Cresco Labs Inc 6-K, filed Nov 17, 2022
Cresco Labs Inc. (CRLBF)
About this 6-K
Cresco Labs Inc filed this 6-K on November 17, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934
For the Month of November 2022
000-56241
(Commission File Number)
Cresco Labs Inc.
(Exact name of Registrant as specified in its charter)
400 W Erie St Suite 110
Chicago, IL 60654
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Exhibit Index
| Exhibit No. |
Description | |
| 99.1 | Condensed Interim Consolidated Financial Statements (Unaudited) for the three and nine months ended September 30, 2022 and 2021 | |
| 99.2 | Management Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2022 and 2021 | |
| 99.3 | Press Release dated November 15, 2022 | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CRESCO LABS INC. | ||||||
| Date: November 17, 2022 | By: | /s/ Charles Bachtell | ||||
| Charles Bachtell | ||||||
| Chief Executive Officer | ||||||
Table of Contents
Exhibit 99.1
CRESCO LABS INC.
UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2022 AND 2021
(Expressed in United States Dollars)
Table of Contents
Cresco Labs Inc.
INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Balance Sheets
As of September 30, 2022 and December 31, 2021
(In thousands of United States Dollars, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 130,042 | $ | 223,543 | ||||
| Restricted cash |
2,278 | 2,559 | ||||||
| Accounts receivable, net |
51,649 | 43,379 | ||||||
| Inventory, net |
152,591 | 136,643 | ||||||
| Loans receivable, short-term |
— | 1,312 | ||||||
| Other current assets |
18,641 | 14,319 | ||||||
|
|
|
|
|
|||||
| Total current assets |
355,201 | 421,755 | ||||||
| Non-current assets: |
||||||||
| Property and equipment, net |
377,941 | 369,092 | ||||||
| Right-of-use assets |
128,135 | 88,017 | ||||||
| Intangible assets, net |
431,446 | 437,644 | ||||||
| Loans receivable, long-term |
1,255 | 505 | ||||||
| Investments |
1,670 | 5,912 | ||||||
| Goodwill |
448,376 | 446,767 | ||||||
| Deferred tax asset |
7,873 | 6,561 | ||||||
| Other non-current assets |
4,394 | 4,210 | ||||||
|
|
|
|
|
|||||
| Total non-current assets |
1,401,090 | 1,358,708 | ||||||
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|
|||||
| TOTAL ASSETS |
$ | 1,756,291 | $ | 1,780,463 | ||||
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|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| LIABILITIES |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 29,194 | $ | 32,278 | ||||
| Accrued liabilities |
58,589 | 95,442 | ||||||
| Short-term borrowings |
28,847 | 19,928 | ||||||
| Income tax payable |
82,289 | 46,949 | ||||||
| Current portion of lease liabilities |
21,575 | 20,792 | ||||||
| Deferred consideration, contingent consideration and other payables, short-term |
50,066 | 71,833 | ||||||
| Derivative liabilities, short-term |
— | 1,172 | ||||||
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|
|
|
|
|||||
| Total current liabilities |
270,560 | 288,394 | ||||||
| Non-current liabilities: |
||||||||
| Long-term notes payable and loans payable |
468,064 | 465,079 | ||||||
| Lease liabilities |
158,153 | 118,936 | ||||||
| Deferred tax liability |
77,009 | 85,666 | ||||||
| Deferred consideration, long-term |
4,058 | 17,651 | ||||||
| Other long-term liabilities |
7,000 | 7,001 | ||||||
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|
|
|
|||||
| Total non-current liabilities |
714,284 | 694,333 | ||||||
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|
|
|||||
| TOTAL LIABILITIES |
984,844 | 982,727 | ||||||
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|
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| COMMITMENTS AND CONTINGENCIES (Note 15) |
||||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Super Voting Shares, no par value; 500,000 shares authorized, issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Subordinate Voting Shares, no par value; unlimited shares authorized; 280,988,200 and 270,033,270 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Proportionate Voting Shares1, no par value; unlimited shares authorized, 20,082,384 and 20,667,206 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Special Subordinate Voting Shares2, no par value; 639 shares authorized, issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Share capital |
1,704,809 | 1,597,715 | ||||||
| Accumulated other comprehensive loss |
(239 | ) | (254 | ) | ||||
| Accumulated deficit |
(915,258 | ) | (841,907 | ) | ||||
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| Equity of Cresco Labs Inc. |
789,312 | 755,554 | ||||||
| Non-controlling interests |
(17,865 | ) | 42,182 | |||||
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|
|
|||||
| TOTAL SHAREHOLDERS’ EQUITY |
771,447 | 797,736 | ||||||
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|
|||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 1,756,291 | $ | 1,780,463 | ||||
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|||||
| 1 | Proportionate Voting Shares (“PVS”) presented on an “as-converted” basis to Subordinate Voting Shares (“SVS”) (1-to-200) |
| 2 | Special Subordinate Voting Shares (“SSVS”) presented on an “as-converted” basis to SVS (1-to-0.00001) |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars, except share and per share amounts)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net |
$ | 210,484 | $ | 215,483 | $ | 643,101 | $ | 603,895 | ||||||||
| Costs of goods sold |
111,372 | 107,162 | 323,792 | 307,570 | ||||||||||||
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|
|||||||||
| Gross profit |
99,112 | 108,321 | 319,309 | 296,325 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative |
82,872 | 81,390 | 260,125 | 238,284 | ||||||||||||
| Impairment loss |
— | 290,949 | — | 290,949 | ||||||||||||
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|
|||||||||
| Total operating expenses |
82,872 | 372,339 | 260,125 | 529,233 | ||||||||||||
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|
|||||||||
| Income (loss) from operations |
16,240 | (264,018 | ) | 59,184 | (232,908 | ) | ||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense, net |
(15,554 | ) | (13,577 | ) | (41,933 | ) | (36,360 | ) | ||||||||
| Other income, net |
14,797 | 1,735 | 12,706 | 2,120 | ||||||||||||
| Loss from equity method investments |
— | — | — | (1,196 | ) | |||||||||||
|
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|
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|
|||||||||
| Total other expense, net |
(757 | ) | (11,842 | ) | (29,227 | ) | (35,436 | ) | ||||||||
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|
|||||||||
| Income (loss) before income taxes |
15,483 | (275,860 | ) | 29,957 | (268,344 | ) | ||||||||||
| Income tax (expense) recovery |
(18,732 | ) | 12,408 | (65,177 | ) | (16,579 | ) | |||||||||
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|||||||||
| Net loss |
(3,249 | ) | (263,452 | ) | (35,220 | ) | (284,923 | ) | ||||||||
| Net income attributable to non-controlling interests, net of tax |
6,539 | 7,193 | 15,490 | 19,942 | ||||||||||||
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|||||||||
| Net loss attributable to Cresco Labs Inc. |
$ | (9,788 | ) | $ | (270,645 | ) | $ | (50,710 | ) | $ | (304,865 | ) | ||||
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|||||||||
| Net loss per share - attributable to Cresco Labs Inc. shareholders: |
||||||||||||||||
| Basic and diluted loss per share |
$ | (0.03 | ) | $ | (1.00 | ) | $ | (0.17 | ) | $ | (1.19 | ) | ||||
| Basic and diluted weighted-average number of shares outstanding |
301,118,445 | 271,183,423 | 296,750,663 | 256,335,128 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Comprehensive Loss For the Three and Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net loss |
$ | (3,249 | ) | $ | (263,452 | ) | $ | (35,220 | ) | $ | (284,923 | ) | ||||
| Foreign currency translation differences, net of tax |
189 | 138 | 15 | 285 | ||||||||||||
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|
|||||||||
| Total comprehensive loss for the period |
(3,060 | ) | (263,314 | ) | (35,205 | ) | (284,638 | ) | ||||||||
| Comprehensive income attributable to non-controlling interests, net of tax |
6,539 | 7,193 | 15,490 | 19,942 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total comprehensive loss attributable to Cresco Labs Inc. |
$ | (9,599 | ) | $ | (270,507 | ) | $ | (50,695 | ) | $ | (304,580 | ) | ||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars)
| Share capital | Accumulated deficit | Accumulated other comprehensive loss, net of tax |
Non-controlling interests |
Total | ||||||||||||||||
| Balance as of January 1, 2021 |
$ | 802,264 | $ | (328,380 | ) | $ | (647 | ) | $ | 102,095 | $ | 575,332 | ||||||||
| Exercise of options and warrants |
1,956 | — | — | — | 1,956 | |||||||||||||||
| Equity-based compensation |
6,207 | — | — | — | 6,207 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
13,139 | — | — | — | 13,139 | |||||||||||||||
| Income tax reserve |
— | 80 | — | — | 80 | |||||||||||||||
| Equity issued related to acquisitions |
2,000 | — | — | — | 2,000 | |||||||||||||||
| Private placement issuance, net of costs |
123,469 | — | — | — | 123,469 | |||||||||||||||
| Equity issuances |
15,790 | — | — | — | 15,790 | |||||||||||||||
| Distributions to non-controlling interest holders |
(2,165 | ) | — | — | (3,980 | ) | (6,145 | ) | ||||||||||||
| Cresco LLC shares redeemed and other adjustments |
93,264 | (85,538 | ) | — | (5,403 | ) | 2,323 | |||||||||||||
| Foreign currency translation |
— | — | 354 | — | 354 | |||||||||||||||
| Net income (loss) |
— | (29,393 | ) | — | 5,269 | (24,124 | ) | |||||||||||||
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|||||||||||
| Balance as of March 31, 2021 |
$ | 1,055,924 | $ | (443,231 | ) | $ | (293 | ) | $ | 97,981 | $ | 710,381 | ||||||||
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|
|||||||||||
| Exercise of options and warrants |
2,564 | — | — | — | 2,564 | |||||||||||||||
| Equity-based compensation |
9,723 | — | — | — | 9,723 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
(698 | ) | — | — | — | (698 | ) | |||||||||||||
| Income tax reserve |
— | 87 | — | — | 87 | |||||||||||||||
| Net impact pursuant to tax receivable agreement |
611 | — | — | — | 611 | |||||||||||||||
| Equity issued related to acquisitions |
213,558 | — | — | — | 213,558 | |||||||||||||||
| Equity issuances |
(387 | ) | — | — | — | (387 | ) | |||||||||||||
| Distributions to non-controlling interest holders |
48,708 | — | — | (53,930 | ) | (5,222 | ) | |||||||||||||
| Cresco LLC shares redeemed and other adjustments |
87,932 | (86,682 | ) | — | (3,685 | ) | (2,435 | ) | ||||||||||||
| Foreign currency translation |
— | — | (207 | ) | — | (207 | ) | |||||||||||||
| Net income (loss) |
— | (4,827 | ) | — | 7,480 | 2,653 | ||||||||||||||
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|||||||||||
| Balance as of June 30, 2021 |
$ | 1,417,935 | $ | (534,653 | ) | $ | (500 | ) | $ | 47,846 | $ | 930,628 | ||||||||
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|||||||||||
| Exercise of options and warrants |
770 | — | — | — | 770 | |||||||||||||||
| Equity-based compensation |
6,753 | — | — | — | 6,753 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
(736 | ) | — | — | — | (736 | ) | |||||||||||||
| Income tax reserve |
— | 11 | — | — | 11 | |||||||||||||||
| Payable pursuant to tax receivable agreements |
(1,522 | ) | — | — | — | (1,522 | ) | |||||||||||||
| Tax benefit from shareholder redemptions |
1,052 | — | — | — | 1,052 | |||||||||||||||
| Equity issued related to acquisitions |
44,810 | — | — | — | 44,810 | |||||||||||||||
| Equity issuances |
118 | — | — | — | 118 | |||||||||||||||
| Distributions to non-controlling interest holders |
5,263 | — | — | (11,655 | ) | (6,392 | ) | |||||||||||||
| Cresco LLC shares redeemed and other adjustments |
9,354 | (7,773 | ) | — | (1,476 | ) | 105 | |||||||||||||
| Foreign currency translation |
— | — | 138 | — | 138 | |||||||||||||||
| Net (loss) income |
— | (270,645 | ) | — | 7,193 | (263,452 | ) | |||||||||||||
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| Balance as of September 30, 2021 |
$ | 1,483,797 | $ | (813,060 | ) | $ | (362 | ) | $ | 41,908 | $ | 712,283 | ||||||||
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5
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars)
| Share capital | Accumulated deficit | Accumulated other comprehensive loss, net of tax |
Non-controlling interests |
Total | ||||||||||||||||
| Balance as of January 1, 2022 |
$ | 1,597,715 | $ | (841,907 | ) | $ | (254 | ) | $ | 42,182 | $ | 797,736 | ||||||||
| Exercise of options and warrants |
358 | — | — | — | 358 | |||||||||||||||
| Equity-based compensation |
7,727 | — | — | — | 7,727 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
(87 | ) | — | — | — | (87 | ) | |||||||||||||
| Income tax reserve |
— | 78 | — | — | 78 | |||||||||||||||
| Payable pursuant to tax receivable agreements |
(163 | ) | — | — | — | (163 | ) | |||||||||||||
| Tax benefit from shareholder redemptions |
186 | — | — | — | 186 | |||||||||||||||
| Distributions to non-controlling interest holders |
(9,992 | ) | — | — | (8,233 | ) | (18,225 | ) | ||||||||||||
| Cresco LLC shares redeemed and other adjustments |
11,708 | (11,185 | ) | — | (523 | ) | — | |||||||||||||
| Foreign currency translation |
— | — | (190 | ) | — | (190 | ) | |||||||||||||
| Net income (loss) |
— | (27,381 | ) | — | 3,706 | (23,675 | ) | |||||||||||||
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| Balance as of March 31, 2022 |
$ | 1,607,452 | $ | (880,395 | ) | $ | (444 | ) | $ | 37,132 | $ | 763,745 | ||||||||
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| Exercise of options |
369 | — | — | — | 369 | |||||||||||||||
| Equity-based compensation |
7,547 | — | — | — | 7,547 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
(326 | ) | — | — | — | (326 | ) | |||||||||||||
| Equity issuances related to acquisitions |
34,708 | — | — | — | 34,708 | |||||||||||||||
| Distributions to non-controlling interest holders |
50,258 | (6,095 | ) | — | (58,302 | ) | (14,139 | ) | ||||||||||||
| Foreign currency translation |
— | — | 16 | — | 16 | |||||||||||||||
| Net income (loss) |
— | (13,541 | ) | — | 5,245 | (8,296 | ) | |||||||||||||
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| Balance as of June 30, 2022 |
$ | 1,700,008 | $ | (900,031 | ) | $ | (428 | ) | $ | (15,925 | ) | $ | 783,624 | |||||||
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|||||||||||
| Exercise of options |
(28 | ) | — | — | — | (28 | ) | |||||||||||||
| Equity-based compensation |
3,174 | — | — | — | 3,174 | |||||||||||||||
| Employee taxes on certain share-based payment arrangements |
(5 | ) | — | — | — | (5 | ) | |||||||||||||
| Income tax reserve |
— | 70 | — | — | 70 | |||||||||||||||
| Payable pursuant to tax receivable agreements |
(135 | ) | — | — | — | (135 | ) | |||||||||||||
| Tax benefit from shareholder redemptions |
153 | — | — | — | 153 | |||||||||||||||
| Distributions to non-controlling interest holders |
(3,638 | ) | — | — | (8,708 | ) | (12,346 | ) | ||||||||||||
| Cresco LLC shares redeemed and other adjustments |
5,280 | (5,509 | ) | — | 229 | — | ||||||||||||||
| Foreign currency translation |
— | — | 189 | — | 189 | |||||||||||||||
| Net income (loss) |
— | (9,788 | ) | — | 6,539 | (3,249 | ) | |||||||||||||
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|||||||||||
| Balance as of September 30, 2022 |
$ | 1,704,809 | $ | (915,258 | ) | $ | (239 | ) | $ | (17,865 | ) | $ | 771,447 | |||||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
6
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (35,220 | ) | $ | (284,923 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
37,468 | 30,443 | ||||||
| Amortization of operating lease assets |
4,177 | 5,018 | ||||||
| Bad debt expense and provision expense for expected credit losses |
926 | 1,416 | ||||||
| Share-based compensation expense |
17,950 | 22,604 | ||||||
| Loss (gain) on investments |
4,165 | (1,481 | ) | |||||
| Loss (gain) on changes in fair value of deferred and contingent consideration |
5,667 | (6,947 | ) | |||||
| Gain on derivative instruments and warrants |
(1,184 | ) | (10,668 | ) | ||||
| Loss on inventory write-offs and provision |
1,281 | 2,926 | ||||||
| Impairment loss |
— | 290,949 | ||||||
| Change in deferred taxes |
(9,048 | ) | (40,570 | ) | ||||
| Accretion of discount and deferred financing costs on debt arrangements |
2,913 | 10,376 | ||||||
| Loss on debt extinguishment |
— | 10,342 | ||||||
| Foreign currency loss |
267 | 777 | ||||||
| Loss on disposal of property, plant and equipment |
1,954 | — | ||||||
| Gain on lease termination and sale and leaseback transaction |
(19,990 | ) | — | |||||
| (Gains) net of losses, on other adjustments to net income |
— | (1,678 | ) | |||||
| Settlement gain |
— | (810 | ) | |||||
| Loss on divestiture |
— | 1,149 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(9,706 | ) | (14,102 | ) | ||||
| Inventory |
(14,610 | ) | (20,467 | ) | ||||
| Other assets |
(5,395 | ) | (3,218 | ) | ||||
| Accounts payable and other accrued expenses |
14,682 | 9,790 | ||||||
| Operating lease liabilities |
(15,417 | ) | (11,958 | ) | ||||
| Other current liabilities |
— | (91 | ) | |||||
| Income tax payable |
34,230 | (12,043 | ) | |||||
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|||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
15,110 | (23,166 | ) | |||||
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| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Purchases of property and equipment |
(69,894 | ) | (76,539 | ) | ||||
| Purchases of intangibles |
(2,918 | ) | (2,666 | ) | ||||
| Proceeds from sale and leaseback transactions and tenant improvement allowances |
47,440 | 25,485 | ||||||
| Payment of acquisition consideration, net of cash acquired |
(1,135 | ) | (21,883 | ) | ||||
| Proceeds from divestiture, net of cash transferred |
— | 69 | ||||||
| Proceeds from disposals of property and equipment |
930 | — | ||||||
| Receipts from collections of loans and advances |
2,654 | 2,000 | ||||||
| Loans and advances for entities expected to be acquired |
(1,200 | ) | (26,292 | ) | ||||
|
|
|
|
|
|||||
| NET CASH USED IN INVESTING ACTIVITIES |
(24,123 | ) | (99,826 | ) | ||||
|
|
|
|
|
|||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds from January offering |
— | 124,105 | ||||||
| Proceeds from the issuance of long-term debt |
— | 387,000 | ||||||
| Payment of debt, financing issuance costs and non-extending lender fees |
— | (6,461 | ) | |||||
| Payment of debt prepayment and debt extinguishment costs |
— | (16,202 | ) | |||||
| Proceeds from exercise of stock options, warrants and sell-to-cover shares |
3,215 | 18,443 | ||||||
| Payments for taxes related to net share settlements of restricted stock units |
— | (143 | ) | |||||
| Payment of acquisition-related contingent consideration |
(4,927 | ) | — | |||||
| Distributions to non-controlling interest redeemable unit holders |
(81,139 | ) | (66,183 | ) | ||||
| Repayment of debt |
— | (200,000 | ) | |||||
| Principal payments on finance lease obligations |
(1,761 | ) | (3,179 | ) | ||||
|
|
|
|
|
|||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(84,612 | ) | 237,380 | |||||
|
|
|
|
|
|||||
| Effect of foreign currency exchange rate changes on cash |
(157 | ) | (365 | ) | ||||
| Net change in cash and cash equivalents and restricted cash |
(93,782 | ) | 114,023 | |||||
| Cash and cash equivalents and restricted cash, beginning of period |
226,102 | 140,774 | ||||||
| Cash and cash equivalents, end of period |
130,042 | 252,838 | ||||||
| Restricted cash, end of period |
2,278 | 1,959 | ||||||
|
|
|
|
|
|||||
7
Table of Contents
Cresco Labs Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2022 and 2021
(In thousands of United States Dollars)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash and cash equivalents and restricted cash, end of period |
$ | 132,320 | $ | 254,797 | ||||
|
|
|
|
|
|||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
| CASH PAID DURING THE PERIOD: |
||||||||
| Income tax, net |
$ | 39,990 | $ | 70,010 | ||||
| Interest |
30,212 | 37,508 | ||||||
| NON-CASH INVESTING AND FINANCING TRANSACTIONS: |
||||||||
| Other share issuances |
$ | — | $ | 273,158 | ||||
| Non-cash consideration for business combination |
34,708 | 46,641 | ||||||
| Non-controlling interests redeemed for equity |
382 | 10,563 | ||||||
| Increase to net lease liability |
22,112 | 20,611 | ||||||
| Liability incurred to purchase property and equipment and intangibles |
7,654 | 5,536 | ||||||
| Cashless exercise of stock options and warrants |
(1,813 | ) | 951 | |||||
| Unpaid declared distributions to non-controlling interest redeemable unit holders |
10,962 | 6,277 | ||||||
| Receivable due from financing lease transactions |
1,086 | — | ||||||
| Liability incurred in accordance with tax receivable agreement |
298 | 1,522 | ||||||
| Issuance of shares for non-solicitation intangible asset |
— | 3,000 | ||||||
| Issuance of shares for settlement |
— | 12,790 | ||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
8
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 1. NATURE OF OPERATIONS
Cresco Labs Inc. (“Cresco Labs” or the “Company”), formerly known as Randsburg International Gold Corp. (“Randsburg”) was incorporated in the Province of British Columbia under the Company Act (British Columbia) on July 6, 1990. The Company is one of the largest vertically-integrated multi-state cannabis operators in the United States licensed to cultivate, manufacture and sell retail and medical cannabis products primarily through Sunnyside*®, Cresco Labs’ national dispensary brand and third-party retail stores. Employing a consumer-packaged goods approach to cannabis, Cresco Labs’ house of brands is designed to meet the needs of all consumer segments and includes Cresco®, Cresco Reserve®, High Supply®, Mindy’sTM, Good News®, RemediTM, Wonder Wellness Co.® and FloraCal® Farms. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Arizona, New York, Massachusetts, Michigan, Florida and Maryland pursuant to the Illinois Compassionate Use of Medical Cannabis Pilot Program Act and the Illinois Cannabis Regulation and Tax Act; the Pennsylvania Compassionate Use of Medical Cannabis Act; the Ohio Medical Marijuana Control Program; the California Medicinal and Adult-Use Cannabis Regulation and Safety Act; the Arizona Medical Marijuana Act and the Smart and Safe Arizona Act; the New York Compassionate Care Act and the New York Marijuana Regulation and Tax Act; the Massachusetts Regulation and Taxation of Marijuana Act and the Medical Use of Marijuana Act; the Michigan Medical Marihuana Act, the Michigan Medical Marihuana Facilities Licensing Act and the Michigan Regulation and Taxation of Marihuana Act; the Florida Compassionate Medical Cannabis Act; and the Maryland Medical Marijuana Act, respectively.
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 change its name from Randsburg to Cresco Labs Inc. and to amend the rights and restrictions of its existing classes of common shares, redesignate such classes as the class of SVS and create the classes of PVS and Super Voting Shares (“MVS”).
Pursuant to the Transaction, among the Company (then Randsburg) and Cresco Labs, LLC, a series of transactions were completed 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. 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 the Cresco LLC limited liability agreement (“Pre-Combination LLC Agreement”). The Pre-Combination LLC Agreement was further amended and restated in connection with the completion of the Transaction.
The Company trades on the Canadian Securities Exchange under the ticker symbol “CL,” on the Over-the-Counter Market under the ticker symbol “CRLBF” and on the Frankfurt Stock Exchange under the symbol “6CQ.”
The Company’s head office is located at Suite 110, 400 W Erie St, Chicago, IL 60654. The registered office is located at Suite 2500, 666 Burrard Street, Vancouver, BC V6C 2X8.
9
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| (a) | Basis of Preparation |
The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with accounting standards generally accepted in the United States (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to Accounting Standards Codification (“ASC”) 270 Interim Reporting. The financial data presented herein should be read in conjunction with the Company’s audited annual consolidated financial statements and accompanying notes as filed on SEDAR. Consolidated Balance Sheets for the year ended December 31, 2021, are derived from audited financial statements filed on SEDAR on March 25, 2022. In the opinion of management, the unaudited financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Operating results for the three and nine months ended September 30, 2022, are not necessarily indicative of results that may be expected for any other reporting period. These unaudited condensed interim consolidated financial statements include estimates and assumptions of management that affect the amounts reported. Actual results could differ from these estimates.
| (b) | Basis of Measurement |
The accompanying unaudited condensed interim consolidated financial statements have been prepared on a going concern basis, under the historical cost convention, except for certain loans receivable, investments, derivative instruments, deferred consideration and contingent consideration, which are recorded at fair value. Historical cost is generally based upon the fair value of the consideration given in exchange for assets acquired and the contractual obligation for liabilities incurred.
| (c) | Functional and Presentation Currency |
The Company’s functional currency and that of the majority of its subsidiaries is the United States (“U.S.”) dollar. The Company’s reporting currency is the U.S. dollar (“USD”). All references to “C$” refer to Canadian dollars. Foreign currency denominated assets and liabilities are re-measured into the functional currency using period-end exchange rates. Gains and losses from foreign currency transactions are included in Other income, net in the Unaudited Condensed Interim Consolidated Statements of Operations.
