CRLBF 0001193125-21-335467 6-K Filing: Nov 22, 2021

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report ofForeign Private Issuer

Pursuant to Rule 13a-16 or15d-16

Under the Securities Exchange Act of 1934

For the Month of November 2021

000-56241

(Commission File Number)

Cresco LabsInc.

(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, 2021 and 2020
99.2	Management Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2021 and 2020

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 19, 2021	By:	/s/ Charles Bachtell
		Charles Bachtell
		Chief Executive Officer

EX-99.1

Exhibit 99.1

CRESCO LABS INC.

UNAUDITED CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND 2020

(Expressed in United States Dollars)

Cresco Labs Inc.

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIALSTATEMENTS:

Unaudited Condensed Interim Consolidated Balance Sheets	2
Unaudited Condensed Interim Consolidated Statements of Operations	3
Unaudited Condensed Interim Consolidated Statements of Comprehensive (Loss) Income	4
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’<br>Equity	5
Unaudited Condensed Interim Consolidated Statements of Cash Flows	7
Notes to the Unaudited Condensed Interim Consolidated Financial Statements	9

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Balance Sheets

As of September 30, 2021 and December 31, 2020

(Inthousands of United States Dollars, except for share amounts)

	September 30,			December 31,
	2021			2020*
ASSETS
Current assets:
Cash and cash equivalents	$	252,838		$	136,339
Restricted cash		1,959			4,435
Accounts receivable, net		47,757			29,943
Inventory, net		131,529			67,183
Loans receivable, short-term		2,543			2,438
Other current assets		12,422			9,129
Total current assets		449,048			249,467
Non-current assets:
Property and equipment, net		344,407			228,804
Right-of-use<br>assets		79,552			71,794
Intangible assets, net		269,451			195,541
Loans receivable, long-term		3,820			21,223
Investments		6,438			4,360
Goodwill		395,878			450,569
Deferred tax asset		17,202			7,130
Other non-current assets		4,142			3,708
Total non-current assets		1,120,890			983,129
TOTAL ASSETS	$	1,569,938	****	$	1,232,596	****
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Current liabilities:
Accounts payable	$	25,617		$	23,231
Accrued liabilities		69,185			130,469
Short-term borrowings		15,445			25,924
Income tax payable		32,374			36,067
Current portion of lease liabilities		18,542			18,040
Deferred consideration, contingent consideration and other payables, short-term		41,892			19,115
Derivative liabilities, short-term		6,180			—
Total current liabilities		209,235			252,846
Non-current liabilities:
Long-term notes payable and loans payable		463,864			255,439
Derivative liabilities, long-term		983			17,505
Lease liabilities		105,347			74,468
Deferred tax liability		62,670			41,202
Deferred consideration and contingent consideration,long-term		8,515			7,247
Other long-term liabilities		7,041			8,557
Total non-current liabilities		648,420			404,418
TOTAL LIABILITIES	****	857,655	****	****	657,264	****
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS’ EQUITY
Super Voting Shares (500,000 Shares authorized, issued and outstanding at September 30, 2021<br>and December 31, 2020, respectively)		—			—
Subordinate Voting Shares (Shares authorized, issued and outstanding at September 30, 2021:<br>unlimited, 253,130,783 and 253,130,783, respectively, at December 31, 2020: unlimited, 194,086,000 and 194,086,000, respectively)		—			—
Proportionate Voting Shares^1^(Shares<br>authorized, issued and outstanding at September 30, 2021: unlimited, 20,777,276 and 20,777,276, respectively, at December 31, 2020: unlimited, 29,311,088 and 29,311,088, respectively)		—			—
Special Subordinate Voting Shares^2^(Shares<br>authorized, issued and outstanding at September 30, 2021 and December 31, 2020: unlimited, 639 and 639, respectively)		—			—
Share capital		1,483,797			802,264
Accumulated other comprehensive loss		(362	)		(647	)
Accumulated deficit		(813,060	)		(328,380	)
Equity of Cresco Labs Inc.		670,375			473,237
Non-controlling interests		41,908			102,095
TOTAL SHAREHOLDERS’ EQUITY	****	712,283	****	****	575,332	****
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,569,938	****	$	1,232,596	****
^1^	PVS presented on an “as-converted” basis to SVS (1-to-200)
---	---
^2^	SSVS presented on an “as-converted” basis to SVS (1-to-0.00001)
---	---
^*^	Derived from audited financial statements
---	---

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements*.*

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars, except for share and per share data)

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2021			2020			2021			2020
Revenue, net	$	215,483		$	153,298		$	603,895		$	313,934
Costs of goods sold		107,162			76,454			307,570			181,715
Gross profit		108,321			76,844			296,325			132,219
Operating expenses:
Selling, general and administrative		81,390			51,909			238,284			154,793
Impairment Loss		290,949			—			290,949			1,217
Total operating expenses		372,339			51,909			529,233			156,010
(Loss) income from operations		(264,018	)		24,935			(232,908	)		(23,791	)
Other (expense) income:
Interest expense, net		(13,577	)		(8,762	)		(36,360	)		(23,290	)
Other income (expense), net		1,735			(354	)		2,120			10,174
(Loss) from equity method investments		—			(134	)		(1,196	)		(254	)
Total other (expense), net		(11,842	)		(9,250	)		(35,436	)		(13,370	)
(Loss) income before income taxes		(275,860	)		15,685			(268,344	)		(37,161	)
Income tax recovery (expense)		12,408			9,891			(16,579	)		(14,423	)
Net (loss) income		(263,452	)		25,576			(284,923	)		(51,584	)
Net income (loss) attributable to non-controlling<br>interests, net of tax		7,193			10,119			19,942			(4,063	)
Net (loss) income attributable to Cresco Labs Inc.	$	(270,645	)	$	15,457	****	$	(304,865	)	$	(47,521	)
Net loss per share - attributable to Cresco Labs Inc. shareholders
Basic (loss) income per share	$	(1.00	)	$	0.07		$	(1.19	)	$	(0.23	)
Basic weighted-average number of shares outstanding		271,183,423			213,754,418			256,335,128			207,273,385
Diluted (loss) income per share	$	(1.00	)	$	0.04		$	(1.19	)	$	(0.23	)
Diluted weighted-average number of shares outstanding		271,183,423			364,291,532			256,335,128			207,273,385

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Comprehensive (Loss) Income

For the Three and Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars)

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2021			2020			2021			2020
Net (loss) income	$	(263,452	)	$	25,576		$	(284,923	)	$	(51,584	)
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences, net of tax		138			(196	)		285			(562	)
Total comprehensive (loss) income for the period	****	(263,314	)	****	25,380	****	****	(284,638	)	****	(52,146	)
Comprehensive income (loss) attributable to<br>non-controlling interests, net of tax		7,193			10,119			19,942			(4,063	)
Total comprehensive (loss) income attributable to Cresco Labs Inc.	$	(270,507	)	$	15,261	****	$	(304,580	)	$	(48,083	)

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars)

	Share capital			Accumulated Deficit			Accumulated othercomprehensive loss,net of tax			Non-controllinginterests			Total
Balance as of January 1, 2020	$	291,723		$	(132,474	)	$	—		$	119,266		$	278,515
Exercise of options and warrants		482			—			—			—			482
Equity-based compensation		871			—			—			—			871
Change in ownership interest		—			—			—			17			17
Income tax reserve		(597	)		(47	)		—			—			(644	)
Equity issued related to acquisitions		429,551			—			—			—			429,551
Cresco LLC shares redeemed and other adjustments		8,132			(8,429	)		—			297			—
Foreign currency translation		—			—			166			—			166
Net (loss) income		—			(26,545	)		—			(8,916	)		(35,461	)
Balance as of March 31, 2020	$	730,162	****	$	(167,495	)	$	166	****	$	110,664	****	$	673,497	****
Exercise of options and warrants		114			—			—			—			114
Equity-based compensation		5,332			—			—			—			5,332
Change in ownership interest		—			—			—			(266	)		(266	)
Income tax reserve		35			(51	)		—			—			(16	)
Equity issued related to acquisitions		6,346			—			—			—			6,346
Distributions to non-controlling interest holders		(1,681	)		—			—			(481	)		(2,162	)
Equity issuances		437			—			—			—			437
Cresco LLC shares redeemed and other adjustments		7,253			(6,100	)		—			(1,153	)		—
Foreign currency translation		—			—			(532	)		—			(532	)
Net (loss) income		—			(36,433	)		—			(5,266	)		(41,699	)
Balance as of June 30, 2020	$	747,998	****	$	(210,079	)	$	(366	)	$	103,498	****	$	641,051	****
Exercise of options and warrants		892			—			—			—			892
Equity-based compensation		2,669			—			—			—			2,669
Income tax reserve		395			(257	)		—			—			138
Employee taxes on certain share-based payment arrangements		2,072			—			—			—			2,072
Equity issued related to acquisitions		(816	)		—			—			—			(816	)
Distributions to non-controlling interest holders		17,255			—			—			(16,312	)		943
Equity issuances		3,117			—			—			—			3,117
Cresco LLC shares redeemed and other adjustments		49,717			(44,037	)		—			(5,680	)		—
Foreign currency translation		—			—			(196	)		—			(196	)
Net income (loss)		—			15,457			—			10,119			25,576
Balance as of September 30, 2020	$	823,299	****	$	(238,916	)	$	(562	)	$	91,625	****	$	675,446	****

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars)

	Sharecapital			Shares to beissued orcanceled			AccumulatedDeficit			Accumulated othercomprehensive loss,<br>net of tax			Non-controllinginterests			Total
Balance as of January 1, 2021	$	800,391		$	1,873		$	(328,380	)	$	(647	)	$	102,095		$	575,332
Exercise of options and warrants		1,899			57			—			—			—			1,956
Equity-based compensation		6,482			(275	)		—			—			—			6,207
Employee taxes on certain share-based payment arrangements		13,139			—			—			—			—			13,139
Income tax reserve		—			—			80			—			—			80
Equity issued related to acquisitions		940			1,060			—			—			—			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 (loss) income		—			—			(29,393	)		—			5,269			(24,124	)
Balance as of March 31, 2021	$	1,053,209	****	$	2,715	****	$	(443,231	)	$	(293	)	$	97,981	****	$	710,381	****
Exercise of options and warrants		1,712			852			—			—			—			2,564
Equity-based compensation		9,723			—			—			—			—			9,723
Employee taxes on certain share-based payment arrangements		(645	)		(53	)		—			—			—			(698	)
Income tax reserve		—			—			87			—			—			87
Tax benefit from shareholder redemptions		611			—			—			—			—			611
Equity issued related to acquisitions		214,618			(1,060	)		—			—			—			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
Balance as of June 30, 2021	$	1,415,481	****	$	2,454	****	$	(534,653	)	$	(500	)	$	47,846	****	$	930,628	****
Exercise of options and warrants		1,691			(921	)		—			—			—			770
Equity-based compensation		6,753			—			—			—			—			6,753
Employee taxes on certain share-based payment arrangements		65			(801	)		—			—			—			(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	)
Balance as of September 30, 2021	$	1,483,065	****	$	732	****	$	(813,060	)	$	(362	)	$	41,908	****	$	712,283	****

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars)

	Nine Months Ended<br>September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(284,923	)	$	(51,584	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		30,443			23,173
Amortization of operating lease assets		5,018			3,234
Bad debt expense and provision expense for expected credit losses		1,416			1,216
Share-based compensation expense		22,604			13,295
(Gain) loss on investments		(1,481	)		646
(Gain) on changes in fair value of deferred and contingent consideration		(6,947	)		(9,493	)
(Gain) on derivative instruments and warrants		(10,668	)		(69	)
(Gain), net of losses, on loan receivables		—			(431	)
Loss on inventory write-offs		2,926			1,214
Impairment loss		290,949			1,194
Change in deferred taxes		(40,570	)		(10,680	)
Accretion of discount and deferred financing costs on debt arrangements		10,376			3,429
Loss on debt extinguishment		10,342			—
Foreign currency loss		777			275
Acquisition termination charges settled in equity		—			1,279
(Gains) net of losses, on other adjustments to net income		(1,678	)		130
Settlement gain		(810	)		—
Loss on divestiture		1,149			—
Changes in operating assets and liabilities:
Accounts receivable		(14,102	)		(3,977	)
Inventory		(20,467	)		(13,370	)
Other assets		(3,218	)		349
Accounts payable and other accrued expenses		9,790			7,981
Operating lease liabilities		(11,958	)		(8,234	)
Other current liabilities		(91	)		(83	)
Income tax payable		(12,043	)		12,928
NET CASH USED IN OPERATING ACTIVITIES		(23,166	)		(27,578	)
CASH FLOWS FROM INVESTING ACTIVITIES:						****
Purchases of property and equipment		(76,539	)		(71,019	)
Purchases of intangibles		(2,666	)		(1,483	)
Proceeds from sale-leaseback transactions and tenant improvement allowances		25,485			39,348
Payment of acquisition consideration, net of cash acquired		(21,883	)		(16,327	)
Proceeds from divestiture, net of cash transferred		69			—
Receipts from collections of loans and advances		2,000			—
Loans and advances for entities to be acquired		(26,292	)		(5,865	)
NET CASH USED IN INVESTING ACTIVITIES		(99,826	)		(55,346	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from January offering		124,105			—
Proceeds from issuance of long-term debt		387,000			100,000
Payment of debt, financing issuance costs and<br>non-extending lender fees		(6,461	)		(4,260	)
Payment of debt prepayment and debt extinguishment costs		(16,202	)		—
Acquisition of non-controlling Interests		—			(203	)
Proceeds from exercise of stock options, warrants and sell-to-cover shares		18,443			3,476
Payments for taxes related to net share settlements of restricted stock units		(143	)		(2,819	)
Proceeds from<br>At-The-Market offering		—			3,521
Distributions to non-controlling interest redeemable unit<br>holders		(66,183	)		(16,372	)
Repayment of debt		(200,000	)		(3,922	)
Proceeds from financing lease transactions		—			11,754
Principal payments on finance lease obligations		(3,179	)		(710	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		237,380			90,465
Effect of foreign currency exchange rate changes on cash		(365	)		(933	)
Net increase in cash and cash equivalents		114,023			6,608
Cash and cash equivalents and restricted cash, beginning of period		140,774			53,009
Cash and cash equivalents, end of period		252,838			57,689
Restricted cash, end of period		1,959			1,928
Cash and cash equivalents and restricted cash, end of period	$	254,797	****	$	59,617	****

Cresco Labs Inc.

