin manufacturing and processing flower into edible medical marijuana products and/or medical marijuana-infused products. Michigan has approximately 250,000 medical marijuana patients, which represents the fourth largest medical marijuana patient base in the United States.

On March 16, 2020, Cresco Michigan received pre-qualification to operate in the adult-use market and received one (1) adult-use processor license and one (1) medical processor license in 2020. Cresco Michigan expanded in 2021, adding two (2) medical cultivation licenses and five (5) adult-use cultivation licenses. All Michigan marijuana licenses are renewed annually through the Marijuana Regulatory Agency after the required fees are paid and the business remains in good standing. In addition, a sworn statement is required that states that the business is in good standing and will uphold a continuing reporting duty. The renewal fees are to be determined by the amount of gross weight of marijuana product transferred during the past year. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Michigan cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Michigan cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

On April 22, 2020, Cresco Michigan and related parties of the Company executed an amended and restated operating agreement which increased the Company’s related parties’ ownership from 50.0% to 85.0% in exchange for a capital commitment of $25.0 million. Provisions contained in the operating agreement entitle related parties of the Company to a majority of profit and gives the Company control of Cresco Michigan and rights and exposure to variable returns. The Company has the right to direct all the relevant activities of and has the full decision-making power over Cresco Michigan.

On April 23, 2020, the Company announced that it had completed the sale of its Marshall, MI facility to IIP. The previously announced sale was for consideration equal to approximately $16.0 million, which included $11.0 million in funding for tenant improvements. Concurrent with the closing of the sale, Cresco Labs entered into a long-term, triple-net lease agreement with IIP and will continue to operate the property as a licensed cannabis cultivation and processing facility upon completion of redevelopment. The property represents approximately 100,000 square feet of industrial space in aggregate. This sale marked Cresco Labs’ fifth completed sale-leaseback or financing transaction, and the fourth with IIP.

On October 4, 2021, the Company unveiled its Marshall facility while celebrating the first harvest at the property.

Florida Operations

In 2014, the Florida Legislature passed the Compassionate Use Act (the “CUA”) which was a low-THC (CBD) law, allowing cannabis containing not more than 0.8% THC to be sold to patients diagnosed with severe seizures or muscle spasms and cancer. The CUA created a competitive licensing structure and originally allowed for one vertically-integrated license to be awarded in each of five regions. The CUA set forth the criteria for applicants as well as the minimum qualifying criteria which included the requirement to hold a nursery certificate evidencing the capacity to cultivate a minimum of 400,000 plants, to be operated by a nurseryman and to be a registered nursery for at least 30.0 continuous years. The CUA also created a state registry to track dispensations. In 2016, the Florida Legislature passed the Right to Try Act (the “RTA”), which expanded the State’s medical cannabis program to allow for full potency THC products to be sold as “medical marijuana” to qualified patients.

In November of 2016, the Florida Medical Marijuana Legalization ballot initiative (the “Initiative”) to expand the medical cannabis program under the RTA was approved by 71.3% of voters, thereby amending the Florida constitution. The Initiative is now codified as Article X, Section 29 of the Florida Constitution.

The Initiative expanded the list of qualifying medical conditions to include cancer, epilepsy, glaucoma, HIV and AIDS, ALS, Crohn’s disease, Parkinson’s disease, multiple sclerosis, or other debilitating medical conditions of the same kind or class or comparable to those other qualifying conditions and for which a physician believes the benefits outweigh the risks to the patient. The Initiative also provided for the implementation of state-issued medical cannabis identification cards. In 2017, the Florida Legislature passed legislation implementing the constitutional amendment and further codifying the changes set forth in the constitution into law (the “2017 Law”). The 2017 Law provides for the issuance of 10 licenses to specific entities and another four licenses to be issued for every 100,000 active qualified patients added to the registry. The 2017 law also initially limited license holders to a maximum of twenty-five (25) dispensary locations with the ability to purchase additional dispensary locations from one another, and for an additional five (5) locations to be allowed by the State for every 100,000 active qualified patients added to the registry. The 2017 legislation’s cap on dispensing facilities expired in April 2020.

On April 14, 2021, the Company announced that it had completed the acquisition of the issued and outstanding shares of Bluma in an all-share transaction that valued Bluma at an equity value of $213.0 million. Under the terms of the Bluma Transaction, shareholders of Bluma received 0.0859 SVS of Cresco Labs for each Bluma share held.

Bluma owns and operates One Plant, a vertically-integrated, licensed medical cannabis company in the State of Florida. One Plant cultivates, processes, dispenses and retails medical cannabis to qualified patients in the State of Florida through multiple retail dispensaries and an innovative next-day door-to-door e-commerce home delivery service, thereby offering convenient access for its customers and meeting the demands of an evolving retail landscape. As of the acquisition date, Bluma, under One Plant, had eight (8) strategically located dispensaries with seven (7) more locations under legal control and planned to open.

On August 16, 2021, a Sunnyside* location was opened in Fort Lauderdale. As of September 30, 2021 nine (9) dispensaries were operational with six (6) more locations planned to open.

In October 2021, the Company opened two additional dispensaries in Tallahassee, Florida and Oakland Park, Florida.