Assets and liabilities of foreign operations having a functional currency other than USD (e.g., C$) are translated at the rate of exchange prevailing at the reporting date; revenues and expenses are translated at the monthly average rate of exchange during the period. Gains or losses on translation of foreign subsidiaries and net investments in foreign operations are included in Foreign currency translation differences, net of tax in the Unaudited Condensed Interim Consolidated Statements of Comprehensive Loss and in Accumulated other comprehensive loss on the Unaudited Condensed Interim Consolidated Balance Sheets.
| (d) | Basis of Consolidation |
The unaudited condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated upon consolidation. Subsidiaries are those entities over which the Company has power over the investee, is exposed, or has rights, to variable involvement with the investee; and has the ability to use its power to affect its returns.
10
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
The following are Cresco Labs’ wholly-owned or controlled entities as of September 30, 2022:
| Entity |
Location | Purpose | Percentage Held |
|||||||||
| Cresco Labs Inc. |
British Columbia, Canada | Parent Company | ||||||||||
| CannaRoyalty Corp. (Origin House) |
Ontario, Canada | Holding Company | 100 | % | ||||||||
| Cali-AntiFragile Corp. |
California | Holding Company | 100 | % | ||||||||
| Alta Supply Inc. (Continuum) |
California | Distribution | 100 | % | ||||||||
| Kaya Management Inc. |
California | Production | 100 | % | ||||||||
| River Distributing Co., LLC |
California | Distribution | 100 | % | ||||||||
| FloraCal Farms |
California | Cultivation | 100 | % | ||||||||
| Cub City, LLC |
California | Cultivation | 100 | % | ||||||||
| CRHC Holdings Corp. |
Ontario, Canada | Holding Company | 100 | % | ||||||||
| Laurel Harvest Labs, LLC |
Pennsylvania | |
Cultivation and Dispensary Facility |
|
100 | % | ||||||
| JDRC Mount Joy, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| JDRC Scranton, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| Bluma Wellness Inc. |
British Columbia, Canada | Holding Company | 100 | % | ||||||||
| CannCure Investments Inc. |
Ontario, Canada | Holding Company | 100 | % | ||||||||
| Cannabis Cures Investments, LLC |
Florida | Holding Company | 100 | % | ||||||||
| 3 Boys Farm, LLC (One Plant Florida) |
Florida | |
Cultivation, Production and Dispensary Facility |
|
100 | % | ||||||
| Farm to Fresh Holdings, LLC |
Florida | |
Cultivation, Production and Dispensary Facility |
|
100 | % | ||||||
| Cresco U.S. Corp. |
Illinois | Manager of Cresco Labs, LLC | 100 | % | ||||||||
| MedMar Inc. |
Illinois | Holding Company | 100 | % | ||||||||
| MedMar Lakeview, LLC |
Illinois | Dispensary | 88 | % | ||||||||
| MedMar Rockford, LLC |
Illinois | Dispensary | 75 | % | ||||||||
| Gloucester Street Capital, LLC |
New York | Holding Company | 100 | % | ||||||||
| Valley Agriceuticals, LLC |
New York | Operating Entity | 100 | % | ||||||||
| JDRC Ellenville, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| CMA Holdings, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| BL Real Estate, LLC |
Massachusetts | Holding Company | 100 | % | ||||||||
| Cultivate Licensing LLC |
Massachusetts | |
Cultivation, Production and Dispensary Facility |
|
100 | % | ||||||
| Cultivate Worcester, Inc |
Massachusetts | Dispensary | 100 | % | ||||||||
| Cultivate Leicester, Inc |
Massachusetts | |
Cultivation, Production and Dispensary Facility |
|
100 | % | ||||||
| Cultivate Framingham, Inc |
Massachusetts | Dispensary | 100 | % | ||||||||
| Cultivate Burncoat, Inc |
Massachusetts | Holding Company | 100 | % | ||||||||
| Cultivate Cultivation, Inc |
Massachusetts | Cultivation and Production Entity | 100 | % | ||||||||
| Good News Holdings, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| Wonder Holdings, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| JDRC Seed, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| CP Pennsylvania Holdings, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| Bay, LLC |
Pennsylvania | Holding Company | 100 | % | ||||||||
| Bay Asset Management, LLC |
Pennsylvania | Holding Company | 100 | % | ||||||||
| Ridgeback, LLC |
Colorado | Holding Company | 100 | % | ||||||||
| Cresco Labs, LLC |
Illinois | Operating Entity | 58 | % | ||||||||
| Cresco Labs Notes Issuer, LLC |
Illinois | Holding Company | ||||||||||
| Cresco Labs Ohio, LLC |
Ohio | |
Cultivation, Production and Dispensary Facility |
|
99 | % | ||||||
| Wellbeings, LLC |
Delaware | |
CBD Wellness Product Development |
|
100 | % | ||||||
| Cresco Labs SLO, LLC |
California | Holding Company | 100 | % | ||||||||
| SLO Cultivation Inc. |
California | Cultivation and Production Facility | 80 | % | ||||||||
| Cresco Labs Joliet, LLC |
Illinois | Cultivation and Production Facility | 100 | % | ||||||||
| Cresco Labs Kankakee, LLC |
Illinois | Cultivation and Production Facility | 100 | % | ||||||||
11
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| Entity |
Location | Purpose | Percentage Held |
|||||||||
| Cresco Labs Logan, LLC |
Illinois | Cultivation and Production Facility | 100 | % | ||||||||
| Cresco Labs PA, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| Cresco Yeltrah, LLC |
Pennsylvania | Cultivation, Production and Dispensary Facility | 100 | % | ||||||||
| JDC Newark, LLC |
Ohio | Holding Company | 100 | % | ||||||||
| Verdant Creations Newark, LLC |
Ohio | Dispensary | 100 | % | ||||||||
| JDC Marion, LLC |
Ohio | Holding Company | 100 | % | ||||||||
| Verdant Creations Marion, LLC |
Ohio | Dispensary | 100 | % | ||||||||
| JDC Chillicothe, LLC |
Ohio | Holding Company | 100 | % | ||||||||
| Verdant Creations Chillicothe, LLC |
Ohio | Dispensary | 100 | % | ||||||||
| JDC Columbus, LLC |
Ohio | Holding Company | 100 | % | ||||||||
| Care Med Associates, LLC |
Ohio | Dispensary | 100 | % | ||||||||
| Cresco Labs Arizona, LLC |
Arizona | Holding Company | 100 | % | ||||||||
| Arizona Facilities Supply, LLC |
Arizona/Maryland | Cultivation, Production and Dispensary Facility | 100 | % | ||||||||
| Cresco Labs Tinad, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| PDI Medical III, LLC |
Illinois | Dispensary | 100 | % | ||||||||
| Cresco Labs Phoenix Farms, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| Phoenix Farms of Illinois, LLC |
Illinois | Dispensary | 100 | % | ||||||||
| JDC Elmwood, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| FloraMedex, LLC |
Illinois | Dispensary | 100 | % | ||||||||
| Cresco Edibles, LLC |
Illinois | Holding Company | 100 | % | ||||||||
| TSC Cresco, LLC |
Illinois | Licensing | 75 | % | ||||||||
| Cresco HHH, LLC |
Massachusetts | Cultivation, Production and Dispensary Facility | 100 | % | ||||||||
| Cresco Labs Michigan, LLC (a) |
Michigan | Cultivation and Production Facility | 85 | % | ||||||||
| (a) | Cresco Labs Michigan, LLC is 85% owned by related parties within management of the Company. |
Cresco U.S. Corp., which is wholly owned by the Company, is the sole manager of Cresco Labs, LLC; Cresco Labs, LLC is the sole owner and manager of Cresco Labs Notes Issuer, LLC. Therefore, the Company controls Cresco Labs Notes Issuer, LLC and has consolidated its results into the unaudited condensed interim consolidated financial statements.
Non-controlling interests (“NCI”) represent ownership interests in consolidated subsidiaries by parties that are not shareholders of the Company. They are shown as a component of total equity in the Unaudited Condensed Interim Consolidated Balance Sheets and the share of net income attributable to NCI is shown as a component of Net loss in the Unaudited Condensed Interim Consolidated Statements of Operations and in the Unaudited Condensed Interim Consolidated Statement of Comprehensive Loss. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.
| (e) | Earnings (Loss) Per Share |
Earnings (loss) per share (“EPS”) is calculated by dividing the net earnings or loss attributable to shareholders by the weighted-average shares outstanding during the period. The Company presents basic and diluted EPS in the Unaudited Condensed Interim Consolidated Statements of Operations. Basic EPS is calculated by dividing the profit or loss attributable to shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the weighted-average number of shares outstanding for the effects of all dilutive potential shares, which are comprised of redeemable Cresco Labs, LLC shares; options, warrants and restricted stock units (“RSUs”) issued. Shares with anti-dilutive impacts are excluded from the calculation. The number of shares included with respect to redeemable shares, options, warrants and RSUs is computed using the treasury stock method.
12
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
Potentially dilutive shares as of September 30, 2022 and September 30, 2021, which were excluded from the calculation of diluted EPS for the periods presented consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Redeemable shares |
107,039 | 111,216 | 107,864 | 116,824 | ||||||||||||
| Options |
23,546 | 11,921 | 23,546 | 13,839 | ||||||||||||
| Warrants |
2,086 | 4,796 | 2,086 | 4,106 | ||||||||||||
| RSUs |
4,114 | 726 | 4,114 | 814 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total potentially dilutive shares |
136,785 | 128,659 | 137,610 | 135,583 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (f) | Recently Adopted Accounting Pronouncements |
In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-04 Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU No. 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this guidance has not had a material impact on the Company’s unaudited condensed interim consolidated financial statements.
| (g) | Recently Issued Accounting Standards |
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU No. 2020-06 simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity. The amendments in this update are effective for all business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We do not expect the adoption of this guidance will have a material impact on the Company’s unaudited condensed interim consolidated financial statements.
13
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 3. INVENTORY
Inventory as of September 30, 2022 and December 31, 2021, consisted of the following:
| ($ in thousands) |
September 30, 2022 | December 31, 2021 | ||||||
| Raw materials |
$ | 36,362 | $ | 38,618 | ||||
| Raw materials - non-cannabis |
30,809 | 22,260 | ||||||
|
Work-in-process |
44,651 | 26,561 | ||||||
| Finished goods |
40,769 | 49,204 | ||||||
|
|
|
|
|
|||||
| Total Inventory |
$ | 152,591 | $ | 136,643 | ||||
|
|
|
|
|
|||||
The Company wrote-off $0.9 million and $1.2 million of inventory during the three and nine months ended September 30, 2022, respectively, and wrote off $1.5 million and $1.7 million during the three and nine months ended September 30, 2021, respectively. These write-offs are included in Cost of goods sold presented on the Unaudited Condensed Interim Consolidated Statements of Operations.
NOTE 4. PROPERTY AND EQUIPMENT
As of September 30, 2022 and December 31, 2021, Property and equipment consisted of the following:
| ($ in thousands) |
Land and Buildings |
Machinery and Equipment |
Furniture and Fixtures |
Leasehold Improvements |
Website, Computer Equipment and Software |
Vehicles | Construction In Progress |
Total | ||||||||||||||||||||||||
| Cost |
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance as of January 1, 2022 |
$ | 146,884 | $ | 38,968 | $ | 26,227 | $ | 152,778 | $ | 8,148 | $ | 3,258 | $ | 42,847 | $ | 419,110 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Additions |
29,826 | 2,622 | 1,812 | 2,993 | 296 | 134 | 31,770 | 69,453 | ||||||||||||||||||||||||
| Transfers |
108 | 2,220 | 1,035 | (282 | ) | 1,131 | — | (4,212 | ) | — | ||||||||||||||||||||||
| Disposals |
— | (105 | ) | (61 | ) | (251 | ) | — | (14 | ) | (2,639 | ) | (3,070 | ) | ||||||||||||||||||
| Sale related to sale and leaseback transaction |
(2,305 | ) | (3,333 | ) | (2,188 | ) | (29,857 | ) | — | — | — | (37,683 | ) | |||||||||||||||||||
| Measurement period adjustments |
1,829 | (210 | ) | 929 | (1,348 | ) | — | — | — | 1,200 | ||||||||||||||||||||||
| Effect of foreign exchange and other adjustments |
252 | (1 | ) | 7 | (288 | ) | (6 | ) | 33 | — | (3 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| As of September 30, 2022 |
$ | 176,594 | $ | 40,161 | $ | 27,761 | $ | 123,745 | $ | 9,569 | $ | 3,411 | $ | 67,766 | $ | 449,007 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Accumulated depreciation |
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance as of January 1, 2022 |
$ | (7,498 | ) | $ | (6,821 | ) | $ | (7,579 | ) | $ | (23,149 | ) | $ | (3,927 | ) | $ | (1,044 | ) | $ | — | $ | (50,018 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Depreciation |
(4,792 | ) | (4,745 | ) | (4,664 | ) | (12,752 | ) | (1,717 | ) | (503 | ) | — | (29,173 | ) | |||||||||||||||||
| Disposals |
— | 26 | 24 | 91 | — | — | — | 141 | ||||||||||||||||||||||||
| Sale related to sale and leaseback transaction |
36 | 736 | 950 | 6,262 | — | — | — | 7,984 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| As of September 30, 2022 |
$ | (12,254 | ) | $ | (10,804 | ) | $ | (11,269 | ) | $ | (29,548 | ) | $ | (5,644 | ) | $ | (1,547 | ) | $ | — | $ | (71,066 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net book value |
||||||||||||||||||||||||||||||||
|
|
|
|
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|||||||||||||||||
| As of December 31, 2021 |
$ | 139,386 | $ | 32,147 | $ | 18,648 | $ | 129,629 | $ | 4,221 | $ | 2,214 | $ | 42,847 | $ | 369,092 | ||||||||||||||||
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|
|||||||||||||||||
| As of September 30, 2022 |
$ | 164,340 | $ | 29,357 | $ | 16,492 | $ | 94,197 | $ | 3,925 | $ | 1,864 | $ | 67,766 | $ | 377,941 | ||||||||||||||||
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|||||||||||||||||
As of September 30, 2022 and December 31, 2021, costs related to construction at the Company’s facilities and dispensaries were capitalized in construction in progress and not depreciated. Depreciation will commence when construction is completed and the facilities and dispensaries are available for their intended use. Land costs at each balance sheet date are included in Land and Buildings.
14
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
In the second quarter of 2022, the Company determined that approximately $2.4 million of materials held in construction in progress would not be used. The assets were classified as held for sale as of June 30, 2022. Based on an analysis of fair value for these materials, the book value of these assets was written down to $0.9 million during the second quarter of 2022, with a $1.5 million loss on sale recorded to Selling, general and administrative expenses in the Unaudited Condensed Interim Consolidated Statements of Operations. The materials were sold in July of 2022 for $0.9 million.
During the second quarter of 2022, the Company initiated a plan to shut down a cultivation facility and a production facility in California. As a result of this plan, the Company exercised its early termination right to reduce the existing lease terms to 180 days at these locations and determined that the useful life of impacted leasehold improvements had essentially ended. As such, the Company accelerated depreciation on these leasehold improvements to reduce the associated net book value down to $nil, with additional depreciation expense taken on these leasehold improvements in the amount of $2.7 million during the second quarter of 2022. During the three months ended September 30, 2022, the Company recorded additional accelerated depreciation on other remaining assets at the facility in the amount of $0.6 million. The Company is currently in the process of determining a disposal plan for the remaining assets at these locations.
On September 1, 2022, the Company closed on a sale and leaseback transaction to sell its Brookville, Pennsylvania facility to Aventine Property Group (“Aventine”). Concurrent with the closing of the sale, the Company, entered into a long-term, triple-net lease agreement with Aventine and will continue to operate the facility as a permitted cannabis cultivation and processing facility. In connection with this transaction, the Company disposed of fixed assets with a net book value of $29.7 million and recorded a net gain on sale of assets of $14.7 million to Other income, net, in the Unaudited Condensed Interim Consolidated Statements of Operations.
In addition to the depreciation expense on long-lived assets shown above of $29.2 million, additional depreciation expense was recorded during the three months ended September 30, 2022 related to an abandoned construction in progress project of $0.6 million. Total depreciation of $9.5 million and $7.1 million was incurred during the three months ended September 30, 2022 and 2021, respectively, of which $2.4 million and $1.6 million, respectively, is included in Selling, general and administrative expenses, with $7.1 million and $5.5 million in Cost of goods sold and ending inventory, respectively. Total depreciation of $29.8 million and $18.3 million was incurred during the nine months ended September 30, 2022 and 2021, respectively, of which $7.0 million and $4.6 million, respectively, is included in Selling, general and administrative expenses, with $22.8 million and $13.7 million in Cost of goods sold and ending inventory, respectively.
As of September 30, 2022 and December 31, 2021, ending inventory includes $11.4 million and $9.1 million of capitalized depreciation, respectively. For the three months ended September 30, 2022 and 2021, $8.1 million and $4.1 million, respectively, of depreciation was recorded to Cost of goods sold, which includes $6.5 million and $2.7 million, respectively, related to depreciation capitalized to inventory in prior quarters. For the nine months ended September 30, 2022 and 2021, $20.5 million and $11.1 million, respectively, of depreciation was recorded to Cost of goods sold, which includes $8.9 million and $3.6 million, respectively, related to depreciation capitalized to inventory in prior years.
15
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 5. LEASES
The Company is the lessee in all of its leasing arrangements and has entered into leases primarily for its corporate office, cultivation and processing facilities and dispensaries. Depending upon the type of lease, the original lease terms generally range from 1 year to 20 years. Certain leases include renewal options ranging from less than one year to 25 years. The Company is reasonably certain to exercise renewal options ranging from 1 year to 10 years on certain leases.
The Company also has long-term financing liabilities associated with certain properties. See Note 11 for additional details on these transactions.
During the second quarter of 2022, the Company initiated a plan to shut down a cultivation facility and a production facility in California. As a result of this plan, the Company has terminated the existing leases at these locations. A termination notice was issued to the landlord of these locations, which included two long-term greenhouse leases and a short-term rental of a housing facility. Due to differences between the carrying amounts of the right-of-use (“ROU”) assets and lease liabilities associated with these leases, a gain on lease termination of $5.2 million was recorded for the nine months ended September 30, 2022 and is included in Other income, net, in the Unaudited Condensed Interim Consolidated Statements of Operations.
On September 1, 2022, the Company closed on a sale and leaseback transaction to sell its Brookville, Pennsylvania, facility to Aventine. Concurrent with the closing of the sale, the Company entered into a long-term, triple-net lease agreement with Aventine and will continue to operate the facility as the permitted cannabis cultivation and processing facility. The selling price for the property was $43.7 million, net of transaction costs and a net gain on sale of assets of $14.7 million was recorded to Other income, net, in the Unaudited Condensed Interim Consolidated Statements of Operations. The lease has a term of 10 years and was recorded as an operating lease which resulted in a ROU asset and lease liability of $29.7 million.
As of both September 30, 2022 and December 31, 2021, ending inventory includes $0.1 million of capitalized lease depreciation. For both the three months ended September 30, 2022 and 2021, $0.1 million of lease depreciation was recorded to Cost of goods sold which includes $0.1 million of lease depreciation capitalized to inventory in prior quarters. For both the nine months ended September 30, 2022 and 2021, $0.3 million of lease depreciation was recorded to Cost of goods sold, which includes $0.1 million and $0.2 million, respectively, of lease depreciation capitalized to inventory in prior years.
NOTE 6. INVESTMENTS
The Company has investments in five entities: 420 Capital Management, LLC (“420 Capital”), a cannabis investment company; Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company; Infamy Brews, LLC (“Two Roots Brewing Co.”), a non-alcoholic brewing company; IM Cannabis Corp. (“IMC”), a pharmaceutical manufacturer that specializes in cannabis and OLD PAL LLC (“Old Pal”), a cannabis operator/licensor.
The 420 Capital, Lighthouse and Old Pal investments are held at fair value and are classified as equity securities without a readily determinable value. The IMC investment is classified as a marketable security with a readily determinable fair value.
During the nine months ended September 30, 2022, Lighthouse, in conjunction with a spin-off transaction, issued Lighthouse shareholders a prorated interest in Infamy Brews, LLC, DBA Two Roots Brewing Co. As a result, the Company now holds an 0.8% ownership interest in Two Roots Brewing Co. The investment is held at fair value and classified as an equity security without a readily determinable value.
16
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
The following is a summary of the investments held at fair value as of September 30, 2022 and December 31, 2021:
| ($ in thousands) |
September 30, 2022 | December 31, 2021 | ||||||
| 420 Capital |
$ | 68 | $ | 68 | ||||
| Lighthouse |
339 | 542 | ||||||
| Two Roots Brewing Co. |
93 | — | ||||||
| Old Pal |
592 | 592 | ||||||
| IMC |
578 | 4,710 | ||||||
|
|
|
|
|
|||||
| Total Investments |
$ | 1,670 | $ | 5,912 | ||||
|
|
|
|
|
|||||
The Company recorded mark-to-market losses of $0.3 million and $2.9 million for the three months ended September 30, 2022 and 2021, respectively, and mark-to-market losses of $4.2 million and $6.8 million for the nine months ended September 30, 2022 and 2021, respectively.
NOTE 7. INTANGIBLE ASSETS AND GOODWILL
As of September 30, 2022 and December 31, 2021, Intangible assets and Goodwill consisted of the following:
| ($ in thousands) |
Customer Relation- ships |
Trade Names |
Permit Application Costs |
Licenses | Other Intangibles (a) |
Goodwill | Total | |||||||||||||||||||||
| Cost |
||||||||||||||||||||||||||||
| Balance at January 1, 2022 |
$ | 31,879 | $ | 2,100 | $ | 11,921 | $ | 404,307 | $ | 6,284 | $ | 446,767 | $ | 903,258 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Additions |
— | — | 2,906 | — | — | — | 2,906 | |||||||||||||||||||||
| Measurement period adjustments |
— | — | — | (1,000 | ) | — | 1,609 | 609 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2022 |
$ | 31,879 | $ | 2,100 | $ | 14,827 | $ | 403,307 | $ | 6,284 | $ | 448,376 | $ | 906,773 | ||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||
| Accumulated amortization |
||||||||||||||||||||||||||||
| Balance at January 1, 2022 |
$ | (4,197 | ) | $ | (695 | ) | $ | (10,448 | ) | $ | — | $ | (3,507 | ) | $ | — | $ | (18,847 | ) | |||||||||
|
|
|
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|
|
|
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|
|
|||||||||||||||
| Amortization |
(3,006 | ) | (897 | ) | (2,505 | ) | — | (1,696 | ) | — | (8,104 | ) | ||||||||||||||||
|
|
|
|
|
|
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|
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|
|
|
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|
|||||||||||||||
| Balance at September 30, 2022 |
$ | (7,203 | ) | $ | (1,592 | ) | $ | (12,953 | ) | $ | — | $ | (5,203 | ) | $ | — | $ | (26,951 | ) | |||||||||
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|
|||||||||||||||
| Net book value |
||||||||||||||||||||||||||||
| December 31, 2021 |
$ | 27,682 | $ | 1,405 | $ | 1,473 | $ | 404,307 | $ | 2,777 | $ | 446,767 | $ | 884,411 | ||||||||||||||
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|
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|
|||||||||||||||
| September 30, 2022 |
$ | 24,676 | $ | 508 | $ | 1,874 | $ | 403,307 | $ | 1,081 | $ | 448,376 | $ | 879,822 | ||||||||||||||
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| (a) | Other Intangibles includes non-compete agreements, non-solicitation agreements and related amortization. |
Amortization of $2.4 million and $4.2 million was recorded for the three months ended September 30, 2022 and 2021, respectively, of which $1.4 million and $3.6 million, respectively, is included in Selling, general and administrative expenses, with $1.0 million and $0.6 million in Cost of goods sold and ending inventory, respectively. Amortization of $8.1 million and $12.6 million was recorded for the nine months ended months ended September 30, 2022 and 2021, respectively, of which $5.8 million and, $10.7 million, respectively, is included in Selling, general and administrative expenses, with $2.3 million and $1.9 million in Cost of goods sold and ending inventory, respectively.
17
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
The following table outlines the estimated annual amortization expense related to intangible assets as of September 30, 2022:
| ($ in thousands) |
||||
| 2022 |
$ | 2,405 | ||
| 2023 |
5,724 | |||
| 2024 |
4,233 | |||
| 2025 |
4,093 | |||
| 2026 |
3,968 | |||
| Thereafter |
7,716 | |||
|
|
|
|||
| Total estimated amortization |
$ | 28,139 | ||
|
|
|
|||
As of September 30, 2022 and December 31, 2021, ending inventory includes $1.4 million and $1.1 million of capitalized amortization, respectively. For the three months ended September 30, 2022 and 2021, $0.8 million and $0.5 million, respectively, of amortization expense was recorded to Cost of goods sold, which includes $0.6 million and $0.4 million, respectively, related to amortization capitalized to inventory in prior quarters. For the nine months ended September 30, 2022 and 2021, $2.1 million and $1.9 million, respectively, of amortization expense was recorded to Cost of goods sold, which includes $1.0 million and $0.9 million, respectively, related to amortization capitalized to inventory in prior years.
During the three and nine months 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 during the three and nine months ended September 30, 2021.