Unaudited Condensed Interim Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2021 and 2020

(In thousands of United States Dollars)

	Nine Months EndedSeptember 30,
	2021		2020
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD:
Income tax, net	$	70,010	$	11,789
Interest		37,508		19,711
NON-CASH INVESTING AND FINANCINGTRANSACTIONS:
Other share issuances	$	273,158	$	434,618
Non-cash consideration for business combination		46,641		—
Non-controlling interests redeemed for equity		10,563		6,536
Increase to net lease liability		20,611		47,643
Liability incurred to purchase property and equipment		5,536		3,508
Cashless exercise of stock options and warrants		951		1,597
Unpaid declared distributions to non-controlling interest<br>redeemable unit holders		6,277		—
Receivables due from financing lease transactions		—		2,916
Liability incurred for debt, financing issuance costs, and<br>non-extending lender fees		—		137
Liability incurred in accordance with tax receivable agreement		1,522
Issuance of shares for non-solicitation intangible<br>asset		3,000		—

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

NOTE 1. NATURE OF OPERATIONS

Cresco Labs Inc. (“Cresco Labs” or the “Company”), formerly known as Randsburg International Gold Corp. 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 some of the most recognized and trusted national brands including Cresco^™^, Cresco Reserve^™^, High Supply^™^, Mindy’s Edibles^™^, Good News^™^, Remedi^™^, Wonder Wellness Co.^™^ and FloraCal Farms^®^. The Company operates in and/ or has ownership interests in Illinois, Pennsylvania, Ohio, California, Maryland, Arizona, New York, Massachusetts, Michigan and Florida, 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 Maryland Medical Marijuana Act, the Arizona Medical Marijuana Act, the New York Compassionate Care Act, the Massachusetts Cannabis Control Commission, the Michigan Medical Marihuana Act and the Florida Compassionate Medical Cannabis 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 Subordinate Voting Shares (“SVS”) and create the classes of Proportionate Voting Shares (“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 Pre-Combination LLC Agreement. The Pre-Combination LLC Agreement was further amended and restated in connection with the completion of the Transaction.

On December 3, 2018, the Company began trading on the Canadian Securities Exchange under the ticker symbol “CL.” On March 6, 2019, Cresco Labs’ shares were approved to be quoted on the Over-the-Counter Market and is traded under the ticker symbol “CRLBF.” On August 13, 2019, the Company began trading its Euro-denominated shares on the Frankfurt Stock Exchange and is trading 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 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

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 (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. 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. 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

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

September 30, 2021 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 equity method investments; loans measured at fair value; and certain investments, derivative instruments, 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. 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 (expense) income, net in the Unaudited Condensed Interim Consolidated Statements of Operations.

Assets and liabilities of foreign operations having a functional currency other than the U.S. dollar 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.

(d)	Significant Accounting Policies

The basis of consolidation as described in Note 2 of the Company’s audited annual consolidated financial statements for the year ended December 31, 2020 have been updated based on percentage of ownership changes as noted below.

i.	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 the power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to use its power to affect its returns. The following are Cresco Labs’ wholly owned or effectively controlled subsidiaries and entities over which the Company has control as of September 30, 2021.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

Entity	Location	Purpose	Percentage Held
Cresco Labs Inc.	British Columbia, Canada	Parent Company
Cresco U.S. Corp.	Illinois	Manager of Cresco Labs, LLC		100	%
Cresco Labs, LLC	Illinois	Operating Entity		56	%
Cresco Labs Notes Issuer, LLC	Illinois	Holding Company		100	%
Gloucester Street Capital, LLC	New York	Holding Company		100	%
Valley Agriceuticals, LLC	New York	Operating Entity		100	%
MedMar Inc.	Illinois	Holding Company		100	%
MedMar Lakeview, LLC (Sunnyside^®^ -<br>Lakeview and Sunnyside^®^ — River North)	Illinois	Dispensary		88	%
MedMar Rockford, LLC (Sunnyside^®^ -<br>Rockford and Sunnyside^®^ — South Beloit)	Illinois	Dispensary		75	%
CMA Holdings, LLC	Illinois	Holding Company		100	%
Cultivate Licensing LLC	Massachusetts	Cultivation, Production and Dispensary Facility		100	%
BL Real Estate, LLC	Massachusetts	Holding Company		100	%
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	%
RPE Inc. (Continuum)	California	Distribution		100	%
FloraCal	California	Cultivation		100	%
Cub City, LLC	California	Cultivation		100	%
CRHC Holdings Corp.	Ontario, Canada	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 Labs Michigan, LLC (a)	Michigan	Cultivation and Production Facility		85	%
(a) Cresco Labs Michigan, LLC is 85% owned by related parties<br>within management of the Company.
Entity	Location	Purpose	Percentage Held
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	%
Cresco Labs Logan, LLC	Illinois	Cultivation and Production Facility		100	%
Cresco Labs PA, LLC	Pennsylvania; Registered: 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<br>(Sunnyside^®^—Buffalo Grove and Sunnyside^®^ — Naperville)	Illinois	Dispensary		100	%
Cresco Labs Phoenix Farms, LLC	Illinois	Holding Company		100	%
Phoenix Farms of Illinois, LLC<br>(Sunnyside^®^<br> <br>— Champaign and Sunnyside^®^ — Danville)	Illinois	Dispensary		100	%
JDC Elmwood, LLC	Illinois	Holding Company		100	%
FloraMedex, LLC (Sunnyside^®^—Elmwood<br>Park and Sunnyside^®^ - Schaumburg)	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 Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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 income (loss) attributable to NCI is shown as a component of Net (loss) income in the Unaudited Condensed Interim Consolidated Statements of Operations and in the Unaudited Condensed Interim Consolidated Statement of Comprehensive (Loss) Income. 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. 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, restricted stock units (“RSUs”) issued and deferred consideration. 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.

Potentially dilutive securities were excluded in the calculation of diluted EPS as their impact would have been anti-dilutive for the periods presented. Potentially dilutive shares 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)	2021		2020		2021		2020
Redeemable units		111,216		—		116,824		137,061
Options		11,921		—		13,839		7,945
Warrants		4,796		2,635		4,106		4,264
RSUs		726		—		814		4
Total potentially dilutive shares	****	128,659	****	2,635	****	135,583	****	149,274

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(f)	Recasts and Adjustments

Prior period amounts included throughout the unaudited condensed interim consolidated financial statements have been recast and adjusted to update for historical changes necessary to present the unaudited condensed interim consolidated financial statements in accordance with U.S. GAAP.

(g)	Recently Adopted Accounting Pronouncements

The Company does not have any recently adopted accounting pronouncements during the three and nine months ended September 30, 2021.

(h)	Recently Issued Accounting Standards

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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.

In May 2021, the FASB issued 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 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. We do not expect the adoption of this guidance will have a material impact on the Company’s unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

NOTE 3. INVENTORY

As of September 30, 2021 and December 31, 2020, inventory was comprised primarily of cannabis and cannabis-related products.

Inventory consisted of the following:

($ in thousands)	September 30,<br>2021		December 31,<br>2020
Raw materials	$	37,309	$	23,203
Raw materials—non-cannabis		23,002		15,288
Work-in-process		32,117		7,530
Finished goods		39,101		21,162
Total Inventory	$	131,529	$	67,183

The Company wrote off $1.5 million and $1.7 million of inventory during the three and nine months ended September 30, 2021, respectively, and $1.1 million during the three and nine months ended September 30, 2020.

During the three and nine months ended September 30, 2021, the Company recorded inventory reserve provisions of $0.7 million and $1.2 million, respectively. During the three and nine months ended September 30, 2020, the Company recorded inventory reserve provisions of $0.1 million and $1.2 million, respectively.

NOTE 4. PROPERTY AND EQUIPMENT

As of September 30, 2021 and December 31, 2020, Property and equipment consisted of the following:

($ in thousands)	Land andBuildings			MachineryandEquipment			FurnitureandFixtures			LeaseholdImprovements			Website,Computer<br>EquipmentandSoftware			Vehicles			ConstructionIn Progress			Total
Cost
Balance as of January 1, 2021	$	96,526		$	23,206		$	17,636		$	88,369		$	5,772		$	1,946		$	19,197		$	252,652
Additions		4,937			4,782			3,215			8,037			1,399			915			54,155			77,440
Transfers		3,493			3,110			3,247			37,283			362			66			(47,561	)		—
Disposals		—			(38	)		(152	)		—			(13	)		(30	)		—			(233
Additions from acquisition		37,475			5,251			421			9,360			108			377			4,412			57,404
Sale of 180 Smoke		—			(92	)		(255	)		(811	)		(10	)		—			—			(1,168
Effect of foreign exchange and other adjustments		27			(157	)		(12	)		(45	)		—			(22	)		25			(184
As of September 30, 2021	$	142,458	****	$	36,062	****	$	24,100	****	$	142,193	****	$	7,618	****	$	3,252	****	$	30,228	****	$	385,911
Accumulated depreciation
Balance as of January 1, 2021	$	(2,033	)	$	(3,235	)	$	(3,199	)	$	(12,882	)	$	(2,006	)	$	(493	)	$	—			(23,848)
Depreciation		(3,905	)		(2,350	)		(3,064	)		(7,188	)		(1,364	)		(441	)		—			(18,312
Disposals		—			23			90			—			7			19			—			139
Sale of 180 Smoke		—			51			55			297			6			—			—			409
Adjustments	****	—	****		88		****	—	****	****	—	****	****	—	****	****	20	****	****	—	****	****	108
As of September 30, 2021	$	(5,938	)	$	(5,423	)	$	(6,118	)	$	(19,773	)	$	(3,357	)	$	(895	)	$	—	****	****	(41,504)
Net book value
As of December 31, 2020	$	94,493	****	$	19,971	****	$	14,437	****	$	75,487	****	$	3,766	****	$	1,453	****	$	19,197	****	$	228,804
As of September 30, 2021	$	136,520	****	$	30,639	****	$	17,982	****	$	122,420	****	$	4,261	****	$	2,357	****	$	30,228	****	$	344,407

All values are in US Dollars.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

As of September 30, 2021 and December 31, 2020, 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.

Depreciation of $7.1 million and $4.5 million was incurred during the three months ended September 30, 2021 and 2020, respectively, of which $1.6 million and $1.2 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory.

Depreciation of $18.3 million and $12.4 million was incurred during the nine months ended September 30, 2021 and 2020, respectively, of which $4.6 million and $3.1 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory.

As of September 30, 2021, ending inventory includes $6.3 million of capitalized depreciation. For the three months ended September 30, 2021 and 2020, $4.1 million and $3.5 million, respectively, of depreciation was recorded to Cost of goods sold, which includes $2.7 million and $2.2 million, respectively, related to depreciation capitalized to inventory in prior quarters. For the nine months ended September 30, 2021 and 2020, $11.1 million and $7.8 million, respectively, of depreciation was recorded to Cost of goods sold, which includes $3.6 million and $1.9 million, respectively, related to depreciation capitalized to inventory in prior years.

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 less than 12 months to 20 Years. Certain leases include renewal options ranging from one year to 35 years. The Company is reasonably certain to exercise renewal options ranging from less than one 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 nine months ended September 30, 2021, the Company recognized 1 new operating lease through the acquisition of Verdant Creations, LLC (“Verdant”), 17 new operating and finance leases through the acquisition of Bluma Wellness, Inc. (“Bluma”), and 2 new operating leases through the acquisition of Cultivate Licensing LLC and BL Real Estate LLC (collectively “Cultivate”). See Note 10 for additional details on these transactions. During March 2021, the Company’s right-of-use (“ROU”) assets and lease liabilities were reduced due to the derecognition of 26 operating leases in connection with the sale of the 180 Smoke business (“180 Smoke”).

NOTE 6. INVESTMENTS

The following is a detailed discussion of the Company’s types of investments held:

(a)	Fair Value Investments

The Company has investments in four entities: 420 Capital Management, LLC (“420 Capital”), a cannabis investment company; Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company; IM Cannabis Corp. (“IMC”), a pharmaceutical manufacturer that specializes in cannabis; and OLD PAL LLC (“Old Pal”), a cannabis operator/licensor.

Upon the acquisition of CannaRoyalty Corp. (“Origin House”) on January 8, 2020, the Company obtained a 1.3% ownership stake in Fleurish Cannabis Inc. (“Fleurish”) for a fair value of $0.1 million as of the acquisition date. During the second quarter of 2021, the Company determined that the Fleurish equity shares had no value due to the company’s continuing declining financial health. As a result, during the second quarter of 2021, the Company fully impaired the investment in Fleurish.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

Upon the acquisition of Bluma on the close of business April 14, 2021, the Company obtained a 13.3% ownership stake in Aloha Holdings of Illinois (“Aloha”), an entity applying for a license to open a cannabis dispensary in Illinois, for a fair value of $0.1 million, and 0.8% ownership stake in Old Pal for a fair value of $0.6 million. See Note 16 for additional details. During the three months ended September 30, 2021, the Company fully impaired the investment in Aloha due to Aloha having an unsuccessful license application in Illinois. 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. The Fleurish and Aloha investments were classified as equity securities held at fair value without readily determinable values prior to being fully impaired as of June 30, 2021 and September 30, 2021, respectively.

The following is a summary of the investments held at fair value as of September 30, 2021 and December 31, 2020:

($ in thousands)	September 30,<br>2021		December 31,<br>2020
420 Capital	$	68	$	68
Lighthouse		781		1,049
Fleurish		—		51
Old Pal		592		—
IMC		4,997		—
Total Investments	$	6,438	$	1,168

The Company recorded a mark-to-market loss of $2.9 million and a gain of $0.1 million for the three months ended September 30, 2021 and 2020, respectively, and a mark-to-market loss of $6.8 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

(b)	Equity Method Investment

As part of the Origin House acquisition, the Company acquired an investment in Trichome Financial Corp. (“Trichome”), a lending entity that focuses its investments on cannabis and cannabis-related companies. At the acquisition date, the fair value of the Trichome investment was $4.3 million. The Company’s ownership stake in Trichome upon acquisition and as of December 31, 2020 was approximately 23.0%. During March 2021, the Company derecognized the Trichome equity method investment as part of an ownership conversion to shares in IMC. The Company recognized a gain on conversion of $9.3 million in Other income (expense), net as the IMC investment exceeded the $2.1 million carrying value of Trichome on the date of conversion.

The following is a summary of the equity method investment held as of September 30, 2021 and December 31, 2020:

($ in thousands)	September 30,2021		December 31,2020
Trichome	$	—	$	3,192
Total Equity method investment	$	—	$	3,192

The Company recorded no gain or loss on investment for the three months ended September 30, 2021 and a loss on investment of $0.1 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, the Company recorded a loss on investment of $1.2 million and $0.3 million, respectively. No distributions were made by the investee to the Company related to investments for any of the respective periods.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

NOTE 7.	INTANGIBLE ASSETS AND GOODWILL

The following is a reconciliation of the balances of intangible assets and goodwill from the beginning balances at December 31, 2020 to the ending balances on September 30, 2021:

($ in thousands)	CustomerRelation-<br>ships			TradeNames			PermitApplication<br>Costs			Licenses		OtherIntangibles<br>(a)			Goodwill			Total
Cost
Balance at January 1, 2021	$	70,529		$	39,700		$	8,752		$	89,347	$	6,390		$	450,569		$	665,287
Additions		—			—			2,659			—		3,003			—			5,662
Additions from acquisitions		21,670			1,400			4			147,560		800			145,855			317,289
Impairment		(62,900	)		(39,000	)		—			—		(3,784	)		(200,606	)		(306,290	)
Measurement period adjustments		—			—			—			—		—			60			60
Disposals		—			—						—		(476	)		—			(476	)
Balance at September 30, 2021	$	29,299	****	$	2,100	****	$	11,415	****	$	236,907	$	5,933	****	$	395,878	****	$	681,532	****
Accumulated amortization
Balance at January 1, 2021	$	(5,129	)	$	(3,970	)	$	(7,118	)	$	—	$	(2,960	)	$	—		$	(19,177	)
Amortization		1,901			3,743			(3,703	)		—		1,033			—			2,974
Balance at September 30, 2021	$	(3,228	)	$	(227	)	$	(10,821	)	$	—	$	(1,927	)	$	—	****	$	(16,203	)
Net book value
December 31, 2020	$	65,400	****	$	35,730	****	$	1,634	****	$	89,347	$	3,430	****	$	450,569	****	$	646,110	****
September 30, 2021	$	26,071	****	$	1,873	****	$	594	****	$	236,907	$	4,006	****	$	395,878	****	$	665,329	****
(a)	Other Intangibles includes market-related intangibles, non-compete<br>agreements, non-solicitation agreements and related amortization.
---	---

Amortization of $4.2 million and $12.6 million was recorded for the three and nine months ended September 30, 2021, respectively, of which $3.6 million and $10.7 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory. During the three and nine months ended September 30, 2021, the Company recorded an adjustment to accumulated amortization of $15.6 million as part of the impairment write-down of the trade names and customer relationship intangibles.

Amortization of $3.3 million and $10.7 million was recorded for the three and nine months ended September 30, 2020, respectively, of which $2.6 million and $8.7 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory.

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.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The following table outlines the estimated annual amortization expense related to intangible assets as of September 30, 2021:

( in thousands)
2021	2,478
2022	7,768
2023	4,358
2024	3,929
2025	4,002
Thereafter	9,219
Total estimated amortization	31,754

All values are in US Dollars.

As of September 30, 2021, ending inventory includes $0.9 million of capitalized amortization. For the three months ended September 30, 2021 and 2020, $0.5 million and $0.8 million, respectively, of amortization expense was recorded to Cost of goods sold, which includes $0.4 million and $0.6 million, respectively, related to amortization capitalized to inventory in prior quarters. For the nine months ended September 30, 2021 and 2020, $1.9 million and $1.9 million, respectively, of amortization expense was recorded to Cost of goods sold, which includes $0.9 million and $0.7 million, respectively, related to amortization capitalized to inventory in prior years.

During the nine months ended September 30, 2021, license intangible assets of $147.6 million were acquired from business combinations and are classified as indefinite-lived intangible assets as the Company cannot continue as a going concern without such licenses. See Note 10 for additional details.

During the nine months ended September 30, 2021, a non-solicitation and cooperation agreement intangible asset of $3.0 million was recognized from a settlement agreement, and is amortized over a period of twenty-four months. Refer to Note 15 for additional details.

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.

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.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

During the nine months ended September 30, 2021 and 2020, 43 thousand and 93 thousand PVS, respectively, were exchanged for 8.5 million and 18.7 million SVS, respectively, at a rate of 1 PVS for 200 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 2,000 votes in respect of each MVS held.

iv.	Unlimited Number of Special Subordinate Voting Shares (“SSVS”) ****

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.

(b)	Issued and Outstanding

As of September 30, 2021 and 2020, issued and outstanding shares and units consisted of the following:

(In thousands)	RedeemableUnits			SubordinateVoting<br>Shares(SVS)		ProportionateVoting Shares(PVS)*			Super VotingShares(MVS)		SpecialSubordinate<br>Voting Shares(SSVS)**		Shares to beIssued orCanceled
Beginning balance, January 1, 2021		126,338			194,086		29,311			500		1		145
Options and warrants exercised		—			2,193		—			—		—		3
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		—			73		—			—		—		75
Share issuances		—			11,469		—			—		—		—
Ending balance, September 30, 2021	****	110,841	****	****	253,131	****	20,777	****	****	500	****	1	****	223
*	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)
---	---

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(In thousands)	RedeemableUnits			SubordinateVotingShares(SVS)		ProportionateVotingShares(PVS)*			SuperVotingShares(MVS)		Special<br>SubordinateVotingShares(SSVS)**		Shares to becancelled
Beginning balance, January 1, 2020		142,172			73,600		57,937			500		—		—
Options and warrants exercised		—			1,239		12			—		—		—
RSUs issued		—			1,415		—			—		—		—
Issuance of shares related to acquisitions		—			69,484		242			—		—		(155	)
Cresco LLC redemption		(11,224	)		11,224		—			—		—		—
PVS converted to SVS		—			18,671		(18,671	)		—		—		—
Issuances related to employee taxes on certain share-based payment arrangements		—			779		—			—		—		—
Share issuances		—			792		—			—		1		—
Ending balance, September 30, 2020	****	130,948	****	****	177,204	****	39,520	****	****	500	****	1	****	(155	)
*	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
---	---

In December 2019, the Company entered into an agreement with Canaccord Genuity Corp (“Canaccord”) to sell up to C$55.0 million SVS at an at-the-market price. During the three and nine months ended September 30, 2020 the Company issued 0.7 million shares at a weighted average price of $4.72 per share and 0.8 million shares at a weighted average price of $4.70 per share. During the three and nine months ended September 30, 2020, gross proceeds were $3.2 million, offset by equity issuance costs of $0.2 million and $3.5 million, offset by equity issuance costs of $0.2 million, respectively. The Company recognized gains of $0.9 million in equity during the three and nine months ended September 30, 2020 related to share issuances for shares withheld for employee taxes on certain share-based payment arrangements as a result of the change in share price between employee exercise and sale of shares. No shares were issued during the three and nine months ended September 30, 2021 under this agreement. 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. This agreement replaced the December 2019 agreement and related fees of $0.3 million were reclassified from share capital to Other expense (income), net.

During the nine months ended September 30, 2020, the Company issued 44 thousand SVS, valued at $0.2 million, and 1 thousand SSVS (as-converted), valued at $3 thousand.

(ii)	Issuance of Shares - 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.

(iii)	Issuance of Shares - 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. See Note 15 for additional information about the arrangement.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(iv)	Issuance of Shares - Verdant

In February 2021, in conjunction with the acquisition of Verdant, the Company issued 0.1 million SVS valued at $2.0 million.

(v)	Issuance of Shares – Bluma

In May 2021, in conjunction with the acquisition of Bluma, the Company issued 15.1 million SVS and 0.8 million replacement shares valued at $183.3 million and $10.0 million, respectively.

(vi)	Issuance of Shares – Cultivate

In September 2021, in conjunction with the acquisition of Cultivate, the Company issued 4.8 million SVS valued at $46.6 million.

(vii)	Issuance of Shares - Origin House

In January 2020, in conjunction with the acquisition of Origin House, the Company issued 66.5 million SVS, valued at $396.6 million.

During the nine months ended September 30, 2020, the Company issued 1.1 million SVS, valued at $3.7 million, to satisfy certain obligations related to deferred consideration related to legacy acquisitions by Origin House.

In May 2020, the Company issued 0.3 million SVS, valued at $1.0 million, in accordance with the post combination remuneration agreement associated with Origin House’s previous acquisition of FloraCal.

In May 2020, the Company also issued 0.8 million SVS, valued at $2.2 million, to settle the deferred consideration associated with Origin House’s previous acquisition of Cub City, LLC.

During the three months ended September 30, 2020, the Company cancelled 0.2 million SVS in connection with the settlement of a contingent liability related to the Origin House acquisition.

(viii)	Issuance of Shares - Valley Agriceuticals, LLC (“Valley Ag”)

During the nine months ended September 30, 2020, the Company issued 0.3 million PVS (as-converted), valued at $1.2 million to satisfy certain obligations related to interest on deferred consideration.

In May 2020, the Company issued 0.5 million SVS, valued at $1.5 million to satisfy a portion of the Company’s make-whole liability. See notes 10 and 16 for further details.

(ix)	Issuance of Shares – MedMar Lakeview

In April 2020, the Company issued 0.1 million SVS, valued at $0.4 million, to satisfy certain obligations related to contingent consideration.