NOTE 8. SHARE CAPITAL
| (a) | Authorized |
The authorized share capital of the Company, which has no par value, is comprised of the following:
| i. | Unlimited Number of Subordinate Voting Shares |
Holders of SVS will be entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company will have the right to vote. At each such meeting, holders of SVS will be entitled to one vote in respect of each SVS held. As long as any SVS remain outstanding, the Company will not, without the consent of the holders of the SVS by separate special resolution, prejudice or interfere with any right attached to the SVS. Holders of SVS will be entitled to receive as and when declared by the directors of the Company, dividends in cash or property of the Company.
18
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| ii. | Unlimited Number of Proportionate Voting Shares |
Holders of PVS will be entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company will have the right to vote. At each such meeting, holders of PVS will be entitled to one vote in respect of each SVS into which such PVS could ultimately be converted to 200 votes per PVS. As long as any PVS remain outstanding, the Company will not, without the consent of the holders of the PVS and MVS by separate special resolution, prejudice or interfere with any right or special right attached to the PVS. The holder of PVS have the right to receive dividends, out of any cash or other assets legally available therefore, pari passu as to dividends and any declaration or payment of any dividend on the SVS.
| iii. | 500,000 Super Voting Shares |
Holders of MVS shall be entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote. At each such meeting, holders of MVS shall be entitled to 2 thousand votes in respect of each MVS held.
| iv. | Unlimited Number of Special Subordinate Voting Shares |
Holders of SSVS will be entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company will have the right to vote. At each such meeting, holders of SSVS will be entitled to a 0.00001 vote in respect of each SSVS held. As long as any SSVS remain outstanding, the Company will not, without the consent of the holders of the SSVS by separate special resolution, prejudice or interfere with any right attached to the SSVS. Holders of SSVS will be entitled to receive dividends in cash or property of the Company, if and when declared by the Board of Directors (the “Board”).
| v. | Redeemable Units |
As part of the Transaction, unit holders of Cresco Labs, LLC exchanged their units for a new class of redeemable units in Cresco Labs, LLC. Each redeemable unit is only exchangeable for the equivalent of one SVS in Cresco Labs Inc. (without any obligation to redeem in cash). These unit holders hold an interest only in Cresco Labs, LLC; they participate in the earnings of only Cresco Labs, LLC and not the earnings of the combined entity.
19
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (b) | Issued and Outstanding |
As of September 30, 2022 and 2021, issued and outstanding shares and units consisted of the following:
| (In thousands) |
Redeemable Units |
SVS* | PVS** | MVS | SSVS*** | |||||||||||||||
| Beginning balance, January 1, 2022 |
109,441 | 269,971 | 20,667 | 500 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Options and warrants exercised |
— | 1,277 | — | — | — | |||||||||||||||
| RSUs issued |
— | 320 | — | — | — | |||||||||||||||
| Issuance of shares related to acquisitions |
— | 5,340 | — | — | — | |||||||||||||||
| Cresco LLC redemption |
(3,201 | ) | 3,201 | — | — | — | ||||||||||||||
| PVS converted to SVS |
— | 585 | (585 | ) | — | — | ||||||||||||||
| Issuances related to employee taxes on certain share-based payment arrangements |
— | 140 | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2022 |
106,240 | 280,834 | 20,082 | 500 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| * | SVS includes shares pending issuance or cancellation |
| ** | PVS presented on an “as-converted” basis to SVS (1-to-200) |
| *** | SSVS presented on an “as-converted” basis to SVS (1-to-0.00001) |
| (In thousands) |
Redeemable Units |
SVS* | PVS** | MVS | SSVS*** | |||||||||||||||
| Beginning balance, January 1, 2021 |
126,338 | 194,231 | 29,311 | 500 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Options and warrants exercised |
— | 2,196 | — | — | — | |||||||||||||||
| RSUs issued |
— | 375 | — | — | — | |||||||||||||||
| Issuance of shares related to acquisitions |
— | 20,904 | — | — | — | |||||||||||||||
| Cresco LLC redemption |
(15,497 | ) | 15,497 | — | — | — | ||||||||||||||
| PVS converted to SVS |
— | 8,534 | (8,534 | ) | — | — | ||||||||||||||
| Issuances related to employee taxes on certain share-based payment arrangements |
— | 148 | — | — | — | |||||||||||||||
| Share issuances |
— | 11,469 | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance, September 30, 2021 |
110,841 | 253,354 | 20,777 | 500 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| * | SVS includes shares pending issuance or cancellation |
| ** | PVS presented on an “as-converted” basis to SVS (1-to-200) |
| *** | SSVS presented on an “as-converted” basis to SVS (1-to-0.00001) |
| (i) | Share Issuances - Equity Distribution Agreement |
In December 2019, the Company entered into an agreement with Canaccord Genuity Corp (“Canaccord”) to sell up to C$55 million SVS at an at-the-market price. In April 2021, the Company announced a new agreement with Canaccord to sell up to $100.0 million of SVS to replace the prior agreement which was set to expire in August 2021. No shares were issued during the three and nine months ended September 30, 2022 and 2021, respectively, under the new agreement.
20
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (ii) | Issuance of Shares - Acquisitions |
During the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company issued shares in conjunction with acquisitions* as follows:
| (In thousands) |
Acquisition date | SVS shares issued |
Replacement shares issued |
Equity-based consideration |
||||||||||
| Nine Months Ended September 30, 2022: |
||||||||||||||
| Cultivate - Contingent Consideration |
September 2, 2021 | 5,340 | — | $ | 34,708 | |||||||||
| Year Ended December 31, 2021: |
||||||||||||||
| Verdant |
February 16, 2021 | 127 | — | $ | 2,004 | |||||||||
| Bluma |
April 14, 2021 | 15,061 | 814 | 193,310 | ||||||||||
| Cultivate |
September 2, 2021 | 4,818 | — | 46,643 | ||||||||||
| Cure Penn |
November 24, 2021 | 6,167 | — | 54,240 | ||||||||||
| Laurel Harvest |
December 09, 2021 | 8,354 | — | 65,844 | ||||||||||
| * | Verdant Creations, LLC (“Verdant”); Bluma Wellness, Inc. (“Bluma”); Cultivate Licensing, LLC (“Cultivate”); Bay, LLC (“Cure Penn”) and Laurel Harvest, LLC (“Laurel Harvest”) |
| (iii) | Shares Issuances - Private Placement |
In January 2021, the Company closed an offering of 9.9 million SVS at a price of C$16.00 ($12.67) per share. The Company received cash proceeds of $120.7 million, net of $3.4 million in commission and other fees, with a corresponding increase to share capital of $124.1 million.
| (iv) | Share Issuances - Arrangement |
In February 2021, a binding settlement was reached with a former executive of the Company for payment of 1.3 million SVS to the counterparty relating to certain equity awards previously held by the counterparty in exchange for a number of covenants, including non-solicitation, non-hire, certain provisions surrounding voting rights and limitations on future sales of Company shares.
| (c) | Stock Purchase Warrants |
Each whole warrant entitles the holder to purchase one SVS or PVS of the Company. A summary of the status of the warrants outstanding as of September 30, 2022 and 2021, is as follows:
| Number of warrants* (In thousands) |
Weighted-average exercise price |
|||||||
| Balance as of January 1, 2022 |
9,842 | $ | 9.63 | |||||
| Exercised |
(12 | ) | 4.24 | |||||
| Forfeited |
(7,744 | ) | 10.27 | |||||
|
|
|
|||||||
| Balance as of September 30, 2022 |
2,086 | $ | 6.64 | |||||
|
|
|
|||||||
| * | PVS presented on an “as-converted” basis to SVS (1-to-200) |
21
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| Number of warrants* (In thousands) |
Weighted-average exercise price |
|||||||
| Balance as of January 1, 2021 |
6,183 | $ | 7.80 | |||||
| Bluma replacement warrants |
4,665 | 11.64 | ||||||
| Exercised |
(709 | ) | 6.18 | |||||
| Forfeited |
(285 | ) | 11.64 | |||||
|
|
|
|||||||
| Balance as of September 30, 2021 |
9,854 | $ | 9.62 | |||||
|
|
|
|||||||
| * | PVS presented on an “as-converted” basis to SVS (1-to-200) |
During the nine months ended September 30, 2022, the Company recorded $0.1 million of warrant exercises into share capital. There were no warrant exercises during the three months ended September 30, 2022. During the three and nine months ended September 30, 2021, the Company recorded $42 thousand and $5.1 million, respectively, of warrant exercises into share capital.
As part of the Bluma acquisition in the second quarter of 2021, the Company issued 4.7 million Cresco warrants valued at $18.4 million in exchange for Bluma warrants that were issued and outstanding on the acquisition date. The issued warrants are equity-classified. In the second quarter of 2021, 0.2 million warrants related to the Bluma acquisition were exercised for $2.2 million, resulting in an increase to share capital of $2.9 million.
During the three and nine months ended September 30, 2022, 5.5 million and 7.7 million warrants expired, respectively, related to issuances to underwriters associated with the September 2019 financing (“September 2019 Financing”) and a portion of the Bluma acquisition replacement warrants. The expired September 2019 Financing warrants consisted of all the outstanding liability-classified warrants, as such, there are no outstanding warrants classified as liabilities as of September 30, 2022. The 2.1 million outstanding warrants as of September 30, 2022, are related to issuances to the sellers from the Valley Agriceuticals, LLC (“Valley Ag”) acquisition and replacement awards issued related to the Bluma acquisition and are equity classified. The remaining 2.1 million outstanding warrants are set to expire during the fourth quarter of 2022.
| (d) | Distribution to Non-controlling Interest Holders |
As of September 30, 2022 and December 31, 2021, the Company had an asset of $0.2 million for tax-related distributions to the 2022 and 2021 unit holders of Cresco Labs, LLC and an accrual of $36.4 million for tax-related distributions to the 2021 and 2020 unit holders of Cresco Labs, LLC, respectively. The accrual for tax-related distributions is recorded based on the year-to-date tax liability attributable to non-controlling interests and the quarterly distributions that are paid are based on the prior year liability, in accordance with the IRS safe harbor rules, which resulted in an asset as of September 30, 2022. These distributions will reduce non-controlling interest upon payment.
In accordance with the underlying operating agreements, the Company declared and paid required distribution amounts to the 2022 and 2021 unit holders of Cresco Labs, LLC and other minority interest holders of $8.7 million and $81.3 million during the three and nine months ended September 30, 2022. Similarly, the Company paid required tax distribution amounts to the 2021 and 2020 unit holders of Cresco Labs, LLC and other minority interest holders of $14.0 million and $69.6 million during the three and nine months ended September 30, 2021.
22
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (e) | Changes in Ownership and Non-controlling Interests |
During the three and nine months ended September 30, 2022, redemptions of 1.5 million and 3.2 million redeemable units occurred, respectively, which were converted into an equivalent number of SVS. These redemptions resulted in a decrease of 0.6% and 1.3%, respectively, in non-controlling interest in Cresco Labs, LLC.
During the three and nine months ended September 30, 2021, redemptions of 1.0 million and 15.5 million redeemable units occurred, respectively, which were converted into an equivalent number of SVS. These redemptions resulted in a decrease of 0.4% and 6.2%, respectively, in non-controlling interest in Cresco Labs, LLC.
As of and for the nine months ended September 30, 2022, Non-controlling interest included the following amounts before intercompany eliminations:
| ($ in thousands) |
TSC Cresco, LLC |
MedMar Inc. (Lakeview) |
MedMar Inc. (Rockford) |
Cresco Labs Ohio, LLC |
SLO Cultivation Inc. |
Other entities including Cresco Labs, LLC1,3 |
Eliminations | Total | ||||||||||||||||||||||||
| Non-current assets |
$ | 4,988 | $ | 31,286 | $ | 23,000 | $ | 17,866 | $ | 13,523 | $ | 1,310,427 | $ | — | $ | 1,401,090 | ||||||||||||||||
| Current assets |
70,919 | 135,531 | 208,108 | 73,526 | 97,308 | 69,847 | (300,038 | ) | 355,201 | |||||||||||||||||||||||
| Non-current liabilities |
— | (11,088 | ) | (3,903 | ) | (12,367 | ) | (2,734 | ) | (684,192 | ) | — | (714,284 | ) | ||||||||||||||||||
| Current liabilities |
(53,770 | ) | (120,916 | ) | (155,412 | ) | (86,619 | ) | (158,309 | ) | (7,169 | ) | 311,635 | (270,560 | ) | |||||||||||||||||
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| Net assets (liabilities) |
$ | 22,137 | $ | 34,813 | $ | 71,793 | $ | (7,594 | ) | $ | (50,212 | ) | $ | 688,913 | $ | 11,597 | $ | 771,447 | ||||||||||||||
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| Net assets (liabilities) attributable to NCI |
$ | 2,710 | $ | 3,704 | $ | 5,325 | $ | (7 | ) | $ | (10,338 | ) | $ | (19,259 | ) | $ | — | $ | (17,865 | ) | ||||||||||||
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| Revenue |
$ | 25,624 | $ | 40,375 | $ | 67,439 | $ | 13,364 | $ | 6,160 | $ | 513,025 | $ | (22,886 | ) | $ | 643,101 | |||||||||||||||
| Gross profit |
16,624 | 27,527 | 47,124 | 1,810 | (11,639 | ) | 234,904 | 2,959 | 319,309 | |||||||||||||||||||||||
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| Net income (loss) |
$ | 13,372 | $ | 9,419 | $ | 30,777 | $ | (2,441 | ) | $ | (5,976 | ) | $ | (80,371 | ) | $ | — | $ | (35,220 | ) | ||||||||||||
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| Net income (loss) allocated to NCI |
$ | 3,343 | $ | 1,168 | $ | 7,694 | $ | (24 | ) | $ | (1,195 | ) | $ | 4,504 | $ | — | $ | 15,490 | ||||||||||||||
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| NCI percentage as of September 30, 2022 |
25.0 | %1 | 12.4 | %2 | 25.0 | %2 | 1.0 | %1 | 20.0 | %1 | 42.1 | % | ||||||||||||||||||||
| 1 | The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 42.1% NCI related to NCI for Cresco Labs Inc. |
| 2 | The NCI percentage reflects the NCI that exists at Cresco U.S. Corp. |
| 3 | Includes the effect of LLC unit redemptions and other adjustments. |
23
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
As of December 31, 2021, Non-controlling interest included the following amounts before intercompany eliminations:
| ($ in thousands) |
TSC Cresco, LLC |
MedMar Inc. (Lakeview) |
MedMar Inc. (Rockford) |
Cresco Labs Ohio, LLC |
SLO Cultivation Inc. |
Other entities including Cresco Labs, LLC1,3 |
Eliminations | Total | ||||||||||||||||||||||||
| Non-current assets |
$ | 5,208 | $ | 33,698 | $ | 22,934 | $ | 16,093 | $ | 23,422 | $ | 1,257,353 | $ | — | $ | 1,358,708 | ||||||||||||||||
| Current assets |
54,506 | 95,522 | 154,929 | 64,897 | 97,276 | 250,029 | (295,404 | ) | 421,755 | |||||||||||||||||||||||
| Non-current liabilities |
— | (11,213 | ) | (3,443 | ) | (12,286 | ) | (14,071 | ) | (653,320 | ) | — | (694,333 | ) | ||||||||||||||||||
| Current liabilities |
(49,726 | ) | (92,049 | ) | (124,597 | ) | (73,441 | ) | (147,993 | ) | (107,143 | ) | 306,555 | (288,394 | ) | |||||||||||||||||
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| Net assets (liabilities) |
$ | 9,988 | $ | 25,958 | $ | 49,823 | $ | (4,737 | ) | $ | (41,366 | ) | $ | 746,919 | $ | 11,151 | $ | 797,736 | ||||||||||||||
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| Net assets (liabilities) attributable to NCI |
$ | 2,850 | $ | 3,910 | $ | 6,123 | $ | 18 | $ | (9,143 | ) | $ | 38,424 | $ | — | $ | 42,182 | |||||||||||||||
| NCI percentage as of December 31, 2021 |
25.0% | 1 | 12.4% | 2 | 25.0% | 2 | 1.0% | 1 | 20.0% | 1 | 43.3% | |||||||||||||||||||||
| 1 | The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 43.3% NCI related to NCI for Cresco Labs Inc. as of December 31, 2021. |
| 2 | The NCI percentage reflects the NCI that exists at Cresco U.S. Corp. |
| 3 | Includes the effect of LLC unit redemptions and other adjustments. |
24
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 9. SHARE-BASED COMPENSATION
The Company has a share-based compensation plan (the “Plan”) for employees and service providers. Under the Plan, options issued have no voting rights and vest proportionately over periods ranging from the grant date to four years from the issuance date. Stock options exercised are converted to SVS. The maximum number of shares issued under the Plan shall not exceed 10% of the issued and outstanding shares.
A summary of the status of the options outstanding as of September 30, 2022, consisted of the following:
| (Shares in thousands) |
Number of stock options outstanding |
Weighted- average exercise price |
Weighted- average remaining contractual life (years) |
Aggregate intrinsic value |
||||||||||||
| Outstanding – January 1, 2022 |
23,610 | $ | 5.54 | 7.70 | $ | 53,455 | ||||||||||
| Granted |
4,393 | 4.46 | ||||||||||||||
| Exercised |
(1,606 | ) | 1.49 | |||||||||||||
| Forfeited |
(2,851 | ) | 7.16 | |||||||||||||
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| Outstanding - September 30, 2022 |
23,546 | $ | 5.43 | 7.44 | $ | 4,622 | ||||||||||
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| Exercisable - September 30, 2022 |
13,676 | $ | 4.35 | 6.66 | $ | 4,515 | ||||||||||
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During the three months ended September 30, 2022 and 2021, options were exercised for gross proceeds of $0.3 million and $0.7 million, respectively. During the nine months ended September 30, 2022 and 2021, options were exercised for gross proceeds of $2.9 million and $2.4 million, respectively.
The following table summarizes the weighted-average grant date fair value and total intrinsic value of options exercised for the nine months ended September 30, 2022:
| ($ in thousands, except per share data) |
Nine Months Ended September 30, 2022 |
|||
| Weighted-average grant date fair value (per share) of stock option units granted |
$ | 3.03 | ||
| Intrinsic value of stock option units exercised, using market price at exercise date |
$ | 5,097 | ||
Weighted-average stock price of options on the dates on which options were exercised for the three and nine months ended September 30, 2022, was $3.69 and $4.66 per option, respectively.
The fair value of stock options granted under the Plan for the nine months ended September 30, 2022, was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:
| September 30, 2022 | ||
| Risk-free annual interest rate |
1.4% - 2.7% | |
| Expected annual dividend yield |
0% | |
| Expected stock price volatility |
74.9% to 79.4% | |
| Expected life of stock options |
5.5 to 7 years | |
| Forfeiture rate |
9.4% - 21.3% | |
| Fair value at grant date |
$1.67 to $4.90 | |
| Stock price at grant date |
$2.53 to $6.91 | |
| Exercise price range |
$2.53 to $6.91 |
25
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of direct and indirect peers of publicly traded companies, as the Company and the cannabis industry have minimal historical share price history available. An increase in volatility would result in an increase in fair value at grant date. The expected life in years represents the period of time that options issued are expected to be outstanding. The risk-free rate is based on U.S. treasury bills with a remaining term equal to the expected life of the options. The forfeiture rate is estimated based on historical forfeitures experienced by the Company.
Restricted Stock Units
The Company has an RSU program to provide employees an additional avenue to participate in the successes of the Company. The fair value of RSUs granted was determined by the fair value of the Company’s share price on date of grant.
A summary of outstanding RSUs as of September 30, 2022, is provided below:
| (Shares in thousands) |
Number of RSUs outstanding |
Weighted- average fair value |
Weighted- average remaining contractual life (years) |
Aggregate intrinsic value |
||||||||||||
| Outstanding - January 1, 2022 |
1,093 | $ | 8.83 | 3.50 | $ | 9,657 | ||||||||||
| Granted |
4,167 | 5.53 | ||||||||||||||
| Vested and settled |
(424 | ) | 5.44 | |||||||||||||
| Forfeited |
(641 | ) | 6.82 | |||||||||||||
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| Outstanding - September 30, 2022 |
4,195 | $ | 5.88 | 4.00 | $ | 24,669 | ||||||||||
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The following table summarizes the total fair value of RSUs vested and settled for the nine months ended September 30, 2022:
| ($ in thousands) |
Nine Months Ended September 30, 2022 |
|||
| Weighted-average grant date fair value (per share) of restricted stock units issued |
$ | 8.60 | ||
| Total fair value of RSUs vested, using market price at vest date |
$ | 2,331 | ||
Expense Attribution
The Company recorded compensation expense for option awards in the amount of $1.5 million and $5.6 million for three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, the Company expensed $1.1 million and $5.0 million, respectively, to Selling, general and administrative expenses, with the remaining $0.4 million and $0.6 million, respectively, in Cost of goods sold and ending inventory. The Company recorded compensation expense for option awards in the amount of $11.2 million and $16.4 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, the Company expensed $9.6 million and $14.4 million, respectively, to Selling, general and administrative expenses, with the remaining $1.6 million and $2.0 million, respectively, in Cost of goods sold and ending inventory. Unrecognized compensation expense as of September 30, 2022 for option awards is $16.5 million and will be recorded over the course of the next 4 years.
26
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
The Company recorded compensation expense for RSU awards in the amount of $2.0 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively, of which $1.5 million and $1.1 million, respectively, is included in Selling, general and administrative expenses, with the remaining $0.5 million and an immaterial amount, respectively, in Cost of goods sold and ending inventory. The Company recorded compensation expense for RSU awards in the amount of $7.5 million and $6.0 million for the nine months ended September 30, 2022 and 2021, respectively, of which $6.0 million and $5.5 million, respectively, is included in Selling, general and administrative expenses. The 2021 selling, general and administrative amount includes $2.1 million and $0.2 million of expense for Bluma replacement awards and Bluma replacement shares, respectively, which were incurred as part of the Bluma acquisition in the second quarter of 2021. The remaining $1.5 million and $0.5 million is included in Cost of goods sold and ending inventory for the nine months ended September 30, 2022 and 2021, respectively. Unrecognized compensation expense for RSU awards as of September 30, 2022, is $11.4 million and will be recognized over the course of the next 4 years.
During the second quarter of 2021, the Company issued 0.1 million subscription awards as compensation to a former member of key management personnel at a weighted average fair value of $11.25 per share. The Company recognized $0.7 million in share-based compensation expense, which was recorded to Selling, general, and administrative expenses.
As of September 30, 2022 and December 31, 2021 ending inventory includes $1.6 million and $1.2 million, respectively, of capitalized compensation expense related to both options and RSUs. For both the three months ended September 30, 2022 and 2021, $0.7 million of compensation expense was recorded to Cost of goods sold, which includes $0.6 million and $0.5 million, respectively, related to compensation expense capitalized to inventory in prior quarters. For the nine months ended September 30, 2022 and 2021, $2.6 million and $2.1 million, respectively, of compensation expense was recorded to Cost of goods sold, which includes $1.1 million and $0.2 million, respectively, related to compensation expense capitalized to inventory in prior years.
NOTE 10. ACQUISITIONS
| (a) | Business Combinations |
No business combinations were completed during the nine months ended September 30, 2022. Current period measurement period adjustments (“MPAs”), along with a discussion of areas where MPAs are most likely to occur in the future, related to acquisitions completed in previous periods are as follows:
(i) Bluma
During the nine months ended September 30, 2022, the Company recorded MPAs related to deferred taxes and income taxes payable, which resulted in a net increase in goodwill of $1.8 million. As the measurement period ended April 14, 2022, no amounts are subject to additional adjustments.
(ii) Cultivate
During the nine months ended September 30, 2022, the Company recorded MPAs related to property and equipment, deferred consideration, licenses and deferred taxes, which resulted in a net increase in goodwill of $0.4 million. As the measurement period ended September 2, 2022, no amounts are subject to additional adjustments.
27
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
(iii) Cure Penn
During the nine months ended September 30, 2022, the Company recorded an MPA related to a working capital adjustment, which resulted in a net increase in goodwill of $0.1 million.
While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are intangible assets and short-term liabilities. Any changes to the preliminary estimates of the fair value of the assets and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
(iv) Laurel Harvest
During the nine months ended September 30, 2022, the Company recorded MPAs related to deferred taxes and income taxes payable, which resulted in a net reduction in goodwill of $0.7 million.
While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are intangibles, deferred tax asset and liabilities, consideration (working capital adjustment), fixed assets and short-term liabilities. Any changes to the preliminary estimates of the fair value of the assets and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
| (b) | Deferred and Contingent Consideration, Short-term |
The following is a summary of Deferred and contingent consideration balances as of September 30, 2022 and December 31, 2021, which are classified as short-term:
| ($ in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| Cultivate contingent consideration |
$ | — | $ | 33,969 | ||||
| Laurel Harvest deferred consideration |
45,636 | 37,847 | ||||||
| Valley Ag operating cash flows deferred consideration |
4,414 | — | ||||||
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| Total Deferred and contingent consideration, short-term |
$ | 50,050 | $ | 71,816 | ||||
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The Company recorded contingent consideration in conjunction with the acquisition of Cultivate in the third quarter of 2021. The former owners of Cultivate were entitled to an earnout, based on Cultivate’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, of up to $68.0 million. During the first quarter of 2022, the Company remeasured the fair value of the contingent consideration, increasing the value from $34.0 million to $39.6 million. The loss related to the earnout adjustment is included in Other income, net in the Unaudited Condensed Interim Consolidated Statements of Operations. During the second quarter of 2022, the Company paid the former owners of Cultivate a total of $39.6 million, settled in cash of $4.8 million and 5.3 million SVS.