In August 2020, the Company issued 19 thousand SVS, valued at $0.1 million, to satisfy certain obligations related to contingent consideration

(x)	Issuance of Shares – Tryke Companies, LLC

In April 2020, the Company issued 0.3 million SVS, valued at $1.3 million, in accordance with the termination agreement which canceled the previously announced purchase agreement to acquire certain assets of and an interest in Tryke Companies, LLC, and certain subsidiaries and affiliates.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(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, 2021 and 2020, is as follows:

(In thousands)	Number ofwarrants*			Weighted-averageexercise 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)
---	---
(In thousands)	Number ofwarrants*			Weighted-averageexercise price
---	---	---	---	---	---
Balance as of January 1, 2020		6,454		$	7.73
Exercised		(12	)		4.24
Balance as of September 30, 2020	****	6,442	****	$	7.73
*	PVS presented on an “as-converted” basis to SVS (1-to-200)
---	---

During the three and nine months ended September 30, 2021, the Company recorded $42 thousand and $5.1 million, of warrant exercises into share capital, respectively. The 9.9 million outstanding warrants are from issuances to underwriters associated with the September 2019 financing and sellers from the Valley Ag acquisition. Of the total outstanding warrants, 0.6 million are classified as non-current liabilities, 3.7 million are classified as current liabilities, and 5.6 million are classified as equity. See Note 16 for information about valuation of liability-classified warrants.

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. During 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 nine months ended September 30, 2021, 0.5 million equity-classified warrants associated with the Valley Ag acquisition were exercised for $0.7 million, resulting in an increase to share capital of $2.2 million. During the three months ended September 30, 2021, 6 thousand warrants associated with the Valley Ag acquisition were exercised. During the nine months ended September 30, 2020, 12 thousand equity-classified warrants associated with the Valley Ag acquisition were exercised for $0.1 million, resulting in an increase to share capital of $0.1 million.

(d)	Distribution to Non-controlling Interest Holders

As of September 30, 2021 and December 31, 2020, the Company accrued for tax-related distributions to 2021 and 2020 unit holders of Cresco Labs, LLC and other minority interest holders of $9.9 million and $64.0 million, respectively. 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 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, respectively. Similarly, the Company paid required tax distribution amounts to 2020 and 2019 unit holders of Cresco Labs, LLC and other minority interest holders of $16.7 million, during the three and nine months ended September 30, 2020, respectively.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(e)	Changes in Ownership and Non-controlling Interests

During the three and nine 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. This redemption resulted in a decrease of 0.4% and 6.2%, respectively, in non-controlling interest in Cresco Labs, LLC.

During the three and nine months ended September 30, 2020, redemptions of 7.7 million and 11.2 million redeemable units occurred, respectively, which were converted into an equivalent number of SVS. This redemption resulted in a decrease of 3.0% and 4.4%, respectively, in non-controlling interest in Cresco Labs, LLC.

As of and for the nine months ended September 30, 2021, non-controlling interest included the following amounts before intercompany eliminations:

($ in thousands)	TSCCresco,LLC			MedMarInc.<br>(Lakeview)			MedMarInc.<br>(Rockford)			CrescoLabs<br>Ohio,LLC			SLOCultivationInc.			Otherentitiesincluding<br>Cresco <br>Labs, LLC^1^			Eliminations			Total
Non-current assets	$	5,167		$	33,576		$	22,710		$	16,066		$	25,530		$	1,017,841		$	—		$	1,120,890
Current assets		47,556			61,299			113,786			56,942			92,184			332,509			(255,228	)		449,048
Non-current liabilities		—			(11,344	)		(3,202	)		(12,249	)		(12,366	)		(609,259	)		—			(648,420	)
Current liabilities		(34,965	)		(67,522	)		(82,043	)		(66,729	)		(138,906	)		(83,899	)		264,829			(209,235	)
Net assets (liabilities)	$	17,758		$	16,009		$	51,251		$	(5,970	)	$	(33,558	)	$	657,192		$	9,601		$	712,283
Net assets (liabilities) attributable to NCI	$	2,969		$	3,583		$	3,625		$	13		$	(7,570	)	$	39,288	^3^	$	—		$	41,908
Revenue	$	15,240		$	35,988		$	62,472		$	16,220		$	17,801		$	485,933		$	(29,759	)	$	603,895
Gross profit		9,874			23,323			31,631			6,188			(3,313	)		238,927			(10,305	)		296,325
Net income (loss)	$	8,964		$	8,903		$	18,924		$	(5,065	)	$	(11,382	)	$	(305,267	)	$	—		$	(284,923	)
Net income (loss) allocated to NCI	$	2,241		$	1,104		$	4,731		$	(51	)	$	(2,276	)	$	14,193		$	—		$	19,942
NCI percentage as of September 30, 2021		25.0	% ^1^		12.4	% ^2^		25.0	% ^2^		1.0	% ^1^		20.0	% ^1^		43.9	%
^1^	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 43.9% NCI related to<br>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
---	---

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

As of and for the twelve months ended December 31, 2020, non-controlling interest included the following amounts before intercompany eliminations:

($ in thousands)	TSCCresco,LLC			MedMarInc.(Lakeview)			MedMarInc.<br>(Rockford)			CrescoLabs<br>Ohio, LLC			SLOCultivationInc.			OtherentitiesincludingCrescoLabs, LLC^1^			Eliminations			Total
Non-current assets	$	4,064		$	32,397		$	20,957		$	13,626		$	22,744		$	889,341		$	—		$	983,129
Current assets		31,099			26,022			38,178			42,934			80,219			184,871			(153,856	)		249,467
Non-current liabilities		—			(11,755	)		(2,188	)		(12,328	)		(10,666	)		(367,481	)		—			(404,418	)
Current liabilities		(24,852	)		(32,922	)		(28,248	)		(46,953	)		(118,870	)		(164,422	)		163,421			(252,846	)
Net assets (liabilities)	$	10,311		$	13,742		$	28,699		$	(2,721	)	$	(26,573	)	$	542,309		$	9,565		$	575,332
Net assets (liabilities) attributable to NCI	$	2,521		$	3,308		$	4,334		$	64		$	(5,293	)	$	97,161	^3^	$	—		$	102,095
NCI percentage as of December 31, 2020		25.0	% ^1^		12.4	% ^2^		25.0	% ^2^		1.0	% ^1^		20.0	% ^1^		50.1	%
^1^	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 50.1% NCI related to<br>NCI for Cresco Labs Inc. as of December 31, 2020.
---	---
^2^	The NCI percentage reflects the NCI that exists at Cresco Labs Inc.
---	---
^3^	Includes the effect of LLC unit redemptions and other adjustments.
---	---

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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, 2021, consisted of the following:

(Shares in thousands)	Number ofstock optionsoutstanding			Weighted-average exerciseprice		Weighted-averageremainingcontractual life(years)		Aggregateintrinsic value
Outstanding – January 1, 2021		22,507		$	3.96		8.1	$	133,604
Granted		4,925			11.74
Exercised		(1,680	)		1.76
Forfeited		(1,118	)		7.91
Outstanding—September 30, 2021	****	24,634	****	****	5.42	****	7.8	****	108,632
Exercisable—September 30, 2021	****	12,951	****	$	3.56	****	7.2	$	75,710

During the three months ended September 30, 2021 and 2020, options were exercised for gross proceeds of $0.7 million and $0.8 million, respectively. During the nine months ended September 30, 2021 and 2020, options were exercised for gross proceeds of $2.4 million and $1.3 million, respectively.

The following table summarizes the weighted-average grant date fair value and intrinsic value of options exercised for the nine months ended September 30, 2021:

($ in thousands, except per share data)	Nine Months Ended<br>September 30, 2021
Weighted-average grant date fair value (per share) of stock option units granted	$	7.66
Intrinsic value of stock option units exercised, using market price at exercise date	$	15,902

Weighted-average share price on dates on which options were exercised for the three and nine months ended September 30, 2021 was $11.04 and $11.23 per option, respectively.

The fair value of stock options granted under the Plan for the nine months ended September 30, 2021, was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:

	September 30, 2021
Risk-free annual interest rate	0.4% - 1.1%
Expected annual dividend yield	—
Expected stock price volatility	67.0% to 80.4%
Expected life of stock options	5 to 7 years
Forfeiture rate	7.5% - 24.9%
Fair value at grant date	$6.04 to $8.78
Stock price at grant date	$9.41 to $13.10
Exercise price range	$9.41 to $13.10

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded companies. 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 number of RSUs granted had the ability to settle in cash at the employee’s election. These awards were determined to be liability-classified awards and are required to be marked-to-market as of the end of each reporting period through issuance. As of September 30, 2021 and December 31, 2020, the Company recorded $0.1 million and $22 thousand, respectively, in Deferred consideration, contingent consideration and other payables, short-term on the Unaudited Condensed Interim Consolidated Balance Sheets related to these awards.

A summary of outstanding RSUs as of September 30, 2021 is provided below:

(shares in thousands)	Number ofRSUs<br>outstanding			Weighted-average fairvalue
Outstanding - January 1, 2021		994		$	6.54
Bluma replacement awards granted		207			12.17
Granted		535			11.76
Vested and settled		(420	)		8.66
Forfeited		(112	)		7.79
Outstanding - September 30, 2021	****	1,204	****	$	9.05
Liability-classified as of September 30, 2021	****	10	****	$	9.41

Of the liability-classified awards above, 10 thousand awards have vested and are pending settlement as of September 30, 2021. The following table summarizes the total fair value of RSUs vested and settled for the nine months ended September 30, 2021:

($ in thousands)	Nine Months EndedSeptember 30, 2021
Total fair value of RSUs vested, using market price at vest date	$	4,625

Replacement Awards

During the second quarter of 2021, the Company granted 0.2 million replacement RSUs with a weighted-average fair value at grant date of $12.17 per share in connection with the Bluma acquisition. Upon closure of the acquisition, the Company accelerated the vesting of all replacement RSUs, recognizing $2.1 million in post combination expense. As of September 30, 2021, 0.2 million replacement shares related to the Bluma acquisition have been issued.

Replacement Shares

During the second quarter of 2021, the Company granted 0.8 million replacement shares to existing holders of vested and unissued Bluma RSUs. The Company recorded $0.2 million in share based compensation expense related to the change in fair value of the shares upon conversion. As of September 30, 2021, all replacement shares related to the Bluma acquisition have been issued.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

Subscription Award

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 awards are considered to be fully vested as of the grant date. The Company recognized $0.7 million in share based compensation expense and a corresponding increase in common stock as of the grant date.

Expense Attribution

The Company recorded compensation expense for option awards in the amount of $5.6 million and $2.7 million for three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021 and 2020, the Company expensed $5.0 million and $2.7 million, respectively, to Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory. The Company recorded compensation expense for option awards in the amount of $16.4 million and $11.0 million for nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the Company expensed $14.4 million and $10.7 million, respectively, to Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory. Unrecognized compensation expense as of September 30, 2021 for option awards is $27.6 million and will be recorded over the course of the next 4 years.

The Company recorded compensation expense for RSU awards in the amount of $1.1 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively, of which $1.1 million and $33 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory. The Company recorded compensation expense for RSU awards in the amount of $3.6 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively, of which $3.1 million and $0.1 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of goods sold and ending inventory. Unrecognized compensation expense as of September 30, 2021 is $4.7 million and will be recognized over the course of the next 3.3 years.

As of September 30, 2021 ending inventory includes $0.6 million of capitalized compensation expense related to both options and RSUs. For the three months ended September 30, 2021 and 2020, $0.7 million and $0.6 million, respectively, of compensation expense was recorded to Cost of goods sold, which includes $0.5 million and $0.6 million, respectively, related to compensation expense capitalized to inventory in prior quarters. For the nine months ended September 30, 2021 and 2020, $2.1 million and $2.2 million, respectively, of compensation expense was recorded to Cost of goods sold, which includes $0.2 million and $1.7 million, respectively, related to compensation expense related to RSUs capitalized to inventory in prior years.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

NOTE 10. ACQUISITIONS AND DISPOSITIONS

(a)	Business Combinations

The table below summarizes business combinations completed during the nine months ended September 30, 2021:

($ in thousands)	Verdant (i)			Bluma (ii)			Cultivate (iii)			Total
Total consideration
Common shares issued	$	2,000		$	183,262		$	46,643		$	231,905
Cash		1,500			—			—			1,500
Cashless exercise option on loan		10,000			—			—			10,000
Settlement of leases		2,150			—			—			2,150
Loan settlement		11,414			21,226			1,852			34,492
Warrants issued		—			18,415			—			18,415
Replacement RSU awards		—			10,048			—			10,048
Payment of acquisition-related transaction costs on behalf of the acquiree		—			3,373			1,001			4,374
Payment of 3rd-party debt on behalf of the<br>acquiree		—			—			20,125			20,125
Deferred consideration		—			1,806			—			1,806
Contingent consideration		—			—			29,642			29,642
Total consideration	$	27,064		$	238,130		$	99,263		$	364,457
Net identifiable assets (liabilities) acquired
Cash	$	1,360		$	1,623		$	2,938		$	5,921
Accounts Receivable		—			—			6,494		$	6,494
Inventory		1,519			19,244			24,862		$	45,625
Loan Receivables, ST		—			2,310			—			2,310
Other current assets		77			1,206			662			1,945
Property & equipment		996			26,152			30,256			57,404
Right-of-use<br>asset		127			13,709			1,304			15,140
Other non-current assets		47			—			—			47
Customer relationships		1,370			6,700			13,600			21,670
License		18,560			117,000			12,000			147,560
Trade name		—			—			1,400			1,400
Non-compete agreements		—			—			800			800
Investments		—			693			—			693
Total identifiable assets acquired	$	24,056		$	188,637		$	94,316		$	307,009
Short-term liabilities		(1,601	)		(3,558	)		(14,157	)		(19,316	)
Lease liability		(127	)		(13,685	)		(1,304	)		(15,116	)
Contract Liability - Loyalty Program		—			(456	)		—			(456	)
Deferred tax liability		(4,396	)		(37,237	)		(11,806	)		(53,439	)
Total identifiable liabilities acquired		(6,124	)		(54,936	)		(27,267	)		(88,327	)
Net identifiable assets acquired	$	17,932		$	133,701		$	67,049		$	218,682
Purchase price allocation
Net identifiable assets acquired		17,932			133,701			67,049			218,682
Goodwill		9,132			104,429			32,214			145,775
Total consideration	$	27,064		$	238,130		$	99,263		$	364,457

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(i)	Verdant

On February 16, 2021, the Company completed the acquisition of 100% of the membership interests of Verdant dispensaries in Cincinnati, Chillicothe, Newark and Marion, Ohio. As a result of this acquisition, the Company now holds additional licenses to distribute medical cannabis in the state of Ohio, bringing the Company’s dispensary presence in Ohio to five, the maximum allowed by the state. As of September 30, 2021, the Company has recorded estimates of the fair value of assets acquired and liabilities assumed. While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are intangibles, leases (including settlement of leases), and taxes. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. Balances are subject to change during the measurement period which will conclude at the earlier of the date the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date, learns that more information is not obtainable, or one year following the acquisition date.

Total consideration for the acquisition was $27.1 million, and consisted of 0.1 million SVS issued as of the acquisition date, valued at $2.0 million, cash payments of $1.5 million, settlement of cashless exercise option on loans receivable of $10.0 million, as stated in the unit purchase option agreement, settlement of a preexisting lease arrangement of $2.2 million, as a result of stated value exceeding fair value per third party valuation, and settlement of other preexisting loan relationships of $11.4 million.

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the Verdant acquisition had occurred as of January 1, 2021. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2021, or of the future operating results.

Total unaudited pro forma Revenue and Net loss for the combined company for the nine months ended September 30, 2021, was $606.6 million and $292.6 million, respectively.

Contributed Revenue and Net income from the Verdant acquisition was $7.8 million and $2.8 million, respectively, for the three months ended September 30, 2021. Contributed Revenue and Net income from the Verdant acquisition was $16.6 million and $4.6 million, respectively, for the nine months ended September 30, 2021.

(ii)	Bluma

On April 14, 2021, the Company completed the acquisition of 100% of the membership interests of Bluma, a vertically integrated operator in Florida. As a result of this acquisition, the Company now holds a license to cultivate, process, transport, and dispense medical cannabis in the state of Florida, bringing the Company’s dispensary presence in Florida to eight. As of September 30, 2021, the Company recorded preliminary estimates of the fair value of assets acquired and liabilities assumed. While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are intangibles, loans receivable, fixed assets, taxes, and inventory. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. Balances are subject to change during the measurement period which will conclude at the earlier of the date the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date, learns that more information is not obtainable, or one year following the acquisition date.

Total consideration for the acquisition was $238.1 million and consisted of 15.1 million SVS issued as of the acquisition date, valued at $183.3 million, cash payments of $3.4 million to pay for the sellers’ transaction fees, 4.7 million equity-classified warrants issued valued at $18.4 million, 0.8 million replacement shares valued at $10.0 million, deferred consideration of $1.8 million and settlement of preexisting loan relationships of $21.2 million. During the nine months ended September 30, 2021, the Company recorded $2.4 million of post combination share-based compensation expense related to warrants issued, replacement shares and replacement RSU awards.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the Bluma acquisition had occurred as of January 1, 2021. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2021, or of the future operating results.

Total unaudited pro forma Revenue and Net loss for the combined company for the nine months ended September 30, 2021, was $611.8 million and $305.6 million, respectively.

Contributed Revenue and Net loss from the Bluma acquisition was $9.1 million and $3.2 million, respectively, for the three months ended September 30, 2021. Contributed Revenue and Net loss from the Bluma acquisition was $16.8 million and $8.1 million, respectively, for the nine months ended September 30, 2021.

The Company recorded transaction costs of $1.5 million in connection with the Bluma acquisition as Selling, general, and administrative expenses in the Unaudited Condensed Interim Consolidated Statements of Operations for the nine months ended September 30, 2021.

During the three months ended September 30, 2021, the Company recorded measurement period adjustments related to replacement RSU awards, short term loan receivables and inventory, which resulted in a net reduction in goodwill of $0.1 million.

(iii)	Cultivate

On September 2, 2021, the Company announced that it had completed the acquisition of 100% of the membership interests of Cultivate. As a result of this acquisition, the Company now holds additional licenses to cultivate, process, transport, and dispense medical and adult-use cannabis in the state of Massachusetts, bringing the Company’s dispensary presence in Massachusetts to four. As of September 30, 2021, the Company recorded preliminary estimates of the fair value of assets acquired and liabilities assumed.

Balances are subject to change during the measurement period which will conclude at the earlier of the date the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date, learns that more information is not obtainable, or one year following the acquisition date. While all amounts remain subject to adjustments, the areas subject to the most significant potential adjustments are intangibles, consideration, accrued expenses, fixed assets, taxes, and inventory. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

Total consideration for the acquisition was $99.3 million and consisted of 4.8 million SVS issued as of the acquisition date, valued at $46.6 million, cash payments of $1.0 million to pay for the sellers’ transaction fees, contingent consideration of $29.6 million, settlement of preexisting loan relationships of $1.9 million and payment of the sellers’ third-party debt of $20.1 million.

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the Cultivate acquisition had occurred as of January 1, 2021. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2021, or of the future operating results.

Total unaudited pro forma Revenue and Net loss for the combined company for the nine months ended September 30, 2021, was $642.9 million and $287.2 million, respectively.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

Contributed Revenue and Net loss from the Cultivate acquisition was $6.8 million and $11.1 million, respectively, for the nine months ended September 30, 2021.

The Company recorded transaction costs of $1.6 million in connection with the Cultivate acquisition as Selling, general, and administrative expenses in the Unaudited Condensed Interim Consolidated Statements of Operations for the nine months ended September 30, 2021.

(b)	Short-term Deferred Consideration, Contingent Consideration and Other Payables

The following is a summary of deferred consideration, contingent consideration, and other payables balances as of September 30, 2021 and December 31, 2020, which are classified as short-term:

($ in thousands)	September 30,<br>2021		December 31,<br>2021
Valley Ag contingent consideration	$	18,652	$	19,093
Liability-classified equity awards		90		22
Cultivate contingent consideration		23,215	****	—
Total Deferred consideration, contingent consideration and other payables,short-term	$	41,957	$	19,115

During the three and nine months ended September 30, 2021, the Company recognized a mark-to-market gain of $8.6 million and $0.5 million, respectively, related to contingent consideration for its Valley Ag acquisition. As of September 30, 2021, the estimated liability of $18.7 million is based on the present value of potential payouts associated with market conditions and changes in the Company’s stock price.

During the nine months ended September 30, 2021, the Company reclassified $0.4 million from equity-classified awards to liability-classified equity awards as the Company elected to allow the option for cash settlement on certain RSUs upon vest. During the three months ended September 30, 2021, there were no reclassifications from equity-classified awards. During the three and nine months ended September 30, 2021, the company recorded an unrecognized nominal gain and a nominal loss, respectively, due to changes in the Company’s stock price. The Company settled $0.4 million of liability-classified awards with the issuance of 24.3 thousand SVS, valued at $0.3 million, and a cash payment of $0.1 million during the nine months ended September 30, 2021, resulting in an ending balance of $0.1 million as of September 30, 2021.

In connection with the Bluma acquisition, the Company recorded a deferred consideration liability valued at $1.8 million associated with acquisition-related transaction costs paid by the Company on behalf of the sellers. In May 2021, the Company settled $0.9 million of the obligation in cash. The remaining balance of $0.9 million was paid off in July 2021.

During the three and nine months ended September 30, 2021, the Company recorded contingent consideration of $29.6 million related to the acquisition of Cultivate. The former owners of Cultivate are entitled to an earnout of up to $68.0 million due to be paid within ten days after the receipt by the Company of its annual consolidated financial statements for the year ending December 31, 2021. The earnout is based on Cultivate’s adjusted EBITDA for the fiscal year ending December 31, 2021, pursuant to the provisions of the Cultivate purchase agreement. The fair value of the earnout payment is determined by risk-adjusted earnings projections using a Monte Carlo Simulation. As of September 30, 2021, the Company remeasured the fair value of the earnout payment, decreasing the value from $29.6 million as of September 2, 2021, to $23.2 million as of September 30, 2021. The decrease was recorded as Other income in the Unaudited Condensed Interim Consolidated Statements of Operations.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(c)	Long-term Deferred and Contingent Consideration

The following is a summary of long-term contingent consideration as of September 30, 2021 and December 31, 2020:

($ in thousands)	September 30,2021		December 31,2021
Valley Ag operating cash flows consideration	$	8,515	$	7,247
Total Long-term deferred and contingent consideration	$	8,515	$	7,247

During the three and nine months ended September 30, 2021, the Company recorded a $0.6 million and $1.3 million increase, respectively, to the present value of Valley Ag operating cash flows consideration due to changes in the Company’s incremental borrowing rate and other present value considerations. As of September 30, 2021, the estimated liability of $8.5 million is based on the present value of expected payments associated with future cash flows of the acquired business.

(d)	Dispositions

On March 30, 2021, the Company completed the divestiture of the 180 Smoke and related intercompany receivables to Spyder Cannabis Inc. and Plant-Based Investment Corp. for approximately $1.1 million, after certain adjustments. The sale resulted in a loss of $0.8 million for the nine months ended September 30, 2021, and is classified as a component of Other (expense) income, net. At the time of sale, the Company recognized an additional loss of $0.3 million for accumulated foreign currency translation loss previously included in Other comprehensive loss, which is included within Other (expense) income, net.

(e)	Pending Acquisitions

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

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

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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, 2021 and December 31, 2020:

($ in thousands)	September 30,<br>2021			December 31,<br>2020
Senior Loan, net of unamortized debt issuance costs	$	376,571		$	—
Amended Term Loan		—			186,442
Interest payable		5,172			3,657
Financing liabilities-leases		97,566			91,264
Total borrowings and interest payable	$	479,309		$	281,363
Less: Short-term borrowings and interest payable		(5,172	)		(15,071	)
Less: Current portion of financing liabilities-leases		(10,273	)		(10,853	)
Total Long-term notes and loans payable	$	463,864	****	$	255,439	****
(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 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 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. The Company capitalized $5.5 million and $0.4 million, respectively, of borrowing costs related to the Tranche A Commitment and Tranche B Commitment.

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”). As a result of the non-substantial debt modification of the existing Term Loan and the OCN Loan, $0.2 million in financing fees were expensed and $0.8 million of deferred financing fees were written off. 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. The Company capitalized $0.1 million and $11.1 million of borrowing costs related to the Non-Extending Lenders Commitment and the Extending and Increasing Lenders Commitment, respectively. Of the $11.2 million in deferred financing fees, $8.6 million was payable upon principal repayment of the Extending and Increasing Lenders Commitment and thus, was reflected within Other long-term liabilities.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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. Proceeds from the Senior Loan were used to retire the existing Amended Term Loan, fund capital expenditures, and pursue other targeted growth initiatives within the U.S. cannabis sector. As a result of the extinguishment of the Amended Term Loan, loss on debt extinguishment of $18.0 million was recognized in Other (expense) income, net, in the unaudited condensed interim consolidated statements of operations.

The Senior Loan accrues interest at a rate of 9.5% per annum, payable in cash biannually, and has a stated maturity of August 2026. 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 is not less than 2 to 1. As of September 30, 2021, the Company is in compliance with all of its 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.

(b)	Financing Liabilities

The Company recognized financing liabilities in relation to sale-leaseback transactions for which the incremental borrowing rates range from 11.2% to 17.5% with remaining terms between 8.3 and 18.8 years, consistent with the underlying lease liabilities. The interest expense associated with financing liabilities is disclosed in Note 19.