In the fourth quarter of 2021, the Company recorded $37.9 million short-term deferred consideration and $9.0 million long-term deferred consideration, for a total of $46.9 million deferred consideration related to the Laurel Harvest acquisition. Total deferred consideration is payable on or before the 18-month anniversary of the acquisition, with accelerated payments required for each of five new dispensaries opened during the 18-month earnout period. In the first quarter of 2022, the Company reclassified $9.0 million of deferred
28
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
consideration from long-term deferred consideration to short-term due to projected dispensary opening dates. Based on an increase in the associated discount rate, the present value was subsequently reduced to $45.6 million, as of September 30, 2022, with a $1.3 million decrease in value recorded to Interest expense, net in the Unaudited Condensed Interim Consolidated Statements of Operations, in the current period. See Note 19 for additional information.
In the third quarter of 2022, the Company reclassified $4.4 million of long-term Valley Ag operating cash flows consideration from long-term to short-term, due to the timing of expected payouts.
| (c) | Deferred Consideration, Long-term |
The following is a summary of Deferred consideration as of September 30, 2022 and December 31, 2021, which is classified as long-term:
| ($ in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| Valley Ag operating cash flows deferred consideration |
$ | 4,058 | $ | 8,577 | ||||
| Laurel Harvest deferred consideration |
— | 9,074 | ||||||
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|
|||||
| Total Deferred consideration, long-term |
$ | 4,058 | $ | 17,651 | ||||
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|
|
|
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In the third quarter of 2022, the Company reclassified $4.4 million of Valley Ag operating cash flow deferred consideration to short-term, as noted above, with $4.1 million remaining in long-term. As of September 30, 2022, the total estimated liability related to the Valley Ag acquisition of $8.5 million is based on the present value of expected payments associated with future cash flows of Valley Ag. During the nine months ended September 30, 2022, the Company recorded a $0.1 million decrease in value recorded to Interest expense, net.
In the fourth quarter of 2021, the Company recorded $9.0 million of long-term deferred consideration, related to the Laurel Harvest acquisition. During the first quarter of 2022, the Company reclassified $9.0 million of long-term deferred consideration to short-term deferred consideration, as noted above.
| (d) | Pending Acquisitions |
On March 23, 2022, the Company announced it had entered into a definitive arrangement agreement (“Arrangement Agreement”) with Columbia Care Inc. (“Columbia Care”) to acquire all of the issued and outstanding shares of Columbia Care pursuant to a statutory plan of arrangement (the “Arrangement”), in an all-share transaction with an equity value of approximately $2.0 billion, as valued at the date of the Arrangement Agreement (the “Columbia Care Transaction”). Under the terms of the Arrangement Agreement, holders of common shares of Columbia Care will receive 0.5579 SVS of Cresco Labs for each Columbia Care share, subject to adjustment. The shareholders of Columbia Care voted in favor of a special resolution to approve the Arrangement on July 8, 2022. The Columbia Care Transaction is expected to close around the end of the first quarter of 2023. While divestitures are anticipated to be required for state regulatory approval of the Columbia Care Transaction, the scope and financial impact of any divestitures cannot be quantified at this time. The Company continues to work toward successful regulatory approvals to complete the transaction, including required divestitures identified in several states and will provide an update regarding the timing and proceeds from divestitures pending the signing of definitive agreements.
29
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 11. LONG-TERM NOTES AND LOANS PAYABLE
The following table represents the Company’s Long-term notes and loans payable balances as of September 30, 2022 and December 31, 2021:
| ($ in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| Senior Loan |
$ | 400,000 | $ | 400,000 | ||||
| Interest payable |
19,317 | 9,711 | ||||||
| Financing liability - leases |
97,181 | 97,797 | ||||||
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|||||
| Total borrowings and interest payable |
516,498 | 507,508 | ||||||
| Less: unamortized debt issuance costs |
(19,587 | ) | (22,501 | ) | ||||
| Less: short-term borrowings and interest payable |
(19,317 | ) | (9,711 | ) | ||||
| Less: current portion of financing liability - leases |
(9,530 | ) | (10,217 | ) | ||||
|
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|
|
|||||
| Total Long-term notes and loans payable |
$ | 468,064 | $ | 465,079 | ||||
|
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|
|||||
| (a) | Senior Loan and Amended Term Loan |
On February 2, 2020, the Company closed on a senior secured term loan agreement (the “Term Loan”) for an aggregate principal amount of $100.0 million, with the option to increase the principal amount to $200.0 million. Of the $100.0 million Term Loan commitment, $92.4 million was committed by Tranche A lenders (the “Tranche A Commitment”) and $7.6 million was committed by Tranche B lenders (the “Tranche B Commitment”).
The Tranche A Commitment accrued interest at a rate of 12.7% per annum, payable in cash quarterly and had a stated maturity of July 22, 2021. The Tranche B Commitment accrued interest at a rate of 13.2% per annum, payable in cash quarterly and had a stated maturity of January 22, 2022. The Company’s effective interest rates for the Tranche A Commitment and Tranche B Commitment of the Term Loan were 17.0% and 16.1%, respectively.
On December 11, 2020, the Company entered into an amendment to exercise the mutual option to increase the principal amount to $200.0 million and refinance the existing Term Loan and the Opaskwayak Cree Nation Loan (the “OCN Loan”), resulting in one amended term loan (the “Amended Term Loan”). Of the $200.0 million Amended Term Loan commitment, $11.7 million was committed by non-extending lenders (the “Non-Extending Lenders Commitment”), $97.3 million was committed by extending lenders (the “Extending Lenders Commitment”) and $91.0 million was committed by increasing lenders (the “Increasing Lenders Commitment”). The Company accelerated principal repayments of $5.4 million and $1.0 million to the OCN Loan lender and certain exiting Term Loan lenders, respectively.
The Non-Extending Lenders Commitment accrued interest at a rate of 12.7% per annum, payable in cash quarterly. The Extending Lenders Commitment and Increasing Lenders Commitment (the “Extending and Increasing Lenders Commitment”) accrued interest at a rate of 12.0% per annum, payable in cash quarterly. The Company’s effective interest rates for the Non-Extending Lenders Commitment and the Extending and Increasing Lenders Commitment were 17.7% and 15.8%, respectively.
30
Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
On August 12, 2021, the Company closed on an agreement for a senior secured term loan with an undiscounted principal balance of $400.0 million (the “Senior Loan”) and an original issue discount of $13.0 million. A portion of proceeds from the Senior Loan were used to retire the existing Amended Term Loan, with the remainder to fund capital expenditures and pursue other targeted growth initiatives within the U.S. cannabis sector.
The Senior Loan accrues interest at a rate of 9.5% per annum, payable in cash semi-annually and has a stated maturity of August 2026. The Company’s effective interest rate for the Senior Loan is 11.0%. The Company capitalized $10.9 million of borrowing costs related to the Senior Loan, of which $7.0 million is payable upon principal repayment of the Senior Loan and thus, is reflected within Other long-term liabilities.
The Senior Loan is secured by a guarantee from substantially all material subsidiaries of the Company, as well as by a security interest in certain assets of the Company and such material subsidiaries. The Senior Loan also contains negative covenants, which restrict the actions of the Company and its subsidiaries during the term of the loan, including restrictions on paying dividends, making investments and incurring additional indebtedness. In addition, the Company is required to maintain a minimum cash balance of $50.0 million and to ensure that the Fixed Charge Coverage Ratio; defined as the ratio of (a) consolidated EBITDA less non-financed capital expenditures; restricted payments, as defined by the loan agreement; and federal, state, provincial, local and foreign income taxes (b) consolidated fixed charges; is not less than 2 to 1. As of November 15, 2022, the Company was in compliance with all covenants.
The Company may prepay in whole or in part the Senior Loan at any time prior to the stated maturity date, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified prepayment premium) and all accrued and unpaid interest and fees. Interest expense is discussed in Note 19.
As discussed in Note 10, on March 23, 2022, the Company announced it had entered into the Arrangement Agreement with Columbia Care to acquire all of the issued and outstanding shares of Columbia Care. On March 23, 2022, Cresco entered into a consent agreement with respect to the Senior Loan pursuant to which certain amendments were made to the Senior Loan which are conditional and effective on the closing of the Arrangement (the “Amended Senior Loan”). The Amended Senior Loan permits the Arrangement, Cresco’s assumption of certain Columbia Care debt and certain proposed asset sales in connection with the Arrangement, in each case, on and subject to the terms and conditions of the Amended Senior Loan.
| (b) | Financing Liabilities |
The Company recognized financing liabilities in relation to sale and leaseback transactions for which the incremental borrowing rates range from 11.3% to 17.5% with remaining terms between 7.3 and 17.8 years, consistent with the underlying lease liabilities. The interest expense associated with financing liabilities is disclosed in Note 19.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 12. REVENUE AND LOYALTY PROGRAMS
| (a) | Revenue |
The following table represents the Company’s disaggregated revenue by source, due to the Company’s contracts with its customers, for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Wholesale |
$ | 92,638 | $ | 109,330 | $ | 282,938 | $ | 313,685 | ||||||||
| Dispensary |
117,846 | 106,153 | 360,163 | 290,210 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Revenue |
$ | 210,484 | $ | 215,483 | $ | 643,101 | $ | 603,895 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company generates revenue, net of sales discounts, at the point in time the control of the product is transferred to the customer, as the Company has a right to payment and the customer has assumed significant risks and rewards of such product without any remaining performance obligation. Sales discounts were approximately 10.3% and 6.3% of gross revenue for the three months ended September 30, 2022 and 2021, respectively. Sales discounts were approximately 9.9% and 5.4% of gross revenue for the nine months ended September 30, 2022 and 2021, respectively.
| (b) | Loyalty Programs |
In the states of Illinois, Arizona, Pennsylvania, New York and Florida; the Company has customer loyalty programs where retail customers accumulate points based on their level of spending. These points are recorded as a contract liability until customers redeem their points for discounts on cannabis products as part of an in-store sales transaction. In addition, the Company records a performance obligation as a reduction of revenue that ranges between $0.01 and $0.04 per loyalty point. Upon redemption, the loyalty program obligation is relieved and the offset is recorded as revenue. As of September 30, 2022 and 2021, there were 124.9 million and 71.3 million points outstanding, with an approximate value of $2.0 million and $0.9 million, respectively. The Company expects outstanding loyalty points to be redeemed within one year.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 13. OTHER INCOME, NET
For the three and nine months ended September 30, 2022 and 2021, Other income, net consisted of the following:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Gain (loss) on disposition of assets |
$ | 14,659 | $ | (2,515 | ) | $ | 14,680 | $ | (6 | ) | ||||||
| Unrealized gain on derivative liabilities—warrants |
— | 7,956 | 1,184 | 10,672 | ||||||||||||
| Gain (loss) on derivative instruments |
— | 14,982 | (5,698 | ) | 16,080 | |||||||||||
| (Loss) gain on provision—loan receivable |
(56 | ) | (332 | ) | 626 | (87 | ) | |||||||||
| Unrealized loss on investments held at fair value |
(276 | ) | (2,647 | ) | (4,162 | ) | (6,587 | ) | ||||||||
| Loss on debt extinguishment |
— | (17,987 | ) | — | (17,987 | ) | ||||||||||
| Gain (loss) on conversion of investment |
22 | 2,509 | 22 | (880 | ) | |||||||||||
| Loss on foreign currency |
(237 | ) | (249 | ) | (264 | ) | (1,274 | ) | ||||||||
| Gain (loss) on lease termination |
— | 3 | 5,243 | (43 | ) | |||||||||||
| Other income |
685 | 15 | 1,075 | 2,232 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Other income, net |
$ | 14,797 | $ | 1,735 | $ | 12,706 | $ | 2,120 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
NOTE 14. RELATED PARTY TRANSACTIONS
| (a) | Transactions with Key Management Personnel |
Related parties, including key management personnel, hold 90.0 million redeemable units of Cresco Labs, LLC, which is equal to a deficit of $16.3 million of Non-controlling interests as of September 30, 2022. During the three and nine months ended September 30, 2022, 79.7% and 74.4%, respectively, of required tax distribution payments to holders of Cresco Labs, LLC were made to related parties including to key management personnel. 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 to key management personnel.
| (b) | Related Parties - Leases |
For the three and nine months ended September 30, 2022 and 2021, the Company had lease liabilities for real estate lease agreements in which the lessors have a minority interest in SLO Cultivation, Inc. (“SLO”) and MedMar, Inc. (“MedMar”). The lease liabilities were incurred in January 2019 and May 2020 and will expire in 2027 through 2030, except for the leases associated with SLO minority interest holders (“SLO Leases”). During the second quarter of 2022, the Company exercised its early termination right to reduce the SLO Leases term to 180 days. This early termination resulted in a reduction in lease liability and ROU assets. The ROU asset was reduced to $nil due to differences in carrying value between the lease asset and liability and a gain on lease termination of $5.2 million has been recorded for the nine months ended September 30, 2022, which is included in Other income (expense), net, in the Unaudited Condensed Interim Consolidated Statements of Operations. The remaining liability for the SLO Leases will expire in the fourth quarter of 2022.
The Company has liabilities for real estate leases and other financing agreements in which the lessor is Clear Heights Properties, where Dominic Sergi, MVS shareholder, is Chief Executive Officer. The liabilities were incurred by entering into operating leases, finance leases and other financing transactions with terms that will
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
expire in 2030. During both the three months ended September 30, 2022 and 2021, the Company received tenant improvement allowance reimbursements of $nil. During the nine months ended September 30, 2022 and 2021, the Company received tenant improvement allowance reimbursements of $1.4 million and $nil, respectively. The Company expects to receive further reimbursements of $0.8 million as of September 30, 2022.
Below is a summary of the expense resulting from the related party lease liabilities for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||
| ($ in thousands) |
Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Operating Leases |
||||||||||||||||||||
| Lessor has minority interest in SLO |
Rent expense | $ | 1 | $ | 389 | $ | 513 | $ | 1,180 | |||||||||||
| Lessor has minority interest in MedMar |
Rent expense | 73 | 57 | 217 | 170 | |||||||||||||||
| Lessor is an MVS shareholder |
Rent expense | 296 | 296 | 890 | 871 | |||||||||||||||
| Finance Leases |
||||||||||||||||||||
| Lessor has minority interest in MedMar |
Depreciation expense | $ | 76 | $ | 70 | $ | 229 | $ | 206 | |||||||||||
| Lessor has minority interest in MedMar |
Interest expense | 67 | 80 | 204 | 231 | |||||||||||||||
| Lessor is an MVS shareholder |
Depreciation expense | 21 | 19 | 60 | 55 | |||||||||||||||
| Lessor is an MVS shareholder |
Interest expense | 19 | 21 | 58 | 63 | |||||||||||||||
Additionally, below is a summary of the ROU assets and lease liabilities attributable to related party lease liabilities as of September 30, 2022 and December 31, 2021:
| As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||
| ($ in thousands) |
ROU Asset | Lease Liability |
ROU Asset | Lease Liability |
||||||||||||
| Operating Leases |
||||||||||||||||
| Lessor has minority interest in SLO |
$ | — | $ | 21 | $ | 6,996 | $ | 11,938 | ||||||||
| Lessor has minority interest in MedMar |
1,444 | 1,481 | 1,525 | 1,549 | ||||||||||||
| Lessor is an MVS shareholder |
5,966 | 6,008 | 6,314 | 4,867 | ||||||||||||
| Finance Leases |
||||||||||||||||
| Lessor has minority interest in MedMar |
$ | 2,111 | $ | 2,506 | $ | 2,137 | $ | 2,457 | ||||||||
| Lessor is an MVS shareholder |
616 | 586 | 616 | 1,063 | ||||||||||||
During both the three months ended September 30, 2022 and 2021, the Company recorded interest expense on finance liabilities of $0.1 million. During both the nine months ended September 30, 2022 and 2021, the Company recorded interest expense on finance liabilities of $0.2 million. As of September 30, 2022 and December 31, 2021, the Company had finance lease liabilities totaling $1.5 million, respectively. All finance liabilities outstanding are due to an entity controlled by an MVS shareholder.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 15. COMMITMENTS AND CONTINGENCIES
| (a) | Claims and Litigation |
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of September 30, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers, or affiliates are an adverse party or has a material interest adverse to the Company’s interest.
| (b) | Contingencies |
The Company’s operations are subject to a variety of federal, state and local regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on the Company’s operations, suspension or revocation permits, or other disciplinary actions (collectively, “Disciplinary Actions”) that could adversely affect the Company’s financial position and results of operations. While management believes that the Company is in substantial compliance with applicable regulations as of September 30, 2022, these regulations continue to evolve and are subject to differing interpretations and enforcement. As a result, the Company may be subject to Disciplinary Actions in the future.
| (c) | Commitments |
As of September 30, 2022, the Company had total commitments of $11.7 million related to material construction projects. During the first quarter of 2022, pursuant to the Illinois Cannabis Regulation and Tax Act, the Company issued an additional $0.2 million in loans to an Illinois company which has secured Craft Grower Licenses to operate in the state and $1.0 million in loans to groups that have been identified by the state of Illinois as having the opportunity to receive Conditional Adult Use Dispensing Organization Licenses. These loans are discussed in Note 16. These loans fully satisfy the Company’s funding requirements under Illinois Cannabis Regulation and Tax Act; however, the Company may elect to fund similar loans in the future.
The Company has employment agreements with key management personnel which include severance in the event of termination totaling approximately $4.6 million with additional equity and/or benefit compensation.
35
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 16. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Financial Instruments
The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses as applicable) or fair value. The carrying values of financial instruments held at amortized cost approximate their fair values as of September 30, 2022 and December 31, 2021 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at fair value.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
| • | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and |
| • | Level 3 – Inputs for the asset or liability that are not based on observable market data. |
There have been no transfers between fair value levels valuing these assets during the three and nine months ended September 30, 2022.
The following tables summarize the Company’s financial instruments as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | ||||||||||||||||||||
| ($ in thousands) |
Amortized Cost |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 130,042 | $ | — | $ | — | $ | — | $ | 130,042 | ||||||||||
| Restricted cash1 |
2,278 | — | — | — | 2,278 | |||||||||||||||
| Accounts receivable, net |
51,649 | — | — | — | 51,649 | |||||||||||||||
| Loans receivable, long-term |
1,255 | — | — | — | 1,255 | |||||||||||||||
| Investments |
— | 578 | 432 | 660 | 1,670 | |||||||||||||||
| Security deposits |
4,366 | — | — | — | 4,366 | |||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 29,194 | $ | — | $ | — | $ | — | $ | 29,194 | ||||||||||
| Accrued liabilities |
58,589 | — | — | — | 58,589 | |||||||||||||||
| Short-term borrowings |
28,847 | — | — | — | 28,847 | |||||||||||||||
| Current portion of lease liabilities |
21,575 | — | — | — | 21,575 | |||||||||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
5 | 11 | — | 50,050 | 50,066 | |||||||||||||||
| Lease liabilities |
158,153 | — | — | — | 158,153 | |||||||||||||||
| Deferred consideration, long-term |
— | — | — | 4,058 | 4,058 | |||||||||||||||
| Long-term notes payable and loans payable |
468,064 | — | — | — | 468,064 | |||||||||||||||
| Other long-term liabilities |
7,000 | — | — | — | 7,000 | |||||||||||||||
| 1 | Restricted cash balances include various escrow accounts related to investments, acquisitions, facility requirements and building improvements. |
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| December 31, 2021 | ||||||||||||||||||||
| ($ in thousands) |
Amortized Cost |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 223,543 | $ | — | $ | — | $ | — | $ | 223,543 | ||||||||||
| Restricted cash1 |
2,559 | — | — | — | 2,559 | |||||||||||||||
| Accounts receivable, net |
43,379 | — | — | — | 43,379 | |||||||||||||||
| Loans receivable, short-term |
747 | — | — | 565 | 1,312 | |||||||||||||||
| Loans receivable, long-term |
505 | — | — | — | 505 | |||||||||||||||
| Investments |
— | 4,710 | 542 | 660 | 5,912 | |||||||||||||||
| Security deposits |
3,941 | — | — | — | 3,941 | |||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 32,278 | $ | — | $ | — | $ | — | $ | 32,278 | ||||||||||
| Accrued liabilities |
95,442 | — | — | — | 95,442 | |||||||||||||||
| Short-term borrowings |
19,928 | — | — | — | 19,928 | |||||||||||||||
| Current portion of lease liabilities |
20,792 | — | — | — | 20,792 | |||||||||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
5 | 12 | — | 71,816 | 71,833 | |||||||||||||||
| Derivative liabilities, short-term |
— | — | — | 1,172 | 1,172 | |||||||||||||||
| Lease liabilities |
118,936 | — | — | — | 118,936 | |||||||||||||||
| Deferred consideration, long-term |
— | — | — | 17,651 | 17,651 | |||||||||||||||
| Long-term notes payable and loans payable |
465,079 | — | — | — | 465,079 | |||||||||||||||
| Other long-term liabilities |
7,001 | — | — | — | 7,001 | |||||||||||||||
| 1 | Restricted cash balances include various escrow accounts related to investments, acquisitions and facility licensing requirements. |
The December 31, 2021 Level 3 asset balance of $1.2 million decreased by $0.5 million to a September 30, 2022 balance of $0.7 million. The decrease was driven by the settlement of the Lighthouse loan, which was classified as Loans receivable, short-term.
The December 31, 2021 Level 3 liability balance of $90.6 million, decreased by $36.5 million compared to the September 30, 2022 balance of $54.1 million. The decrease was primarily driven by payment of the Cultivate contingent consideration earnout of $39.6 million in the second quarter of 2022. Additionally, the fair value of warrants decreased by $1.2 million, to $nil, driven by the expiration of the instruments and the Laurel Harvest deferred consideration decreased by $1.3 million, based on an increase in the associated discount rate. These decreases were partially offset by a $5.6 million increase to the fair value of the Cultivate contingent consideration balance during the first quarter of 2022. During the nine months ended September 30, 2022, amounts of $9.0 million and $4.4 million were reclassified from long-term to short-term related to the Laurel Harvest deferred consideration liability and the Valley Ag operating cash flows deferred consideration liability, respectively. See Note 10 for additional discussion of the reclassifications.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (a) | Loans receivable, short-term |
The following is a summary of Loans receivable, short-term balances and valuation classifications (discussed further below) as of September 30, 2022 and December 31, 2021:
| ($ in thousands) |
Valuation classification |
September 30, 2022 |
December 31, 2021 |
|||||||
| Short-term loans receivable - Lighthouse, net of ECL1 |
Fair value | $ | — | $ | 565 | |||||
| Interest receivable |
Amortized cost | — | 747 | |||||||
|
|
|
|
|
|||||||
| Total Loans receivable, short-term |
$ | — | $ | 1,312 | ||||||
|
|
|
|
|
|||||||
| 1 | Expected Credit Loss (“ECL”) |
On August 12, 2019, the Company issued a secured convertible promissory note that was convertible, at the Company’s discretion, into additional membership units approximating 1% ownership of the parent company of Lighthouse. The loan was amended in March 2021 to extend the maturity date from February 2021 to February 2022. During the first quarter of 2022, the Company received payment for the outstanding balance and accrued interest.
| (b) | Loans receivable, long-term |
The following is a summary of Loans receivable, long-term balances and valuation classifications (discussed further below) as of September 30, 2022 and December 31, 2021:
| ($ in thousands) |
Valuation classification |
September 30, 2022 |
December 31, 2021 |
|||||||
| Long-term loans receivable - Illinois Incubator, net of ECL |
Amortized cost | $ | 819 | $ | 100 | |||||
| Long-term loans receivable - other, net of ECL |
Amortized cost | 436 | 405 | |||||||
|
|
|
|
|
|||||||
| Total Loans receivable, long-term |
$ | 1,255 | $ | 505 | ||||||
|
|
|
|
|
|||||||
| (i) | Illinois Incubator Loan |
Pursuant to the Illinois Cannabis Regulation and Tax Act, the Company has issued $0.3 million in loans to an Illinois company which has secured a Craft Grower License to operate in the state and $1.0 million in loans to groups that have been identified by the state of Illinois as having the opportunity to receive Conditional Adult Use Dispensing Organization Licenses. One $0.1 million loan related to the Craft Grower License, was fully funded on July 20, 2021 and matures on July 20, 2026. The remaining loans of $1.2 million were fully funded on March 21, 2022 and matures on July 20, 2027. The loans are measured at amortized cost and bear no interest.
| (ii) | Other Loans |
In connection with the acquisition of CannaRoyalty Corp., the Company assumed a loan receivable with a balance of $0.4 million as of September 30, 2022 and December 31, 2021.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (c) | Share Purchase Warrants |
At September 30, 2022, the Company had 2.1 million warrants outstanding, none of which are classified as current liabilities.
In the second quarter of 2022, the Company reduced the liability classified warrants to $nil, resulting in a mark-to-market gain of $1.2 million for the three months ended June 30, 2022. The gain was driven by changes in the Company’s share price, volatility and the remaining expected life of the warrants. During the three months ended September 30, 2022, all 4.2 million liability-classified warrants expired.