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, 2021 and 2020:

	Three Months Ended<br>September 30,				Nine Months EndedSeptember 30,
($ in thousands)	2021		2020		2021		2020
Wholesale	$	109,330	$	90,470	$	313,685	$	183,550
Dispensary		106,153		62,828		290,210		130,384
Total Revenue	$	215,483	$	153,298	$	603,895	$	313,934

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The Company generates revenue 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. The Company does not engage in long-term sales contracts.

(b)	Loyalty Programs

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 based on the estimated probability of point obligation incurred, which is calculated based on a standalone selling price adjusted for estimated breakage. Upon redemption, the loyalty program obligation is relieved, and the offset is recorded as revenue. As of September 30, 2021, there were 71.3 million points outstanding, with an approximate value of $0.9 million. The Company expects the outstanding loyalty points will be redeemed within one year.

NOTE 13. OTHER (EXPENSE) INCOME, NET

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

	Three Months Ended<br>September 30,						Nine Months EndedSeptember 30,
($ in thousands)	2021			2020			2021			2020
Unrealized gain (loss) on derivative liabilities - warrants	$	7,956		$	(2,946	)	$	10,672		$	172
Gain on derivative instruments		14,982			2,639			16,080			9,959
Gain (loss) on provision — loan receivable		(332	)		(307	)		(87	)		(420	)
Unrealized gain (loss) on investments held at fair value		(2,647	)		68			(6,587	)		(162	)
Loss on debt extinguishment		(17,987	)		—			(17,987	)		—
Gain on conversion of investment		—			(86	)		—			(86	)
Loss on foreign currency		(249	)		(232	)		(1,274	)		(216	)
Other loss-investments		—			(28	)		—			(148	)
Other income		12			538			1,303			1,075
Total Other (expense) income, net	$	1,735	****	$	(354	)	$	2,120	****	$	10,174	****

NOTE 14. RELATED PARTY TRANSACTIONS

(a)	Transactions with Key Management Personnel

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

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

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

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(b)	Related Parties – Debt

On August 12, 2021, the Company closed on a new Senior Loan agreement, the proceeds from which were used to retire the existing Amended Term Loan. Upon entering the new Senior Loan agreement, the Company has no borrowings with related parties. Prior to the closing of the new Senior loan, the Company had borrowings with related parties related to the Amended Term Loan. The balance of the Amended Term Loan as of September 30, 2021 is $nil as payments of $16.6 million were made in the third quarter to satisfy this debt. During the three months ended September 30, 2021 and 2020, the Company recorded interest expense related to borrowings with related parties of $0.2 million and $0.5 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded interest expense related to borrowings with related parties of $1.2 million and $1.3 million, respectively. As of September 30, 2021 and December 31, 2020, the Company had interest payable related to borrowings with related parties of $nil and $0.1 million, respectively. See Notes 11 and 19 for additional details.

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

(c)	Related Parties - Leases

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

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

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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

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

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

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

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

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, 2021, there were no pending or threatened lawsuits, except as disclosed below, 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.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

During the year ended December 31, 2020, a former executive of the Company commenced proceedings against the Company. On January 29, 2021, the Company commenced an action in the Supreme Court of British Columbia against various parties, including this former executive and a special purpose acquisition entity. On February 1, 2021, a binding settlement was reached and the terms were memorialized in an agreement as of March 1, 2021. The agreed-upon terms included a 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. As contemplated by the settlement, the Company discontinued the action on February 4, 2021 and a mutual release of claims resulted. At December 31, 2020, the Company recorded an estimated liability, based on certain assumptions impacting the value of the settlement and benefits to the Company, of $13.6 million for this settlement within Accounts payable and other accrued expenses, in accordance with ASC 450 Contingencies.

The payment of 1.3 million SVS was made during the first quarter of 2021. The settlement and payment resulted in an increase to share capital of $15.8 million, a non-solicitation and cooperation agreement intangible asset of $3.0 million to be amortized over two years, and litigation accrual adjustment of $0.8 million in selling, general and administrative expense to adjust the settlement expense from $13.6 million to $12.8 million. The fair value of the non-solicitation and cooperation agreement intangible asset was estimated using the with-or-without method. The with-and-without method estimates the value of an intangible asset by quantifying the loss of economic profits under a hypothetical condition where only the subject intangible does not exist and needs to be re-created. Projected revenues, operating expenses and cash flows are calculated in each “with” and “without” scenario and the difference in the cash flow is discounted to present value.

(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, 2021, 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, 2021 the Company had total commitments related to construction projects of $6.3 million.

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.

NOTE 16. FINANCIAL INSTRUMENTS AND FINANCIAL RISKMANAGEMENT

Financial Instruments

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

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

•	Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;<br>

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

•	Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either<br>directly or indirectly; and
•	Level 3 – Inputs for the asset or liability that are not based on observable market data.<br>
---	---

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

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

	September 30, 2021
($ in thousands)	AmortizedCost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	252,838	$	—	$	—	$	—		252,838
Restricted cash^1^		1,959		—		—		—		1,959
Accounts receivable, net		47,757		—		—		—		47,757
Loans receivable, short-term		1,365		—		—		1,178		2,543
Loans receivable, long-term		3,820		—		—		—		3,820
Investments^2^		—		4,997		781		660		6,438
Security deposits		3,893		—		—		—		3,893
Financial Liabilities:
Accounts payable	$	25,617	$	—	$	—	$	—	$	25,617
Accrued liabilities		69,185		—		—		—		69,185
Short-term borrowings		15,445		—		—		—		15,445
Current portion of lease liabilities		18,542		—		—		—		18,542
Deferred consideration, contingent consideration and other payables, short-term		—		89		—		41,803		41,892
Derivative liabilities, short-term		—		—		—		6,180		6,180
Derivative liabilities, long-term		—		—		—		983		983
Lease liabilities		105,347		—		—		—		105,347
Deferred consideration and contingent consideration, long-term		—		—		—		8,515		8,515
Long-term notes payable and loans payable		463,864		—		—		—		463,864
^1^	Restricted cash balances include various escrow accounts related to investments, acquisitions, facility<br>requirements and building improvements..
---	---
^2^	Investment balances in the amortized cost column represent equity method investments.
---	---

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

	December 31, 2020
($ in thousands)	AmortizedCost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	136,339	$	—	$	—	$	—	$	136,339
Restricted cash^1^		4,435		—		—		—		4,435
Accounts receivable, net		29,943		—		—		—		29,943
Loans receivable, short-term		921		—				1,517		2,438
Loans receivable, long-term		1,204		—		—		20,019		21,223
Investments^2^		3,192		—		1,049		119		4,360
Security deposits		3,558		—		—		—		3,558
Financial Liabilities:
Accounts payable	$	23,231	$	—	$	—	$	—	$	23,231
Accrued liabilities		130,469		—		—		—		130,469
Short-term borrowings		25,924		—		—		—		25,924
Current portion of lease liabilities		18,040		—		—		—		18,040
Deferred consideration, contingent consideration and other payables, short-term		—		22		—		19,093		19,115
Derivative liabilities, long-term		—		—		—		17,505		17,505
Lease liabilities		74,468		—		—		—		74,468
Deferred consideration and contingent consideration, long-term		—		—		—		7,247		7,247
Long-term notes payable and loans payable		255,439		—		—		—		255,439
^1^	Restricted cash balances include various escrow accounts related to investments, acquisitions and facility<br>licensing requirements.
---	---
^2^	Investment balances in the amortized cost column represent equity method investments.
---	---

The December 31, 2020, Level 3 asset balance of $21.7 million, decreased by $19.9 million to a September 30, 2021 balance of $1.8 million due to the effective settlement of $20.0 million of Loans receivable, long-term on February 16, 2021 as part of the Verdant acquisition, partially offset by an increase to an investment in Old Pal of $0.6 million obtained upon the acquisition of Bluma.

The September 30, 2021 Level 3 liability balance of $57.5 million, increased by $13.6 million compared to the December 31, 2020 balance of $43.8 million due to an increase of $23.2 million of contingent consideration related to the purchase of Cultivate, offset by an $10.3 million decrease in share purchase warrants liabilities. Warrant decrease was due to a decrease in the Company’s volatility and remaining expected life; offset by a minimal increase in the Company’s share price. The Company had one addition to the Level 3 classification of $23.2 million during the current period related to the Cultivate contingent consideration.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The tables below summarizes the Level 3 activity for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended<br>September 30, 2021						Three Months Ended<br>September 30, 2020
($ in thousands)	Asset			Liability			Asset		Liability
Fair value as of July 1	$	2,220		$	50,500		$	19,888	$	27,074
Changes in estimated fair value		(382	)		(15,973	)		1,145		1,037
Payments / Cash Extended		—			—			—		(984	)
Acquisition Related		—			23,150			—		—
Foreign exchange		—			(201	)		—		168
Fair value as of September 30	$	1,838	****	$	57,476	****	$	21,033	$	27,295	****
	Nine Months Ended<br>September 30, 2021						Nine Months Ended<br>September 30, 2020
---	---	---	---	---	---	---	---	---	---	---	---
($ in thousands)	Asset			Liability			Asset		Liability
Fair value as of January 1	$	21,654		$	43,845		$	18,311	$	40,198
Changes in estimated fair value		(90	)		(9,839	)		1,437		(9,333	)
Payments / Cash Extended		(443	)		(9	)		1,284		(3,683	)
Acquisition Related		(19,283	)		23,150			—		—
Foreign exchange		1			334			—		113
Fair value as of September 30	$	1,839	****	$	57,481	****	$	21,032	$	27,295	****
(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, 2021 and December 31, 2020:

($ in thousands)	Valuation<br>classification		September 30,<br>2021		December 31,<br>2020
Short-term loans receivable — Lighthouse		Fair value	$	1,178	$	1,517
Short-term loans receivable — Northern Emerald		Amortized cost		710		—
Interest receivable		Amortized cost		655		921
Total Loans receivable, short-term			$	2,543	$	2,438
(i)	Lighthouse Loan
---	---

On August 12, 2019, the Company issued a secured convertible promissory note that is convertible, at the Company’s discretion, into additional membership units approximating 1% ownership of the parent company of Lighthouse. At inception, the loan had a maturity of 18 months. The loan was amended in March 2021 to extend the maturity date from February 2021 to February 2022. The loan had a fair value, net of ECL, of $1.2 million as of September 30, 2021 and $1.5 million as of December 31, 2020. See Note 6 for discussion of the Company’s investment in Lighthouse.

(ii)	Other Loans

The Company acquired an additional short-term loan receivable from the Bluma acquisition due within 12 months. The receivable is referred to as the “Northern Emerald” loan which, had fair values, net of ECL, at acquisition of $0.7 million. There was no change to the carrying value of the Northern Emerald loan whose fair value remains $0.7 million at September 30, 2021. The Company received full payment of a loan of $1.8 million acquired via the Bluma acquisition in the third quarter of 2021.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The Company did not acquire or extend other short-term loans in the three months ended September 30, 2021.

(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, 2021 and December 31, 2020:

($ in thousands)	Valuationclassification		September 30,<br>2021		December 31,<br>2020
Long-term loans receivable — Verdant		Fair value	$	—	$	20,019
Long-term loans receivable — Laurel Harvest		Amortized Cost		3,322		—
Long-term loans receivable — IL Incubator		Amortized Cost		100		—
Long-term loans receivable — Other		Amortized cost		395		367
Interest receivable		Amortized cost		4		837
Total Loans receivable, long-term			$	3,820	$	21,223
(i)	Verdant Loan
---	---

On February 16, 2021, the Company acquired four dispensaries from Verdant. As part of the acquisition, the long-term loans receivable and related interest receivable due from Verdant were effectively settled and classified as consideration paid as part of the acquisition. See Note 10 for additional details.

(ii)	Bluma Loan

On April 14, 2021 the Company acquired dispensary and cultivation operations from Bluma. As part of the acquisition, the long-term loans receivable and related interest receivable due from Bluma were effectively settled and classified as consideration paid as part of the acquisition. See Note 10 for additional details.

(iii)	Cultivate Loan

On September 2, 2021 the Company acquired dispensary and cultivation operations from Cultivate. As part of the acquisition, the long-term loans receivable and related interest receivable due from Cultivate were effectively settled and classified as consideration paid as part of the acquisition. See Note 10 for additional details.

(iv)	Laurel Harvest Loan

In connection with the pending acquisition of Laurel Harvest Inc., (“Laurel Harvest”) the Company issued a loan receivable for a principal amount of $3.3 million, fully funded on September 10, 2021. This loan is measured at amortized cost as there are no embedded derivatives. The loan accrues interest at a rate equal to LIBOR + 2% per annum. As of September 30, 2021, the accrued interest is de minimis.

(v)	IL Incubator Loan

In connection with the Illinois Social Equity Applicant program, the Company has issued one $0.1 million loan to an IL company who has secured a Craft Grower License to operate in the state; the loan was fully funded on July 20, 2021. This loan is measured at amortized cost as there are no embedded derivatives. The loan bears no interest and matures on July 20, 2026.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(vi)	Other Loans

In connection with the acquisition of Origin House, the Company assumed a loan receivable with a fair value of $0.4 million and $0.3 million as of September 30, 2021 and the acquisition date, respectively.

(c)	Share Purchase Warrants

At September 30, 2021, the Company had 9.9 million warrants outstanding, of which 0.6 million warrants classified as derivative liabilities, long-term, and 3.7 million classified as current liabilities, from issuances to underwriters associated with September 2019 financing.

During the three months ended September 30, 2021, no September 2019 financing warrants were exercised. During the nine months ended September 30, 2021, 1 thousand September 2019 financing warrants were exercised for $10 thousand, resulting in a realized loss of $5 thousand and an increase to share capital of $19 thousand. As of September 30, 2021, 4.3 million September 2019 financing warrants remain outstanding.

During 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 three months ended September 30, 2020, the Company recorded a mark-to-market loss of $2.9 million primarily due to changes in the Company’s share price and other market factors and an unrealized foreign exchange loss of $0.2 million.

During 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. For the nine months ended September 30, 2020, the Company recorded a mark-to-market gain of $0.2 million primarily due to changes in share price; additionally, the Company recorded a $0.1 million unrealized loss on foreign exchange.

All warrants classified as derivative liabilities are measured at fair value.

As of September 30, 2021 and December 31, 2020, the fair value of liability-classified warrants was determined using the Black-Scholes option-pricing model utilizing the following assumptions:

	September 30,2021			December 31,2020
Risk-free annual interest rate		0.1	%		0.1	%
Expected annual dividend yield		0	%		0	%
Expected stock price volatility		50	%		83	%
Expected life of stock warrants		1.0 -1.1 years			1.8 years
Forfeiture rate		0	%		0	%
Share price at period end	$	9.41		$	9.86
Strike price at period end	$	9.81		$	9.82

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

For the quarter ended September 30, 2021, volatility was calculated by using the Company’s historical share volatility. 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 before warrants expire. The risk-free rate is based on U.S. treasury bills with a remaining term equal to the expected life of the warrants. The Company does not expect grantees to forfeit warrants.

For the year ended December 31, 2020, volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies. 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 before warrants expire. The risk-free rate is based on U.S. treasury bills with a remaining term equal to the expected life of the options. The Company does not expect grantees to forfeit warrants.

The change in volatility rate noted above was made because the Company now has a reasonable observable history of volatility to use a company-specific rate, whereas in the past it did not. The impact of the change in volatility rates resulted in a gain of $5.2 million, which is included in Other income (expense), net on the Unaudited Condensed Interim Consolidated Statements of Operations.

Financial Risk Management

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

(a)	Credit and Banking Risk

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

The Company’s aging of Accounts receivables as of September 30, 2021 and December 31, 2020 was as follows:

($ in thousands)	September 30,<br>2021		December 31,<br>2020
0 to 60 days	$	42,775	$	28,280
61 to 120 days		3,735		1,134
120 days +		2,839		1,225
Total accounts receivable, gross	$	49,349	$	30,639
Allowance for doubtful accounts		1,592		696
Total accounts receivable, net	$	47,757	$	29,943

During the nine months ended September 30, 2021 and 2020, the Company recorded bad debt expense of $1.0 million and $0.3 million, respectively, to account for ECL and recorded an additional $0.3 million and $0.5 million, respectively, in bad debt related to invoice write-offs.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(b)	Asset Forfeiture Risk

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

(c)	Liquidity Risk

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

In January 2021, the Company completed the placement of 9.9 million SVS at a price of C$16.00 per share for total gross proceeds of approximately $120.7 million. In August 2021, the Company amended the existing term loan facility, increasing the total principal outstanding to $400.0 million, at a reduced interest rate of 9.5%. See Note 8 and Note 11 for further information. 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, 2021:

($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and accrued liabilities	$	94,802	$	—	$	—	$	94,802
Deferred consideration, contingent consideration and other payables, short-term		41,892		—		—		41,892
Deferred consideration and contingent consideration, long-term		—		8,515		—		8,515
Long-term notes payable and loans payable and short-term borrowings		15,445		463,864		—		479,309
Total obligations as of September 30, 2021	$	152,139	$	472,379	$	—	$	624,518

In addition to the commitments outlined in Note 15, the Company had the following contractual obligations as of December 31, 2020:

($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and accrued liabilities	$	153,700	$	—	$	—	$	153,700
Deferred consideration, contingent consideration and other payables, short-term		19,115		—		—		19,115
Deferred consideration and contingent consideration, long-term		—		7,247		—		7,247
Long-term notes payable and loans payable and short-term borrowings		25,924		255,439		—		281,363
Total obligations as of December 31, 2020	$	198,739	$	262,686	$	—	$	461,425

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

(d)	Market Risk
(i)	Currency Risk
---	---

The operating results and balance sheet of the Company are reported in U.S. dollars. As of September 30, 2021 and December 31, 2020, the Company’s financial assets and liabilities are denominated primarily in U.S. dollars. However, from time to time some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company recorded $0.2 million and $1.3 million in foreign exchange losses during the three and nine months ended September 30, 2021, respectively. The Company recorded $0.2 million in foreign exchange losses for the three and nine months ended September 30, 2020, respectively. See Note 13 for additional details.

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

(ii)	Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. An increase or decrease in the Company’s incremental borrowing rate by 10% would result in an associated increase or decrease in Deferred consideration, contingent consideration and other payables and Interest expense, net of $0.1 million. The Company’s effective interest rates for its Senior Loan is 11.0% and the stated interest rate is 9.5%. See Note 11 for further information.

(iii)	Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company is subject to price risk related to derivative liabilities and contingent consideration that are valued based on the Company’s own stock price. An increase or decrease in stock price by 10% would result in an associated increase or decrease to Deferred consideration, contingent consideration and other payables, Derivative liabilities, long-term and Deferred consideration and contingent consideration with a corresponding change to Other (expense) income, net. As of September 30, 2021 an increase or decrease in stock price by 10% would result in an impact of $4.3 million or $3.9 million, respectively.

(iv)	Tax Risk

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

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The novel coronavirus (“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, 2021 the vaccine has become more widely available, however, there remains significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on the Company’s future financial results.

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, 2021 and December 31, 2020. All of these entities were determined to be VIEs as the Company possesses the power to direct activities through written agreements:

	September 30, 2021			December 31, 2020
($ in thousands)	Cresco Labs Michigan,LLC			Cresco LabsMichigan, LLC			Cresco Labs,LLC
Current assets	$	34,902		$	7,111		$	830,828
Non-current assets		35,870			14,744			143,449
Current liabilities		(61,950	)		(20,898	)		(849,691	)
Non-current liabilities		(23,067	)		(2,986	)		(83,138	)
Non-controlling interests		—			—			97,180
Equity attributable to Cresco Labs Inc.		(14,244	)		(2,029	)		(55,732	)

As of September 30, 2021, control of Cresco Labs, LLC resides with the Company, therefore Cresco Labs, LLC is no longer a variable interest entity and has been consolidated for all periods presented.

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 nine months ended September 30, 2021 and for the year ended December 31, 2020:

	September 30, 2021			December 31, 2020
($ in thousands)	Cresco Labs Michigan,<br>LLC			Cresco Labs<br>Michigan, LLC			CrescoLabs, LLC
Revenue	$	2,974		$	2,916		$	98,786
Net income (loss) attributable to non-controlling<br>interests		—			—			6,666
Net income (loss) attributable to Cresco Labs Inc.		(6,332	)		(1,796	)		10,204
Net income (loss)		(6,332	)		(1,796	)		16,870

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’s review financial information presented on a consolidated basis accompanied by information by customer and geographic region.

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

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. For the three and nine months ended September 30, 2020, the Company generated 98.3% and 97.9%, respectively, of its revenue in the United States with the remainder generated in Canada.

NOTE 19. INTEREST EXPENSE, NET

Interest expense, net consisted of the following for the three and nine months ended September 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30,

	Three Months EndedSeptember 30,						Nine Months Ended<br>September 30,
($ in thousands)	2021			2020			2021			2020
Interest expense – leases	$	(1,070	)	$	(851	)	$	(3,029	)	$	(2,174	)
Interest expense – notes and loans payable		(7,895	)		(3,712	)		(19,950	)		(10,140	)
Accretion of debt discount and amortization of deferred financing fees		(1,242	)		(1,222	)		(4,225	)		(3,429	)
Interest expense – financing activities related to sale-leasebacks		(2,988	)		(2,677	)		(8,620	)		(7,916	)
Other interest expense		(578	)		(629	)		(1,275	)		(528	)
Interest income		196			329			739			897
Total Interest expense, net	$	(13,577	)	$	(8,762	)	$	(36,360	)	$	(23,290	)

See Note 11 for additional information on notes and loans payable and accretion of debt discount and amortization of deferred financing fees.

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 US federal income tax purposes as well as state income tax purposes for all states except California and Arizona. 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, the State of California and State of Arizona do not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns and Arizona Corporate Income Tax Returns.

The Company is treated as a United State corporation for US federal income tax purposes under IRC Section 7874 and is subject to US 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) (the “ITA”) for Canadian income tax purposes. As a result, the Corporation is subject to taxation both in Canada and the United States.

The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2021			2020			2021			2020
(Loss) income before income taxes	$	(275,860	)	$	15,685		$	(268,344	)	$	(37,161	)
Income tax expense	$	(12,408	)	$	(9,891	)	$	16,579		$	14,423
Effective tax rate		4.5	%		(63.1	)%		(6.2	)%		(38.8	)%

Cresco Labs Inc.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2021 and 2020

The Company determined that the tax impact of certain arrangements between its management companies and operating companies did not meet the more likely than not threshold under ASC 740-10 due to the evolving interpretations of IRC Section 280E, and based on the limited guidance available. As a result, the Company had recorded a reserve for an uncertain tax position $4.7 million as of December 31, 2020. During the third quarter of 2021, the IRS completed an examination of one of Cresco’s management companies with no changes to its return. In light of this new information, management has updated the estimates used in the cumulative probability model for examining tax positions. As a result, management now believes there is sufficient evidence that these tax positions should continue to be upheld upon a future examination. No UTP liability is accrued for the Company as of September 30, 2021.

NOTE21. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 18, 2021, which is the date on which these financial statements were issued.

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

EX-99.2

Exhibit 99.2

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

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

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

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

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

OVERVIEW OF THE COMPANY

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

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

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

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

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

Issuing IPO, Reverse Takeover & CorporateStructure

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

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

^1^	The Sunnyside*^®^(inclusive of the stand-alone asterisk<br>mark) and Cresco^®^ brands maintain federal trademark registrations for websites pertaining to medical cannabis and cannabis educational services, as well as multiple state trademark<br>registrations.
^2^	The High Supply^®^, Good News^®^, Wonder Wellness Co.^®^, Cresco Reserve^®^, and FloraCal^®^ brands maintain federal trademark registrations for apparel and multiple state trademark registrations.
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Set forth below is the organization chart of the Company.