For the three months ended September 30, 2021, the Company recorded a mark-to-market gain of $8.0 million, primarily due to a decrease in the Company’s share price, a decrease in remaining expected life and a decrease in the volatility; additionally, the Company recorded a $0.2 million unrealized gain on foreign exchange. For the nine months ended September 30, 2021, the Company recorded a mark-to-market gain of $10.7 million, primarily due to a decrease in the Company’s share price, volatility and remaining expected life; additionally, the Company recorded a $0.3 million unrealized loss on foreign exchange.
All warrants classified as derivative liabilities are measured at fair value. As of December 31, 2021, the fair value of liability-classified warrants was determined using the Black-Scholes option-pricing model utilizing the following assumptions:
| December 31, 2021 | ||
| Risk-free annual interest rate |
0.15% | |
| Expected annual dividend yield |
0% | |
| Expected stock price volatility |
47.3% | |
| Expected life of stock warrants |
< 1 year | |
| Forfeiture rate |
0% | |
| Share price at period end |
$6.62 | |
| Strike price at period end |
$9.86 |
Volatility was calculated by using the Company’s historical share volatility. The expected life in years represented the period of time before warrants expired. The risk-free rate was based on U.S. treasury bills with a remaining term equal to the expected life of the warrants. The Company did not estimate forfeitures on warrants.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
Financial Risk Management
The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board and the Company’s 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 as of September 30, 2022 and December 31, 2021 is the carrying amount of cash, accounts receivable and loans receivable. The Company does not have significant credit risk with respect to its growth in its key retail markets, as payment is typically due upon transferring the goods to the customer at our dispensaries. which currently accept only cash and debit cards. Additionally, the Company does not have significant credit risk with respect to its loan counterparties as the interest rate on our Senior Loan is not variable and therefore, is not materially impacted by interest rate increases enacted by the Federal Reserve. 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 or deposit funds from businesses involved with the cannabis industry, leading to an increased risk of legal actions against the Company and forfeitures of the Company’s assets.
The Company’s aging of Accounts receivables as of September 30, 2022 and December 31, 2021 was as follows:
| ($ in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| 0 to 60 days | $ | 46,882 | $ | 37,750 | ||||
| 61 to 120 days | 3,092 | 4,309 | ||||||
| 120 days + | 5,298 | 3,540 | ||||||
|
|
|
|
|
|||||
| Total accounts receivable, gross | $ | 55,272 | $ | 45,599 | ||||
|
|
|
|
|
|||||
| Allowance for doubtful accounts | 3,623 | 2,220 | ||||||
|
|
|
|
|
|||||
| Total Accounts receivable, net | $ | 51,649 | $ | 43,379 | ||||
|
|
|
|
|
|||||
For the nine months ended September 30, 2022 and 2021, the Company recorded bad debt expense of $1.4 million and $1.0 million, respectively, to account for ECL and recorded an additional $0.1 million and $0.3 million, respectively, in bad debt related to invoice write-offs.
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Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (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, 2022, the Company had working capital (defined as current assets less current liabilities) of $84.6 million. The Company will continue to raise capital as needed to fund operations and expansion.
In addition to the commitments outlined in Note 15, the Company has the following contractual obligations as of September 30, 2022:
| ($ in thousands) |
< 1 Year | 1 to 3 Years | 3 to 5 Years | Total | ||||||||||||
| Accounts payable and Accrued liabilities |
$ | 87,783 | $ | — | $ | — | $ | 87,783 | ||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
50,066 | — | — | 50,066 | ||||||||||||
| Deferred consideration, long-term |
— | 4,058 | — | 4,058 | ||||||||||||
| Long-term notes payable and loans payable and Short-term borrowings |
28,847 | — | 468,064 | 496,911 | ||||||||||||
| Other long-term liabilities |
— | — | 7,000 | 7,000 | ||||||||||||
| Total obligations as of September 30, 2022 |
$ | 166,696 | $ | 4,058 | $ | 475,064 | $ | 645,818 | ||||||||
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| (d) | Market Risk |
| (i) | Currency Risk |
The operating results and balance sheet of the Company are reported in USD. As of September 30, 2022 and December 31, 2021, the Company’s financial assets and liabilities are primarily in USD. However, from time to time, some of the Company’s financial transactions are denominated in currencies other than USD. The results of the Company’s operations are subject to currency transaction and translation risks. The Company recorded $0.2 million and $0.3 million in foreign exchange losses during the three and nine months ended September 30, 2022, respectively. 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.
As of September 30, 2022 and December 31, 2021, 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.
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (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 would result in an associated increase or decrease in Deferred consideration, contingent consideration and other payables and Interest expense, net. The Company’s Senior Loan accrues at a rate of 9.5% per annum and has an effective interest rate of 11.0%.
| (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 would result in an associated increase or decrease to Deferred consideration, contingent consideration and other payables and Derivative liabilities, short-term with a corresponding change to Other income, net.
| (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 Internal Revenue Code (“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. See Note 20 for the Company’s disclosure of uncertain tax positions.
| (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 the regulatory outlook on the cannabis industry has been moving in a positive trend, the Company is aware that unforeseen regulatory changes could have a material adverse impact on the goals and operation of the business as a whole.
| (vi) | Novel Coronavirus (“COVID-19”) Risk |
COVID-19 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, 2022, the vaccine is 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.
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
| (vii) | Inflation Risk |
Inflation risk is the risk that rising inflation will increase our cultivation costs, distribution costs and operating expenses; thus, impacting our operating results. The Company maintains strategies to mitigate the impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing and other actions, which may help to offset a portion of the adverse impact.
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 17. VARIABLE INTEREST ENTITIES
The following table presents the summarized financial information about the Company’s consolidated variable interest entities (“VIEs”) which are included in the Unaudited Condensed Interim Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. Cresco Labs Michigan, LLC was determined to be a VIE as the Company possesses the power to direct activities through written agreements. See Note 2 for additional information.
| September 30, 2022 | December 31, 2021 | |||||||
| ($ in thousands) |
Cresco Labs Michigan, LLC |
Cresco Labs Michigan, LLC |
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| Current assets |
$ | 44,670 | $ | 36,850 | ||||
| Non-current assets |
35,252 | 36,320 | ||||||
| Current liabilities |
(84,696 | ) | (72,476 | ) | ||||
| Non-current liabilities |
(23,356 | ) | (23,124 | ) | ||||
| Equity (deficit) attributable to Cresco Labs Inc. |
(28,130 | ) | (22,430 | ) | ||||
The following table presents the summarized financial information about the Company’s consolidated VIEs which are included in the Unaudited Condensed Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| ($ in thousands) |
Cresco Labs Michigan, LLC |
Cresco Labs Michigan, LLC |
Cresco Labs Michigan, LLC |
Cresco Labs Michigan, LLC |
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| Revenue |
$ | 4,406 | $ | 860 | $ | 7,901 | $ | 2,974 | ||||||||
| Net loss attributable to Cresco Labs Inc. |
(805 | ) | (2,423 | ) | (5,821 | ) | (6,332 | ) | ||||||||
| Net loss |
(805 | ) | (2,423 | ) | (5,821 | ) | (6,332 | ) | ||||||||
NOTE 18. SEGMENT INFORMATION
The Company operates in one segment, the cultivation, manufacturing, distribution and sale of cannabis. The Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and the Chief Commercial Officer of the Company have been identified as the Chief Operating Decision Makers (“CODM”) and manage the Company’s operations as a whole. For the purpose of evaluating financial performance and allocating resources, the CODM review certain financial information presented on a consolidated basis accompanied by information by customer and geographic region.
For the three and nine months ended September 30, 2022, the Company generated 100% of its revenue in the United States. For the three and nine months ended September 30, 2021, the Company generated 100.0% and 99.5%, respectively, of its revenue in the United States with the remainder generated in Canada.
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 19. INTEREST EXPENSE, NET
Interest expense, net, consisted of the following for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Interest expense – leases |
$ | (989 | ) | $ | (1,070 | ) | $ | (2,973 | ) | $ | (3,029 | ) | ||||
| Interest expense – notes and loans payable |
(9,711 | ) | (7,895 | ) | (28,817 | ) | (19,950 | ) | ||||||||
| Accretion of debt discount and amortization of deferred financing fees |
(1,009 | ) | (1,242 | ) | (2,913 | ) | (4,225 | ) | ||||||||
| Interest expense – financing activities and sale and leasebacks |
(2,961 | ) | (2,988 | ) | (8,920 | ) | (8,620 | ) | ||||||||
| Other interest (expense) income1 |
(1,042 | ) | (578 | ) | 1,312 | (1,275 | ) | |||||||||
| Interest income |
158 | 196 | 378 | 739 | ||||||||||||
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| Total Interest expense, net |
$ | (15,554 | ) | $ | (13,577 | ) | $ | (41,933 | ) | $ | (36,360 | ) | ||||
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| 1 | During the nine months ended September 30, 2022, the Company recorded reductions in interest expense of $1.3 million and $0.1 million related to Laurel Harvest deferred consideration and Valley Ag operating cash flows deferred consideration, respectively; resulting in interest income and partially offset by $0.1 million of interest expense. See Note 10 for additional information. |
See Note 11 for additional information on Interest expense – notes and loans payable and accretion of debt discount and amortization of deferred financing fees.
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
NOTE 20. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES
As the Company operates in the cannabis industry, the Company is subject to the limits of IRC Section 280E for U.S. federal income tax purposes as well as some state income tax purposes. Under IRC Section 280E, 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. However, certain states including California, Maryland and New York do not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its income tax returns in these states.
The Company is treated as a United States corporation for U.S. federal income tax purposes under IRC Section 7874 and is subject to U.S. federal income tax on its worldwide income. However, for Canadian tax purposes, the Company, regardless of any application of IRC Section 7874, is treated as a Canadian resident company, as defined in the Income Tax Act (Canada), for Canadian income tax purposes. As a result, the Company is subject to taxation both in Canada and the United States.
During the third quarter of 2022, the Company identified certain expenses classified as selling, general and administrative for financial statement purposes that could be considered costs related to sales of product for tax purposes. The Company plans to continue with this treatment for the year ended 2022. The Company has determined that this tax treatment does not meet the more likely than not threshold under ASC 740 Income Taxes due to the evolving interpretations of IRC Section 280E, and, as a result, a reserve for an uncertain tax position of $5.7 million related to the 2022 tax year has been recorded as of September 30, 2022. The Company expects to record an additional reserve related to the 2021 tax year during the fourth quarter of 2022, once all 2021 income tax returns have been filed.
The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Income (loss) before income taxes |
$ | 15,483 | $ | (275,860 | ) | $ | 29,957 | $ | (268,344 | ) | ||||||
| Income tax expense (recovery) |
18,732 | (12,408 | ) | 65,177 | 16,579 | |||||||||||
| Effective tax rate |
121.0 | % | 4.5 | % | 217.6 | % | (6.2 | )% | ||||||||
NOTE 21. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 15, 2022, which is the date on which these financial statements were issued.
On November 4, 2022, the Company announced that it had entered into a definitive agreement to divest certain New York, Illinois, and Massachusetts assets (the “Assets”) to entities owned and controlled by Sean “Diddy” Combs, (the “Combs Transaction”) for total consideration of $185.0 million (the “Purchase Price”). The divestiture of the Assets is required for Cresco Labs to close its previously announced acquisition of Columbia Care and is expected to close concurrently with the closing of the Columbia Care Transaction. The purchasing entities will acquire certain Cresco Labs and Columbia Care assets in New York, Illinois, and Massachusetts. A portion of the Purchase Price is payable upon closing of the Combs Transaction, subject to adjustments contained in the definitive agreements, and will be
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Table of Contents
Cresco Labs Inc.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2022 and 2021
comprised of approximately $110.0 million in cash and approximately $45.0 million of seller notes. The remaining portion of the Purchase Price is payable post-closing of the Combs Transaction upon achievement of certain short-term, objective, and market-based milestones. The following combination of Cresco Labs (“CL”) and Columbia Care (“CC”) assets will be divested in the Combs Transaction:
| • | New York: Brooklyn (CC), Manhattan (CC), New Hartford (CL), and Rochester (CC) retail assets and Rochester (CC) production asset. |
| • | Massachusetts: Greenfield (CC), Worcester (CL), and Leicester (CL) retail assets and Leicester (CL) production asset. |
| • | Illinois: Chicago – Jefferson Park (CC) and Villa Park (CC) retail assets and Aurora (CC) production asset. |
The closing of the Combs Transaction is subject to certain closing conditions in the definitive agreements, including the receipt of all required regulatory approvals; clearance under the Hart-Scott-Rodino Antitrust Improvements Act; and the closing of the Columbia Care Acquisition.
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Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021.
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 15, 2022 and has been prepared for the three and nine months ended September 30, 2022 and 2021. 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, 2021 and 2020, which were 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, 2022 and 2021. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Financial information presented in this MD&A is presented in United States (“U.S.”) dollars (“USD” or “$”) 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 GAAP financial measure. Please see the information under the heading “Non-GAAP Financial Measures” for additional information on the Company’s use of non-GAAP financial measures.
This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable U.S. 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, 2021, 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, 2021, 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. As of September 30, 2022, the Company was operating one (1) adult-use and medical cannabis cultivation center, two (2) adult-use and medical cannabis manufacturing centers, five (5) adult-use and medical dispensary locations and five (5) adult-use dispensary locations in Illinois; one (1) medical cannabis cultivation and manufacturing center and ten (10) medical dispensary locations in Pennsylvania; one (1) medical cannabis cultivation and processing center and five (5) medical dispensary locations in Ohio; two (2) adult-use and medical cannabis cultivation centers, one (1) adult-use and medical cannabis cultivation and distribution facility and one (1) adult-use and medical cannabis distribution facility in
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California; 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; three (3) adult-use and medical cannabis cultivation and manufacturing 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) medical cannabis manufacturing center and four (4) medical dispensary locations in New York; one (1) adult-use and medical cannabis cultivation and processing center in Michigan; one (1) medical cannabis cultivation and manufacturing center and nineteen (19) 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, 2022 and 2021.
During 2019, the Company announced a new dispensary brand, Sunnyside*®1. Sunnyside* was created to accelerate industry growth by shifting consumer expectations and perceptions around shopping for cannabis from intimidation and doubt to curiosity and acceptance through a new trial and marketing approach. In the first quarter of 2022, the Company opened one (1) Sunnyside* dispensary in Pennsylvania and three (3) Sunnyside* dispensaries in Florida. No additional Sunnyside* dispensaries were opened in the second quarter of 2022. In the third quarter of 2022, the Company opened three (3) additional Sunnyside* dispensaries in Florida. As of September 30, 2022, the Company operated ten (10) Sunnyside* dispensaries in Illinois, ten (10) dispensaries in Pennsylvania, five (5) dispensaries in Ohio, one (1) dispensary in Arizona, four (4) dispensaries in Massachusetts, four (4) dispensaries in New York and nineteen (19) dispensaries in Florida. In October of 2022, the Company opened one (1) additional Sunnyside* location in Pensacola, Florida, bringing the total number of dispensaries in the state to twenty (20). 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. The Company distributes and markets these products both to third-party licensed retail cannabis stores across the U.S. and 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 3,300 people across the organization as of September 30, 2022, while being named as a “Top Diversity Employer” by Diversity Jobs in 2021. The Company’s registered office is located at Suite 2500, 666 Burrard Street, Vancouver, BC V6C 2X8.
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 International Gold Corp 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 (“PVS”) 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 Cresco Reserve®, High Supply®, Good News®, Wonder Wellness Co.® and FloraCal® brands maintain federal trademark registrations for apparel and multiple state trademark registrations. |
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Set forth below is the organization chart of the Company.
Recent Developments
On March 23, 2022, the Company announced it had entered into a definitive arrangement agreement (the “Arrangement Agreement”) with Columbia Care Inc. (“Columbia Care”) to acquire all of the issued and outstanding shares of Columbia Care pursuant to a statutory plan of arrangement (the “Arrangement”) in an all-share transaction with an equity value of approximately $2.0 billion as valued at the date of the Arrangement Agreement (the “Columbia Care Transaction”). Under the terms of the Arrangement Agreement, holders of common shares of Columbia Care will receive 0.5579 SVS of Cresco Labs for each Columbia Care share, subject to adjustments. Additional details of the Columbia Care Transaction was described in the management information circular and proxy statement that was mailed to Columbia Care shareholders in connection with a special meeting of Columbia Care
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shareholders (the “Columbia Care Meeting”), held on July 8, 2022 to approve this transaction. At the Columbia Care Meeting, the shareholders of Columbia Care voted in favor of a special resolution to approve the Arrangement. On July 15, 2022, Columbia Care obtained the final order from the Supreme Court of British Columbia approving the Arrangement. The Company is in the process of finalizing necessary regulatory approvals to close the Columbia Care Transaction, which is now expected to occur around the end of the first quarter of 2023.
On March 23, 2022, Cresco entered into a consent agreement with respect to the senior secured term loan (the “Senior Loan”) pursuant to which certain amendments were made to the Senior Loan which are conditional and effective on the closing of the Arrangement (the “Amended Senior Loan”). The Amended Senior Loan permits the Arrangement, Cresco’s assumption of certain Columbia Care debt and certain proposed asset sales in connection with the Arrangement, in each case, on and subject to the terms and conditions of the Amended Senior Loan.
On May 16, 2022, Cresco announced the expiration of the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) in connection with the Columbia Care Transaction.
During the second quarter of 2022, the Company initiated a plan to shut down a cultivation facility and a production facility in California. As a result of this plan, the Company terminated the existing leases at these locations and accelerated depreciation on the impacted leasehold improvements. All operations at the facility ceased in the third quarter of 2022. The Company is currently in the process of determining a disposal plan for the remaining assets at these locations.
During the third quarter of 2022, the Company shut down a cultivation facility in Arizona. The Company is currently in the process of determining a disposal plan for the assets at this location.
On September 1, 2022, the Company closed on a sale and leaseback transaction to sell its Brookville, Pennsylvania, facility to Aventine Property Group (“Aventine”). Concurrent with the closing of the sale, Cresco Yeltrah, LLC (“Yeltrah”) entered into a long-term, triple-net lease agreement with Aventine regarding the property and will continue to operate the facility as a permitted cannabis cultivation and processing facility. The property represents approximately 135,000 square feet of existing cultivation, manufacturing and production capacity.
Components of Our Results of Operations
Revenue
We derived approximately 56% of our revenue from company-owned retail dispensary locations for the three and nine months ended September 30, 2022. Retail revenue includes medical and adult-use cannabis sales in the U.S. Revenue from the wholesale of cannabis products to dispensary locations represents the remaining 44%.
Gross profit
Gross profit is calculated as revenue less cost of goods sold (“COGS”). COGS includes 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 cultivation and manufacturing facilities. |
| • | Direct supplies: The direct material cost for maintenance of the plants, the supplies and nutrients, the production expenses, packaging costs and equipment used to process marijuana. |
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| • | 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 benefit fees, 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. |
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 benefit 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 generally decrease as our revenue increases, with fluctuations in some quarters. Efficiencies associated with scaling the business are expected to drive the decreasing trend, while market conditions and investments in growing the business may contribute to increases as a percentage of sales in some periods.
For the three and nine months ended September 30, 2022 and 2021, SG&A was comprised of the following:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Payroll and employee costs |
$ | 39,188 | $ | 34,341 | $ | 118,384 | $ | 99,693 | ||||||||
| Selling and marketing expenses |
4,366 | 6,265 | 12,647 | 24,999 | ||||||||||||
| Share-based compensation |
2,256 | 6,083 | 15,345 | 20,492 | ||||||||||||
| Depreciation and amortization |
4,416 | 5,787 | 14,620 | 17,118 | ||||||||||||
| Excise taxes |
4,058 | 2,710 | 13,983 | 11,131 | ||||||||||||
| Facility expenses |
6,257 | 6,082 | 20,546 | 14,621 | ||||||||||||
| Consulting and professional fees |
8,093 | 4,415 | 16,948 | 9,887 | ||||||||||||
| Computer and software expense |
2,275 | 3,224 | 7,749 | 10,020 | ||||||||||||
| Business insurance |
1,786 | 2,622 | 6,074 | 6,917 | ||||||||||||
| Rental fees |
2,595 | 1,970 | 7,409 | 5,295 | ||||||||||||
| Accounting |
907 | 286 | 3,102 | 3,329 | ||||||||||||
| Legal |
2,793 | 3,683 | 9,630 | 7,379 | ||||||||||||
| Travel and employee expenses |
849 | 1,360 | 3,305 | 3,040 | ||||||||||||
| Litigation accrual adjustment |
— | — | — | (810 | ) | |||||||||||
| Loss on sale of asset |
248 | — | 1,728 | — | ||||||||||||
| Other expenses |
2,785 | 2,562 | 8,655 | 5,173 | ||||||||||||
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| Total Selling, general and administrative expenses |
$ | 82,872 | $ | 81,390 | $ | 260,125 | $ | 238,284 | ||||||||
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5
Other expense
Other expense consists mainly of reoccurring expenses such as gains (losses) on derivative instruments and foreign currency and derivative liabilities on warrants. Also included are ad hoc expenses such as gain (loss) on lease termination. These expenses do not generally correlate to revenue and do not include interest expense, net or equity investee income, which when added to other expense, sum to total other expense, net discussed in the “Selected Financial Information” section below.
For the three and nine months ended September 30, 2022 and 2021, Other income, net consisted of the following:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| ($ in thousands) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Gain (loss) on disposition of assets |
$ | 14,659 | $ | (2,515 | ) | $ | 14,680 | $ | (6 | ) | ||||||
| Unrealized gain on derivative liabilities - warrants |
— | 7,956 | 1,184 | 10,672 | ||||||||||||
| Gain (loss) on derivative instruments |
— | 14,982 | (5,698 | ) | 16,080 | |||||||||||
| (Loss) gain on provision - loan receivable |
(56 | ) | (332 | ) | 626 | (87 | ) | |||||||||
| Unrealized loss on investments held at fair value |
(276 | ) | (2,647 | ) | (4,162 | ) | (6,587 | ) | ||||||||
| Loss on debt extinguishment |
— | (17,987 | ) | — | (17,987 | ) | ||||||||||
| Gain (loss) on conversion of investment |
22 | 2,509 | 22 | (880 | ) | |||||||||||
| Loss on foreign currency |
(237 | ) | (249 | ) | (264 | ) | (1,274 | ) | ||||||||
| Gain (loss) on lease termination |
— | 3 | 5,243 | (43 | ) | |||||||||||
| Other income |
685 | 15 | 1,075 | 2,232 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Other income, net |
$ | 14,797 | $ | 1,735 | $ | 12,706 | $ | 2,120 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Income Taxes
The Company is classified for U.S. federal income tax purposes as a U.S. 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. These permanent differences apply to federal tax and most states; however, some states including California, Maryland and New York do not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its income tax returns in these states.
6
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.
Summary of Quarterly Results
| ($ in thousands) |
2022 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | |||||||||||||||||||||||||
| Revenue, net |
$ | 210,484 | $ | 218,226 | $ | 214,391 | $ | 217,787 | $ | 215,483 | $ | 209,975 | $ | 178,437 | $ | 162,317 | ||||||||||||||||
| Income (loss) from operations |
16,240 | 22,677 | 20,267 | 15,557 | (264,018 | ) | 14,872 | 16,238 | 329 | |||||||||||||||||||||||
| Net loss attributable to Cresco Labs Inc. |
(9,788 | ) | (13,541 | ) | (27,381 | ) | (14,732 | ) | (270,645 | ) | (4,827 | ) | (29,393 | ) | (54,636 | ) | ||||||||||||||||
| Basic EPS |
$ | (0.03 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.08 | ) | $ | (1.00 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.25 | ) | ||||||||
| Diluted EPS |
$ | (0.03 | ) | $ | (0.05 | ) | $ | (0.09 | ) | $ | (0.08 | ) | $ | (1.00 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.22 | ) | ||||||||
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
The following tables set forth selected consolidated financial information for the periods indicated that are derived from our unaudited condensed interim consolidated financial statements and the respective accompanying notes prepared in accordance with 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) |
2022 | 2021 | $ Change | % Change | ||||||||||||
| Revenue |
$ | 210,484 | $ | 215,483 | $ | (4,999 | ) | (2.3 | )% | |||||||
| Cost of goods sold |
111,372 | 107,162 | 4,210 | 3.9 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross profit |
99,112 | 108,321 | (9,209 | ) | (8.5 | )% | ||||||||||
| Total operating expenses |
82,872 | 372,339 | (289,467 | ) | (77.7 | )% | ||||||||||
| Total other expense, net |
(757 | ) | (11,842 | ) | 11,085 | (93.6 | )% | |||||||||
| Income tax (expense) recovery |
(18,732 | ) | 12,408 | (31,140 | ) | (251.0 | )% | |||||||||
|
|
|
|
|
|
|
|||||||||||
| Net loss1 |
$ | (3,249 | ) | $ | (263,452 | ) | $ | 260,203 | (98.8 | )% | ||||||
|
|
|
|
|
|
|
|||||||||||
| 1 | Net loss includes amounts attributable to non-controlling interests. |
Revenue
Revenue for the three months ended September 30, 2022 decreased $5.0 million, or 2.3%, compared to the three months ended September 30, 2021. The decrease in revenue was primarily driven by a strategic shift to discontinue certain third-party brand sales to focus on Cresco-owned brands in California, as well as price compression and increased market competition in Illinois. These decreases were partially offset by increases to revenue due to the closing of the Bay, LLC d/b/a Cure Pennsylvania (“Cure Penn”) and Laurel Harvest Labs, LLC (“Laurel Harvest”) acquisitions in the fourth quarter of 2021. Additionally, Ohio stores were still fairly fresh off the (Verdant Creations, LLC (“Verdant”) acquisition and had room for growth and improvement in 2021, which has been actualized in the past year. Revenue in Michigan increased compared to prior year as Michigan did not have flower supply until November of 2021.
7
COGS and Gross profit
COGS for the three months ended September 30, 2022, increased $4.2 million, or 3.9%, compared to the three months ended September 30, 2021. The increase was primarily attributable to the closing of the Cultivate Licensing, LLC and BL Real Estate LLC (collectively, “Cultivate”) acquisition in September of 2021, as well as increased production to accommodate for additional retail store openings.
Gross profit decreased by $9.2 million, or 8.5%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to the decreased revenue following the strategic shift in California as well as increased costs attributable to the acquisitions closed in 2021 as discussed above.
Total operating expenses
Total operating expenses for the three months ended September 30, 2022 decreased $289.5 million, or 77.7%, compared to the three months ended September 30, 2021. The decrease 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 to discontinue certain third-party brand sales to focus on Cresco-owned brand sales in California.
Total other expense, net
Total other expense, net for the three months ended September 30, 2022 decreased $11.1 million, or 93.6%, compared to the three months ended September 30, 2021, primarily driven by a $14.7 million gain on dispositions recorded in the third quarter of 2022 related to the Aventine sale and leaseback transaction, partially offset by higher interest expense.
Provision for income taxes
Income tax expense for the three months ended September 30, 2022, increased $31.1 million, or 251.0%, compared to the three months ended September 30, 2021. The increase was primarily due to the impairment of goodwill and intangibles during the third quarter of 2021 (discussed above), which significantly reduced income tax expense for that period.
Net loss
Net loss for the three months ended September 30, 2022, decreased $260.2 million, or 98.8%, compared to the three months ended September 30, 2021. This was primarily driven by the goodwill and intangible impairment charges in the third quarter of 2021 noted above, partially offset by higher income tax expense during the quarter.
8
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
The following tables set forth selected consolidated financial information for the periods indicated that are derived from our unaudited condensed interim consolidated financial statements and the respective accompanying notes prepared in accordance with GAAP.
The selected consolidated financial information set out below may not be indicative of the Company’s future performance:
| Nine Months Ended September 30, | ||||||||||||||||
| ($ in thousands) |
2022 | 2021 | $ Change | % Change | ||||||||||||
| Revenue |
$ | 643,101 | $ | 603,895 | $ | 39,206 | 6.5 | % | ||||||||
| Cost of goods sold |
323,792 | 307,570 | 16,222 | 5.3 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross profit |
319,309 | 296,325 | 22,984 | 7.8 | % | |||||||||||
| Total operating expenses |
260,125 | 529,233 | (269,108 | ) | (50.8 | )% | ||||||||||
| Total other expense, net |
(29,227 | ) | (35,436 | ) | 6,209 | (17.5 | )% | |||||||||
| Income tax expense |
(65,177 | ) | (16,579 | ) | (48,598 | ) | 293.1 | % | ||||||||
|
|
|
|
|
|
|
|||||||||||
| Net loss1 |
$ | (35,220 | ) | $ | (284,923 | ) | $ | 249,703 | (87.6 | )% | ||||||
|
|
|
|
|
|
|
|||||||||||
| 1 | Net loss income includes amounts attributable to non-controlling interests. |
Revenue
Revenue for the nine months ended September 30, 2022 increased $39.2 million, or 6.5%, compared to the nine months ended September 30, 2021. The increase in revenue was primarily driven by the closing of five acquisitions in 2021 (Bluma Wellness Inc. (“Bluma”), Cultivate, Cure Penn, Laurel Harvest and Verdant), partially offset by the divestiture of 180 Smoke in the first quarter of 2021. The Company has seen continued growth in the states where it operated in the first three quarters of 2021, 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.
COGS and Gross profit
COGS for the nine months ended September 30, 2022 increased $16.2 million, or 5.3%, compared to the nine months ended September 30, 2021. The increase was primarily attributable to year-over-year revenue growth as well as increases to compensation and facility expenses related to expansions and the acquisitions mentioned above.
Gross profit increased by $23.0 million, or 7.8%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to the increase in revenue, operating synergies realized through acquisitions and continued efforts to increase cultivation yields.
Total operating expenses
Total operating expenses for the nine months ended September 30, 2022 decreased $269.1 million, or 50.8%, compared to the nine months ended September 30, 2021. The decrease 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 to discontinue certain third-party brand sales to focus on Cresco-owned brand sales in California. The decrease was partially offset by higher expenses primarily attributable to significant investments in our team and operational infrastructure, reflected in higher payroll and employee costs and facility expenses.
9
Total other expense, net
Total other expense, net for the nine months ended September 30, 2022 decreased $6.2 million, or 17.5%, compared to the nine months ended September 30, 2021. The decrease in expense was primarily driven by a $14.7 million gain on dispositions recorded in the third quarter of 2022, related to the Aventine sale and leaseback transaction. This gain was partially offset by higher interest expense related to the August 2021 debt refinancing and a loss from equity method investments recorded in the prior year.
Provision for income taxes
Income tax expense for the nine months ended September 30, 2022, increased $48.6 million, or 293.1%, compared to the nine months ended September 30, 2021. The increase was primarily due to an impairment of intangibles during the third quarter of 2021, which significantly reduced income tax expense for the quarter, as well as higher gross profit during the first three quarters of 2022.
Net loss
Net loss for the nine months ended September 30, 2022, decreased $249.7 million, or 87.6%, compared to the nine months ended September 30, 2021. The decrease in net loss was primarily driven by the goodwill and intangible impairment charges in the third quarter of 2021, as well as increased revenue in the current period, partially offset by higher operating expenses, income tax expense and interest expense during the period.
10
Non-GAAP Financial Measures
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA are non-GAAP financial measures and do not have standardized definitions under GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP and may not be comparable to similar measures presented by other issuers. These supplemental non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspectives and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to and should only be considered in conjunction with, the GAAP financial measures presented herein. Accordingly, the Company has included below reconciliations of the supplemental non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
| Three Months Ended September 30, | ||||||||||||||||
| ($ in thousands) |
2022 | 2021 | $ Change | % Change1 | ||||||||||||
| Net loss2 |
$ | (3,249 | ) | $ | (263,452 | ) | $ | 260,203 | (98.8 | )% | ||||||
| Depreciation and amortization |
13,395 | 10,486 | 2,909 | 27.7 | % | |||||||||||
| Interest expense, net |
15,554 | 13,577 | 1,977 | 14.6 | % | |||||||||||
| Income tax expense (recovery) |
18,732 | (12,408 | ) | 31,140 | (251.0 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| EBITDA (non-GAAP) |
$ | 44,432 | $ | (251,797 | ) | $ | 296,229 | (117.6 | )% | |||||||
|
|
|
|
|
|
|
|||||||||||
| Other income, net |
(14,797 | ) | (1,735 | ) | (13,062 | ) | nm | |||||||||
| Fair value mark-up for acquired inventory |
21 | 8,396 | (8,375 | ) | (99.7 | )% | ||||||||||
| Adjustments for acquisition and other non-core costs |
9,093 | 3,830 | 5,263 | 137.4 | % | |||||||||||
| Impairment loss |
— | 290,949 | (290,949 | ) | (100.0 | )% | ||||||||||
| Share-based compensation |
2,995 | 6,806 | (3,811 | ) | (56.0 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Adjusted EBITDA (non-GAAP) |
$ | 41,744 | $ | 56,449 | $ | (14,705 | ) | (26.1 | )% | |||||||
|
|
|
|
|
|
|
|||||||||||
| 1 | Percentage changes shown as “nm” (not meaningful) are values greater than 399%. |
| 2 | Net loss includes amounts attributable to non-controlling interests. |
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA, a non-GAAP financial measure, excludes depreciation and amortization; interest expense, net; income taxes; other expense, net; share-based compensation; adjustments for acquisition and other non-core costs and adjustments for the fair value of mark-up for acquired inventory. Non-core costs include non-operating costs such as costs related to restructuring, loss on sale of assets, unique legal expenses and other expenses which are mostly one-time in nature. Adjusted EBITDA was $41.7 million for the three months ended September 30, 2022, compared to $56.4 million for the three months ended September 30, 2021. The decrease in adjusted EBITDA of $14.7 million is due to lower gross profit, as well as higher operating expenses to support the growth of the business, both organically and inorganically.
11
| Nine Months Ended September 30, | ||||||||||||||||
| ($ in thousands) |
2022 | 2021 | $ Change | % Change | ||||||||||||
| Net loss1 |
$ | (35,220 | ) | $ | (284,923 | ) | $ | 249,703 | (87.6 | )% | ||||||
| Depreciation and amortization |
37,468 | 30,443 | 7,025 | 23.1 | % | |||||||||||
| Interest expense, net |
41,933 | 36,360 | 5,573 | 15.3 | % | |||||||||||
| Income tax expense |
65,177 | 16,579 | 48,598 | 293.1 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| EBITDA (non-GAAP) |
$ | 109,358 | $ | (201,541 | ) | $ | 310,899 | (154.3 | )% | |||||||
|
|
|
|
|
|
|
|||||||||||
| Other income, net |
(12,706 | ) | (2,120 | ) | (10,586 | ) | nm | |||||||||
| Loss from equity method investments |
— | 1,196 | (1,196 | ) | 100.0 | % | ||||||||||
| Fair value mark-up for acquired inventory |
5,466 | 15,034 | (9,568 | ) | 63.6 | % | ||||||||||
| Adjustments for acquisition and other non-core costs |
23,018 | 10,849 | 12,169 | 112.2 | % | |||||||||||
| Impairment loss |
— | 290,949 | (290,949 | ) | (100.0 | )% | ||||||||||
| Share-based compensation |
17,950 | 22,603 | (4,653 | ) | (20.6 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Adjusted EBITDA (non-GAAP) |
$ | 143,086 | $ | 136,970 | $ | 6,116 | 4.5 | % | ||||||||
|
|
|
|
|
|
|
|||||||||||
| 1 | Net loss includes amounts attributable to non-controlling interests. |
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA, a non-GAAP financial measure, excludes depreciation and amortization; interest expense, net; income taxes; other expense, net; share-based compensation; adjustments for acquisition and other non-core costs; loss on equity method investments and adjustments for the fair value of mark-up for acquired inventory. Non-core costs include non-operating costs such as costs related to restructuring, loss on sale of assets, unique legal expenses and other expenses which are mostly one-time in nature. Adjusted EBITDA was $143.1 million for the nine months ended September 30, 2022, compared to $137.0 million for the nine months ended September 30, 2021. The increase in adjusted EBITDA of $6.1 million is due to higher gross profit, partially offset by higher operating expenses to support the growth of the business, both organically and inorganically.
12
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of September 30, 2022, the Company held $130.0 million in cash and cash equivalents, $2.3 million in restricted cash and $84.6 million of working capital compared to December 31, 2021, where the Company held $223.5 million in cash and cash equivalents, $2.6 million in restricted cash and $133.4 million of working capital. The decrease of $48.8 million in working capital was primarily driven by a decrease in cash of $93.5 million during the period, primarily due to increased inventory, purchases of property and equipment, income tax payments and debt interest payments. The effect of the decrease in cash on working capital was partially offset by a $17.8 million decrease in current liabilities, due primarily to the settlement of contingent consideration related to the Cultivate acquisition in the second quarter of 2022 and partially offset by reclasses of deferred consideration from long term liabilities into short-term, related to the Laurel Harvest and Valley Agriceuticals, LLC (“Valley Ag”) acquisitions.
The Company is generally able to access private and/or public financing through, but not limited to, institutional lenders, such as the Senior Loan of $400.0 million, effective 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 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 January 14, 2021, the Company announced the commencement of the January 2021 Offering of SVS. The SVS were offered in each of the provinces of Canada, other than Québec and in the U.S. on a private placement basis to “qualified institutional buyers.” 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 twelve months.
Cash Flows
Operating Activities
Net cash provided by operating activities was $15.1 million for the nine months ended September 30, 2022, an increase of $38.3 million compared to $23.2 million of cash used in operating activities during the nine months ended September 30, 2021. The decrease in net cash used in operating activities was primarily attributable to an increase in gross profit due to improved efficiencies and greater scale in the Company’s established markets as well as a decrease in cash paid for taxes.
Investing Activities
Net cash used in investing activities was $24.1 million for the nine months ended September 30, 2022, a decrease of $75.7 million compared to $99.8 million used in the nine months ended September 30, 2021. The decrease in net cash used in investing activities was primarily driven by net cash receipts of $43.7 million generated through the sale and leaseback transaction in the third quarter of 2022, as well as a reduction in loans and advances paid to entities expected to be acquired.
Financing Activities
Net cash used in financing activities was $84.6 million for the nine months ended September 30, 2022, an increase in cash used of $322.0 million compared to cash provided by financing activities of $237.4 million for the nine months ended September 30, 2021. The increase in cash used was primarily due to proceeds received in the prior year from the January 2021 equity offering and decreased proceeds from the exercise of stock options and warrants in the current period.
13
OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS
| (a) | Off-Balance Sheet Arrangements |
The Company has no material undisclosed off-balance sheet arrangements 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 is material to investors.
| (b) | Proposed Transactions |
On March 23, 2022, the Company announced that it had entered into the Arrangement Agreement with Columbia Care in respect of the Columbia Care Transaction. See “Overview of the Company – Recent Developments.” After giving effect to the Columbia Care Transaction, the Company would have pro forma revenue, without taking into consideration elimination of revenues related to divestitures, based on actual 2021 results, of $1.3 billion. While divestitures are anticipated to be required for state regulatory approval, the scope and financial impact of any divestitures cannot be quantified at this time. After giving effect to the Columbia Care Transaction, Columbia Care Shareholders will hold approximately 35% of the pro forma Cresco Labs Shares (on a fully diluted in-the-money, treasury method basis).
The Columbia Care Transaction has been unanimously approved by the boards of directors of each of the Company and Columbia Care. The Columbia Care Transaction is subject to, among other things, receipt of the necessary approvals of the Supreme Court of British Columbia, the approval of two-thirds of the votes cast by shareholders of Columbia Care at a special meeting of shareholders to approve the Columbia Care Transaction, receipt of the required regulatory approvals, including, but not limited to, approval pursuant to the HSR Act and other customary closing conditions. As announced on May 16, 2022, the 30-day waiting period under the HSR Act expired, which marks a major step towards closing of the transaction. Approval of the shareholders of the Company is not required in connection with the Columbia Care Transaction.
On July 8, 2022, at the Columbia Care Meeting, the shareholders of Columbia Care voted in favor of a special resolution to approve the Arrangement.
On July 15, 2022, Columbia Care obtained the final order from the Supreme Court of British Columbia approving the Arrangement.
The Company is in the process of finalizing necessary regulatory approvals to close the Columbia Care Transaction, which is now expected to occur around the end of the first quarter of 2023.
On November 4, 2022, the Company announced that it had entered into a definitive agreement to divest certain New York, Illinois, and Massachusetts assets (the “Assets”) to entities owned and controlled by Sean “Diddy” Combs (the “Combs Transaction”), for total consideration of $185.0 million (the “Purchase Price”). The divestiture of the Assets is required for Cresco Labs to close its previously announced acquisition of Columbia Care and is expected to close concurrently with the closing of the Columbia Care Transaction. The purchasing entities will acquire certain Cresco Labs and Columbia Care assets in New York, Illinois, and Massachusetts. A portion of the Purchase Price is payable upon closing of the Combs Transaction, subject to adjustments contained in the definitive agreements, and will be comprised of approximately $110.0 million in cash and approximately $45.0 million of seller notes. The remaining portion of the Purchase Price is payable post-closing upon achievement of certain short-term, objective, and market-based milestones. The following combination of Cresco Labs (“CL”) and Columbia Care (“CC”) assets will be divested in the Combs Transaction:
14
| • | New York: Brooklyn (CC), Manhattan (CC), New Hartford (CL), and Rochester (CC) retail assets and Rochester (CC) production asset. |
| • | Massachusetts: Greenfield (CC), Worcester (CL), and Leicester (CL) retail assets and Leicester (CL) production asset. |
| • | Illinois: Chicago – Jefferson Park (CC) and Villa Park (CC) retail assets and Aurora (CC) production asset. |
The closing of the Combs Transaction is subject to certain closing conditions in the definitive agreements, including the receipt of all required regulatory approvals; clearance under the Hart-Scott-Rodino Antitrust Improvements Act; and the closing of the Columbia Care Acquisition.
CONTRACTUAL OBLIGATIONS
As of September 30, 2022, maturities of lease liabilities were as follows:
| ($ in thousands) |
Total | Operating Leases |
Finance Leases |
|||||||||
| 2022 |
$ | 8,014 | $ | 6,673 | $ | 1,341 | ||||||
| 2023 |
32,127 | 26,695 | 5,432 | |||||||||
| 2024 |
32,425 | 26,817 | 5,608 | |||||||||
| 2025 |
33,232 | 27,474 | 5,758 | |||||||||
| 2026 |
33,589 | 27,690 | 5,899 | |||||||||
| Thereafter |
239,987 | 206,872 | 33,115 | |||||||||
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|
|
|
|
|
|
|||||||
| Total lease payments |
$ | 379,374 | $ | 322,221 | $ | 57,153 | ||||||
|
|
|
|
|
|
|
|||||||
| Less: imputed interest |
(194,478 | ) | (167,910 | ) | (26,568 | ) | ||||||
| Less: tenant improvement allowance |
(5,168 | ) | (4,523 | ) | (645 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Present value of lease liabilities |
179,728 | 149,788 | 29,940 | |||||||||
|
|
|
|
|
|
|
|||||||
| Less: short-term lease liabilities |
(21,575 | ) | (17,214 | ) | (4,361 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Present value of long-term lease liabilities |
$ | 158,153 | $ | 132,574 | $ | 25,579 | ||||||
|
|
|
|
|
|
|
|||||||
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, the Company will continue to invest in its facilities through construction and other capital expenditures as it expands its footprint in existing and new markets.
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In addition to the lease commitments above, the Company has the following contractual obligations as of September 30, 2022:
| ($ in thousands) |
< 1 Year | 1 to 3 Years | 3 to 5 Years | Total | ||||||||||||
| Accounts payable and Accrued liabilities |
$ | 87,783 | $ | — | $ | — | $ | 87,783 | ||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
50,066 | — | — | 50,066 | ||||||||||||
| Deferred consideration, long-term |
— | 4,058 | — | 4,058 | ||||||||||||
| Long-term notes payable and loans payable and Short-term borrowings |
28,847 | — | 468,064 | 496,911 | ||||||||||||
| Other long-term liabilities |
— | — | 7,000 | 7,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total obligations as of September 30, 2022 |
$ | 166,696 | $ | 4,058 | $ | 475,064 | $ | 645,818 | ||||||||
|
|
|
|
|
|
|
|
|
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RELATED PARTY TRANSACTIONS
| (a) | Transactions with Key Management Personnel |
Related parties, including key management personnel, hold 90.0 million redeemable units of Cresco Labs, LLC, which is equal to a deficit of $16.3 million of Non-controlling interests as of September 30, 2022. During the three and nine months ended September 30, 2022, 79.7% and 74.4% respectively, of required tax distribution payments to holders of Cresco Labs, LLC were made to related parties including to key management personnel. 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 to key management personnel.
| (b) | Related Parties - Leases |
For the three and nine months ended September 30, 2022 and 2021, the Company had lease liabilities for real estate lease agreements in which the lessors have minority interest in SLO Cultivation, Inc. (“SLO”) and MedMar, Inc. (“MedMar”). The lease liabilities were incurred in January 2019 and May 2020 and will expire in 2027 through 2030, with the exception of the leases associated with SLO minority interest holders (“SLO Leases”). During the second quarter of 2022, the Company exercised its early termination right to reduce the SLO Leases term to 180 days. This early termination resulted in a reduction in lease liability and right-of-use (“ROU”) assets. The ROU asset was reduced to $nil due to differences in carrying value between the lease asset and liability and a gain on lease termination of $5.2 million has been recorded for the nine months ended September 30, 2022 which is included in Other income, net, in the Unaudited Condensed Interim Consolidated Statements of Operations. The remaining liability for the SLO Lease will expire in the fourth quarter of 2022.
The Company has liabilities for real estate leases and other financing agreements in which the lessor is Clear Heights Properties, where Dominic Sergi, MVS shareholder, is Chief Executive Officer. The liabilities were incurred by entering into operating leases, finance leases and other financing transactions with terms that will expire in 2030. During both the three months ended September 30, 2022 and 2021, the Company received tenant improvement allowance reimbursements of $nil. During the nine months ended September 30, 2022 and 2021, the Company received tenant improvement allowance reimbursements of $1.4 million and $nil, respectively. The Company expects to receive further reimbursements of $0.8 million as of September 30, 2022.
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Below is a summary of the expense resulting from the related party lease liabilities for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| ($ in thousands) |
Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating Leases |
||||||||||||||||||
| Lessor has minority interest in SLO |
Rent expense | $ | 1 | $ | 389 | $ | 513 | $ | 1,180 | |||||||||
| Lessor has minority interest in MedMar |
Rent expense | 73 | 57 | 217 | 170 | |||||||||||||
| Lessor is an MVS shareholder |
Rent expense | 296 | 296 | 890 | 871 | |||||||||||||
| Finance Leases |
||||||||||||||||||
| Lessor has minority interest in MedMar |
Depreciation expense | $ | 76 | $ | 70 | $ | 229 | $ | 206 | |||||||||
| Lessor has minority interest in MedMar |
Interest expense | 67 | 80 | 204 | 231 | |||||||||||||
| Lessor is an MVS shareholder |
Depreciation expense | 21 | 19 | 60 | 55 | |||||||||||||
| Lessor is an MVS shareholder |
Interest expense | 19 | 21 | 58 | 63 | |||||||||||||
Additionally, below is a summary of the ROU assets and lease liabilities attributable to related party lease liabilities as of September 30, 2022 and December 31, 2021:
| As of September 30, 2022 | As of December 31, 2021 | |||||||||||||||
| ($ in thousands) |
ROU Asset | Lease Liability |
ROU Asset |
Lease Liability |
||||||||||||
| Operating Leases |
||||||||||||||||
| Lessor has minority interest in SLO |
$ | — | $ | 21 | $ | 6,996 | $ | 11,938 | ||||||||
| Lessor has minority interest in MedMar |
1,444 | 1,481 | 1,525 | 1,549 | ||||||||||||
| Lessor is an MVS shareholder |
5,966 | 6,008 | 6,314 | 4,867 | ||||||||||||
| Finance Leases |
||||||||||||||||
| Lessor has minority interest in MedMar |
$ | 2,111 | $ | 2,506 | $ | 2,137 | $ | 2,457 | ||||||||
| Lessor is an MVS shareholder |
616 | 586 | 616 | 1,063 | ||||||||||||
During both the three months ended months ended September 30, 2022 and 2021, the Company recorded interest expense on finance liabilities of $0.1 million. During both the nine months ended months ended September 30, 2022 and 2021, the Company recorded interest expense on finance liabilities of $0.2 million. As of September 30, 2022 and December 31, 2021, the Company had finance lease liabilities totaling $1.5 million, respectively. All finance liabilities outstanding are due to an entity controlled by an MVS shareholder.
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FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or fair value. The carrying values of financial instruments held at amortized cost approximate their fair values as of September 30, 2022 and December 31, 2021, due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at fair value.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
| • | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and |
| • | Level 3 – Inputs for the asset or liability that are not based on observable market data. |
There have been no transfers between fair value levels valuing these assets during the three and nine months ended September 30, 2022.