LOGO

Recent Developments

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

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

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

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

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

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

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

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

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

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

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

Components of Our Results of Operations

Revenue

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

Gross profit

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

•	Direct labor costs: These expenses include all salaries, benefits, and taxes for all employees at the<br>facility.
•	Direct supplies: The direct material cost for maintenance of the plants, the supplies and nutrients, and<br>the production expenses 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,<br>utilities, property taxes, maintenance, and costs associated with monitoring the security systems.
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•	Other operating expenses: These expenses include all costs associated with the facility itself including<br>insurance, community outreach programs, professional services related to licenses and compliance, uniforms, employee training programs, tracking and inventory management systems, product testing, business development, information technology, license<br>renewal fees and certain excise taxes.
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•	Cultivation, manufacturing, and packaging costs: These expenses are comprised of cannabis plant costs and<br>are initially capitalized into inventory in the period in which they are incurred.
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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 andadministrative expenses (“SG&A”)

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

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

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

	Three Months Ended<br>September 30,				Nine Months Ended<br>September 30,
($ in thousands)	2021		2020		2021			2020
Payroll and employee costs	$	34,341	$	21,318	$	99,693		$	58,973
Selling and marketing expenses		6,265		4,066		24,999			10,843
Share-based compensation		6,083		2,764		20,492			11,060
Depreciation and amortization		5,787		4,317		17,118			12,993
Excise taxes		2,710		4,311		11,131			8,526
Facility expenses		6,082		4,558		14,621			11,478
Consulting and professional fees		4,415		2,605		9,887			14,475
Computer and software expense		3,224		2,274		10,020			5,427
Business insurance		2,622		1,068		6,917			3,127
Rental fees		1,970		1,940		5,295			4,325
Accounting		286		485		3,329			2,397
Legal		3,683		1,110		7,379			4,796
Travel and employee expenses		1,360		523		3,040			2,545
Litigation accrual adjustment		—		—		(810	)		—
Other expenses		2,562		570		5,173			3,828
Total Selling, general and administrative expenses	$	81,390	$	51,909	$	238,284	****	$	154,793

Other (expense) income

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

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

	Three Months Ended<br>September 30,						Nine Months EndedSeptember 30,
($ in thousands)	2021			2020			2021			2020
Unrealized gain (loss) on derivative liabilities—warrants	$	7,956		$	(2,946	)	$	10,672		$	172
Gain on derivative instruments		14,982			2,639			16,080			9,959
Gain (loss) on provision—loan receivable		(332	)		(307	)		(87	)		(420	)
Unrealized gain (loss) on investments held at fair value		(2,647	)		68			(6,587	)		(162	)
Loss on debt extinguishment		(17,987	)		—			(17,987	)		—
Gain on conversion of investment		—			(86	)		—			(86	)
Loss on foreign currency		(249	)		(232	)		(1,274	)		(216	)
Other loss-investments		—			(28	)		—			(148	)
Other income		12			538			1,303			1,075
Total other (expense) income, net	$	1,735	****	$	(354	)	$	2,120	****	$	10,174	****

Income Taxes

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

SELECTED FINANCIAL INFORMATION

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

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

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

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

	Three Months Ended September 30,
($ in thousands)	2021			2020			Change		% Change
Revenue	$	215,483		$	153,298					40.6	%
Cost of goods sold		(107,162	)		(76,454	)		)		40.2	%
Gross profit		108,321			76,844					41.0	%
Total operating expenses		372,339			51,909					nm	^2^
Total other (expense), net		(11,842	)		(9,250	)		)		28.0	%
Income tax recovery		12,408			9,891					25.4	%
Net (loss) income ^1^	$	(263,452	)	$	25,576			)		nm

All values are in US Dollars.

^1^	Net loss includes amounts attributable to non-controlling interests.<br>
^2^	Percentage changes shown as “nm” (not meaningful) are values greater than 399%.<br>
---	---

Revenue

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

Cost of goods sold and Gross profit

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

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

Total operating expenses

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

Total other (expense), net

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

Provision for income taxes

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

Net (loss) income

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

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

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

	Nine Months Ended September 30,
($ in thousands)	2021			2020			Change		% Change
Revenue	$	603,895		$	313,934					92.4	%
Cost of goods sold		(307,570	)		(181,715	)		)		69.3	%
Gross profit		296,325			132,219					124.1	%
Total operating expenses		529,233			156,010					239.2	%
Total other (expense), net		(35,436	)		(13,370	)		)		165.0	%
Income tax (expense)		(16,579	)		(14,423	)		)		14.9	%
Net loss^1^	$	(284,923	)	$	(51,584	)		)		nm

All values are in US Dollars.

^1^	Net loss includes amounts attributable to non-controlling interests.<br>

Revenue

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

Cost of goods sold and Gross profit

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

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

Total operating expenses

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

Total other (expense), net

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

Provision for income taxes

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

Net (loss)

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

Non-GAAP Financial Measures

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

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

	Three Months Ended September 30,
($ in thousands)	2021			2020			Change		% Change
Net (loss) income^1^	$	(263,452	)	$	25,576			)		nm
Depreciation and amortization		10,486			8,641					21.4	%
Interest expense, net		13,577			8,762					55.0	%
Income tax recovery		(12,408	)		(9,891	)		)		25.4	%
Earnings before interest, taxes, depreciation, and amortization (EBITDA) (non-GAAP)	$	(251,797	)	$	33,088	****		)		nm
Other (income) expense, net		(1,735	)		354			)		nm
Loss from equity method investments		—			134			)		100.0	%
Fair value mark-up for acquired inventory		8,396			1,843					355.6	%
Adjustments for acquisition and other non-core<br>costs		3,830			1,412					171.2	%
Impairment loss		290,949			—					100.0	%
Management incentive compensation (share-based)		6,806			3,335					104.1	%
Adjusted EBITDA (non-GAAP)	$	56,449	****	$	40,166	****		****		40.5	%

All values are in US Dollars.

^1^	Net loss includes amounts attributable to non-controlling interests.<br>

Adjusted EBITDA (non-GAAP)

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

	Nine Months Ended September 30,
($ in thousands)	2021			2020			Change		% Change
Net (loss)^1^	$	(284,923	)	$	(51,584	)		)		nm
Depreciation and amortization		30,443			23,172					31.4	%
Interest expense, net		36,360			23,290					56.1	%
Income tax expense		16,579			14,423					14.9	%
Earnings before interest, taxes, depreciation, and amortization (EBITDA) (non-GAAP)	$	(201,541	)	$	9,301	****		)	****	nm	****
Other income, net		(2,120	)		(10,174	)				79.2	%
Loss from equity method investments		1,196			254					370.9	%
Fair value mark-up for acquired inventory		15,034			3,749					301.0	%
Adjustments for acquisition and other non-core<br>costs		10,849			13,113			)		17.3	%
Impairment loss		290,949			1,194					nm
Management incentive compensation (share-based)		22,603			13,295					70.0	%
Adjusted EBITDA (non-GAAP)	$	136,970	****	$	30,732	****		****		345.7	%

All values are in US Dollars.

^1^	Net loss includes amounts attributable to non-controlling interests.<br>

Adjusted EBITDA (non-GAAP)

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

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

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

Cash Flows

Operating Activities

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

Investing Activities

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

Financing Activities

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

CONTRACTUAL OBLIGATIONS

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

($ in thousands)	Total			Operating<br>Leases			Finance<br>Leases
2021	$	13,715		$	9,818		$	3,897
2022		22,731			17,373			5,358
2023		22,817			17,283			5,534
2024		24,286			18,600			5,686
2025		24,715			18,894			5,821
Thereafter		216,686			180,651			36,035
Total lease payments	$	324,950	****	$	262,619	****	$	62,331	****
Less: imputed interest		(185,963	)		(154,849	)		(31,114	)
Less: tenant improvement allowance		(15,072	)		(14,373	)		(699	)
Present value of lease liabilities		123,915			93,397			30,518
Less: short-term lease liabilities		(18,568	)		(14,673	)		(3,895	)
Present value of long-term lease liabilities	$	105,347	****	$	78,724	****	$	26,623	****

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

OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS

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

RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

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

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

•	Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;<br>
•	Level 2 – inputs other than quoted prices that are observable for the asset or liability, either<br>directly or indirectly; and
---	---
•	Level 3 – inputs for the asset or liability that are not based on observable market data.<br>
---	---

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

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

	September 30, 2021
($ in thousands)	AmortizedCost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	252,838	$	—	$	—	$	—	$	252,838
Restricted cash^1^		1,959		—		—		—		1,959
Accounts receivable, net		47,757		—		—		—		47,757
Loans receivable, short-term		1,365		—		—		1,178		2,543
Loans receivable, long-term		3,820		—		—		—		3,820
Investments^2^		—		4,997		781		660		6,438
Security deposits		3,893		—		—		—		3,893
Financial Liabilities:
Accounts payable	$	25,617	$	—	$	—	$	—	$	25,617
Accrued liabilities		69,185		—		—		—		69,185
Short-term borrowings		15,445		—		—		—		15,445
Current portion of lease liabilities		18,542		—		—		—		18,542
Deferred consideration, contingent consideration and other payables		—		89		—		41,803		41,892
Derivative liabilities, short-term		—		—		—		6,180		6,180
Derivative liabilities, long-term		—		—		—		983		983
Lease liabilities		105,347		—		—		—		105,347
Deferred consideration and contingent consideration		—		—		—		8,515		8,515
Long-term notes payable and loans payable		463,864		—		—		—		463,864
^1^	Restricted cash balances include various escrow accounts related to investments, acquisitions, facility<br>requirements and building improvements.
---	---
^2^	Investment balances in the amortized cost column represent equity method investments.
---	---

	December 31, 2020
($ in thousands)	AmortizedCost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	136,339	$	—	$	—	$	—	$	136,339
Restricted cash^1^		4,435		—		—		—		4,435
Accounts receivable, net		29,943		—		—		—		29,943
Loans receivable, short-term		921		—				1,517		2,438
Loans receivable, long-term		1,204		—		—		20,019		21,223
Investments^2^		3,192		—		1,049		119		4,360
Security deposits		3,558		—		—		—		3,558
Financial Liabilities:
Accounts payable	$	23,231	$	—	$	—	$	—	$	23,231
Accrued liabilities		130,469		—		—		—		130,469
Short-term borrowings		25,924		—		—		—		25,924
Current portion of lease liabilities		18,040		—		—		—		18,040
Deferred consideration, contingent consideration and other payables		—		22		—		19,093		19,115
Derivative liabilities, long-term		—		—		—		17,505		17,505
Lease liabilities		74,468		—		—		—		74,468
Deferred consideration and contingent consideration		—		—		—		7,247		7,247
Long-term notes payable and loans payable		255,439		—		—		—		255,439
^1^	Restricted cash balances include various escrow accounts related to investments, acquisitions and facility<br>licensing requirements.
---	---
^2^	Investment balances in the amortized cost column represent equity method investments.
---	---

Financial Risk Management

(a)	Credit and Banking Risk

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

(b)	Asset Forfeiture Risk

(c)	Liquidity Risk

(d)	Market Risk
(i)	Currency Risk
---	---

(ii)	Interest Rate Risk

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

(iii)	Price Risk

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

(iv)	Tax Risk

(v)	Regulatory Risk

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

SUMMARY OF OUTSTANDING SHARE DATA

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

Securities	Number of Shares<br>(in thousands)
Issued and Outstanding
Super Voting Shares		500
Subordinate Voting Shares		253,131
Proportionate Voting Shares^1^		20,777
Special Subordinate Voting Shares^2^		1
Warrants		9,854
Stock Options		24,634
Restricted Stock Units		1,204
^1^	PVS presented on an “as-converted” basis to SVS (1-to-200)
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^2^	SSVS presented on an “as-converted” basis to SVS (1-to-0.00001)
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Federal Regulatory Environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Illinois Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

Pennsylvania Operations

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

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

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

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

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

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

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

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

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

Ohio Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

California Operations

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

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

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

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

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

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

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

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

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

Mendota (Fresno County)

•	SLO has been issued one (1) provisional license for Type 7 (Manufacturing 2 – Volatile), Adult-Use & Medical (“A&M”).
•	SLO has been issued one (1) provisional license for Type 11 (Distribution), A&M.
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•	SLO submitted annual applications for the two (2) listed license types to the state regulator and is<br>awaiting approval for these annual applications.
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Carpinteria (Santa Barbara County)

•	SLO has been issued the following provisional licenses:
•	Twenty-three (23) Cultivation: Small Mixed-Light Tier 1 licenses.
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•	One (1) Nursery license: allowing for the planting and cultivation of medical cannabis from seeds, clones<br>and immature plants.
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•	One (1) Processor license: allowing for the harvesting, drying, curing, grading or tanning of cannabis as<br>well as the packaging and labelling of certain non-manufactured cannabis.
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•	SLO submitted annual renewal applications for the three (3) listed license types to the state regulator and<br>is awaiting approval of the annual applications.
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Origin House

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

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

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

West Sacramento (Yolo County)

•	Origin House has been issued one (1) provisional license for Type 11 (Distribution), Adult-use and Medical (“A&M”).
•	Origin House submitted an annual application for the one (1) listed license type to the state regulator and<br>is awaiting approval for the annual application.
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La Habra (Orange County)

•	Origin House has been issued one (1) provisional license for Type 11 (Distribution), A&M.<br>
•	Origin House submitted an annual application for the one (1) listed license type to the state regulator and<br>is awaiting approval for the annual application.
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Unincorporated Sonoma (Sonoma County)

•	Origin House has been issued one (1) provisional license for Cultivation, Medical Medium Indoor.<br>
•	Origin House has been issued one (1) provisional license for Processor, Medical.
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•	Origin House has been issued one (1) provisional license for Type 11 (Distribution), A&M.<br>
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•	Origin House has been issued one (1) provisional license for Cultivation: Medical Small Indoor.<br>
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•	Origin House submitted annual applications for the four (4) listed license types to the state regulator and<br>is awaiting approval for these annual applications.
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In addition to the six (6) active licenses listed above, Origin House continues to pursue new state license opportunities and recently applied for an additional Type 11 (Distribution) license for the Unincorporated Sonoma (Sonoma County) location.

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

Arizona Operations

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

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

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

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

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

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

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

New York Operations

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

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

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

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

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

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

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

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

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

Massachusetts Operations

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

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

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

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

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

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

Michigan Operations

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

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

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

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

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

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

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

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

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

Florida Operations

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

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

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

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

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

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

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

CRLBF 6-K