The following tables summarize the Company’s financial instruments as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | ||||||||||||||||||||
| ($ in thousands) |
Amortized Cost |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 130,042 | $ | — | $ | — | $ | — | $ | 130,042 | ||||||||||
| Restricted cash1 |
2,278 | — | — | — | 2,278 | |||||||||||||||
| Accounts receivable, net |
51,649 | — | — | — | 51,649 | |||||||||||||||
| Loans receivable, long-term |
1,255 | — | — | — | 1,255 | |||||||||||||||
| Investments |
— | 578 | 432 | 660 | 1,670 | |||||||||||||||
| Security deposits |
4,366 | — | — | — | 4,366 | |||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 29,194 | $ | — | $ | — | $ | — | $ | 29,194 | ||||||||||
| Accrued liabilities |
58,589 | — | — | — | 58,589 | |||||||||||||||
| Short-term borrowings |
28,847 | — | — | — | 28,847 | |||||||||||||||
| Current portion of lease liabilities |
21,575 | — | — | — | 21,575 | |||||||||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
5 | 11 | — | 50,050 | 50,066 | |||||||||||||||
| Lease liabilities |
158,153 | — | — | — | 158,153 | |||||||||||||||
| Deferred consideration, long-term |
— | — | — | 4,058 | 4,058 | |||||||||||||||
| Long-term notes payable and loans payable |
468,064 | — | — | — | 468,064 | |||||||||||||||
| Other long-term liabilities |
7,000 | — | — | — | 7,000 | |||||||||||||||
| 1 | Restricted cash balances include various escrow accounts related to investments, acquisitions, facility requirements and building improvements. |
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| December 31, 2021 | ||||||||||||||||||||
| ($ in thousands) |
Amortized Cost |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 223,543 | $ | — | $ | — | $ | — | $ | 223,543 | ||||||||||
| Restricted cash1 |
2,559 | — | — | — | 2,559 | |||||||||||||||
| Accounts receivable, net |
43,379 | — | — | — | 43,379 | |||||||||||||||
| Loans receivable, short-term |
747 | — | — | 565 | 1,312 | |||||||||||||||
| Loans receivable, long-term |
505 | — | — | — | 505 | |||||||||||||||
| Investments |
— | 4,710 | 542 | 660 | 5,912 | |||||||||||||||
| Security deposits |
3,941 | — | — | — | 3,941 | |||||||||||||||
| Financial Liabilities: |
||||||||||||||||||||
| Accounts payable |
$ | 32,278 | $ | — | $ | — | $ | — | $ | 32,278 | ||||||||||
| Accrued liabilities |
95,442 | — | — | — | 95,442 | |||||||||||||||
| Short-term borrowings |
19,928 | — | — | — | 19,928 | |||||||||||||||
| Current portion of lease liabilities |
20,792 | — | — | — | 20,792 | |||||||||||||||
| Deferred consideration, contingent consideration and other payables, short-term |
5 | 12 | — | 71,816 | 71,833 | |||||||||||||||
| Derivative liabilities, short-term |
— | — | — | 1,172 | 1,172 | |||||||||||||||
| Lease liabilities |
118,936 | — | — | — | 118,936 | |||||||||||||||
| Deferred consideration, long-term |
— | — | — | 17,651 | 17,651 | |||||||||||||||
| Long-term notes payable and loans payable |
465,079 | — | — | — | 465,079 | |||||||||||||||
| Other long-term liabilities |
7,001 | — | — | — | 7,001 | |||||||||||||||
| 1 | Restricted cash balances include various escrow accounts related to investments, acquisitions and facility licensing requirements. |
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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 as of September 30, 2022 and December 31, 2021 is the carrying amount of cash, accounts receivable and loans receivable. The Company does not have significant credit risk with respect to its growth in its key retail markets, as payment is typically due upon transferring the goods to the customer at our dispensaries. which currently accept only cash and debit cards. Additionally, the Company does not have significant credit risk with respect to its loan counterparties as the interest rate on our Senior Loan is not variable and therefore, is not materially impacted by interest rate increases enacted by the Federal Reserve. 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 or deposit funds from businesses involved with the cannabis industry, leading to an increased risk of legal actions against the Company and forfeitures of the Company’s assets.
| (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, 2022, the Company had working capital (defined as current assets less current liabilities) of $84.6 million. The Company will continue to raise capital as needed to fund operations and expansion.
21
| (d) | Market Risk |
| (i) | Currency Risk |
The operating results and balance sheet of the Company are reported in USD. As of September 30, 2022 and December 31, 2021, the Company’s financial assets and liabilities are primarily in USD. However, from time to time, some of the Company’s financial transactions are denominated in currencies other than USD. The results of the Company’s operations are subject to currency transaction and translation risks. The Company recorded $0.2 million in and $0.3 million in foreign exchange losses during the three and nine months ended September 30, 2022, respectively. 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.
As of September 30, 2022 and December 31, 2021, 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 would result in an associated increase or decrease in Deferred consideration, contingent consideration and other payables and Interest expense, net. The Company’s Senior Loan accrues at a rate of 9.5% per annum and has an effective interest rate of 11.0%.
| (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 would result in an associated increase or decrease to Deferred consideration, contingent consideration and other payables and Derivative liabilities, short-term with a corresponding change to Other income, net.
| (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.
22
| (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 the 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 a material adverse impact on the goals and operations of the business as a whole.
| (vi) | Novel Coronavirus (“COVID-19”) Risk |
COVID-19 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 (“U.S. FDA”). As of September 30, 2022, the vaccine is 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.
| (vii) | Inflation Risk |
Inflation risk is the risk that rising inflation will increase our cultivation costs, distribution costs and operating expenses; thus, impacting our operating results. The Company maintains strategies to mitigate the impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing and other actions, which may help to offset a portion of the adverse impact.
23
SUMMARY OF OUTSTANDING SHARE AND SHARE-BASED DATA
Cresco has the following securities issued and outstanding, as of September 30, 2022:
| Securities |
Number of Shares (in thousands) |
|||
| Issued and Outstanding |
||||
| Super Voting Shares |
500 | |||
| Subordinate Voting Shares1 |
280,834 | |||
| Proportionate Voting Shares2 |
20,082 | |||
| Special Subordinate Voting Shares3 |
1 | |||
| Redeemable Shares |
106,240 | |||
| Warrants |
2,086 | |||
| Stock Options |
23,546 | |||
| Restricted Stock Units |
4,195 | |||
| 1 | SVS includes shares pending issuance or cancellation |
| 2 | PVS presented on an “as-converted” basis to SVS (1-to-200) |
| 3 | SSVS presented on an “as-converted” basis to SVS (1-to-0.00001) |
24
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 U.S. as permitted within a particular state’s regulatory framework. All issuers with U.S. 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 disclosures 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, 2022, 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, New York, Maryland, Massachusetts, 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 U.S., 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 U.S. 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 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 U.S. for life. The Rohrabacher–Farr amendment (also known as the Rohrabacher–
25
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 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. The Joyce Amendment was again included in the most recent annual appropriations bill. Additionally, the Blumenauer-McClintock-Norton-Lee amendment had been under consideration. This amendment would have extended the protections of the Joyce Amendment to adult-use businesses. However, the Blumenauer-McClintock-Norton-Lee amendment was not included in the appropriations bill that was passed by Congress on March 10, 2022 and signed by President Biden on March 15, 2022. The Blumenauer-McClintock-Norton-Lee amendment is expected to again be under consideration for inclusion in the next annual appropriations bill.
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 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 Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia, Washington and the District of Columbia, have legalized adult-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. In February 2022, the South Dakota Senate passed bills that would legalize and tax adult-use cannabis. However, an adult-use cannabis initiative will be on the ballot in South Dakota this fall. If passed, the referendum will pave the way for possession and home grow but not a regulated, commercial market. South Dakota’s secretary of state office ruled that this referendum, put forth by South Dakotans for Better Marijuana Laws, qualified for the November ballot. 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 were introduced: Mayor Muriel Bowser’s Safe Cannabis Sales Act of 2021 and Council member Phil Mendelson’s Comprehensive Cannabis Legalization and Regulation Act of 2021. A public hearing on D.C. Council Chair Mendelson’s bill was held on November 19, 2021, which was the D.C. Council’s first hearing on a bill to legalize adult-use cannabis sales. However, 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. The budget rider preventing adult-use sales in the District of Columbia remained in place for the 2022 federal budget. 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. However, following the state Supreme Court’s action, legislators took up the medical marijuana issue and on February 2, 2022, the governor of Mississippi signed a bill legalizing medical marijuana in the state.
26
In addition, almost three quarters 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 government 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, 2021, 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 to 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, the MORE Act was passed by the House by a vote of 228-164 in December 2020. The bill did not advance in the U.S. Senate. The bill was reintroduced by Representative Nadler (D-NY) 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. On April 1, 2022, the U.S. House of Representatives passed the MORE Act once again. On April 4, 2022, the bill was received in the Senate and read twice and referred to the Committee on Finance, where it currently remains.
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/HR 4350), which passed the House on September 23, 2021. However, the Senate’s version of the bill did not include SAFE and the compromised NDAA language also failed to include SAFE. On January 28, 2022, Rep. Ed Perlmutter (D-CO) filed an amendment to the America COMPETES Act, HR 4521, which incorporated the SAFE Banking language into the bill. The America COMPETES Act relates to high-tech investment incentives and programs. On February 1, 2022, Rep. Perlmutter’s
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SAFE Banking amendment was considered by the House Rules Committee and included in the America COMPETES Act. The America COMPETES act passed the House on February 4, 2022, with SAFE banking included. The House and Senate determined the content of the final bill and whether SAFE’s language would be included through a conference committee process in which the final content of the bill is negotiated by members of both the House and Senate and both political parties. On June 23, 2022, the SAFE Banking Act was removed from the America COMPETES/United States Innovation and Competition Act in favor of historic investment to surge production of American-made goods, tackle supply-chain vulnerabilities and increase global competitiveness; among other priorities.
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 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 July 14, 2021, Leader Schumer and Senators Wyden and Booker released the Cannabis Administration and Opportunity Act (the “CAO Act”), a 163-page discussion 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 U.S. 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 spent significant time considering those comments and amended the discussion draft bill. On July 21, 2022, Leader Schumer and Senators Wyden and Booker formally filed the CAO Act. However, there is no indication that the bill will be brought to a vote in the near future.
On November 15, 2021, Rep. Nancy Mace (R-SC) introduced the States Reform Act. The bill, if enacted, would legalize cannabis at the federal level by removing cannabis from the Controlled Substances Act and provide some deference to the states and state programs. The bill defers to the states to prohibit or commercially regulate adult-use cannabis within their borders. In addition to state regulation, cannabis would generally be regulated at the federal level in manner similar to alcohol, including by the U.S. FDA, the U.S. Department of Agriculture and the Alcohol and Tobacco Tax and Trade Bureau, which would be renamed the Bureau of Alcohol, Tobacco and Cannabis Tax and Trade Bureau. The States Reform Act was referred to the House Judiciary Committee and will be reported to several other committees and subcommittees before advancement. There is no indication that the bill will move forward while the House is under Democratic control.
On June 23, 2022, U.S. Congressmen Troy A Carter, Sr. (D-LA) and Guy Reschenthaler (R-PA) introduced bipartisan legislation, The Capital Lending and Investment for Marijuana Businesses Act (“CLIMB Act”), to allow state legal American cannabis companies, including small, minority and veteran-owned businesses the ability to access critical lending and investment opportunities currently available to other domestic and regulated industries. The CLIMB Act currently sits in the House Financial Services Committee.
On October 6, 2022, President Joe Biden announced he will take executive action to pardon thousands of people convicted of marijuana possession under federal law. President Biden said he would also encourage state governors to take similar action with state offenses and asked the U.S. Department of Health and Human Services and the U.S Department of Justice to review how marijuana is scheduled, or classified, under federal law.
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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 cannabis, became effective January 1, 2014. There were over forty-one (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 cannabis 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 (“SB”) 2023 which added eleven (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 (“CRTA”) into law, making Illinois the 11th state to legalize recreational cannabis. Adult-use sales of cannabis in Illinois began on January 1, 2020.
Cresco Labs is licensed to operate in the State of Illinois as a medical and adult-use cultivator and product manufacturer. Phoenix Farms, LLC (“Phoenix”), PDI Medical III, LLC (“PDI”), FloraMedex, LLC (“FloraMedex”), MedMar Lakeview, LLC (“MedMar Lakeview”) and MedMar Rockford, LLC (“MedMar Rockford”) are each licensed to operate retail dispensaries in the State of Illinois. Further, each of these medical dispensary licenses allowed for one (1) additional adult-use dispensary license, for a total of ten (10) dispensary locations, which are all now open and branded as Sunnyside* dispensaries. In November 2021, the Company relocated its Sunnyside* dispensaries in Buffalo Grove and Lakeview (Chicago) to larger facilities. The new 10,000 square-foot Sunnyside* Lakeview location is approximately 400 feet from Wrigley Field, the home of the Chicago Cubs, making it the closest cannabis dispensary in the country to a national sports stadium. Under applicable laws, the licenses permit Cresco Labs and its subsidiaries to collectively cultivate, manufacture, process, package, sell and purchase cannabis 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, including three (3) transportation licenses. There are currently seven (7) categories of licenses in Illinois: (i) medical cultivation/processing; (ii) adult-use cultivation/processing; (iii) dual use (medical plus adult-use) dispensary; (iv) adult-use dispensary; (v) craft grower; (vi) infuser and (vii) transporting. The licenses are independently issued for each approved activity.
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All cultivation/processing establishments and transporters 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 registration certificate. Registration certificates for medical cannabis operations 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. Registration certificates for adult-use operations are valid for a period of two (2) years and are subject to 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 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 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 cannabis and cannabis products from cultivation/processing facilities, craft growers and infusers and allows the sale of cannabis and cannabis products to registered patients and adult-use customers. As of September 30, 2022, the Company has opened ten (10) Sunnyside* dispensary locations in Illinois, the maximum allowed by the State of Illinois. Two (2) of the ten (10) are located within the City of Chicago.
The three (3) medical cultivation licenses held by Cresco Labs permit it to acquire, possess, cultivate, manufacture/process into edible medical cannabis products and/or cannabis marijuana-infused products, deliver, transfer, test, transport, supply or sell cannabis and related supplies to medical cannabis 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 600,000 square feet, the maximum allowed by law.
The CRTA mandates that the IDOA issue up to forty (40) craft grower licenses by July 1, 2020. The CRTA further required the IDOA to issue up to sixty (60) craft grower licenses by December 21, 2021. After January 1, 2022, the IDOA may by rule modify or raise the number of craft grower licenses. However, at no time may the number of craft grower licenses exceed one hundred fifty (150). Pursuant to the CRTA, the IDOA was also required to issue up to forty (40) infuser licenses by July 1, 2020 and then could issue up to sixty (60) additional infuser licenses by December 21, 2021. Prior to the issuance of these up to sixty (60) additional licenses, the CRTA permits the IDOA to adopt emergency rules to modify or raise the number of infuser licenses. After January 1, 2022, the IDOA may again modify or raise the number of infuser licenses by rule. The IDOA is also authorized under the CRTA to issue an unlimited amount of transporter licenses, starting, according to the CRTA, no later than July 1, 2020. On August 2, 2021, the IDOA announced that it had issued the first round of adult use cannabis licenses under the CRTA. In total, on that day, it issued thirty-two (32) initial craft grower licenses, twenty-eight (28) infuser licenses and nine (9) transporter licenses. Since that time, the IDOA has issued additional licenses, as authorized under the CRTA.
The Cannabis Regulation and Tax Act also requires the award of conditional adult-use dispensing licenses by the IDFPR. On September 3, 2021, the IDFPR announced the results of several lotteries to award one hundred eighty-five (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 were not immediately formally awarded. On July 22, 2022, the IDFPR began issuing Conditional Adult Use Dispensing Organization Licenses, awarding one hundred forty-nine (149) Conditional Licenses. The IDFPR previously announced its intention to conduct an additional lottery to award conditional adult-use dispensing organization licenses and resolve pending litigation. With court approval, the IDFPR conducted fifty-one (51) corrective lotteries over three days. The Qualifying Applicant Lottery was held on June 21, 2022; the Social Equity Justice Involved Lottery was held on June 22, 2022 and the Tied Applicant Lottery was held on June 23, 2022. Pursuant to court order, those who obtain winning positions in any of the lotteries will be awarded conditional licenses if they prevail on the merits of their substantive claims in court or if the IDFPR agrees they constitute qualified applicants.
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On October 3, 2022, the IDOA announced that Star Buds IL, the first social equity Craft Grow licensee, was issued an operational permit and has now successfully commenced business operations.
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 (1) of twenty-one (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 twelve (12) licenses to cultivate/process and twenty-seven (27) licenses to operate retail dispensaries (which entitled holders up to three (3) medical dispensary locations). Out of the hundreds of applicants in each license category, 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 House Bill (“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 post-harvest 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 thirteen (13) additional cultivation/processing licenses and twenty-three (23) additional dispensary licenses. The application period ran from April 2018 through May 2018. Yeltrah submitted additional dispensary applications and in December 2018 one (1) 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. All six (6) dispensary locations are currently operational.
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. The PDOH is currently in the process of revising its medical regulations, which had been expected to be finalized in the second quarter of 2022. The PDOH submitted final regulations to the Pennsylvania Independent Regulatory Review Commission but withdrew their submission. As a result, Pennsylvania continues to operate under temporary regulations despite a deadline to finalize regulations by May 2022. A final version of the revised regulations was disseminated in September 2022 and it is anticipated that the revised medical regulations will take effect later this year.
There are three (3) categories of licenses in Pennsylvania: (i) grower/processer, (ii) dispensary and (iii) clinical registrant. The Yeltrah licenses are independently issued for each approved activity for use at Yeltrah facilities in Pennsylvania.
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All grower/processor establishments and all dispensaries must register with the PDOH. 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. 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 grower/processer facilities and allows the sale of marijuana and marijuana products to registered patients. The medical grower 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.
On November 25, 2021, Cresco Labs completed its acquisition of Cure Penn for aggregate consideration of $89.0 million. The acquisition added one (1) additional dispensary license, which allowed for three (3) additional dispensary locations in the State of Pennsylvania. All three (3) dispensary locations are operational and have been rebranded as Sunnyside* dispensaries in the first quarter of 2022.
In December of 2021, Cresco closed the acquisition of Laurel Harvest for consideration equal to $136.7 million. Laurel Harvest’s permit is a Clinical Registrant permit license (“CR”). A CR permittee is required to have a contractual relationship with an academic clinical research center under which the academic or clinical research center provides advice to the permit holder regarding patient health and safety, medical applications and dispensing and management of controlled substances, among other things. Laurel Harvest has a contractual relationship with Temple University, which has established one of the most sophisticated cannabis research programs in the country. A CR permittee is approved by the PDOH to hold a permit as both a grower/processor and a dispensary. The Laurel Harvest cultivation and processing facility is currently under construction in Mt. Joy. Laurel Harvest currently has one (1) operational dispensary in Montgomeryville. The CR permit entitles Laurel Harvest to an additional five (5) dispensary locations throughout the Commonwealth. In the first quarter of 2022, one (1) dispensary was rebranded as a Sunnyside* dispensary.
On September 1, 2022, the Company closed on a sale and leaseback transaction to sell its Brookville, Pennsylvania, facility to Aventine. Concurrent with the closing of the sale, the Company entered into a long-term, triple-net lease agreement with Aventine regarding the property and will continue to operate the facility as a permitted cannabis cultivation and processing facility.
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 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 but have yet to do so.
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On February 4, 2022, the PDOH’s Office of Medical Marijuana released a statement announcing that it was ordering the recall of certain vape medical marijuana products containing some added ingredients that had not been approved for inhalation by the U.S. FDA. This recall effected three vape product formulations sold by Cresco entities in Pennsylvania. The Company previously reviewed the pertinent facts and completed its assessment of the potential impact of the recall, concluding no material impact to the consolidated financial position, results of operations, or cash flows. However, in June 2022, a Commonwealth Court stopped the recall, allowing the sale of products that had been taken off shelves to resume.
Ohio Operations
HB 523, effective on September 8, 2016, legalized medical marijuana in Ohio. The Ohio Medical Marijuana Control Program (“OMMCP”) 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. HB 523 required that the framework for the OMMCP 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 (3) following state government agencies are responsible for the operation of OMMCP: (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 Ohio Pharmacy Board.
On June 4, 2018, the Ohio Pharmacy Board awarded fifty-six (56) medical marijuana provisional dispensary licenses. The licenses were awarded after an extensive review of three hundred seventy-six (376) submitted dispensary applications.
By rule, the Ohio Pharmacy Board was limited to issuing up to sixty (60) dispensary licenses across the state but will had the authority to increase the number of licenses. The Ohio Pharmacy Board recently opened up a new application period for dispensaries, increasing the potential number of dispensaries in the state to one hundred thirty (130). However, the Ohio Pharmacy Board left unchanged a regulation that limits the number of dispensary certificates of operation that a single owner can hold at five (5). 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. On December 12, 2018, Cresco Labs Ohio was granted the first dispensary Certificate of Operation in the state. 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.
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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 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. Cresco Labs Ohio received its Certificate of Operation to begin processing activities on June 11, 2021.
Ohio cultivation and processor licenses are renewable annually by the Ohio Department of Commerce (“ODOC”). Renewal applications are due at least thirty days prior to the expiration date of the Certificate of Operation. The ODOC 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 forty-five 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 forty-five 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 February 16, 2021, the Company closed on the acquisition of Verdant for total consideration of $25.0 million. The acquisition added dispensaries in Cincinnati, Chillicothe, Newark and Marion, Ohio. This acquisition brought the Company’s dispensary presence in Ohio to five (5), the maximum allowed by the State of Ohio.
The Ohio Pharmacy Board approved employee discounts which will take effect in July 2022. Previously, companies could not offer discounts to employees that are also patients/cardholders. SB 261, which includes changes to the medical cannabis program, passed in the Senate on December 15, 2021 and was sent to the Government Oversight Committee in the House. It is expected to be voted on during the 2022 Lame-Duck session, which starts in September and runs through December. Additionally, in May, the Ohio Pharmacy Board began awarding the recipients of seventy (70) new dispensary licenses, more than doubling the current number of dispensaries. The 2021 to 2022 adult-use ballot initiative, which had been in process, has been pushed back to the 2023 November election cycle. An agreement was met, between campaign and Republican leadership, to accept the first round of one hundred thirty-two thousand signatures uncontested next year. A second round of signatures will have to be collected and filed one hundred twenty-five days before the November 8th, 2023 election.
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’s recommendation.
In 2003, SB 420 was signed into law establishing an optional identification card system for medical marijuana patients.
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In September 2015, the California legislature passed three (3) 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 twenty-one years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed SB 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 (4) 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 Newsom signed into law Assembly Bill (“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.
California Operations — SLO Cultivation, Inc. (“SLO”) and CannaRoyalty Corp. d/b/a Origin House (“Origin House”)
On June 7, 2018, Cresco Labs acquired a 60% ownership interest in SLO. On September 27, 2018, Cresco acquired a further 20% ownership interest in SLO bringing its total ownership to 80%. SLO operates cannabis facilities in the cities of Carpinteria (Santa Barbara County) and Mendota (Fresno County). 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 licenses.
On January 8, 2020, Cresco Labs acquired all of the issued and outstanding shares of Origin House, a leading distributor and provider of brand support services in California. The combined entity is one of the largest vertically-integrated multi-state cannabis operators in the U.S.; a leading North American cannabis company, by footprint; and one of the largest cannabis brand distributors.
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, the Company 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 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 Company in California and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
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The Company is licensed to cultivate, manufacture and distribute medical and adult-use cannabis and cannabis-related products:
Mendota (Fresno County)
| • | SLO has been issued one (1) annual license for Type 7 (Volatile Solvent Extraction). |
| • | SLO has been issued one (1) provisional license for Type 11 (Distribution). |
| • | SLO submitted an annual application for a Type 11 (Distribution) license to the state regulator and is awaiting approval for this annual application. |
Carpinteria (Santa Barbara County)
| • | SLO has been issued the following provisional licenses: |
| • | Twenty-three (23) Cultivation: Small Mixed-Light Tier 1 licenses. |
| • | One (1) Nursery license: allowing for the production of clones, immature plants, seeds and other agricultural products used specifically for the propagation and cultivation of cannabis. |
| • | One (1) Processor license: allowing for the harvesting, drying, curing, grading or tanning of cannabis, as well as the packaging and labeling of certain non-manufactured cannabis products. |
| • | SLO submitted annual applications for the three (3) listed license types to the state regulator and is awaiting approval of these annual applications. |
West Sacramento (Yolo County)
| • | Origin House has been issued one (1) provisional Type 11 (Distribution) license. |
| • | Origin House submitted an annual application for the one (1) listed license type to the state regulator and is awaiting approval for this annual application. |
La Habra (Orange County)
| • | Origin House has been issued one (1) provisional Type 11 (Distribution) license. |
| • | Origin House submitted an annual application for the one (1) listed license type to the state regulator and is awaiting approval for this annual application. |
Unincorporated Sonoma (Sonoma County)
| • | Origin House has been issued one (1) provisional Cultivation, Medium Indoor license. |
| • | Origin House has been issued one (1) provisional Processor license. |
| • | Origin House has been issued two (2) provisional Type 11 (Distribution) license. |
| • | Origin House has been issued one (1) provisional Cultivation, Small Indoor license. |
| • | Origin House has been issued one (1) provisional Nursery license. |
| • | Origin House submitted annual applications for the five (5) listed license types to the state regulator and is awaiting approval for these annual applications. |
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During the year ended December 31, 2021, the Company mutually terminated an agreement for exclusive distribution rights with a third-party vendor, which resulted in the impairment of the remaining net book value of a market-related intangible of $0.8 million. Additionally, management determined that the Company’s shift in strategy to reduce third-party distribution in California was an indicator of impairment 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, $215.6 million in goodwill impairment was recorded to the California reporting unit.
In March 2022, the DCC initiated a rule making process in which it promulgated a comprehensive regulatory proposal, including amendments to its current rules that would make permanent emergency rules that have been in effect since September 2021. Comments on the proposed rules were submitted by all interested parties by April 19, 2022. The DCC then considered the comments submitted and issued an updated rule set for a second comment period. A final version of the rules was filed by the DCC with the California Office of Administrative Law on September 26, 2022. The rules are still pending and are anticipated to become effective in the fall of 2022. Among other rule making activities, the DCC is currently considering new rules for large cultivation licenses and conversion to large and medium licenses in addition to rules related to the establishment of a standard cannabinoids test method, including standardized operating procedures which will be utilized by all licensed testing laboratories in California. With respect to legislation, the California legislature passed AB 195, which was signed into law by Governor Newsom on June 30, 2022. AB-195 eliminates the cannabis cultivation tax and serves to shift responsibility for collecting the cannabis excise tax from distributors to retailers.
During the second quarter of 2022, the Company initiated a plan to shut down a cultivation facility and production facility in California. As a result of this plan, the Company exercised its early termination right to reduce the existing lease terms to 180 days. All operations at the facilities ceased in the third quarter of 2022 and the corresponding licenses will be surrendered in the fourth quarter of 2022. The Company is currently in the process of determining a disposal plan for the remaining assets at these locations.
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 (“AZ Dispensary License”), entities are authorized to dispense and cultivate medical cannabis. Each AZ 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 an AZ 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 an AZ Dispensary License may not be sold, transferred or otherwise conveyed, AZ 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 October 24, 2018, Cresco Labs obtained a 100% ownership interest in Arizona Facilities Supply, LLC which includes a vertically-integrated cultivation, processing and dispensary operation in Arizona.
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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. No cannabis reforms occurred in the 2022 Legislative Session. However, pursuant to the state’s Social Equity Ownership Program required under Proposition 207, twenty-six (26) new social equity licenses were awarded in April of 2022. License holders have eighteen months to become operational or potentially forfeit their license.
During the third quarter of 2022, the Company shut down a cultivation facility in Arizona. The Company is currently in the process of determining a disposal plan for the assets at this location.
The licenses in Arizona are renewed bi-annually. Before expiry, licensees are required to submit a renewal application. While renewals are granted bi-annually, there is no ultimate expiry after which no renewals are permitted. Additionally, with 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.
New York Operations
The State of New York’s medical cannabis program was introduced in July 2014 when former 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, former Governor Cuomo, prompted by an 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 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.
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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 (2) 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 (4) and six (6) 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 Ag. Valley Ag is one (1) of the ten (10) 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) dispensary locations are branded as Sunnyside* dispensaries. The Company has successfully renewed its initial licenses and all licenses are, as of the date hereof, active with the State of New York.
On January 6, 2021, former 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 (the “OCM”) 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 annual tax revenue for the State of New York.
On February 16, 2021, former 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 detailed 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.
Former Governor Cuomo signed SB 854/AB 1248A on March 31, 2021, creating the Empire State’s adult-use cannabis program. This legislation expands Cresco Labs’ potential 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 (the “CCB”) oversees the rollout of the program was seated in summer/early fall 2021. The CCB held its first meeting on October 5, 2021. At that meeting the CCB announced changes to the state’s medical program that would go into effect immediately including that cannabis flower could be sold to patients. Since that initial meeting, the CCB has granted certifying healthcare providers wider discretion in recommending medical cannabis, increased the amount of medical cannabis a patient can purchase at one time, begun the process of developing home cultivation rules and implemented rules for its Cannabinoid Hemp Program. The CCB and the OCM have not yet promulgated comprehensive adult-use regulations that would govern the adult-use cannabis program. However, on March 30, 2022, proposed rules related to the issuance of conditional adult-use retail dispensary licenses were published by the OCM. Those rules underwent a public comment period and final rules were approved by the CCB on July 14, 2022. The regulations went into effect on August 3, 2022. Previously, on March 9, 2022, the CCB and the OCM published proposed amendments to the rules governing New York’s medical cannabis program. The public comment period for
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those rules concluded, but the draft rules have been revised and republished for additional public comments. Key revisions in this second draft include: a streamlining of patient registration process; revised packaging, labeling, marketing and advertising rules; the removal of prior written approval requirements for medical cannabis product brands; the removal of remote supervision by pharmacists; energy and environmental revisions and several clarifying definitions. In addition to the adoption of rules and ongoing rule making, on February 22, 2022, the current governor of New York Kathy Hochul signed legislation that provides a path for New York’s existing hemp operators to obtain provisional cannabis cultivator and processor licenses. Further, New York State’s fiscal year 2022 to 2023 budget includes Section 280E Deductions, which permits tax deductions for commercial cannabis activity. This applies to taxable years beginning on January 1, 2022. The budget also includes a $200.0 million Social Equity Fund, which allows New York State to invest in a private fund to finance the leasing and equipping of up to one hundred and fifty (150) conditional adult-use retail dispensaries in New York State to be operated by individuals who have been impacted by the inequitable enforcement of marijuana laws.
Through the OCM, New York began issuing licenses for cannabis cultivation and processing in April and August of 2022, respectively. Approximately two hundred forty (240) conditional cultivation licenses have been granted and fifteen (15) conditional processor licenses. The state is currently reviewing applications for Conditional Adult-Use Retail Dispensary licenses. The application period was open from August 25, 2022 to September 25, 2022 and the state received approximately nine hundred (900) applications, for one hundred seventy-five (175) available licenses. While the OCM is currently reviewing applications and granting conditional licenses for cultivation, processing and retail sales, it has not yet promulgated regulations governing general adult-use licenses, which are available to applicants not eligible for conditional licenses. These regulations are expected in the coming weeks and months.
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 “CCC”) (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 and sales for adult-use cannabis officially began in November 2018.
The CCC 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 eleven (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.
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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. On February 7, 2020, the Company legally closed 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 (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 Massachusetts CCC 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 September 2, 2021, the Company announced that it had completed the acquisition of 100% of the membership interests of Cultivate for total consideration of $99.3 million. Cultivate owned and operated 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.
The Massachusetts Senate and House of Representatives debated and voted on bills SB 2823 and HB 4791 in April and June, respectively, and passed the bills in August of 2022. The bills address several cannabis related issues, including host community agreement reform, a social equity trust fund and the referendum process for social consumption licenses.
Michigan Operations
In November 2008, Michigan residents approved the Michigan Medical Marihuana 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. The scope of LARA’s remit has expanded in the last several years and LARA is now the Cannabis Regulatory Agency (“CRA”). LARA is the main regulatory authority for the licensing of marijuana businesses.
On November 6, 2018, Michigan voters approved Proposal 1, to make marijuana legal under state and local law for adults twenty-one 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 would 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, an affiliate of the Company (the “Michigan Affiliate”) announced that it had completed the most comprehensive portion of Michigan’s application process, being pre-qualified for a cultivation and processing license in Michigan. The pre-qualification represents the authorization of the entity to move forward with the licensing process for its intended facilities.
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On November 13, 2019, Michigan announced any existing medically licensed businesses would be allowed to sell recreational-use marijuana beginning December 1, 2019. On March 5, 2020, the Michigan Affiliate was issued a medical processing license to begin manufacturing and processing flower into edible medical marijuana products and/or medical marijuana-infused products.
In 2020, the Michigan Affiliate received approval to operate one (1) adult-use processor license and one (1) medical processor license. The Michigan Affiliate received its first medical and adult-use cultivation licenses in June 2021. Additional cultivation licenses have been added as production capacity continues to grow.
All Michigan licenses are renewed annually through the Cannabis 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 products 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, the Michigan Affiliate 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 the Michigan Affiliate 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 the Michigan Affiliate.
On April 23, 2020, the Company announced that it had completed the sale of its Marshall, MI facility to IIP. Concurrent with the closing of the sale, Cresco Labs entered into a long-term, triple-net lease agreement with IIP and continues to operate the property as a licensed cannabis cultivation and processing facility upon completion of redevelopment. On October 4, 2021, the Company unveiled its Marshall facility while celebrating the first harvest at the property. Following the unveiling of its Marshall facility, the Michigan Affiliate expanded its licensure to fully realize the growth potential of the Marshall facility. In late 2021, the Michigan Affiliate was awarded eight (8) additional Medical Class C Grower licenses bringing its total medical grow licenses to ten (10) in addition to its one (1) existing Medical Processor license. With increased medical grow potential, the Michigan Affiliate was also able to acquire seven (7) Adult Use Excess Grower licenses in addition to its existing five (5) Adult Use Class C Grow licenses and one (1) Adult Use Processor license.
No Public Acts relating to cannabis were introduced in the third quarter of 2022. However, a cannabis reform bill is pending with regard to spouses and ownership. HB 5389 would amend the Michigan Regulation and Taxation of Marihuana Act to prohibit the Cannabis Regulatory Agency from denying an application for licensure, or conducting other specified activities, solely because the spouse of an individual who holds an ownership interest in the applicant is a member of, or employed by, a state or federal regulatory body or governmental body; provided that the applicant submits an attestation with certain details. The bill passed out of the House of Representatives and is now before the Senate Regulatory Reform Committee; it is expected to pass if there is a full Senate vote in late November of 2022 and be signed by the Governor in early December of 2022.
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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 (1) vertically-integrated license to be awarded in each of five (5) 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 thirty 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 ten (10) licenses to specific entities and another four (4) 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 March 18, 2019, Governor Ron DeSantis signed SB 182 “Medical Use of Marijuana” into law. Among other provisions, SB 182 repealed the state’s smoking ban that had been in place. The medical program is currently administered by the Florida Department of Health’s (“FDOH”) Office of Medical Marijuana Use (“OMMU”). OMMU is responsible for crafting and implementing regulations governing the program, overseeing the Medical Marijuana Use Registry, licensing operators to cultivate, process and dispense medical marijuana and certifying testing laboratories. Governor DeSantis signed SB 768 into law on April 20, 2022, which includes the following provisions: FDOH will now collect samples of marijuana and marijuana delivery devices from a medical marijuana treatment center (“MMTC”) for specified testing, rather than only samples of edibles; FDOH is required to promulgate rules to allow for potency variations not to exceed 15% from labels and FDOH has the authority not to renew the license of a MMTC that has not begun to cultivate by their renewal date.
With regard to the potential for adult-use cannabis in the state, a group, Regulate Florida, sought to place the questions of whether to legalize adult-use cannabis on the November 2022 ballot but was not successful. The group has indicated it will target the 2024 ballot instead. Regulate Florida will need to gather more than 222,000 signatures to trigger judicial and fiscal review and then more than 890,000 signatures to make the 2024 ballot.
On April 14, 2021, the Company announced it completed the acquisition of Bluma for total consideration of $238.1 million. Bluma owns and operates 3 Boys Farm, LLC dba One Plant Florida (“One Plant”), a vertically-integrated, licensed MMTC 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. Since the acquisition, Cresco has rebranded these dispensaries as Sunnyside*.
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During the first quarter of 2022, the Company opened three (3) additional Sunnyside* locations in Clearwater, North Miami and Lady Lake, Florida. No additional Sunnyside* dispensaries were opened during the second quarter of 2022. In the third quarter of 2022, the Company opened three (3) additional Sunnyside* dispensaries in Cape Coral, Tampa and Panama City Beach Florida. In October of 2022, the Company opened one (1) additional Sunnyside* location in Pensacola, Florida, bringing the total number of dispensaries in the state to twenty (20).
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 Florida 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 Florida cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
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Exhibit 99.3
Cresco Labs Announces Third Quarter 2022 Results
Company reports $210 million in revenue and continues industry leadership with branded product performance
Company took actions to improve long-term profitability and prepare for the integration of Columbia Care in 2023
CHICAGO—(BUSINESS WIRE)— Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) (FSE: 6CQ) (“Cresco Labs” or the “Company”), a vertically integrated, multi-state operator and the No. 1 producer of branded cannabis products in the industry, today released its financial results for the quarter ended September 30, 2022. All financial information presented in this release is reported in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and in U.S. dollars, unless as otherwise indicated.
Third Quarter 2022 Financial Highlights
| • | Third quarter revenue of $210 million, down 2% year-over-year. Growth in emerging markets was offset by price compression, increased verticality by retailers, and the Company’s strategic exit of 3rd party distribution in California in Q4 of 2021. Adjusted for change in the Company’s California business, non-GAAP third quarter revenue would have been up over 2% year-over-year. |
| • | Adjusted gross profit1 of $100 million or 47% of revenue. Third quarter adjusted EBITDA1 of $42 million, or 20% of revenue. |
| • | Adjusted gross margin1 and adjusted EBITDA margin1 were impacted by actions taken in the quarter to improve long-term profitability, including the closing of under-performing facilities and associated inventory adjustments, causing an approximate 340 bps drag on margins in the quarter. Normalized for these non-cash, non recurring adjustments, adjusted gross margin1 would have been 51% and adjusted EBITDA margin1 would have been 23%. |
| • | Wholesale revenue of $93 million, which maintained the Company’s position as the No. 1 U.S. seller of branded cannabis products in the industry with leading share positions in the flower, concentrates, and vapes categories2. |
| • | Maintained market leadership in Illinois, Pennsylvania, and Massachusetts2. |
| • | Retail revenue increased 11% year-over-year, to $118 million, or an average $2.35 million per store open for the entire quarter. |
| • | Generated $26 million in operating cash flow and ended the quarter with $130 million of cash on hand. |
| • | On November 4, 2022, Cresco Labs announced planned divestitures of Cresco and Columbia Care assets in New York, Illinois and Massachusetts to entities controlled by Sean Combs for a total purchase price of up to $185 million; closing is expected to occur concurrently with the closing of the Columbia Care acquisition around the end of the first quarter of 2023. |
Management Commentary
“It’s an exciting time for the cannabis industry as we get closer to a clear inflection point. In the face of multiple industry headwinds and an unprecedented macro environment, our team did an incredible job of taking everything that the quarter had to give and maintained our industry position as the No. 1 wholesaler of branded cannabis2 and the No. 1 branded product portfolio chosen by consumers2. In the quarter, we took actions to reduce costs to position ourselves for long-term improvement. This included the closing of underperforming facilities and the sell through of related inventory. While this had a short-term negative impact on gross margin in Q3, it was the right thing to do to align our cost structure and optimize our operations ahead of closing the Columbia Care transaction and in furtherance of our commitment to improved margin growth in the coming quarters,” said Charles Bachtell, CEO and Co-Founder of Cresco Labs.
“We made significant progress toward closing the Columbia Care transaction with the signing of definitive agreements to divest assets in New York, Illinois and Massachusetts for total consideration of up to $185 million. The future is bright for our industry and Cresco Labs. We continue to see legislative and regulatory progress at the state level and we’ve never been closer to achieving federal reform on cannabis than we are today. We continue to lead these efforts in these areas as we understand the legislative process is the ultimate unlock of the potential and value for this industry and our stakeholders,” concluded Mr. Bachtell.
Balance Sheet, Liquidity, and Other Financial Information
| • | As of September 30, 2022, current assets were $355 million, including cash and cash equivalents of $130 million. The Company had working capital of $85 million and senior secured term loan debt, net of discount and issuance costs, of $380 million. |
| • | Total shares on a fully converted basis were 437,484,245 as of September 30, 2022. |
Social Equity and Education Development Program
| • | Secured support of the National Black Chamber of Commerce, National Hispanic Cannabis Council, New York New Jersey Minority Development Council, NAACP of New Jersey, New York Urban League and other advocacy organizations urging for critical federal legislation that would enable banking and lending access for cannabis businesses. |
| • | The Sentence of Michael Thompson, a documentary produced by Cresco Labs, premiered on MSNBC and will be available on XTR’s Streaming Service DOCUMENTARY+. Through the MSNBC and DOCUMENTARY+ agreement, the film will reach over 3 million viewers nationwide. |
| • | This year’s “Summer of Social Justice” campaign has far surpassed last year’s impact, with the Company’s SEEDTM initiative supporting the record sealing, expungement process and restorative journey recently achieving a milestone of assisting 5,000 individuals nationwide. |
Capital Markets and M&A Activity
| • | On November 4, 2022, the Company announced a definitive agreement for the divestiture of Columbia Care and Cresco assets in New York, Illinois and Massachusetts for total proceeds of up to $185 million. Please click here for additional details. |
| • | The asset divestiture process is proceeding as planned in terms of gross proceeds and the Company is working toward final agreements on the remaining assets required to be divested in Florida, Ohio and Maryland. The Company targets closing the transaction around the end of the first quarter of 2023. |
| • | On September 6, 2022, the Company closed on a sale-and-leaseback transaction with Aventine Property group for its Brookville, PA facility for $45 million. Please click here for additional details. |
Conference Call and Webcast
The Company will host a conference call and webcast to discuss its financial results on Tuesday, November 15, 2022, at 8:30am Eastern Time (7:30am Central Time). The conference call may be accessed via webcast or by dialing 1-844-200-6205 (US Toll Free), 1-833-950-0062 (CDN Toll Free), 1-646-904-5544 (US Local), +1 929-526-1599 (Other) providing access code 334786. Archived access to the webcast will be available for one year on the Cresco Labs’ investor relations website.
Consolidated Financial Statements
The financial information reported in this press release is based on unaudited management prepared financial statements for the quarter ended September 30, 2022. These financial statements have been prepared in accordance with U.S. GAAP. The Company expects to file its unaudited interim condensed consolidated financial statements for the quarter ended September 30, 2022, on SEDAR on November 15, 2022. Accordingly, such financial information may be subject to change. All financial information contained in this press release is qualified in its entirety with reference to such financial statements. While the Company does not expect there to be any material changes between the information contained in this press release and the consolidated financial statements it files on SEDAR, to the extent that the financial information contained in this press release is inconsistent with the information contained in the Company’s financial statements, the financial information contained in this press release shall be deemed to be modified or superseded by the Company’s filed financial statements. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation for purposes of applicable securities laws. Further, the reader should refer to the additional disclosures in the Company’s audited financial statements for the year ended December 31, 2021, previously filed on SEDAR.
Cresco Labs references certain non-GAAP financial measures throughout this press release, which may not be comparable to similar measures presented by other issuers. Please see the “Non-GAAP Financial Measures” section below for more detailed information.
Non-GAAP Financial Measures
Earnings before interest, taxes, depreciation, and amortization (“EBITDA”), Adjusted EBITDA, and Adjusted gross profit 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.
About Cresco Labs Inc.
Cresco Labs is one of the largest vertically integrated, multistate cannabis operators in the United States, with a mission to normalize and professionalize the cannabis industry. Employing a consumer-packaged goods (“CPG”) approach, Cresco Labs is the largest wholesaler of branded cannabis products in the U.S. Its brands are designed to meet the needs of all consumer segments and comprised of some of the most recognized and trusted national brands including Cresco®, Cresco Reserve®, High Supply®, Mindy’s™, Good News®, Remedi™, Wonder Wellness Co.® and FloraCal®. Sunnyside*®, Cresco Labs’ national dispensary brand, is a wellness-focused retailer created to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco Labs operates the industry’s largest Social Equity and Educational Development initiative, SEED™, which was established to ensure that all members of society have the skills, knowledge and opportunity to work and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.
Forward-Looking Statements
This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”). Such forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the Company’s Annual Information Form for the year ended December 31, 2021, filed on March 25, 2022, other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Labs’ shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.
| 1 | See “Non-GAAP Financial Measures” at the end of this press release for more information regarding the Company’s use of non-GAAP financial measures. |
| 2 | According to BDSA |
Cresco Labs Inc.
Financial Information and Non-GAAP Reconciliations
(All amounts expressed in thousands of U.S. Dollars)
Unaudited Consolidated Statements of Operations
For the Three Months Ended September 30, 2022, June 30, 2022, and September 30, 2021
| For the Three Months Ended | ||||||||||||
| ($ in thousands) |
September 30, 2022 |
June 30, 2022 |
September 30, 2021 |
|||||||||
| Revenue |
$ | 210,484 | $ | 218,226 | $ | 215,483 | ||||||
| Cost of goods sold |
111,372 | 105,402 | 107,162 | |||||||||
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| Gross profit |
99,112 | 112,824 | 108,321 | |||||||||
| Gross profit % |
47.1 | % | 51.7 | % | 50.3 | % | ||||||
| Operating expenses: |
||||||||||||
| Selling, general and administrative |
76,200 | 77,912 | 69,520 | |||||||||
| Share-based compensation |
2,256 | 6,583 | 6,083 | |||||||||
| Depreciation and amortization |
4,416 | 5,652 | 5,787 | |||||||||
| Impairment loss |
— | — | 290,949 | |||||||||
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| Total operating expenses |
82,872 | 90,147 | 372,339 | |||||||||
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| Income (loss) from operations |
16,240 | 22,677 | (264,018 | ) | ||||||||
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| Other (expense) income: |
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| Interest expense, net |
(15,554 | ) | (12,016 | ) | (13,577 | ) | ||||||
| Other income, net |
14,797 | 4,681 | 1,735 | |||||||||
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| Total other expense, net |
(757 | ) | (7,335 | ) | (11,842 | ) | ||||||
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| Income (loss) before income taxes |
15,483 | 15,342 | (275,860 | ) | ||||||||
| Income tax (expense) recovery |
(18,732 | ) | (23,638 | ) | 12,408 | |||||||
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| Net loss1 |
$ | (3,249 | ) | $ | (8,296 | ) | $ | (263,452 | ) | |||
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| 1 | Net loss includes amounts attributable to non-controlling interests. |
Cresco Labs Inc.
Unaudited Reconciliation of Gross Profit to Adjusted Gross Profit (Non-GAAP)
For the Three Months Ended September 30, 2022, June 30, 2022, and September 30, 2021
| For the Three Months Ended | ||||||||||||
| ($ in thousands) |
September 30, 2022 |
June 30, 2022 |
September 30, 2021 |
|||||||||
| Revenue |
$ | 210,484 | $ | 218,226 | $ | 215,483 | ||||||
| Cost of goods sold1 |
111,372 | 105,402 | 107,162 | |||||||||
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| Gross profit |
$ | 99,112 | $ | 112,824 | $ | 108,321 | ||||||
| Fair value mark-up for acquired inventory |
21 | 123 | 8,396 | |||||||||
| COGS adjustments for acquisition and other non-core costs |
593 | 2,657 | — | |||||||||
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| Adjusted gross profit (Non-GAAP) |
$ | 99,726 | $ | 115,604 | $ | 116,717 | ||||||
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| Adjusted gross profit % |
47.4 | % | 53.0 | % | 54.2 | % | ||||||
| 1 | Production (cultivation, manufacturing, and processing) costs related to products sold during the period. |
Cresco Labs Inc.
Summarized Unaudited Consolidated Statements of Financial Position
As of September 30, 2022 and December 31, 2021
| ($ in thousands) |
September 30, 2022 |
December 31, 2021 |
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| Cash and cash equivalents |
$ | 130,042 | $ | 223,543 | ||||
| Other current assets |
225,159 | 198,212 | ||||||
| Property and equipment, net |
377,941 | 369,092 | ||||||
| Intangible assets, net |
431,446 | 437,644 | ||||||
| Goodwill |
448,376 | 446,767 | ||||||
| Other non-current assets |
143,327 | 105,205 | ||||||
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| Total assets |
$ | 1,756,291 | $ | 1,780,463 | ||||
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| Total current liabilities |
270,560 | 288,394 | ||||||
| Total long-term liabilities |
714,284 | 694,333 | ||||||
| Total shareholders’ equity |
771,447 | 797,736 | ||||||
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| Total liabilities and shareholders’ equity |
$ | 1,756,291 | $ | 1,780,463 | ||||
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Cresco Labs Inc.
Unaudited Reconciliation of Net Income to Adjusted EBITDA (Non-GAAP)
For the Three Months Ended September 30, 2022, June 30, 2022, and September 30, 2021
| For the Three Months Ended | ||||||||||||
| ($ in thousands) |
September 30, 2022 |
June 30, 2022 |
September 30, 2021 |
|||||||||
| Net loss1 |
$ | (3,249 | ) | $ | (8,296 | ) | $ | (263,452 | ) | |||
| Depreciation and amortization |
13,395 | 13,113 | 10,486 | |||||||||
| Interest expense, net |
15,554 | 12,016 | 13,577 | |||||||||
| Income tax expense (recovery) |
18,732 | 23,638 | (12,408 | ) | ||||||||
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| Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-GAAP) |
$ | 44,432 | $ | 40,471 | $ | (251,797 | ) | |||||
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| Other income, net |
(14,797 | ) | (4,681 | ) | (1,735 | ) | ||||||
| Fair value mark-up for acquired inventory |
21 | 123 | 8,396 | |||||||||
| Adjustments for acquisition and other non-core costs |
9,093 | 7,231 | 3,830 | |||||||||
| Impairment loss |
— | — | 290,949 | |||||||||
| Share-based compensation |
2,995 | 7,449 | 6,806 | |||||||||
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| Adjusted EBITDA (Non-GAAP) |
$ | 41,744 | $ | 50,593 | $ | 56,449 | ||||||
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1 Net loss includes amounts attributable to non-controlling interests. |
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Cresco Labs Inc.
Unaudited Summarized Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2022, June 30, 2022, and September 30, 2021
| For the Three Months Ended | ||||||||||||
| ($ in thousands) |
September 30, 2022 |
June 30, 2022 |
September 30, 2021 |
|||||||||
| Net cash provided by (used in) operating activities |
$ | 25,604 | $ | (7,076 | ) | $ | 7,075 | |||||
| Net cash provided by (used in) investing activities |
23,484 | (13,388 | ) | (43,449 | ) | |||||||
| Net cash (used in) provided by financing activities |
(9,112 | ) | (69,135 | ) | 155,864 | |||||||
| Effect of foreign currency exchange rate changes on cash |
10 | 13 | 74 | |||||||||
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| Net change in cash and cash equivalents and restricted cash |
$ | 39,986 | $ | (89,586 | ) | $ | 119,564 | |||||
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| Cash and cash equivalents and restricted cash, beginning of period |
92,334 | 181,920 | 135,233 | |||||||||
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| Cash and cash equivalents and restricted cash, end of period |
$ | 132,320 | $ | 92,334 | $ | 254,797 | ||||||
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Contacts
Media
Jason Erkes, Cresco Labs
Chief Communications Officer
press@crescolabs.com
312-953-2767
Investors
Megan Kulick, Cresco Labs
SVP, Investor Relations
investors@crescolabs.com
For general Cresco Labs inquiries:
312-929-0993
info@crescolabs.com
Source: Cresco Labs